<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[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 (S)240.14a-11(c) or (S)240.14a-12
ALGOS PHARMACEUTICAL CORPORATION
-----------------------------------------------------
(Name of Registrant as Specified In Its Charter)
-----------------------------------------------------
(Name(s) of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_]No fee required.
[X]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: common
stock, par value $.01 per share; warrants to purchase common stock, par
value $.01 per share
(2) Aggregate number of securities to which transaction applies: 17,403,895
shares of common stock and 17,403,895 warrants
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange ActRule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): $1.00(a)
(4) Proposed maximum aggregate value of transaction: $17,403,895
(5) Total fee paid: $3,481
- --------
(a) Based on the book value of Endo common stock as of September 30, 1999. The
exercisability of warrants is contingent upon the occurrence of events that
may never happen and therefore the warrants have no current value.
[_]Fee paid previously with preliminary materials.
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
[LOGO OF ALGOS]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
, 2000
Dear Fellow Stockholder:
Algos Pharmaceutical Corporation has agreed to merge with a subsidiary of
Endo Pharmaceuticals Holdings Inc. in a merger transaction. In this merger, the
holders of Algos common stock will receive shares of Endo common stock and
warrants to purchase additional shares of Endo common stock for nominal
consideration. These warrants will become exercisable only if the U.S. Food and
Drug Administration approves Algos' New Drug Application for MorphiDex(R) by
December 31, 2002. In addition, immediately prior to the merger, each current
holder of Endo common stock will receive one warrant for each of its Endo
shares. These warrants will enable these pre-merger holders of Endo common
stock to purchase shares of Endo common stock for nominal consideration in the
event that the U.S. Food and Drug Administration does not approve MorphiDex(R)
by December 31, 2002. The Endo common stock and the Endo warrants to be
received by Algos stockholders in the merger will be publicly tradable and will
each be listed on the NASDAQ National Market under the symbols " " and " ,"
respectively.
Before we can proceed with the merger, the stockholders of Algos must vote
in favor of the proposed transaction. The terms of the merger are described in
detail in the accompanying proxy statement/prospectus, which I urge you to read
carefully. You should carefully consider the risk factors beginning on page 19
of this proxy statement/prospectus before voting your shares.
The Algos Board of Directors has approved the merger and recommends that the
stockholders vote for the proposal. We have scheduled a special meeting of our
stockholders to vote on the proposal. You may vote on the proposal at the
special meeting either in person or by using the enclosed proxy card. The
special meeting will be held at on , 2000 at , local time.
Your vote is very important. Whether or not you plan to attend the special
meeting, please take the time to vote your shares regarding the merger proposal
described above. You may vote your shares by completing, signing, dating and
returning the enclosed proxy card as promptly as possible in the enclosed
postage-paid envelope. If you do not return your proxy card or vote in person
at the special meeting, the effect will be the same as a vote against the
proposal.
Sincerely,
John W. Lyle
Chief Executive Officer
and President
Neither the Securities and Exchange Commission nor any state securities
commission has approved the securities to be issued under this proxy
statement/prospectus or determined if this proxy statement/prospectus is
accurate or adequate. Any representation to the contrary is a criminal offense.
This proxy statement/prospectus is dated , 2000, and was first mailed
to stockholders of Algos on or about , 2000.
<PAGE>
ALGOS PHARMACEUTICAL CORPORATION
1333 CAMPUS PARKWAY
NEPTUNE, NEW JERSEY 07753-6815
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 2000
----------------
A special meeting of the stockholders of Algos Pharmaceutical Corporation, a
Delaware corporation, will be held at , on , 2000 at ,
local time, for the following purposes:
1.To consider and vote on a proposal to approve and adopt the Agreement
and Plan of Merger, dated as of November 26, 1999, by and among Endo
Pharmaceuticals Holdings Inc., Endo Inc. and Algos Pharmaceutical
Corporation, under which, among other things, Algos would merge with and
into Endo Inc., a wholly owned subsidiary of Endo Pharmaceuticals Holdings
Inc., and holders of Algos common stock would receive shares of Endo common
stock and warrants to purchase additional shares of Endo common stock that
will become exercisable only if the U.S. Food and Drug Administration
approves Algos' New Drug Application for MorphiDex(R) by December 31, 2002.
A copy of the merger agreement is set forth as Appendix A to the attached
proxy statement/prospectus.
2.To transact such other business as may properly come before the
special meeting or any adjournment or postponement.
We describe these items of business more fully in the proxy
statement/prospectus attached to this Notice.
The Algos Board of Directors recommends that you vote in favor of the
approval and adoption of the merger agreement and approval of the merger.
Holders of record at the close of business on , 2000 of shares of
Algos common stock will be entitled to vote at the special meeting or any
adjournment or postponement thereof. A list of stockholders entitled to vote at
the special meeting will be available during ordinary business hours at Algos'
offices at 1333 Campus Parkway, Neptune, New Jersey 07753-6815 for a period of
at least 10 days prior to the special meeting for examination by any Algos
stockholder entitled to vote at the special meeting for any purpose germane to
the special meeting.
By Order of the Board of Directors,
James R. Ledley
Assistant Secretary
Neptune, New Jersey
, 2000
To ensure that your shares are represented at the special meeting, we urge you
to complete, date and sign the enclosed proxy and mail it promptly in the
postage-paid return envelope provided, whether or not you plan to attend the
meeting in person. You can withdraw your proxy, or change your vote, at any
time before it is voted.
<PAGE>
REFERENCES TO ADDITIONAL INFORMATION
This document incorporates important business and financial information
about Algos from documents filed with the SEC that have not been included in or
delivered with this document. This information is available to you without
charge upon your written or oral request. You can obtain documents incorporated
by reference in this document by requesting them in writing or by telephone
from Algos at the following address:
Algos Pharmaceutical Corporation
Investor Relations
1333 Campus Parkway
Neptune, New Jersey 07753-6815
(732) 938-5959
Please request documents by , 2000. If you request any incorporated
documents, we will mail the documents you request by first class mail, or
another equally prompt means, by the next business day after we have received
your request.
See "WHERE YOU CAN FIND MORE INFORMATION" for more information about the
documents referred to in this proxy statement/prospectus.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................... 1
SUMMARY.................................................................... 4
The Companies............................................................. 4
Summary of Transaction.................................................... 4
Algos Special Meeting..................................................... 5
Record Date; Voting Power................................................. 5
Vote Required............................................................. 5
Recommendation to Algos Stockholders...................................... 5
Formation of Endo Pharma LLC and Treatment of Current Endo Employee Stock
Options.................................................................. 5
Ownership of Endo After the Merger........................................ 6
Collaboration Agreement................................................... 6
Interests of Officers and Directors in the Merger......................... 6
Completion of the Merger.................................................. 6
Termination of the Merger Agreement....................................... 7
Fees and Expenses......................................................... 7
Accounting Treatment...................................................... 7
Fairness Opinion of Financial Advisor to Algos Stockholders............... 7
Federal Income Tax Considerations......................................... 7
Appraisal Rights.......................................................... 8
Listing of Endo Common Stock and Warrants................................. 8
Forward-Looking Statements................................................ 8
What Algos Stockholders will Receive in the Merger........................ 9
Summary Selected Historical Financial Data................................ 11
Summary Selected Unaudited Pro Forma Combined Financial Information of
Endo..................................................................... 15
COMPARATIVE PER SHARE DATA................................................. 17
ALGOS MARKET PRICE INFORMATION AND DIVIDENDS............................... 18
RISK FACTORS............................................................... 19
THE MERGER................................................................. 26
Background of the Merger.................................................. 26
Algos' Reasons for the Merger; Recommendation of the Algos Board.......... 28
Opinion of Algos' Financial Advisor....................................... 31
Accounting Treatment...................................................... 37
Material U.S. Federal Income Tax Consequences of the Merger............... 37
Regulatory Matters........................................................ 42
Appraisal Rights.......................................................... 42
</TABLE>
<TABLE>
<S> <C>
Federal Securities Laws Consequences; Resale Restrictions................. 42
Delisting and Deregistration of Algos Common Stock........................ 43
Conduct of the Business if the Merger is Not Completed.................... 43
FINANCIAL PROJECTIONS...................................................... 44
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION............... 46
INTERESTS OF CERTAIN PERSONS IN THE MERGER AND RELATED MATTERS............. 51
Board of Directors........................................................ 51
Indemnification and Insurance............................................. 51
Compensation Arrangements for Algos Officers.............................. 51
Effect of Merger on Algos Stock Options and Warrants...................... 52
Ownership of Algos Common Stock by Certain Owners and Management of
Algos.................................................................... 53
Current Holdings of Stockholders, Directors and Executive Officers of
Endo..................................................................... 55
DIRECTORS AND MANAGEMENT OF ENDO FOLLOWING THE MERGER...................... 57
General................................................................... 57
Directors of Endo Following the Merger.................................... 57
Executive Officers of Endo Following the Merger........................... 58
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF ENDO..................... 59
THE MERGER AGREEMENT....................................................... 60
General................................................................... 60
The Merger................................................................ 60
Effective Time and Closing of the Merger.................................. 60
Procedure to Exchange Certificates........................................ 60
Representations and Warranties............................................ 61
Covenants Relating to Conduct of Business................................. 62
No Solicitation........................................................... 65
Additional Agreements..................................................... 65
Conditions Precedent to the Merger........................................ 69
Termination; Amendment and Waiver......................................... 69
December 17, 1999 Amendment to Merger Agreement........................... 70
</TABLE>
i
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<TABLE>
<S> <C>
ADDITIONAL AGREEMENTS...................................................... 71
Voting Agreements......................................................... 71
Collaboration Agreement................................................... 72
Kelso Side Letter......................................................... 72
ENDO PHARMA LLC............................................................ 73
Formation; Purpose........................................................ 73
Tax Sharing Agreement..................................................... 73
THE ALGOS SPECIAL MEETING.................................................. 74
Time and Place; Purposes.................................................. 74
Recommendation............................................................ 74
Record Date............................................................... 74
Quorum.................................................................... 74
Vote Required............................................................. 74
Voting Rights; Proxies.................................................... 74
Solicitation of Proxies................................................... 75
Voting and Revocation of Proxies.......................................... 75
THE COMPANIES.............................................................. 76
Algos..................................................................... 76
Endo...................................................................... 76
DESCRIPTION OF ENDO CAPITAL STOCK.......................................... 92
Authorized Capital Stock.................................................. 92
Endo Common Stock......................................................... 92
Endo Preferred Stock...................................................... 93
DESCRIPTION OF THE ENDO WARRANTS........................................... 94
Warrants Issued to Current Algos Stockholders in the Merger............... 94
Warrants Issued to Current Endo Stockholders Immediately Prior to the
Merger................................................................... 96
Series A Warrants......................................................... 96
COMPARISON OF STOCKHOLDER RIGHTS........................................... 98
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION................. 110
LEGAL MATTERS.............................................................. 110
FUTURE STOCKHOLDER PROPOSALS............................................... 111
WHERE YOU CAN FIND MORE INFORMATION........................................ 111
</TABLE>
LIST OF APPENDICES
APPENDIX A -- Agreement and Plan of Merger
APPENDIX B -- Credit Suisse First Boston Corporation Opinion
APPENDIX C -- Form of Endo Warrant Agreement
APPENDIX D -- Form of Amended and
Restated Certificate of
Incorporation of Endo
Pharmaceuticals Holdings Inc.
APPENDIX E -- Form of Amended and
Restated By-Laws of Endo
Pharmaceuticals Holdings Inc.
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What is the proposed transaction?
A: Algos and Endo will form a combined company by merging Algos with a
subsidiary of Endo.
Q: When do you expect to complete the merger?
A: We expect to complete the merger in the second quarter of 2000. Because the
merger is subject to governmental approvals, however, we cannot predict the
exact timing.
Q: What will I receive for one Algos share in the merger?
A: You will receive one share of Endo common stock and one Endo warrant. This
is called the merger consideration.
Q: Will I be able to trade the Endo common stock and Endo warrants that I
receive in the merger?
A: Yes. The Endo common stock and the Endo warrants will each be listed on the
NASDAQ National Market under the symbols " " and " ," respectively.
However, you may elect to receive non-transferable warrants by noting this
election on your proxy card.
Q: How much of Endo's common stock will the Algos stockholders own after the
merger?
A: The Algos stockholders will initially own common stock that represents 20%
of Endo's outstanding common stock. If MorphiDex(R), an Algos drug designed
to treat moderate-to-severe pain, is approved by the U.S. Food and Drug
Administration, or the FDA, on or before December 31, 2001, the warrants
will become exercisable, enabling the Algos stockholders to obtain
additional shares of Endo common stock for $.01 per share that, together
with shares issued to the Algos stockholders in the merger, would have
constituted 35% of Endo's outstanding common stock at the time of the
merger. If the FDA does not approve MorphiDex(R) on or before December 31,
2001, but does approve it on or before December 31, 2002, this percentage
will decrease by 5 percentage points for each six months that MorphiDex(R)
is not approved, as described in detail under "DESCRIPTION OF THE ENDO
WARRANTS" on page 94. If the FDA does not approve MorphiDex(R) by December
31, 2002, these warrants will expire and the warrants that the stockholders
of Endo received immediately prior to the merger will become exercisable,
thereby entitling the holders of these warrants to receive an additional 5%
of the pro forma combined company, to be calculated as if all of these
warrants had been exercised at the closing of the merger.
Also, if Endo does not achieve a cash gross profit target (based on current
Endo products and future non-Algos related products internally developed
and sold or marketed by Endo) for fiscal year 2000 of at least
$147.4 million, then the Endo stockholders who were Endo stockholders
before the merger will return a number of their shares of Endo common stock
to Endo's treasury, which will increase the percentage ownership in Endo of
the Algos stockholders by an additional 5 percentage points.
Q: Can I exercise the warrant right away?
A: No. The warrant is not exercisable until MorphiDex(R) is approved by the
FDA for one or more pain indications. If the FDA approves MorphiDex(R), the
warrant must be exercised within 6 months of this approval. If the FDA does
not approve MorphiDex(R) by December 31, 2002, these warrants will expire
and you will receive nothing with respect to them.
Q: How many shares of Endo will I receive upon exercise of the warrant?
A: The exact number of Endo shares you will receive depends on whether Endo
has achieved a cash gross profit target (based on current Endo products and
future non-Algos related products internally developed and sold or marketed
by Endo) for fiscal year 2000 of at least $147.4 million. If Endo does
achieve this target, you will receive upon exercise:
. approximately 1.15 shares of Endo common stock if the FDA approves
MorphiDex(R) on or before December 31, 2001;
1
<PAGE>
. approximately 0.71 shares of Endo common stock if the FDA approves
MorphiDex(R) after December 31, 2001 and on or before June 30, 2002; and
. approximately 0.33 shares of Endo common stock if the FDA approves
MorphiDex(R) after June 30, 2002 and on or before December 31, 2002.
If Endo does not achieve this cash gross profit target, you will receive
upon exercise:
. approximately 1.00 shares of Endo common stock if the FDA approves
MorphiDex(R) on or before December 31, 2001;
. approximately 0.62 shares of Endo common stock if the FDA approves
MorphiDex(R) after December 31, 2001 and on or before June 30, 2002; and
. approximately 0.29 shares of Endo common stock if the FDA approves
MorphiDex(R) after June 30, 2002 and on or before December 31, 2002.
If the FDA does not approve MorphiDex(R) by December 31, 2002, these
warrants will expire and you will receive nothing with respect to them. All
of these share numbers may be subject to some antidilution adjustments.
Q: What is the exercise price of the warrant?
A: Each warrant is exercisable at a price of $0.01 per share of Endo common
stock. If you have a warrant exercisable into 100 shares, you will need to
pay $1.00 to exercise the warrant. You may elect to exercise on a
"cashless" basis by paying no money and receiving only the net number of
Endo shares, after deducting a number of shares the value of which will
equal the aggregate exercise price that you would have had to otherwise pay
to exercise the warrant.
Q: Will my rights as an Algos stockholder change as a result of the merger?
A: Yes. While your stockholder rights will remain governed by Delaware law,
currently Algos stockholder rights are governed by Algos' certificate of
incorporation and by-laws, whereas Endo stockholder rights are governed by
Endo's certificate of incorporation and by-laws. Algos stockholders will
receive Endo common stock in the merger and will become stockholders of
Endo. Endo intends to amend and restate its certificate of incorporation
and by-laws immediately prior to the merger and, therefore, after the
merger, stating your rights will be governed by Endo's amended and restated
certificate of incorporation and amended and restated by-laws.
Q: Is the merger taxable?
A: Endo and Algos each expect the merger to be tax free. Endo and Algos have
structured the merger so that their legal counsel expect to be able to
deliver opinions, the delivery of which is a condition to the merger,
stating that Endo and Algos will not recognize any gain or loss for U.S.
federal income tax purposes in the merger. Algos stockholders will not
recognize gain or loss for U.S. federal income tax purposes with respect to
Endo common stock received in the merger. The receipt of warrants by Algos
stockholders also should not cause Algos stockholders to recognize gain or
loss for U.S. federal income tax purposes, although this result is not
completely free from doubt, in the case of the receipt of transferable, and
therefore liquid, warrants.
Set forth below in more detail on page 37 is a description of the material
U.S. federal income tax consequences of the transactions, including the tax
treatment of the warrants. The tax consequences to you will depend on the
facts of your own situation. Please consult your tax advisors for a full
understanding of the tax consequences to you of the merger.
Q: Am I entitled to appraisal rights?
A: No. Holders of Algos common stock are not entitled to appraisal rights in
connection with the merger.
Q: How do I vote?
A: If you hold your shares of Algos common stock directly, mail your signed
proxy card in the enclosed postage-paid return envelope as soon as possible
so that your shares may be represented at the special meeting. Stockholders
may also vote in person at the special meeting.
2
<PAGE>
If your shares of Algos common stock are held by a broker in "street name"
or by another nominee, you must instruct your broker or nominee to vote your
shares. If you do not vote your shares, the effect will be a vote against
the merger agreement.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: If you do not provide your broker with instructions on how to vote your
"street name" shares, your broker will not be permitted to vote them on the
merger. You should therefore be sure to provide your broker with
instructions on how to vote your shares. If you do not give voting
instructions to your broker, you will not be counted as voting for purposes
of the merger, the effect of which will be a vote against the merger
agreement unless you appear in person at the Algos special meeting.
Q: Can I change my vote?
A: Yes. You may change your vote before the special meeting by delivering, or
instructing your broker or other nominee to deliver, a later-dated, signed
proxy card to Algos' corporate secretary, or, if you hold your shares
directly, by attending the special meeting and voting in person.
Q: Whom can I call with questions?
A: If you have any questions about the merger or any related transactions,
please call W. Bradford Middlekauff at Algos at (732) 938-5959 or Osagie O.
Imasogie at Endo at (610) 558-9800. If you would like copies of any of the
documents we refer to in this proxy statement/prospectus, you should call
Algos if the documents relate to Algos, or call Endo if the documents relate
to Endo.
Q: Should I send in my stock certificates now?
A: No. After we complete the merger, Endo will send instructions to
stockholders whose shares were converted in the merger. These instructions
will explain how to exchange your Algos share certificates for the
appropriate Endo share certificates and warrants.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
document and completing and signing your proxy card, mail your signed proxy
card in the enclosed postage-paid return envelope as soon as possible so
that your voted shares may be represented at the special meeting. In order
to assure that your vote is obtained, please give your proxy as instructed
on your proxy card even if you currently plan to attend the meeting in
person.
The board of directors of Algos recommends that you vote in favor of the
merger agreement.
3
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SUMMARY
This summary highlights selected information from this proxy
statement/prospectus and may not contain all of the information that is
important to you. For a more complete description of the legal terms of the
merger, you should carefully read the rest of this document and the other
documents to which we refer. See "WHERE YOU CAN FIND MORE INFORMATION" on page
111. We have included page references in parentheses to direct you to a more
complete description of the topics presented in this summary.
The Companies (See Page 76)
Algos Pharmaceutical Corporation
1333 Campus Parkway
Neptune, New Jersey 07753-6815
Telephone: (732) 938-5959
Algos is a leader in developing proprietary pain management products. Our
products combine existing analgesics and anesthetics with NMDA-receptor
antagonist drugs in an attempt to enhance the efficacy of existing pain
management drugs such as morphine. Algos' products currently in development
include opioid analgesics (MorphiDex(R), HydrocoDex/TM/ and OxycoDex/TM/) for
moderate-to-severe pain, a non-opioid analgesic (NeuroDex/TM/) for neuropathic
pain, long-lasting local anesthetics (LidoDex/TM/ IED) for post-operative pain,
an intranasal anesthetic for migraine and products for the treatment of opiate
and nicotine addiction.
Endo Pharmaceuticals Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
Telephone: (610) 558-9800
Endo is a specialty pharmaceutical company with market leadership in pain
management. The company researches, develops, produces and markets both branded
and generic pharmaceuticals focusing primarily on the treatment of pain. Endo
has a portfolio of fourteen branded products that include established brands
such as Percocet(R) and Percodan(R), opioid analgesics that treat moderate-to-
severe pain. In September 1999, Endo launched Lidoderm(R), the first and only
FDA-approved product for the treatment of the pain associated with post-
herpetic neuralgia. Endo is currently a private company owned by affiliates of
Kelso & Company, members of the management of Endo and other investors.
Endo Inc.
223 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
Telephone: (610) 558-9800
Endo Inc. is a newly formed, wholly owned subsidiary of Endo. Upon the
completion of the merger, Algos will be merged with and into Endo Inc. Endo
Inc. will act as an operating subsidiary of Endo following the merger.
Summary of Transaction (See Page 26)
In the merger, Algos will merge with and into Endo Inc. As a result, Algos
will cease to exist as a separate corporate entity and Endo Inc. will continue
as the surviving corporation and a wholly owned subsidiary of Endo. Immediately
after the merger, current Endo stockholders will own 80% of the combined public
company's approximately 89.5 million pro forma fully-diluted outstanding
shares, while Algos stockholders will own 20%.
Stockholders of Algos will receive one share of Endo common stock for each
share of Algos common stock held by them. Each stockholder of Algos will also
receive one Endo warrant for each of its Algos shares. If MorphiDex(R), an
Algos drug designed to treat moderate-to-severe pain, is approved by the U.S.
Food and Drug Administration, or the FDA, on or before December 31, 2001, the
warrants will become exercisable, enabling the Algos stockholders to obtain
additional shares of Endo common stock for $.01 per share that, together with
shares issued to the Algos stockholders in the merger, would have constituted
35% of Endo's outstanding common stock at the time of the merger. If the FDA
does not approve MorphiDex(R) on or before December 31, 2001, but does approve
it on or before December 31, 2002, this percentage will decrease by 5
percentage points for each six months that MorphiDex(R) is not approved, as
described in detail under "DESCRIPTION OF THE
4
<PAGE>
ENDO WARRANTS" on page 94. If the FDA does not approve MorphiDex(R) by December
31, 2002, these warrants will expire unexercised.
In addition, immediately prior to the merger, each current Endo stockholder
will receive one warrant for each of its Endo shares to be exercised for $0.01
per share into Endo common stock if FDA approval of MorphiDex(R) is not
attained by December 31, 2002. If FDA approval of MorphiDex(R) is not attained
by this date, then, upon exercise of these warrants, holders of these warrants
will receive an additional 5% of the pro forma combined company, calculated as
if all of these warrants had been exercised at the closing of the merger. If
FDA approval of MorphiDex(R) is attained by December 31, 2002, these warrants
will expire unexercised. See "DESCRIPTION OF THE ENDO WARRANTS."
If Endo does not meet or exceed a cash gross profit target (based on current
Endo products and future non-Algos related products internally developed and
sold or marketed by Endo) of $147.4 million for fiscal year 2000, shares held
by Endo stockholders who held these shares prior to the merger will be returned
to treasury, thereby increasing current Algos stockholders' ownership of Endo
by an additional 5 percentage points. See "THE MERGER AGREEMENT--Additional
Agreements--Formation of Endo Pharma LLC."
Algos Special Meeting (See Page 74)
The Algos special meeting will be held at on , 2000, at
, local time. At the special meeting, Algos will ask its stockholders to
consider and vote upon the approval and adoption of the merger agreement and
other matters as may properly come before the special meeting or any
postponements or adjournments of the meeting.
Record Date; Voting Power (See Page 74)
Algos stockholders are entitled to one vote per share. Only holders of Algos
common stock at the close of business on , 2000 will be entitled to
notice of the Algos special meeting and entitled to vote at the Algos special
meeting. On that date, there were shares of Algos common stock
outstanding held by holders.
Vote Required (See Page 74)
Approval and adoption of the merger agreement will require the affirmative
vote of the holders of record of a majority of the shares of Algos common stock
outstanding as of the record date.
Algos stockholders holding a total of 4,176,022 shares of Algos common
stock, or approximately 24% of all Algos common stock outstanding on December
15, 1999 have entered into voting agreements that obligate them to vote these
shares in favor of approval and adoption of the merger agreement unless the
merger agreement is terminated. In addition, on December 15, 1999, other
directors and executive officers of Algos and their affiliates, none of whom
have entered into voting agreements, beneficially owned approximately 141,600
shares of Algos common stock, or less than one percent of all Algos common
stock outstanding on December 15, 1999.
Recommendation to Algos Stockholders (See Page 74)
The Algos board of directors has concluded that the merger agreement and the
merger are fair to, and in the best interests of, the Algos stockholders, and
recommends that the stockholders vote in favor of approval and adoption of the
merger agreement.
Formation of Endo Pharma LLC and Treatment of Current Endo Employee Stock
Options (See Page 73)
Endo has agreed to use its reasonable best efforts to cause each of the
current Endo stockholders to contribute their shares of Endo common stock to
Endo Pharma LLC prior to the merger, in an effort to ensure that the exercise
of the Endo employee stock options that are outstanding prior to the merger
will only affect those holders of Endo common stock who held these shares prior
to the merger and not dilute the Algos stockholders' ownership in Endo
following the merger. These current Endo employee stock options will be
exercisable only into shares of Endo common stock that are held by the LLC.
Holders of these Endo employee stock options must consent to this amendment to
their stock options.
5
<PAGE>
The holders of approximately 90% of the outstanding Endo employee stock options
have already consented to this amendment.
Upon these stock options vesting, Endo will incur substantial non-cash
compensation charges. The vesting of these options will not, however, result in
the issuance of any additional Endo shares. The expense associated with these
options remains deductible by Endo even though these options will be satisfied
by Endo Pharma LLC. Accordingly, the parties have entered into a tax sharing
agreement which, in general, provides that Endo will pay to Endo Pharma LLC the
amount of the tax benefits it receives as a result of the exercise of these
current Endo stock options for the years in which these tax benefits arise.
Ownership of Endo After the Merger (See Page 73)
After the merger, Endo Pharma LLC will own 80% of Endo's outstanding common
stock. Kelso Investment Associates V, L.P., Kelso Equity Partners V, L.P. and
other affiliates and designees of Kelso & Company, will have contributed to
this LLC approximately 83.2% of the Endo common stock owned by the LLC, and
Greenwich Street Capital Partners, L.P. will have contributed approximately
9.8%. See "THE MERGER AGREEMENT--Additional Agreements--Formation of Endo
Pharma LLC."
In connection with the merger, Kelso Investment Associates V, L.P. and Kelso
Equity Partners V, L.P. have entered into a binding letter agreement with Algos
and Endo in which these Kelso entities have agreed that they will not, among
other things, engage in any "going private" transaction within the meaning of
Rule 13e-3 of the Securities Exchange Act for a period of two years from the
merger unless the transaction is approved by a vote of, or other action by, the
holders of the majority of the then outstanding Endo common stock not
affiliated with these Kelso entities. See "ADDITIONAL AGREEMENTS--Kelso Side
Letter."
Collaboration Agreement (See Page 72)
On November 26, 1999, Endo Pharmaceuticals Inc., an operating subsidiary of
Endo, and Algos also entered into a collaboration agreement under which the
parties will co-develop oxycodone-based products using Algos' proprietary
technology and Endo's established brands. Endo will be the exclusive worldwide
marketer of these products. In the event the merger does not occur, this
collaboration agreement will survive. See "ADDITIONAL AGREEMENTS--Collaboration
Agreement."
Interests of Officers and Directors in the Merger (See Page 51)
Some members of Algos management and the Algos board of directors have
interests in the merger that are different from, or in addition to, the
interests of the Algos stockholders generally. The Algos board was aware of
these interests and considered them, among other matters, when they adopted and
approved the merger agreement.
Completion of the Merger (See Page 69)
Before we can complete the merger, we must satisfy a number of conditions.
These include:
. Stockholder Approval. The merger agreement will have been approved by the
vote of stockholders of Algos.
. Listing on the NASDAQ. Endo common stock issuable in the merger will have
been authorized for listing on the NASDAQ.
. Hart-Scott-Rodino Act. The waiting period applicable to the consummation
of the merger under the Hart-Scott-Rodino Act will have expired or
terminated.
. Registration Statement. A registration statement, which will include this
proxy statement/prospectus, will have been made effective according to
the Securities Act.
. No Governmental Action/Order. There shall not have been any action by any
governmental entity or law challenging or preventing the merger.
. Performance of Obligations; Representations and Warranties. Each of the
parties will have performed in all material respects each of its
covenants and agreements contained in the merger agreement. Each of the
representations and warranties of the parties contained in the merger
agreement will be true and correct.
6
<PAGE>
. Tax Opinion. The counsel of each of Endo and Algos will have delivered
legal opinions, stating that the merger will qualify as a tax-free
reorganization under the Internal Revenue Code.
. Formation of Endo Pharma LLC. The formation of Endo Pharma LLC will have
occurred.
Termination of the Merger Agreement (See Page 69)
Endo and Algos may mutually agree in writing to terminate the merger
agreement at any time without completing the merger, even after the
stockholders of Algos have approved it. In addition, either Endo or Algos may
decide to terminate the merger if:
. the other company breaches its obligations under the merger agreement in
a material manner;
. there has been a material breach by the other company of any
representation or warranty;
. a final court order prohibits the merger;
. any condition to the merger becomes incapable of satisfaction prior to
June 30, 2000;
. the merger has not been completed by June 30, 2000, unless extended; or
. the Algos stockholders fail to approve the merger agreement.
In addition, subject to specified limitations, Endo may terminate the merger
agreement if, on or before January 25, 2000, it determines in good faith that
any of Algos' intellectual property representations contained in the merger
agreement is inaccurate or untrue. See "THE MERGER AGREEMENT--December 17, 1999
Amendment to Merger Agreement."
Fees and Expenses (See Page 65)
Each party will pay its own costs and expenses. However, all filing fees and
printing expenses related to this proxy statement/prospectus and the
registration statement will be shared equally by Endo and Algos. If the merger
agreement is terminated as a result of a breach, the breaching party will
reimburse the non-breaching party for all out-of-pocket expenses. In addition,
Algos will reimburse Endo for all out-of-pocket expenses if the Algos
stockholders do not approve and adopt the merger agreement.
Accounting Treatment (See Page 37)
The merger will be accounted for using the purchase method of accounting as
this term is used under generally accepted accounting principles. Endo will be
deemed the acquiring company for accounting purposes principally because the
stockholders of Endo will receive 80% of the shares of the combined company.
The purchase method accounts for a merger as an acquisition of one company by
another. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION."
Fairness Opinion of Financial Advisor to Algos Stockholders (See Page 31)
Algos' financial advisor, Credit Suisse First Boston Corporation, has given
a written opinion to Algos' board of directors that, as of November 26, 1999,
the merger consideration the Algos stockholders will receive is fair from a
financial point of view. This opinion is subject to the qualifications and
limitations referred to in the opinion. This opinion is attached to this proxy
statement/prospectus as Appendix B. Algos stockholders are strongly urged to
read this opinion.
Federal Income Tax Considerations (See Page 37)
Endo and Algos each expect the merger to be tax free. Endo and Algos have
structured the merger so that their legal counsel expect to be able to deliver
opinions, the delivery of which is a condition to the merger, that Endo and
Algos will not recognize any gain or loss for U.S. federal income tax purposes
in the merger. Algos stockholders will not recognize gain or loss for U.S.
federal income tax purposes with respect to Endo common stock received in the
merger. The receipt of warrants by Algos stockholders also should not cause
Algos stockholders to recognize gain or loss for U.S.
7
<PAGE>
federal income tax purposes, although this result is not completely free from
doubt, in the case of the receipt of transferable warrants. See "THE MERGER--
Material U.S. Federal Income Tax Consequences of the Merger."
In order to ensure that the receipt of warrants will be tax free, Algos
stockholders may elect to receive non-transferable warrants by noting this
election on their proxy cards. In making this election, however, the warrants
these Algos stockholders will receive will be illiquid securities, and not
transferable to a third party.
Tax matters are very complicated, and the tax consequences of the merger to
you will depend on the facts of your own situation. You should consult your tax
advisor for a full understanding of the tax consequences of the merger to you.
Appraisal Rights (See Page 42)
The holders of Algos common stock are not entitled to dissenters' or
appraisal rights in connection with the merger under applicable Delaware law.
Listing of Endo Common Stock and Warrants (See Page 69)
Endo will use its reasonable best efforts to cause the Endo common stock and
Endo warrants, that are to be issued in connection with the merger, to be
authorized for listing on the NASDAQ. The listing of the Endo common stock to
be issued in connection with the merger is a condition to the merger's
completion. Prior to the completion of the merger, there will be no public
market for these securities.
Forward-Looking Statements (See Page 110)
Any statements in this proxy statement/ prospectus, including the documents
that are incorporated by reference as set forth under the captions "THE MERGER"
and "WHERE YOU CAN FIND MORE INFORMATION," about the expected impact of the
merger on Algos' and Endo's businesses, financial performance and condition,
accounting and tax treatment and the extent of the charges to be incurred by
Endo relating to the merger, are forward-looking statements within the meaning
of the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Further, any statements contained in this proxy statement/ prospectus
that are not statements of historical fact may be deemed to be forward-looking
statements. The words "projects," "believes," "anticipates," "plans,"
"expects," "intends" and similar expressions are intended to identify forward-
looking statements. There are a number of important factors that could cause
the results of the combined company to differ materially from those indicated
by these forward-looking statements, including, but not limited to:
. the significant transaction charges and the potential dilutive effect to
holders of Algos common stock that will result from the merger,
. significant fluctuations in operating results,
. the ability to develop, manufacture and ship planned products,
. the risk that the anticipated strategic benefits from the merger will not
be realized,
. the ability of the combined company to obtain FDA approval of
MorphiDex(R) in a timely manner if at all,
. the ability to recruit, train and retain qualified sales and other
personnel,
. the ability to secure additional funding, and
. other factors described in this proxy statement/prospectus under the
caption "RISK FACTORS."
Neither Endo nor Algos undertakes any obligation to update any forward-
looking statements.
8
<PAGE>
What Algos Stockholders will Receive in the Merger
Algos stockholders will receive one share of Endo common stock and one Endo
warrant for each share of Algos common stock held by them.
The Algos stockholders will initially own common stock that represents 20%
of Endo's outstanding common stock. If the FDA approves MorphiDex(R) on or
before December 31, 2001, the warrants will become exercisable, enabling the
Algos stockholders to obtain additional shares of Endo common stock that,
together with shares issued to the Algos stockholders in the merger, would have
constituted 35% of Endo's outstanding common stock at the time of the merger.
If the FDA does not approve MorphiDex(R) on or before December 31, 2001 but
does approve it on or before December 31, 2002, this percentage will decrease
by 5 percentage points for every six months that MorphiDex(R) is not approved,
as described in detail under "DESCRIPTION OF THE ENDO WARRANTS" on page 94.
Also, if Endo does not achieve a cash gross profit target (based on current
Endo products and future non-Algos related products internally developed and
sold or marketed by Endo) for fiscal year 2000 of at least $147.4 million, then
the Endo stockholders who were Endo stockholders before the merger will return
a number of their shares of Endo common stock to Endo's treasury, which will
increase the percentage ownership in Endo of the Algos stockholders by an
additional 5 percentage points. The following table shows the percentage of
Endo common stock that the stockholders of Algos will own under the various
possibilities, assuming that there are no other share issuances by Endo after
the merger:
- --------
<TABLE>
<CAPTION>
Endo Achieves Cash Gross Endo Does Not Achieve
Profit Target Cash Gross Profit Target
------------------------ ------------------------
<S> <C> <C>
MorphiDex(R) approved by FDA
on or before December 31,
2001........................ 35% 40%
MorphiDex(R) approved by FDA
after December 31, 2001 and
on or before June 30, 2002.. 30% 35%
MorphiDex(R) approved by FDA
after June 30, 2002 and on
or before December 31,
2002........................ 25% 30%
MorphiDex(R) not approved by
December 31, 2002........... 15% 20%
</TABLE>
If Endo does achieve the cash gross profit target, Algos stockholders will
receive for each warrant upon exercise:
. approximately 1.15 shares of Endo common stock if the FDA approves
MorphiDex(R) on or before December 31, 2001;
. approximately 0.71 shares of Endo common stock if the FDA approves
MorphiDex(R) after December 31, 2001 and on or before June 30, 2002; and
. approximately 0.33 shares of Endo common stock if the FDA approves
MorphiDex(R) after June 30, 2002 and on or before December 31, 2002.
If Endo does not achieve the cash gross profit target, Algos stockholders
will receive for each warrant upon exercise:
. approximately 1.00 shares of Endo common stock if the FDA approves
MorphiDex(R) on or before December 31, 2001;
. approximately 0.62 shares of Endo common stock if the FDA approves
MorphiDex(R) after December 31, 2001 and on or before June 30, 2002; and
. approximately 0.29 shares of Endo common stock if the FDA approves
MorphiDex(R) after June 30, 2002 and on or before December 31, 2002.
If the FDA does not approve MorphiDex(R) by December 31, 2002, the warrants
will expire and Algos stockholders will receive nothing with respect to them.
The above share numbers may be subject to some antidilution adjustments.
9
<PAGE>
If the FDA does not approve MorphiDex(R) by December 31, 2002, these
warrants will expire and the warrants that the stockholders of Endo received
immediately prior to the merger will become exercisable, thereby entitling the
holders of these warrants to receive an additional 5% of the pro forma combined
company, calculated as if all of these warrants had been exercised at the
closing of the merger. Specifically, if the FDA does not approve MorphiDex(R)
by December 31, 2002, the warrants that the stockholders of Endo received
immediately prior to the merger will be exercisable, thereby entitling the
holders of these warrants to receive upon exercise:
. approximately 0.42 shares of Endo common stock if Endo does achieve the
cash gross profit described above; and
. approximately 0.25 shares of Endo common stock if Endo does not achieve
this cash gross profit.
10
<PAGE>
Summary Selected Historical Financial Data
Endo Summary Selected Historical Consolidated Financial Data
The following table contains summary selected historical consolidated
financial data for Endo. The consolidated balance sheet data as of December 31,
1997 and December 31, 1998 and the consolidated statement of operations data
for the period from August 26, 1997, the date of the acquisition of Endo from
the then DuPont Merck Pharmaceutical Company (see "THE COMPANIES--Endo"), to
December 31, 1997 and the year ended December 31, 1998 have been derived from
the consolidated financial statements audited by Deloitte & Touche, LLP,
independent accountants of Endo (except for net income (loss) per share data)
and the consolidated balance sheet data as of August 26, 1997, December 31,
1996 and December 31, 1995 and the consolidated statement of operations data
for the periods then ended have been derived from the statements of earnings
and statement of assets to be sold audited by PricewaterhouseCoopers LLP,
independent accountants. The consolidated statement of operations data and
consolidated balance sheet data for the nine months ended and as of September
30, 1998 and September 30, 1999 have been derived from unaudited financial
statements, which in the opinion of Endo's management contain all adjustments,
consisting only of normal recurring accruals, which are necessary for a fair
statement of Endo's financial results for these periods. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of results to be expected for the entire year ending December 31,
1999 or any future period. The information presented below is not necessarily
indicative of the results of Endo's future operations. You should read the
following information together with the consolidated financial statements and
the related notes that are included elsewhere in this proxy
statement/prospectus, "PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION" and
"THE COMPANIES--Endo--Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
Predecessor Company (1) Endo
--------------------------------- --------------------------------------------------------
Period From
August 26, 1997
Year Ended, Period From (Date of Nine Months Ended
December 30, January 1, 1997 Acquisition) to Year Ended ---------------------------
--------------- to August 26, December 31, December 31, September 30, September 30,
1995 1996 1997 1997 1998 1998 1999
-------- -------- --------------- --------------- ------------ ------------- -------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net sales............... $113,884 $102,325 $65,077 $39,431 $108,370 $74,864 $87,296
Cost of sales........... 44,691 48,369 30,551 29,779 54,731 40,730 40,804
Gross profit............ 69,193 53,956 34,526 9,652 53,639 34,134 46,492
Selling, general &
administrative......... 13,024 12,286 5,621 8,707 25,540 18,916 29,743
Research & development.. 6,550 6,856 5,253 2,865 5,893 3,724 6,106
Depreciation and
amortization........... -- -- -- 2,340 7,373 5,477 6,073
Purchased in-process
research and
development............ -- -- -- 46,000 -- -- --
Operating income
(loss) ................ 49,619 34,814 23,652 (50,260) 14,833 6,017 4,570
Interest expense, net... -- -- -- 5,352 14,451 10,840 10,407
Income (loss) before
income tax (benefit)... 49,619 34,814 23,652 (55,612) 382 (4,823) (5,837)
Income tax (benefit).... -- -- -- (20,318) 181 (1,786) (2,215)
Net income (loss)....... 49,619 34,814 23,652 (35,294) 201 (3,037) (3,622)
Net income (loss) per
share
Basic................... N/A N/A N/A $ (0.49) $ 0.00 $ (0.04) $ (0.05)
Diluted................. N/A N/A N/A (0.49) 0.00 (0.04) (0.05)
Shares used to compute
net income (loss) per
share
Basic................... N/A N/A N/A 71,328 71,585 71,574 71,613
Diluted................. N/A N/A N/A 71,328 71,585 71,574 71,613
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Predecessor Company (1) Endo
----------------------------- -----------------------------------------------------
December 31, December 31, September 30,
------------- August 26, ------------------------ ---------------------------
1995 1996 1997 1997 1998 1998 1999
------ ------ --------------- --------------- -------- ------------- -------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash and cash equivalents. $ -- $ -- $ -- $ 14,521 $ 17,367 $ 14,806 $ 20,258
Working capital........... -- -- -- 17,659 37,676 26,775 39,852
Total assets.............. -- -- -- 275,496 287,618 273,237 304,475
Total debt................ -- -- -- 167,472 170,544 170,157 190,465
Other long-term
obligations.............. -- -- -- 5,852 6,352 1,717 1,760
Stockholders' equity...... -- -- -- 74,706 75,358 72,120 71,711
<CAPTION>
Predecessor Company (1) Endo
----------------------------- -----------------------------------------------------
Period From
August 26, 1997
Period From (Date of Nine Months Ended
January 1, 1997 Acquisition) to ---------------------------
to August 26, December 31, September 30, September 30,
1995 1996 1997 1997 1998 1998 1999
------ ------ --------------- --------------- ---- ------------- -------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Financial Data:
Cash flows provided by
operating activities..... -- -- -- $ 15,165 $ 20,932 $ 15,862 $ 10,514
Cash flows used in
investing activities..... -- -- -- (268,454) (3,537) (1,028) (7,598)
Cash flows provided by
(used in) financing
activities............... -- -- -- 267,810 (14,549) (14,549) (25)
Consolidated EBITDA (2)... 49,619 34,814 23,652 17,125 40,727 26,082 24,504
Cash gross profit (3)..... 69,193 53,956 34,526 25,597 72,159 48,722 60,353
</TABLE>
- --------
(1) On August 26, 1997, Endo commenced operations by acquiring certain branded
and generic pharmaceutical products, related rights and certain assets of
DuPont Pharmaceuticals Company, or the Predecessor Company. The financial
information for the Predecessor Company is not comparable to Endo's
financial information as the business was operated as a portion of the
Predecessor Company and historical financial statements were not prepared
for the business. Interest expense and income taxes were not charged to the
business by the Predecessor Company, although income tax expense, on a pro
forma basis, has been reflected on the face of the predecessor financial
statements of $19,848, $13,926 and $9,461 for the years ended December 31,
1995, December 31, 1996 and the period ended August 26, 1997, respectively.
The financial information for the Predecessor Company includes estimates
and allocations that may not necessarily be indicative of the costs that
would have resulted if the business had been operated as a separate entity.
(2) Consolidated EBITDA is defined by Endo's credit facility as consolidated
net income for the applicable period plus, without duplication and to the
extent deducted from revenues in determining consolidated net income for
that period, the sum of (a) the aggregate amount of consolidated cash
interest expense for the period, (b) the aggregate amount of letter of
credit fees paid during the period, (c) the aggregate amount of income tax
expense for the period, (d) all amounts attributable to depreciation and
amortization for the period, (e) all extraordinary charges during the
period and (f) all other non-cash charges during the period; and minus,
without duplication and to the extent added to revenues in determining
consolidated net income for such period, the sum of (i) all extraordinary
gains during the period and (ii) all other non-cash gains during such
period, all as determined on a consolidated basis with respect to Endo and
subsidiaries in accordance with generally accepted accounting principles.
Consolidated EBITDA is used for management presentation purposes and does
not purport to represent net income or net cash provided by operating
activities as those terms are defined under generally accepted accounting
principles. Consolidated EBITDA is not a substitute for operating cash
flow.
12
<PAGE>
(3) Cash gross profit is defined in the merger agreement and has been
determined to be a meaningful measure of financial performance because
unless Endo achieves a cash gross profit of $147.4 million for fiscal year
2000, Endo Pharma LLC will, as set forth in the merger agreement, return a
number of its shares of Endo common stock to Endo's treasury, which will
increase the percentage ownership in Endo of the Algos stockholders by an
additional five percentage points. See "THE MERGER AGREEMENT--Additional
Agreements--Formation of Endo Pharma LLC" for the definition of cash gross
profit.
Non-cash manufacturing charges excluded from gross profit as defined by
generally accepted accounting principles to arrive at cash gross profit are
$15,945, $18,520, $14,588 and $13,861 for the period from August 26, 1997
to December 31, 1997, for the year ended December 31, 1998, for the nine
months ended September 30, 1998 and September 30, 1998, respectively.
Included in the non-cash manufacturing charges are $2,701, $14,228, $10,538
and $13,753, respectively, of charges which reflect the present value of
non-interest bearing promissory notes issued to Dupont Pharmaceuticals over
the initial five-year term of the manufacturing and supply agreement. These
amounts have been excluded from gross profit, per the definition of cash
gross profit. See "THE MERGER AGREEMENT--Additional Agreements--Formation
of Endo Pharma LLC."
Also included in the non-cash manufacturing charges are $13,244, $4,292,
$4,050 and $108, respectively, of purchase accounting charges related to
the allocation of purchase price to the finished goods inventory acquired
at the date of the acquisition of Endo on August 26, 1997. These charges
are deemed to be non-recurring.
13
<PAGE>
Algos Summary Selected Historical Financial Information
The following summary selected financial information of Algos as of and for
the five fiscal years ended December 31, 1998 has been derived from Algos'
audited financial statements contained in its Annual Report on Form 10-K/A for
the years then ended, and is qualified in its entirety by such documents. The
financial statements for those periods were audited by PricewaterhouseCoopers
LLP, independent public accountants. The summary financial information for Algos
as of and for the nine months ended September 30, 1999 and 1998 has been derived
from the unaudited financial statements contained in the Quarterly Report on
Form 10-Q for the period ended September 30, 1999 and is qualified in its
entirety by such document and, in the opinion of Algos' management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information for the unaudited interim periods. The
operating results for the nine months ending September 30, 1999 are not
necessarily indicative of results for the full fiscal year ending December 31,
1999. This information should be read in conjunction with management's
discussion and analysis of results of operations and financial condition of
Algos and the financial statements and notes thereto of Algos incorporated by
reference into this proxy statement/prospectus.
<TABLE>
<CAPTION>
For the Nine
Months Ended
For the Year Ended December 31, September 30,
-------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- -------- --------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $ -- $ -- $ 2,000 $ 1,000 $ -- $ -- $ --
Operating expenses:
Research and
development............ 654 1,615 3,344 9,799 13,085 10,399 7,602
Selling, general and
administrative......... 623 760 2,466 2,458 4,813 3,295 7,718
------- ------- ------- ------- -------- -------- --------
Total operating
expenses............... 1,277 2,375 5,810 12,257 17,898 13,694 15,320
------- ------- ------- ------- -------- -------- --------
Interest income......... 153 253 723 2,435 2,028 1,508 1,569
------- ------- ------- ------- -------- -------- --------
Net loss................ $(1,124) $(2,122) $(3,087) $(8,822) $(15,870) $(12,186) $(13,751)
------- ------- ------- ------- -------- --------
Net loss per common
share, basic and
diluted................ $ (0.35) $ (0.36) $ (0.56) $ (0.98) $ (0.76) $ (0.79)
======= ======= ======= ======== ======== ========
Weighted average common
shares outstanding,
basic and diluted...... 6,003 8,535 15,863 16,144 15,991 17,341
======= ======= ======= ======== ======== ========
<CAPTION>
December 31, September 30,
-------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- -------- --------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents,
marketable securities
and interest
receivable............. $ 5,634 $ 3,707 $48,576 $41,658 $ 50,497 $ 29,675 $ 37,696
Working capital......... 5,503 3,419 47,932 36,368 44,216 22,975 35,114
Total assets............ 5,765 3,820 49,202 42,360 52,430 31,676 39,254
Deficit accumulated
during the development
stage.................. (1,766) (3,888) (6,976) (15,798) (31,668) (27,984) (45,420)
Total stockholders'
equity................. 5,618 3,521 48,228 39,759 49,518 28,177 36,272
</TABLE>
14
<PAGE>
Summary Selected Unaudited Pro Forma Combined Financial Information of Endo
The following table contains summary selected unaudited pro forma financial
information derived from the unaudited pro forma condensed combined financial
information set forth under "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
INFORMATION." You should read this table in conjunction with "UNAUDITED PRO
FORMA CONDENSED COMBINED FINANCIAL INFORMATION" and the financial statements
included elsewhere in this proxy statement/prospectus or incorporated by
reference in this proxy statement/prospectus.
<TABLE>
<CAPTION>
Unaudited Pro Forma Unaudited Pro Forma
Combined for the Combined for the
Year Ended Nine Months Ended
December 31, September 30,
1998 1999
------------------- -------------------
<S> <C>
(amounts in thousands,
except per share data)
Consolidated Statement of
Operations Data:
Net sales........................ $108,370 $ 87,296
Cost of sales.................... 54,731 40,804
Gross profit..................... 53,639 46,492
Selling, general and
administrative.................. 30,211 37,286
Research and development......... 18,979 13,708
Depreciation and amortization.... 26,939 20,816
Purchased in-process research and
development..................... -- --
Operating loss................... (22,490) (25,318)
Interest expense, net............ 12,422 8,838
Loss before income tax
(benefit)....................... (34,912) (34,156)
Income tax (benefit)............. -- --
Net loss......................... (34,912) (34,156)
Net loss per share
Basic.......................... $ (0.39) $ (0.38)
Diluted........................ (0.39) (0.38)
Shares used to compute loss per
share
Basic.......................... 89,486 89,513
Diluted........................ 89,486 89,513
<CAPTION>
Unaudited Pro Forma
Combined as of the
Nine Months Ended
September 30,
1999
-------------------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........ $ 53,688
Working capital.................. 67,466
Total assets..................... 537,967
Total debt....................... 190,465
Other long-term obligations...... 1,760
Stockholders' equity............. 294,721
<CAPTION>
Unaudited Pro Forma Unaudited Pro Forma
Combined as of the Combined as of the
Year Ended Nine Months Ended
December 31, September 30,
1998 1999
------------------- -------------------
<S> <C> <C>
Other Financial Data:
Consolidated EBITDA (1).......... $ 22,970 $ 9,359
Cash gross profit (2)............ 72,159 60,353
</TABLE>
15
<PAGE>
- --------
(1) Consolidated EBITDA is defined by Endo's Credit Facility as consolidated
net income for the applicable period plus, without duplication and to the
extent deducted from revenues in determining consolidated net income for such
period, the sum of (a) the aggregate amount of consolidated cash interest
expense for the period, (b) the aggregate amount of letter of credit fees
paid during the period, (c) the aggregate amount of income tax expense for
the period, (d) all amounts attributable to depreciation and amortization for
the period, (e) all extraordinary charges during the period and (f) all other
non-cash charges during the period; and minus, without duplication and to the
extent added to revenues in determining consolidated net income for the
period, the sum of (i) all extraordinary gains during the period and (ii) all
other non-cash gains during such period, all as determined on a consolidated
basis with respect to the borrower and subsidiaries in accordance with
generally accepted accounting principles. Consolidated EBITDA is used for
management presentation purposes and does not purport to represent net income
or net cash provided by operating activities as those terms are defined under
generally accepted accounting principles. Consolidated EBITDA is not a
substitute for operating cash flow.
(2) Cash gross profit is defined by the merger agreement and has been
determined to be a meaningful measure of financial performance because,
unless Endo achieves a cash gross profit of $147.4 million for fiscal year
2000, Endo Pharma LLC will, as set forth in the merger agreement, return a
number of its shares of Endo common stock to Endo's treasury, which will
increase the percentage ownership in Endo of the Algos stockholders by an
additional five percentage points. See "THE MERGER AGREEMENT--Additional
Agreements--Formation of Endo Pharma LLC" for the definition of cash gross
profit. Non-cash manufacturing charges excluded from gross profit (as
defined by generally accepted accounting principles) to arrive at cash
gross profit are $18,520 and $13,861 for the year ended December 31, 1998
and the nine months ended September 30, 1999, respectively. Included in the
non-cash manufacturing charges are $14,228 and $13,753, respectively of
charges which reflect the present value of non-interest bearing promissory
notes issued to Dupont Pharmaceuticals over the initial five-year term of
the manufacturing and supply agreement. These amounts have been excluded
from gross profit, per the definition of cash gross profit.
Also included in the non-cash manufacturing charges are $4,292 and $108,
respectively, of purchase accounting charges related to the allocation of
purchase price to the finished goods inventory acquired at the date of the
acquisition of Endo on August 26, 1997. These charges are deemed to be non-
recurring.
16
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are separate net income (loss), cash dividends and book
value per common share data for Endo on a historical basis, giving effect to
the recapitalization of Endo that will take place immediately prior to the
merger, for the combined company on a pro forma combined basis, for Algos on a
historical basis and for the combined company on a pro forma combined basis per
equivalent Algos share.
Under "Pro Forma Combined Per Algos Equivalent Common Share Data" below, we
show the effect of the merger from the perspective of an Algos stockholder. We
computed the information set out under that caption by multiplying the combined
company pro forma information by the exchange ratio of one (1).
You should read the information below together with Endo's and Algos'
historical financial statements and related notes contained in the annual
reports and other information that Algos has filed with the Securities and
Exchange Commission, or SEC, and incorporated by reference. To obtain copies of
these documents, see "WHERE YOU CAN FIND MORE INFORMATION" on page 111.
Unaudited pro forma combined data has been provided below for illustrative
purposes only. The companies may have performed differently had they always
been combined. You should not rely on this information as being indicative of
the historical results that we would have achieved had our companies always
been combined or the future results that the combined company will experience
after the merger.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30,
December 31, 1998 1999
----------------- -----------------
<S> <C> <C>
Endo Historical per Common Share Data:
Earnings (Loss)--Basic.................... $ 0.00 $(0.05)
Earnings (Loss)--Assuming dilution........ $ 0.00 $(0.05)
Cash dividends............................ -- --
Book value (as of the end of the period).. $ 1.05 $ 1.00
Pro Forma Combined per Common Share Data
for the Combined Company:
Loss--Basic............................... $(0.39) $(0.38)
Loss--Assuming dilution................... $(0.39) $(0.38)
Cash dividends............................ -- --
Book value (as of the end of the period).. -- $ 3.29
Algos Historical per Common Share Data:
Loss--Basic............................... $(0.98) $(0.79)
Loss--Assuming dilution................... $(0.98) $(0.79)
Cash dividends............................ -- --
Book value (as of the end of the period).. $ 2.91 $ 2.09
Pro Forma Combined per Algos Equivalent
Common Share Data:
Loss--Basic............................... $(0.39) $(0.38)
Loss--Assuming dilution................... $(0.39) $(0.38)
Cash dividends............................ -- --
Book value (as of the end of the period).. -- $ 3.29
</TABLE>
17
<PAGE>
ALGOS MARKET PRICE INFORMATION AND DIVIDENDS
Algos common stock is traded on the NASDAQ National Market under the symbol
"ALGO." The following table sets forth, for the periods indicated, the range of
high and low sale prices of Algos common stock. The prices shown represent
quotations between dealers, without adjustment for retail markups, markdowns or
commissions, and may not represent actual transactions. Algos stockholders are
urged to consult publicly available sources for current price information
regarding the Algos common stock. Algos has never declared or paid any cash
dividends on its capital stock.
<TABLE>
<CAPTION>
Algos Common
Stock
---------------
High Low
------- -------
<S> <C> <C>
Year Ending December 31, 1997
1st Quarter.............................................. $ 20.75 $10.875
2nd Quarter.............................................. 19.25 14.00
3rd Quarter.............................................. 31.625 14.75
4th Quarter.............................................. 33.00 21.50
Year Ending December 31, 1998
1st Quarter.............................................. $ 34.00 $ 26.50
2nd Quarter.............................................. 39.50 23.75
3rd Quarter.............................................. 36.00 19.5625
4th Quarter.............................................. 29.75 18.50
Year Ending December 31, 1999
1st Quarter.............................................. $33.625 $24.375
2nd Quarter.............................................. 30.125 19.875
3rd Quarter.............................................. 28.75 7.625
4th Quarter (through the close of trading December 15,
1999)................................................... 18.00 8.25
</TABLE>
18
<PAGE>
RISK FACTORS
You should consider the following risk factors in determining how to vote at
the special meeting.
The present lack of a public market for Endo common stock and Endo warrants and
the potential volatility of the market for these securities after the merger
may reduce liquidity and adversely affect the trading price of these
securities. Endo has not paid and does not intend to pay dividends.
Before the merger, there will have been no public market for the Endo common
stock and Endo warrants that you will receive in the merger. As a result, the
price at which the Endo common stock and Endo warrants will trade following the
merger is uncertain and may not necessarily correlate to the market prices of
the Algos common stock exchanged in the merger. Although Endo has applied to
have its common stock and warrants approved for trading on NASDAQ and the
listing of its common stock is a condition to the merger, we cannot assure you
that even if it is approved for listing the common stock and warrants will be
actively traded on the market or that, if active trading does develop, it will
be sustained. The stock market has from time to time experienced significant
price and volume fluctuations that may be unrelated to the operating
performance of particular companies. The market price of the Endo common stock
and Endo warrants, and the price at which Endo may sell its securities in the
future, could be subject to large fluctuations in response to changes and
variations in Endo's operating results, general market conditions,
announcements of technological innovations, regulatory matters or new
commercial products by Endo or its competitors, developments or disputes
concerning patent or proprietary rights, publicity regarding actual or
potential clinical results relating to products under development by Endo or
its competitors, regulatory developments in the United States as well as
foreign countries, public concern as to the safety of pharmaceutical products,
and economic and other external factors, as well as period-to-period
fluctuations in Endo's financial results. In addition, the complicated nature
of this transaction and the non-cash compensation charges associated with
variable plan accounting may adversely affect the market price of the Endo
common stock and the Endo warrants. See "THE COMPANIES-- Endo--Description of
Endo Stock Option Plans Following the Merger."
Endo has not paid any cash dividends since inception. Endo does not
anticipate paying cash dividends in the foreseeable future.
Endo is dependent on product development, commercialization and marketing for
continued growth and development.
Endo's future results of operations will depend, to a significant extent,
upon its ability to successfully commercialize new proprietary and off-patent
pharmaceutical products in a timely manner. As a result, new products must be
continually developed, tested and manufactured and, in addition, must meet
regulatory standards and receive requisite regulatory approvals. Products
currently in development by Endo may or may not receive the regulatory
approvals necessary for marketing by Endo and other third-party partners.
Furthermore, the development and commercialization process is time-consuming
and costly, and we cannot assure you that any of Endo's products, if and when
developed and approved, can be successfully commercialized. Risk particularly
exists with respect to the development of proprietary products, because of the
uncertainties and higher costs associated with research and development of
these products and the unproven market acceptability of these products.
Once approved, there is no guarantee that the market will accept Endo's future
products.
Even if regulatory approvals are obtained, uncertainty exists as to whether
Endo's products will be accepted by the market. A number of factors may limit
the market acceptance of Endo's products, including the timing of regulatory
approvals and market entry relative to competitive products, the availability
of alternative products, the price of Endo's products relative to alternative
products, the availability of third-party reimbursement and the extent of
marketing efforts by third-party distributors or agents retained by Endo. There
can be no assurance that products will receive market acceptance in a
commercially viable period of time, if at all. In addition, many of Endo's
products contain narcotic ingredients that require stringent record-keeping
obligations and strict storage requirements and other limitations on these
products' availability which could limit the commercial usage of these
products.
19
<PAGE>
The FDA may never approve MorphiDex(R) and the Endo warrants issuable in the
merger may never become exercisable and thus expire worthless.
The Endo warrants issuable to Algos stockholders in the merger are only
exercisable if FDA approval of MorphiDex(R) is obtained on or before December
31, 2002. If FDA approval is not obtained by this time, each of these Endo
warrants will become void, and all rights in respect of these Endo warrants
will cease. In the event that the FDA never approves MorphiDex(R), a material
adverse effect on Endo's business, results of operations or financial condition
could occur. If the FDA does not approve MorphiDex(R) by December 31, 2002, the
warrants that the stockholders of Endo received immediately prior to the merger
will become exercisable, thereby entitling the holders of these warrants to
receive an additional 5% of the pro forma combined company, calculated as if
all of these warrants had been exercised at the closing of the merger. The
former Algos stockholders' ownership of Endo will be diluted in this event.
Conflicts of interests could result in decisions that are not in the
stockholders' best interests.
The merger agreement provides that if the cash gross profit of Endo (based
on current Endo products and future non-Algos related products internally
developed and sold or marketed by Endo) for fiscal year 2000 does not meet or
exceed $147.4 million, then shares held by Endo stockholders who held these
shares prior to the merger will be returned to treasury, thereby increasing
current Algos stockholders' ownership of Endo by an additional 5 percentage
points. The result of this merger agreement provision is that Endo's business
could be managed for the short-term goal of ensuring that this cash gross
profit target is met at the possible expense of Endo's long-term business plan.
In addition, the two sets of Endo warrants that will be issued in connection
with the merger are diametrically opposed in that the warrants to be issued to
Algos stockholders in the merger become exercisable if MorphiDex(R) is approved
by the FDA on or prior to December 31, 2002 and the warrants being issued to
Endo stockholders prior to the merger become exercisable if MorphiDex(R) is not
approved by the FDA by December 31, 2002. However, Endo has agreed to use its
reasonable efforts to continue to process the FDA application for MorphiDex(R)
in a timely fashion.
Existing stockholders of Endo will control Endo following the merger.
After the merger, Endo Pharma LLC will own 80% of Endo's common stock. See
"THE MERGER AGREEMENT--Conditions Precedent to the Merger--Formation of Endo
Pharma LLC" and "ENDO PHARMA LLC." Kelso Investment Associates V, L.P. and
Kelso Equity Partners V, L.P. (affiliates of Kelso & Company) together with
other Kelso affiliates and designees will have contributed to this LLC
approximately 85.2% of the Endo common stock held by the LLC and Greenwich
Street Capital Partners, L.P. and affiliated investors will have contributed
approximately 13.6%. In addition, some of the directors of Endo are partners in
, the managing member of the LLC, and therefore may affect how the LLC
votes its Endo shares on corporate matters. As a result, this entity and these
individuals would be able to control the outcome of stockholder votes,
including votes concerning the election of the majority of directors, the
adoption or amendment of provisions in Endo's charter or by-laws and the
approval of mergers and other significant corporate transactions.
Algos' stockholders' ownership of Endo may be diluted by the exercise of
current Endo employee stock options and future share issuances.
Endo has agreed to use its reasonable best efforts to cause each of the
current Endo stockholders to contribute its shares of Endo common stock to Endo
Pharma LLC prior to the merger, in an effort to ensure that the Endo employee
stock options that are outstanding prior to the merger will affect only those
holders of Endo common stock who held their shares prior to the merger.
20
<PAGE>
These current Endo employee stock options will be exercisable only into shares
of Endo common stock that are held by the LLC. Holders of these Endo employee
stock options must consent to this amendment to their stock options. Although
the executives of Endo who, in the aggregate, hold approximately 90% of the
currently outstanding Endo employee stock options have consented to this
amendment, there is a risk that the remaining employees who hold approximately
10% of these stock options will not. Accordingly, it is possible that the
current Endo employee stock options held by these non-executive employees may,
once exercised into shares of Endo common stock, dilute the ownership of all
holders of Endo on a pro rata basis. In addition, any future share issuances by
Endo will also dilute the ownership of all holders of Endo other than warrant
holders who will have minimal antidilution protection.
Endo is dependent on key personnel.
Because of the specialized scientific nature of Endo's business, Endo's
ability to develop its products and to compete with its current and future
competitors, Endo is, and will remain, highly dependent, in large part, upon
its ability to attract and retain qualified scientific and technical personnel.
The loss of significant scientific and technical personnel or the failure to
recruit additional key scientific and technical personnel could have a material
adverse effect on Endo. While Endo has consulting agreements with certain key
individuals and institutions and has employment agreements with its key
executives, we cannot assure you that Endo will succeed in retaining this
personnel or their services under existing agreements. There is intense
competition for qualified personnel in the areas of Endo's activities, and we
cannot assure you that Endo will be able to continue to attract and retain the
qualified personnel necessary for the development of its business.
Endo faces intense competition from new products and from lower-cost generic
products.
The pharmaceutical industry is highly competitive and rapidly changing.
Endo's principal competitors, among others, are major international
corporations with substantial resources for research and development,
production, and technical, marketing and human resources. Endo's branded
products also face intense competition from lower-cost generic products. As new
products enter the market, Endo's competitors' products may be more effective
or more effectively marketed and sold than Endo's products. Increased
competition could result in significant price competition, reduced profit
margins or loss of market share. If Endo fails to maintain its competitive
position, this could have a material adverse effect on its business, results of
operations or financial condition.
Endo's current credit agreement limits its ability to conduct its business,
which could negatively affect Endo's ability to finance future capital needs
and engage in other business activities.
The covenants in Endo's existing credit agreement contain a number of
significant limitations on its ability to, among other things:
. pay dividends;
. incur additional indebtedness;
. create liens on its assets; and
. acquire or dispose of assets.
These restrictive covenants contained in Endo's credit agreement could
negatively affect its ability to finance its future capital needs, engage in
other business activities or withstand a future downturn in its business or the
economy.
Endo has indebtedness, which may restrict its growth and put it at a
competitive disadvantage.
As of September 30, 1999, Endo had total indebtedness of approximately
$190.5 million. This leverage may have important negative consequences for
Endo, including the following:
. Endo's ability to obtain additional financing for acquisitions, working
capital, investments or other expenditures could be impaired or financing
may not be available on terms favorable to Endo;
21
<PAGE>
. a portion of Endo's cash flow will be used to make principal and interest
payments on its debt, reducing the funds that would otherwise be
available to Endo for its operations and future business opportunities;
. a decrease in Endo's net operating cash flows or an increase in its
expenses could make it difficult for Endo to meet its debt service
requirements and force Endo to modify its operations; and
. Endo may be placed at a competitive disadvantage if it has significantly
more indebtedness than its competitors.
Product regulation may adversely affect Endo's ability to bring new products to
market.
Endo and its competitors are subject to strict government controls on the
development, manufacture, labeling, distribution and marketing of products.
Endo must obtain and maintain regulatory approval for a pharmaceutical product
before it may sell the product.
The submission of an application to the FDA does not guarantee that the FDA
will grant approval to market the product.
In Endo's principal market, the approval process for a new product is
complex and lengthy. The time taken to obtain approval varies but generally
takes from eight months to four years from the date of application. This
process increases the costs to Endo of developing new products and increases
the risk that Endo will not succeed in selling these products successfully.
Endo is dependent on outside manufacturers for the manufacture of its products.
Endo's products are all currently manufactured by third-party manufacturers
pursuant to contractual arrangements. Accordingly, Endo's ability to control
the manufacturing process or costs related to this process is limited. Endo is
reliant on its third-party manufacturers to maintain the facilities at which
its products are manufactured in compliance with FDA and DEA regulations. The
vast majority of Endo's products are manufactured by DuPont Pharmaceuticals.
The contract that governs this manufacturing arrangement has a five-year
initial term expiring August 2002, and is renewable at Endo's option up through
2007. At the expiration of this term, Endo will have to consider alternatives
for its manufacturing which may be expensive. Additionally, we cannot assure
you that Endo's third-party manufacturers will fulfill their obligations under
the terms of the manufacturing contracts.
Endo's business is subject to government regulation. There can be no assurance
of U.S. or foreign regulatory approval of any of Endo's products.
The federal, state and local governmental authorities in the United States,
the principal one of which is the FDA, impose substantial requirements on the
manufacture, labeling, sale, distribution, marketing, advertising, promotion
and introduction of therapeutic pharmaceutical products through lengthy and
detailed laboratory and clinical testing and other costly and time-consuming
procedures. Satisfaction of these requirements typically takes a number of
years, varies substantially based upon the type, complexity and novelty of the
pharmaceutical products and is subject to uncertainty. Government regulation
also affects the manufacture and marketing of pharmaceutical products.
Regulatory approvals, if granted, may include significant limitations on the
indicated uses for which a product may be marketed. The FDA actively enforces
regulations prohibiting marketing of products for non-indicated use. Failure to
comply with applicable regulatory requirements in this regard can result in,
among other things, government-imposed fines, suspensions of approvals,
seizures or recalls of products, operating restrictions and criminal
prosecutions. Furthermore, changes in existing regulations or adoption of new
regulations could prevent Endo from obtaining, or affect the timing of, future
regulatory approvals. The effect of government regulation may be to delay
marketing of Endo's new products for a considerable period of time, to impose
costly procedures upon Endo's activities and to furnish a competitive advantage
to larger companies that compete with Endo.
22
<PAGE>
There can be no assurance that FDA or other regulatory approval for any
products developed by Endo, including MorphiDex(R), will be granted on a timely
basis, if at all, or, if granted, that this approval will not entail limiting
the indicated uses for which it may be marketed, which indications could limit
the potential market for any of these products. Any delay of this nature in
obtaining, or failure to obtain, these approvals would adversely affect the
marketing of Endo's products and the ability to generate product revenue. Endo
is also subject to certain U.S. Drug Enforcement Agency, or DEA, regulations,
including restrictions on storage, transportation and administration, for its
narcotic products. Government regulation may increase at any time, creating
additional hurdles for Endo. Furthermore, approved products and their
manufacture are subject to continued review and the possible discovery of
previously unknown problems with a product or its manufacture, and this review
may result in restrictions on this product or its manufacture, including
withdrawal of the product from the market. In general, failure to comply with
FDA requirements could result in severe civil and criminal penalties, including
but not limited to recall or seizure of product, injunction against a product's
manufacture, distribution, sales and marketing and possible criminal
prosecution. In addition, the extent of potentially adverse government
regulation that might arise from future legislation or administrative action
cannot be predicted.
The ability of Endo to protect its proprietary technology is uncertain.
Endo's success, competitive position and amount of potential future income
will depend in part on its ability to obtain patent protection relating to the
technologies, processes and products it is currently developing and may develop
in the future. Endo's policy is to seek patent protection and enforce
intellectual property rights. We cannot assure you that patent applications
submitted by Endo will result in patents being issued. With respect to its
current products (excluding Algos-related products), Endo holds two issued U.S.
patents and two foreign issued patents, two U.S. patent applications pending
and 11 foreign patent applications pending and has exclusive licenses for 22
issued U.S. patents, four pending U.S. applications and 64 foreign issued
patents. We cannot assure you that any patent issued or licensed to Endo will
not be infringed upon or designed around by others, or will otherwise be
commercially viable. In this regard, the patent position of pharmaceutical
compounds and compositions is particularly uncertain. Even issued patents may
later be modified or revoked by the U.S. Patent and Trademark Office or in
legal proceedings. Moreover, Endo believes that obtaining foreign patents may
be more difficult than obtaining domestic patents because of differences in
patent laws and, accordingly, its patent position may be stronger in the U.S.
than abroad. In addition, foreign patents may be more difficult to protect
and/or the remedies available may be less extensive than in the United States.
Patent applications in the United States are maintained in secrecy until
patents issue and, since publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries, Endo cannot be certain that
it was the first creator of the inventions covered by pending patent
applications or the first to file patent applications on those inventions. We
cannot assure you that any of Endo's pending patent applications will be
allowed, or if allowed, whether the scope of the claims allowed will be
sufficient to protect Endo's products. Litigation to establish the validity of
patents, to defend against patent infringement claims of others and to assert
patent infringement claims against others can be expensive and time-consuming
even if the outcome is favorable to Endo. If the outcome is unfavorable to
Endo, this could have a material adverse effect on its business, results of
operations or financial condition. Endo may, in the future, take steps to
enhance its patent protection, but there can be no assurance that these steps
will be successful or that, if unsuccessful, its patent protection will be
adequate.
Endo also relies upon, and expects to continue to rely upon, trade secrets,
know-how, continuing technological innovations and licensing opportunities to
develop and maintain its competitive position. Endo attempts to protect its
proprietary technology in large part by confidentiality agreements with its
employees, consultants and other contractors. We cannot assure you, however,
that these agreements will not be breached, that Endo would have adequate
remedies for any breach or that Endo's trade secrets will not otherwise become
known or independently discovered by competitors. We cannot assure you that
others will not independently develop substantially equivalent proprietary
information or be issued patents that may prevent the sale of Endo's products
or know-how or require licensing and the payment of significant fees or
royalties by Endo in order to produce its products. Moreover, we cannot assure
you that Endo's technology does not infringe upon any valid claims on patents
owned by others.
23
<PAGE>
If Endo were found to be infringing on a patent held by another, Endo might
have to seek a license to use the patented technology. We cannot assure you
that, if required, Endo would be able to obtain such a license on terms
acceptable to Endo, if at all. If a legal action were to be brought against
Endo or its licensors, Endo could incur substantial costs in defending itself,
and we cannot assure you that such an action would be resolved in Endo's favor.
If such a dispute were to be resolved against Endo, Endo could be subject to
significant damages, and the testing, manufacture or sale of one or more of
Endo's technologies or proposed products, if developed, could be enjoined.
We cannot assure you as to the degree of protection any patents will afford,
whether patents will be issued or whether Endo will be able to avoid violating
or infringing upon patents issued to others or that others will not manufacture
and distribute Endo's patented products upon expiration of their patents.
Despite the use of confidentiality agreements and non-compete agreements, which
themselves may be of limited effectiveness, it may be difficult for Endo to
protect its trade secrets.
Integration of Algos into Endo may be difficult and expensive to achieve.
The merger involves the integration of companies that have previously
operated independently. We cannot assure you that Endo will integrate the
operations of Endo and Algos without encountering difficulties, including
possible unanticipated costs, failure to retain key employees or the diversion
of management attention. In addition, following the merger, the combined
company may not realize the results that Endo expects to achieve or that would
justify the investment made.
Product liability claims could adversely affect Endo's business and results of
operations.
Although Endo is insured for product liability claims, product liability is
a significant commercial risk for Endo. Substantial damage awards have been
made in some jurisdictions against pharmaceutical companies based upon claims
for injuries allegedly caused by the use of their products.
Currently, Endo is not involved in any product liability cases. However, we
cannot assure you that a future product liability claim or series of claims
brought against Endo would not have an adverse effect on its business, results
of operations or financial condition. If any claim is brought against Endo,
regardless of the success or failure of the claim, there can be no assurance
that Endo will be able to obtain or maintain product liability insurance in the
future on acceptable terms or with adequate coverage against potential
liabilities.
The availability of health care reimbursement is uncertain.
Endo's ability to commercialize its pain management products depends in part
on the extent to which reimbursement for the costs of these products is
available from government health administration authorities, private health
insurers and others. We cannot assure you that third-party insurance coverage
will be adequate for Endo to maintain price levels sufficient for realization
of an appropriate return on its investment. Government, private insurers and
other third-party payers are increasingly attempting to contain health care
costs by (1) limiting both coverage and the level of reimbursement for new
products approved for marketing by the FDA and (2) refusing, in some cases, to
provide any coverage for uses of approved products for indications for which
the FDA has not granted marketing approval. If government and third-party
payers do not provide adequate coverage and reimbursement levels for uses of
Endo's products, the market acceptance of these products could be adversely
affected.
Endo's Year 2000 program may not succeed, or outside factors could cause the
Year 2000 problem to disrupt its operations.
Endo has evaluated the impact of the Year 2000 issue and has completed its
upgrade or modification of critical applications and systems to accommodate
Year 2000 dating, which includes all computer systems, office machines, phone
and security systems, off-the-shelf systems and applications, custom software
applications and accounting systems. Endo believes that the financial and
operational systems of Endo, as currently used, will function adequately with
respect to the Year 2000 issue.
24
<PAGE>
Endo has limited information concerning the compliance status of its third-
party contractors. Endo's current third-party contractors generally test Endo's
products and provide Endo with the results of those tests and manufacture drug
supplies. Endo has initiated formal communications with all of its significant
suppliers and vendors to determine the extent to which Endo may be vulnerable
if those third parties fail to remediate their own Year 2000 issues. Endo is
continually receiving and evaluating written assurances from all significant
suppliers and vendors that they have completed, or are working on, Year 2000
projects with deadlines well in advance of December 1999. To date, all
significant suppliers and vendors whom Endo has contacted have reported that
they expect to be fully operational on January 1, 2000.
As part of the commercialization of products, Endo has third parties
manufacture and distribute its products. Endo places significant dependence on
these third parties' computer systems for purchasing, production, customer
order entry and invoicing and other related activities. A disruption in these
systems could result in lost revenue from inventory shortages, improper
execution of customer orders and/or delays in the resolution and collection of
outstanding invoices.
At this time, Endo does not expect that the cost of its Year 2000 issue
compliance program will be material to its business, financial condition or
results of operations and does not currently anticipate any material disruption
in its operations.
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THE MERGER
Background of the Merger
From time to time during 1997, while Kelso and members of Endo's management
were considering the acquisition of Endo, Michael B. Goldberg, a principal at
Kelso and a director of Endo, and Donald G. Drapkin, a director of Algos,
discussed the similarities between the businesses of Endo and Algos as well as
the potential strategic fit between the companies. Shortly after the formation
of Endo in August 1997, Carol A. Ammon, the President and Chief Executive
Officer of Endo, approached John W. Lyle, the President and Chief Executive
Officer of Algos, regarding Endo's interest in a strategic combination of the
two companies. Those discussions did not result in any agreement with respect
to a combination. However, Algos recognized the potential strategic fit between
Algos' products in development and Endo's product line and manufacturing and
marketing capabilities and expressed an interest in continuing communications.
Over the next two years, the companies from time to time continued to discuss a
possible stock-for-stock transaction as well as a possible collaboration in
which Algos and Endo would work together to complete the development,
manufacturing and commercialization of pain management products containing
Algos' proprietary technology and which would be marketed under Endo's brand
names.
In connection with these discussions regarding a strategic combination, or
alternatively a collaboration, Endo and Algos each furnished the other
proprietary information regarding its products and its business generally. None
of these discussions resulted in an agreement on the material terms of either a
strategic combination or a collaboration.
On June 29, 1999, Mr. Lyle, Roger Kimmel and Michael Hyatt, each Algos
directors, met with Ms. Ammon, other members of Endo's management,
representatives of Kelso and representatives of Endo's financial advisors,
Goldman, Sachs & Co. and Salomon Smith Barney Inc., to further discuss a
possible transaction. Discussions continued between the parties throughout June
and July 1999.
On August 2, 1999, Algos received a letter from the FDA indicating that its
New Drug Application for MorphiDex(R) was not approvable at that time. Shortly
after Algos issued a press release describing the FDA's letter, Mr. Goldberg
approached Mr. Drapkin to express Endo's continued interest in a strategic
stock-for-stock transaction between the two companies, notwithstanding the
current status of the MorphiDex(R) New Drug Application with the FDA. Mr.
Goldberg and Mr. Drapkin discussed a proposal in which Algos stockholders would
receive for their shares of Algos common stock, shares representing 20% of the
outstanding common stock of Endo in a tax-free reorganization. In addition, the
Algos stockholders would receive warrants to purchase for a nominal amount an
additional 15% of the Endo common stock if FDA approval of MorphiDex(R) was
received within two years. On September 16, 1999, Mr. Lyle, Mr. Kimmel and Mr.
Hyatt met with Ms. Ammon, representatives of Endo's management and
representatives of Kelso to receive more business and financial information
regarding Endo and to better understand Endo's merger proposal. During
September 1999, representatives of Endo had discussions with management of
Algos to discuss the strategic fit of the two companies and the terms of the
Endo proposal.
On September 17, 1999, the Algos board held a special meeting in which the
Algos board discussed the strategic direction for Algos in light of the status
of MorphiDex(R) approval with the FDA. The Algos board discussed a variety of
possible strategic alternatives for Algos' future direction, including the
possibility of changing Algos' product development and drug application
strategy, entering into collaboration agreements with other companies, seeking
a partner for a strategic merger, selling Algos and continuing to operate under
the current business plan. As part of the discussion of a strategic merger, the
Algos board discussed generally the Endo merger proposal suggested by Mr.
Goldberg. It was the general sense of the Algos board following these
discussions that, given the current trading price of the Algos common stock and
the significant value that they continued to believe existed if the FDA
approved Algos' products, it would not be in the best interest of the Algos
stockholders to sell Algos in a cash transaction in which Algos stockholders
would not be able to share in the future value of their company. At the same
time, a number of Algos directors expressed concern that relying solely on a
business plan that depended upon FDA approval of Algos' products presented a
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considerable risk to Algos stockholders. The Algos board then determined to
continue discussions with Endo and to engage Credit Suisse First Boston to
assist in evaluating the Endo merger proposal and other possible strategic
alternatives.
On October 6, 1999, Mr. Kimmel, together with representatives of Latham &
Watkins, Algos' outside counsel, met with Mr. Goldberg, representatives of
Kelso and representatives of Skadden, Arps, Slate, Meagher & Flom LLP, Endo's
outside counsel, to discuss the structure of the Endo merger proposal. During
this meeting, Mr. Goldberg modified the Endo merger proposal regarding the
warrants to be received by the Algos stockholders. Among other things, he
proposed to extend the period in which FDA approval for MorphiDex(R) could be
obtained in order for the warrant to become exercisable from two years to
three, with the percentage of Endo common stock for which the warrants would be
exercisable, decreasing by five percentage points for every six months
following the second year of that period in which FDA approval for MorphiDex(R)
was not yet obtained.
Beginning in early October 1999, Credit Suisse First Boston examined Algos'
business, financial condition, prospects and strategic alternatives as well as
Endo's business, financial condition and prospects. On October 11, 1999, the
senior management of both Algos and Endo, together with representatives of the
financial and legal advisors of both companies, attended a meeting in which
Endo's senior management made a presentation of its business, financial
condition and prospects.
At a special meeting of the Algos board held on October 18, 1999, the Algos
board discussed generally with Credit Suisse First Boston the Endo merger
proposal as well as other strategic alternatives that might be available to
Algos. The Algos board concluded, based upon the information provided by Endo,
that Endo was a good strategic fit. The Algos board discussed whether it should
nevertheless solicit other strategic partners. However, Endo had previously
indicated to Algos that it would terminate discussions of the Endo merger
proposal if Algos conducted a solicitation. In addition, the Algos board
concluded that soliciting other strategic partners so soon after the public
announcement of the FDA's current position that the New Drug Application for
MorphiDex(R) was not approvable would suggest that Algos had lost confidence in
its proprietary technology. Also, the Algos board determined that a
solicitation would be unlikely to result in any competitive proposal to the
Endo merger proposal that was not conditioned upon FDA approval of MorphiDex(R)
or another of Algos' products under development. The Algos board noted that,
other than Endo, no one had approached Algos directly regarding any possible
transaction since the public announcement of the FDA letter and the substantial
decrease in the Algos common stock price since that announcement. The Algos
board authorized Mr. Kimmel to continue negotiations with Endo.
For the next two weeks, each company and its financial and legal advisors
conducted their review of the business and financial position of the other
company. On November 2, 1999, representatives from the companies and their
respective legal and financial advisors met to further discuss the terms of
Endo's merger proposal and Endo's request for voting agreements and options
from particular members of Algos' board and management and an option from Algos
to purchase shares of Algos common stock. At that meeting it was agreed that
the existing Endo management incentive options, if exercised, would dilute only
the ownership of existing Endo stockholders, even if exercised after the
merger. In addition, Algos agreed to attempt to obtain voting agreements from
Algos' directors, management and significant stockholders holding in aggregate
approximately 33% of the Algos common stock. The companies also agreed that,
irrespective of the merger, they would seek to enter into a collaboration
agreement in which Algos and Endo would work together to successfully complete
the development, manufacturing and commercialization of pain management
pharmaceutical products containing the combination of oxycodone and
dextromethorphan.
On November 11, 1999, the Algos board received detailed presentations from
Mr. Lyle, and representations from Credit Suisse First Boston and Latham &
Watkins regarding the proposed transaction, and Credit Suisse First Boston
indicated that it was prepared to render an opinion that the consideration to
be received by Algos stockholders was fair from a financial point of view.
After discussing the matter, the Algos board directed Mr. Kimmel, with the
assistance of Credit Suisse First Boston and Latham & Watkins, to negotiate
further on certain provisions of the various agreements. The Algos board also
unanimously authorized
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Mr. Lyle to complete negotiations on a collaboration agreement for pain
management pharmaceutical products containing the combination of oxycodone and
dextromethorphan.
On November 15, 1999, Mr. Kimmel, Mr. Lyle and representatives of Credit
Suisse First Boston met with Unifina Holding, A.G., the holder of approximately
9% of the outstanding Algos common stock, to discuss the Endo proposal and
whether Unifina would be willing to enter into a voting agreement. Unifina
indicated that it was not prepared to do so, given its current view of its
investment in Algos and the expected dilutive effect of the Endo proposal.
Unifina also expressed concern as to Endo's relative value in the event that
Endo was not able to meet its financial forecasts. Following the meeting with
Unifina, representatives of Algos and Endo and their respective financial
advisors had numerous discussions to address the Unifina concerns. Endo then
revised its proposal on November 17, 1999 to provide that, in addition to the
shares of Endo common stock and the warrants the Algos stockholders were to
receive pursuant to Endo's prior proposal, the current stockholders of Endo
would agree that if Endo (based on current Endo products and future non-Algos
related products internally developed and sold or marketed by Endo) did not
meet a cash gross profit target of $147.4 million for fiscal year 2000, these
Endo stockholders would return to Endo's treasury the number of shares of Endo
common stock owned by them such that the former Algos stockholders would then
own an additional 5% of all of the outstanding Endo common stock as of the
closing of the merger. In addition, Endo proposed that warrants to purchase 5%
of the common stock of Endo be granted to the existing stockholders of Endo.
These warrants would become exercisable only if FDA approval of MorphiDex(R)
was not obtained within three years and would expire unexercised if FDA
approval of MorphiDex(R) were obtained prior to that time. Furthermore, at this
time Endo modified its offer to eliminate its request, which had been opposed
by the Algos board, that it receive an option from Algos to purchase shares of
Algos common stock and options from particular members of Algos' board and
management. Nevertheless, Unifina declined to enter into the voting agreement,
and Unifina's representative on the Algos board, Mr. Dieter Sulser, abstained
from the vote to approve the merger agreement.
Negotiations continued over the next week, and at a special meeting of the
Algos board held on November 24, 1999, Credit Suisse First Boston and Latham &
Watkins provided updated presentations reflecting the revised terms of the Endo
merger proposal. The Algos board decided to review the presentation of Credit
Suisse First Boston and current drafts of the definitive documentation in order
to come to a final decision and authorized Mr. Kimmel to further negotiate
specific terms of the merger that remained open. In addition, the Algos board
approved the collaboration agreement with Endo Pharmaceuticals. At a special
meeting of the Algos board held on the afternoon of November 26, 1999, the
Algos board received the oral opinion of Credit Suisse First Boston, confirmed
by a written opinion dated November 26, 1999, that, as of that date, the
consideration to be received by the Algos stockholders was fair from a
financial point of view. At the November 26, 1999 meeting, five of the six
members of the Algos board approved the terms of the agreements and authorized
the execution of these agreements on the basis that they had been negotiated,
subject to specified modifications. Mr. Dieter Sulser, the Unifina
representative on the Algos board, abstained from the vote.
On the evening of November 26, 1999, the merger agreement, the voting
agreements and the collaboration agreement were executed following final
negotiations. Before the opening of trading on November 29, 1999, Endo and
Algos publicly announced these agreements in a joint press release.
Algos' Reasons for the Merger; Recommendation of the Algos Board
On November 26, 1999, the Algos board of directors determined by a vote of
five directors (with the Unifina representative on the Algos board abstaining)
that the merger is advisable and fair to, and in the best interests of, Algos
and the Algos stockholders. The Algos board approved the merger agreement and
decided to recommend that Algos stockholders approve and adopt the merger
agreement. In making this decision, the Algos board considered the factors
listed below:
1. The Algos board determined that the merger presented Algos stockholders
with a unique strategic opportunity to maximize the long-term value of their
investment in Algos by exchanging their shares of Algos common stock for Endo
common stock and warrants to purchase additional Endo common stock if FDA
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approval of MorphiDex(R) is obtained by December 31, 2002. The merger would
give Algos stockholders the opportunity to continue to participate in Algos'
potential growth while:
. reducing the risk that Algos' limited resources would impede this
growth by merging with a company with established product revenues;
. reducing the risks associated with transitioning from a product
development-oriented company to a commercial sales and marketing-
oriented enterprise by merging with a company with an established sales
and marketing team focused on pain management;
. simultaneously offering the Algos stockholders the chance to benefit
from Endo's substantially greater capacity to develop, test and market
Algos' products as part of Endo's strategy of expanding Endo's pain
franchise through innovative proprietary pharmaceuticals; and
. providing Algos with the immediate significant brand recognition that
Percocet(R) and Percodan(R) enjoy within the pain management market by
enabling Algos to market its products containing oxycodone utilizing
the brand equity of these products.
The Algos board also believed that there were special opportunities for
synergistic benefits to be realized from a combination of Algos and Endo. These
benefits include the combination of the established manufacturing and marketing
infrastructure of Endo with Algos' pipeline of proprietary pharmaceuticals and
management expertise in selling proprietary pharmaceuticals. However, the Algos
board also recognized the risk that these synergistic benefits may not be
realized.
2. In reaching this conclusion, the Algos board considered not only the
value of the consideration being offered to Algos stockholders in the merger,
as discussed in paragraph 4 below, but also certain other specific aspects of
Endo's proposal, including:
. Endo's demonstrated enthusiasm for assisting with the development of
Algos' products and existing familiarity with Algos and its product
line as a result of the discussions that started in 1997 and its
continued commitment throughout that period to a merger with Algos as
an integral step in Endo's own business strategy;
. Endo's willingness to improve its offer for Algos such that if Endo
(based on current Endo products and future products internally
developed and sold or marketed by Endo) did not meet or exceed a cash
gross profit target of $147.4 million for fiscal year 2000, Algos
stockholders would become the owners of an additional 5% of Endo's
outstanding common stock;
. Endo's agreement to eliminate its request, which had been opposed by
the Algos board, that it receive an option from Algos to purchase
shares of Algos common stock and options from particular members of
Algos' board and management; and
. Endo's intention to integrate Algos' own workforce with Endo's
workforce.
3. The Algos board also took into account:
. its own and Endo's respective assessments of Algos' business, financial
condition, pipeline of potential products, contractual arrangements,
plans and prospects; and
. its own and Endo's respective assessments of Endo's business,
financial condition, prospects and capacity, as a major participant in
the pain management pharmaceutical products industry, to exploit
Algos' potential.
4. The Algos board viewed the consideration to be received by the Algos
stockholders for their shares of common stock as an attractive price for Algos.
Among other factors, the Algos board took into consideration:
. the Algos board's evaluation of financial analyses presented in
connection with Credit Suisse First Boston's opinion and summarized
under "THE MERGER--Opinion of Algos' Financial Advisor";
. the financial condition of Endo, which indicated to the Algos board
that the shares of Endo common stock and the warrants to purchase Endo
common stock that Algos stockholders would receive in the merger would
be readily tradeable by those Algos stockholders who do not wish to
make a long-term investment in Algos and would therefore offer
immediate liquidity to those Algos stockholders; and
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. the facts that (1) the merger is conditioned upon the receipt of
opinions of counsel that it will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368 of the
Internal Revenue Code and (2) assuming this treatment, no gain or loss
will be recognized by Algos stockholders upon their exchange of Algos
common stock for Endo common stock and warrants.
5. The Algos board took into consideration Credit Suisse First Boston's
opinion that, as of November 26, 1999, the date the merger agreement was
approved by the Algos board, the merger consideration was fair to Algos
stockholders from a financial point of view. A copy of Credit Suisse First
Boston's written opinion, dated November 26, 1999, setting forth the
assumptions made, matters considered and review undertaken, is attached to this
proxy statement/prospectus as Appendix B. The full text of the written opinion
is incorporated into this proxy statement/prospectus by reference, and the
description above of the opinion is qualified in its entirety by this
reference. See "--Opinion of Algos' Financial Advisor." Algos stockholders are
urged to read the opinion carefully in its entirety.
6. The Algos board considered generally the material terms of the merger
agreement and concluded that the terms were appropriate for a transaction of
the nature of the merger. The Algos board recognized that the conditions to
Endo's obligations to consummate the merger include conditions beyond the
ability of Algos to control and concluded that the risk of nonconsummation of
the merger had been appropriately limited and was outweighed by the potential
advantages of the merger to Algos stockholders. In making this determination,
the Algos board considered that the merger agreement provided that the merger
generally cannot be terminated by Endo for any change or development relating
to MorphiDex(R) or any other of the Algos products under development, including
the FDA or DEA approval process for those products.
7. In considering the opportunity created by the merger for Algos
stockholders to participate in the anticipated value that will be created by
the combined company, including the value created by the future introduction of
Algos' products in the marketplace, the Algos board considered the binding
letter agreement among Kelso Investment Associates V, L.P. and Kelso Equity
Partners V, L.P., the current majority stockholders of Endo, Endo and Algos in
which these Endo stockholders agreed not to take any actions for the next two
years that would constitute a "going private" transaction under the Securities
Exchange Act of 1934, unless a majority of the Endo stockholders not affiliated
with these stockholders also approved the transaction.
8. The Algos board considered the termination provisions of the merger
agreement, which provide that the Algos board is permitted to:
. consider competing proposals,
. provide information to competing bidders if required to do so in
carrying out its fiduciary duties and
. change its recommendation regarding this merger to the Algos
stockholders upon the receipt of a superior proposal.
However, the Algos board noted that the terms of the merger agreement do not
permit the Algos board to terminate the merger agreement for a superior
acquisition proposal by a competing bidder but instead require the Algos board
to take the merger agreement and the merger to the Algos stockholders for a
vote. The Algos board also noted that, under the voting agreements, Endo has
been granted irrevocable proxies to vote shares of Algos common stock
representing approximately 24% of the presently outstanding shares. The merger
agreement provides that Endo will not in any event receive any fees for
termination of the merger agreement other than out-of-pocket expenses under
limited circumstances.
The discussion above of the factors considered by the Algos board is not
intended to be exhaustive, but summarizes all material factors considered. The
Algos board did not assign any relative or specific weights to the above
factors nor did it specifically characterize any factor as positive or negative
(except as described above), and individual directors may have given differing
weights to differing factors and may have viewed certain factors more
positively or negatively than others.
The Algos board recommends that you approve and adopt the merger agreement.
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Opinion of Algos' Financial Advisor
Summary
Credit Suisse First Boston, as financial advisor to Algos, delivered a
written opinion, dated November 26, 1999, to the Algos board of directors to
the effect that, as of that date, the merger consideration was fair to the
Algos stockholders from a financial point of view. The full text of Credit
Suisse First Boston's opinion is attached as Appendix B to this proxy
statement/prospectus. The opinion describes important exceptions, assumptions
and limitations, and you should read it carefully and completely. Credit Suisse
First Boston's opinion is not a recommendation to any Algos stockholder as to
how a stockholder should vote with respect to the merger.
Opinion of Credit Suisse First Boston
Credit Suisse First Boston Corporation has acted as Algos' financial advisor
in connection with the merger. Algos selected Credit Suisse First Boston based
on Credit Suisse First Boston's experience, expertise and reputation and
familiarity with Algos' business. Credit Suisse First Boston is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, Algos requested
that Credit Suisse First Boston evaluate whether the merger consideration was
fair to the stockholders of Algos from a financial point of view. On November
26, 1999, Credit Suisse First Boston rendered to the Algos board of directors
its oral opinion as well as its written opinion dated November 26, 1999 that,
as of that date and based upon and subject to the factors and assumptions set
forth in its opinion, the merger consideration was fair to the Algos
stockholders from a financial point of view.
This summary of the Credit Suisse First Boston opinion is qualified in its
entirety by the full text of the opinion, which sets forth the procedures
followed, assumptions made, matters considered, and qualifications and
limitations of the review undertaken by Credit Suisse First Boston. The full
text of the Credit Suisse First Boston opinion is attached as Appendix B and is
incorporated by reference to this proxy statement/prospectus. Holders of Algos
common stock should read the Credit Suisse First Boston opinion carefully and
completely. Credit Suisse First Boston's opinion was provided to the Algos
board for its information and relates to whether the merger consideration was
fair to the Algos stockholders from a financial point of view. Credit Suisse
First Boston's opinion does not address the underlying decision by Algos to
engage in the merger and does not constitute a recommendation to any
stockholder of Algos as to how to vote on the proposed merger.
Matters Reviewed
In connection with rendering its opinion, Credit Suisse First Boston
reviewed and considered, among other things:
. the merger agreement and the warrant agreements;
. publicly available business information relating to Endo and publicly
available business and financial information relating to Algos;
. other information, including financial forecasts, provided by Algos and
Endo;
. financial and stock market data of Algos and financial data of Endo, and
similar data for publicly held companies in businesses similar to Algos
and Endo;
. the financial terms of a number of recent business combinations and other
transactions; and
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. other relevant information, financial studies, analyses and
investigations and financial, economic and market criteria.
Credit Suisse First Boston has not assumed any responsibility for
independent verification of any of the information above and has relied on its
being complete and accurate in all material respects.
Assumptions
In its review and analysis and in formulating its opinion, Credit Suisse
First Boston assumed without independent verification that:
. Endo common stock to be received by the stockholders of Algos would be
issued pursuant to an effective Registration Statement on Form S-4, and
that these shares will be authorized for quotation on the NASDAQ;
. the financial forecasts provided by Algos and Endo were prepared on
reasonable bases reflecting the best currently available estimates and
judgments of Algos' and Endo's management, respectively, as to the future
financial performance of Algos and Endo;
. the merger will be treated as a tax-free reorganization for income tax
purposes; and
. the representations and warranties of each party contained in the merger
agreement were and will remain true and correct, that each party would
perform all the covenants and agreements required under the merger
agreement, and that all conditions to the consummation of the merger
would be satisfied without being waived.
Limitations
Credit Suisse First Boston's analysis and opinion were subject to certain
limitations, including that Credit Suisse First Boston:
. did not make, nor was it provided, any independent evaluation or
appraisal of the assets or liabilities of Endo or Algos;
. did not express any opinion as to the actual value of the common stock
and/or warrants when issued to the Algos stockholders pursuant to the
merger, whether any active trading market will develop for the common
stock or warrants, or the prices at which the common stock and warrants
will trade subsequent to the merger;
. based its opinion upon financial, economic, market and other conditions
as they existed and could be evaluated on the date the opinion was
rendered; and
. did not solicit third-party indications of interest in acquiring all or
any part of Algos.
Credit Suisse First Boston's opinion and its financial analyses presented to
the Algos board and summarized below were not the only factors considered by
the Algos board of directors in its evaluation of the proposed merger and
should not be viewed as necessarily determinative of the views of the Algos
board with respect to the merger or merger consideration.
Presentation to the Algos Board of Directors
The following is a summary of the material analyses underlying Credit Suisse
First Boston's opinion to the Algos board of directors in connection with the
merger. The financial analyses summarized below include information presented
in tabular format. In order to fully understand Credit Suisse First Boston's
financial analyses, the tables must be read together with the text of each
summary. The tables alone do not constitute a complete description of the
financial analyses. Considering the data set forth in the table below without
considering the full narrative description of the financial analyses, including
methodologies and assumptions underlying the analyses, could create a
misleading or incomplete view of Credit Suisse First Boston's financial
analyses.
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The estimates contained in Credit Suisse First Boston's analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which
may be significantly more or less favorable than those suggested by the
analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Credit Suisse First
Boston's analyses and estimates are inherently subject to substantial
uncertainty.
The summaries set forth below do not purport to be complete descriptions of
the analyses underlying Credit Suisse First Boston's opinion or the
presentation made by Credit Suisse First Boston to the Algos board of
directors. The preparation of a fairness opinion is a complex analytical
process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances and, therefore, a fairness opinion is not readily
susceptible to partial analysis or summary description. Accordingly, Credit
Suisse First Boston believes that its analyses must be considered as a whole
and that selecting portions of its analyses, without considering all analyses,
would create an incomplete view of the process underlying the preparation of
Credit Suisse First Boston's opinion.
Discounted Cash Flow Analysis
Credit Suisse First Boston estimated the present value of the stand-alone,
unlevered, after-tax free cash flows that Algos could produce over calender
years 2000 through 2007, and that Endo could produce over the calendar years
2000 through 2003, based on management estimates in various scenarios.
The free cash flows in each of the years were individually discounted using
a weighted average discount rate based on the contribution to total revenue of
each product and each product's stage of clinical development. The terminal
values were calculated using two different methodologies:
(1) unlevered net income multiples, using a range of multiples of 16.0x to
22.0x; and
(2) a free cash flow perpetuity method using a range of perpetual growth
rates of 8.0% to 11.0% and a terminal discount rate of 15%.
The terminal values were discounted using a range of discount rates from
33.0% to 39.0%.
For the Algos discounted cash flow analysis, Credit Suisse First Boston
examined four cases. The first Algos case assumed that MorphiDex(R) was
approved by the FDA by the end of 2001. This analysis indicated a value per
share of Algos common stock ranging from $23.31 to $28.93 and a range of
implied Algos pro forma fully diluted equity ownership of the combined company
of 32.1% to 39.8% based on an implied summary equity valuation range for Endo
of $778 to $878 million.
Using the same analyses for the second Algos case, in which MorphiDex(R) is
not approved by the FDA, the indicated value per share of Algos common stock
ranged from $5.03 to $7.84, and the range of implied Algos pro forma fully
diluted equity ownership of the combined company ranged from 9.2% to 15.2%
based on an implied summary equity valuation range for Endo of $778 to $878
million.
Using the same analyses for the third Algos case, MorphiDex(R) is approved
by the FDA by mid-2002, the indicated value per share of Algos common stock
ranged from $17.68 to $21.90. Finally in the fourth Algos case, in which
MorphiDex(R) is approved by the FDA by the end of 2002, the same analyses
indicated a value per share of Algos common stock ranging from $10.65 to
$14.87.
The following chart sets forth the implied enterprise value and implied
equity value reference ranges for each of the four Algos cases (in millions):
<TABLE>
<CAPTION>
Implied enterprise Implied equity
value range value range
------------------ --------------
<S> <C> <C>
MorphiDex(R) approval by the end of 2001..... $375--$475 $414--$514
No MorphiDex(R) approval..................... $ 50--$100 $ 89--$139
MorphiDex(R) approval by mid-2002............ $275--$350 $314--$389
MorphiDex(R) approval by the end of 2002..... $150--$225 $189--$264
</TABLE>
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For the Endo discounted cash flow analysis, the free cash flows were
discounted at a range of discount rates from 12.0% to 15.0%. The terminal
values were calculated using three different methodologies:
(1) Cash EBITDA multiples, using a range of 9.0x to 12.0x;
(2) unlevered net income multiples, using a range of 15.0x to 21.0x and
(3) a free cash flow perpetuity method, using a range of perpetual growth
rates of 0.0% to 3.0% and a terminal discount rate of 10%.
The terminal values were discounted using a range of discount rates from
12.0% to 15.0%. Credit Suisse First Boston examined three cases for Endo. The
first Endo case, the base case, utilized assumptions from the calender years
from 2000 through 2003 provided by the management of Endo. Credit Suisse First
Boston used the same analyses for the third Endo case, the worst case, which
was based on the assumption that Endo will not meet its downside case fiscal
year 2000 cash gross profit estimate of $147.4 million.
The following chart sets forth the implied enterprise value and implied
equity value reference ranges for each of the three Endo cases (in millions):
<TABLE>
<CAPTION>
Implied
Implied Enterprise Equity
Value Range Value Range
------------------ -------------
<S> <C> <C>
Base Case..................................... $1,200-$1,400 $1,028-$1,228
Downside Case................................. $ 700-$ 850 $ 528-$ 678
Worst Case.................................... $ 650-$ 800 $ 478-$ 628
Summary DCF Reference Range................... $ 950-$1,050 $ 778-$ 878
</TABLE>
Credit Suisse First Boston placed the greatest emphasis on a discounted cash
flow analysis for both Algos and Endo, and less emphasis on a comparable
companies trading analysis or a comparable acquisitions analysis, given the
difficulty in assigning relevant multiples for a company and peer group that is
often not yet profitable.
Comparable Company Trading Analysis
Credit Suisse First Boston also reviewed and compared financial information,
ratios and public market multiples relating to Algos and Endo to corresponding
publicly available financial data for similar, publicly-traded pharmaceutical
companies. Credit Suisse First Boston selected these companies based upon its
views as to the comparability of the financial and operating characteristics of
these companies to Algos and Endo, respectively. Credit Suisse First Boston
divided companies comparable to Algos into three categories, corresponding to
different stages of product development.
The companies included in the Algos comparable companies analysis were:
Companies with Approved Products
. Guilford Pharmaceuticals, Inc.
. Advanced Polmer Systems, Inc.
. KV Pharmaceuticals, Inc.
. Andrx Corporation
. Kos Pharmaceuticals, Inc.
. Anesta Corporation
. The Liposome Company, Inc.
. Celgene Corporation
. Nastech Pharmaceutical Company Inc.
. Cephalon, Inc.
. Noven Pharmaceuticals, Inc.
. CIMA Labs Inc.
. PathoGenesis Corporation
. Columbia Laboratories, Inc.
. Penwest Pharmaceuticals Co.
. Dura Pharmaceuticals, Inc.
. SuperGen, Inc.
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<PAGE>
Companies with Products Filed Companies with Development Stage
Products
.Aviron Corporation
.Alkermes, Inc.
.Cygnus, Inc.
.Aradigm Corporation
.Emisphere Technologies, Inc.
.Enzon, Inc.
.Inhale Therapeutic Systems, Inc.
.GelTex Pharmaceuticals, Inc.
.Matrix Pharmaceutical, Inc.
.Oxford GlycoSciences Plc
.Skyepharma Plc
The mean and median forward multiples of price to earnings per share for
estimated 1999, 2000 and 2001 earnings per share of the comparable companies
are set forth in the following table:
<TABLE>
<CAPTION>
1999 earnings 2000 earnings 2001 earnings
per share per share per share
------------- ------------- -------------
<S> <C> <C> <C>
Overall Mean....................... 31.3x 28.4x 20.7x
Overall Median..................... 31.6x 27.8x 15.7x
</TABLE>
Algos' multiples for the same periods did not produce meaningful results.
The companies included in the Endo comparable companies trading analysis
were:
. IVAX Corporation . Duramed Pharmaceuticals, Inc.
. Alpharma Inc. . SICOR Inc.
. Barr Laboratories, Inc. . Mylan Laboratories Inc.
. Schein Pharmaceutical, Inc. . TEVA Pharmaceutical
. Biovail Corporation International
Credit Suisse First Boston compared financial information and multiples of
market value of these companies to the following information regarding Endo
provided by management:
. enterprise value to the latest 12 months' earnings before interest,
taxes, depreciation and amortization, or, cash EBITDA;
. 1999 estimated net income;
. 2000 estimated net income; and
. 2001 estimated net income.
The mean and median forward multiples of price to earnings per share for
estimated 1999, 2000 and 2001 earnings per share of the comparable companies
are set forth in the following table:
This information implied a range of multiples of enterprise value to the
latest 12 months' cash EBITDA of from 9.0x to 12.0x. This information also
implied ranges of multiples of price to 1999 estimated earnings per share from
16.0x to 23.0x, of price to 2000 estimated earnings per share from 13.0x to
17.0x and of price to 2001 estimated net income from 11.0x to 15.0x.
These reference multiple ranges were applied to cash EBITDA and net income
assumptions in the three Endo cases considered. This analysis indicated implied
enterprise value ranges for the base case, downside case and worst case of $722
to $922 million, $447 to $547 million and $372 to $447 million, respectively.
This analysis also indicated implied equity value ranges for the base case,
downside case and worst case of $550 to $750 million, $275 to $375 million and
$200 to $275 million, respectively.
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<PAGE>
No company utilized in the comparable public companies analysis is identical
to Algos or Endo. Accordingly, an analysis of the results of the foregoing
necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of Algos and Endo and
other factors that could affect the public trading value of the companies to
which they are being compared. In evaluating the comparable companies, Credit
Suisse First Boston made judgments and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Algos or Endo, such as
the impact of competition on Algos or Endo and the industry generally, industry
growth and the absence of any adverse material change in the financial
conditions and prospects of Algos or Endo or the industry or in the financial
markets in general.
Comparable Acquisitions Analysis
Credit Suisse First Boston performed a comparable acquisitions analysis for
both Algos and Endo for illustrative purposes, but the mean and median
multiples were not used to calculate a valuation for either company because of
the inherent difficulty in assigning relevant trailing multiples for a company
and peer group that is often not yet profitable and for which meaningful
multiples are not available. Credit Suisse First Boston selected these
transactions based upon Credit Suisse First Boston's views as to the
comparability of the transactions' characteristics to the proposed transaction
between Algos and Endo. Credit Suisse First Boston reviewed and compared
certain financial information, ratios and public market multiples relating to
Algos and Endo to corresponding publicly available financial data for similar
publicly-traded companies in preparing this analysis.
Algos Comparable Acquisitions
Biovail Corporation International/Fuisz Technologies Ltd.
Abbott Laboratories/ALZA Corporation
Gilead Sciences, Inc./NeXstar Pharmaceuticals, Inc.
Watson Pharmaceuticals, Inc./Theratech, Inc.
ALZA Corporation /SEQUUS Pharmaceuticals, Inc.
Mylan Laboratories, Inc./Penederm Inc.
Cardinal Health, Inc./R.P. Scherer Corporation
Elan Corporation plc/Neurex Corporation
Elan Corporation plc/Sano Corporation
Elan Corporation plc/Athena Neurosciences, Inc.
Endo Comparable Acquisitions
Teva Pharmaceutical/Copley Pharmaceuticals, Inc.
Watson Pharmaceuticals, Inc./Rugby (Hoescht Marion Roussel)
Teva Pharmaceutical/Biocraft Laboratories, Inc.
Watson Pharmaceuticals, Inc./Royce Laboratories, Inc.
IVAX Corporation/Zenith Laboratories, Inc.
Contribution Analysis
Credit Suisse First Boston reviewed selected estimated future financial
information for Algos and Endo to determine Algos' and Endo's relative
contribution to the combined company after the merger, using Endo's base case
and both the no MorphiDex(R) approval and the MorphiDex(R) approval by the end
of 2001 cases.
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Credit Suisse First Boston analyzed Algos' and Endo's relative contributions to
cash EBITDA and revenues, based the discounted cash flow valuations discussed
above for the years 2001 through 2003. The relative contributions of Algos and
Endo to the combined company implied relative contributions to enterprise value
of 7% for Algos and 93% for Endo in the no MorphiDex(R) approval case and of
30% for Algos and 70% for Endo in the MorphiDex(R) approval by the end of 2001
case.
Merger Consequence Analysis
Credit Suisse First Boston analyzed the merger consequences based on the
following assumptions:
. purchase accounting treatment for the merger;
. use of Endo management base case projections for Endo and both the
MorphiDex(R) non-approval case and the MorphiDex(R) approval by the end
of 2001 case for Algos; and
. limitations on the use of Algos' net operating losses, or NOLs, to the
extent the combined company generates earnings in future periods.
Credit Suisse First Boston determined that based on the above assumptions,
the proposed merger would be:
. dilutive to Endo's stand-alone earnings per share for each of the years
2000, 2001 and 2002 applying both the no MorphiDex(R) approval case and
the MorphiDex(R) approval by the end of 2001 case projections for Algos.
The actual results achieved by the combined company may vary from projected
results, and the variations may be material.
Miscellaneous
Algos has agreed to pay Credit Suisse First Boston for its financial
advisory services an aggregate fee equal to $750,000, of which $500,000 was
payable upon delivery of Credit Suisse First Boston's opinion and the remaining
$250,000 will be payable upon completion of the merger. Algos also has agreed
to reimburse Credit Suisse First Boston for its reasonable out-of-pocket
expenses, including reasonable fees and expenses of legal counsel, and to
indemnify Credit Suisse First Boston and related parties against liabilities,
including liabilities under the federal securities laws, arising out of its
engagement.
In the ordinary course of business, Credit Suisse First Boston or its
affiliates may actively trade the equity securities of Algos for its own and
such affiliates' own accounts and for the accounts of customers and,
accordingly may at any time hold a long or short position in such securities.
Accounting Treatment
The merger will be accounted for using the purchase method of accounting,
which means that the assets and liabilities of Algos, including intangible
assets, will be recorded at their fair values. The results of operations and
cash flows of Algos will be included in Endo's financial statements
prospectively as of the completion of the merger. Endo will consolidate its
investment in Algos.
Material U.S. Federal Income Tax Consequences of the Merger
In the opinion of Latham & Watkins and Skadden, Arps, Slate, Meagher, & Flom
LLP, the material United States federal income tax consequences generally
applicable to Algos, Endo, Endo Inc. and Algos stockholders who receive Endo
common stock and warrants pursuant to the merger are described below. This
discussion is based upon current provisions of the Internal Revenue Code of
1986, as amended, or the Code, currently applicable Treasury regulations,
administrative decisions and rulings and court decisions.
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<PAGE>
We cannot assure you that the Internal Revenue Service, or IRS, will not take a
contrary view, and we have not and will not seek a ruling from the IRS.
Legislative, judicial or administrative changes or interpretations may occur
that could alter or modify the statements and conclusions set forth in this
proxy statement/prospectus. Any changes or interpretations that occur after the
date of this proxy statement/prospectus could be retroactive and could affect
the tax consequences to the Algos stockholders.
This discussion does not purport to deal with all aspects of United States
federal income taxation that may affect particular Algos stockholders in light
of their individual circumstances, and is not intended for Algos stockholders
subject to special treatment under the United States federal income tax law.
Algos stockholders subject to special treatment include:
. insurance companies,
. tax-exempt organizations,
. non-resident aliens,
. foreign corporations,
. foreign partnerships,
. foreign trusts,
. financial institutions,
. broker-dealers,
. Algos stockholders who hold their common stock as part of a hedge,
straddle or conversion transaction,
. Algos stockholders who do not hold their common stock as a capital asset,
and
. Algos stockholders who have acquired their common stock upon the exercise
of options or otherwise as compensation.
In addition, this discussion does not consider the effect of any applicable
foreign, state, local or other tax laws.
Each Algos stockholder should consult its own tax advisors as to the
particular tax consequences to it of the merger, including the applicability
and effect of any state, local, foreign, or other tax laws, and of changes in
applicable tax laws.
Tax Treatment of Algos, Endo Inc. and Endo
The merger is intended to qualify as a reorganization under Section 368(a)
of the Code. It is a condition to the obligation of Endo to consummate the
merger that Endo shall have received an opinion from Skadden, Arps to the
effect that the merger will be treated as a reorganization within the meaning
of Section 368(a) of the Code. It is a condition to the obligation of Algos to
consummate the merger that Algos shall have received an opinion from Latham &
Watkins to the effect that the merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code. In rendering these opinions,
counsel to each of Endo and Algos will rely upon the facts, representations and
assumptions set forth or referred to in these opinions, including
representations contained in certificates executed by officers of Endo and
Algos.
Assuming the accuracy of the representations and assumptions referred to
above upon which the opinions of counsel will be based, the merger will
constitute a reorganization within the meaning of Section 368(a) of the Code.
As a result, no gain or loss will be recognized for federal income tax purposes
by Endo, Endo Inc. or Algos.
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<PAGE>
Tax Treatment of Algos Stockholders
The federal income tax consequences to Algos stockholders summarized below
are based on the assumption that the merger will qualify as a reorganization
under Section 368(a) of the Code. In general, no gain or loss is recognized by
a stockholder if stock or securities in a corporation that is a party to a
reorganization is exchanged solely for stock or securities in another
corporation that is a party to the reorganization. If a stockholder receives in
the exchange either property other than stock or securities, or securities with
a principal amount that exceeds the principal amount of the securities that it
surrendered, such amounts are treated as "boot" and gain will be recognized in
an amount equal to the lesser of the realized gain or the fair market value of
the boot, as described in more detail below. Treasury Regulations provide that,
for this purpose, securities include rights issued by a party to the
reorganization to acquire its stock but that such rights are treated as having
no principal amount. Accordingly, if the warrants are properly treated as
"securities" an Algos stockholder will not be treated as receiving boot and
therefore will not recognize gain or loss on the exchange of Algos common stock
for Endo common stock and warrants pursuant to the merger.
Because the exercise price of each warrant will be a nominal amount and the
ability to exercise the warrants is contingent upon the occurrence of future
events, however, it is not clear whether the warrants will be treated as
"securities" with a zero principal amount under the Treasury Regulations
referred to above. If the warrants are not "securities" within the meaning of
the Treasury Regulations, then they will instead be treated as a contingent
right to receive Endo common stock. In that case, non-transferable warrants
will not be treated as boot and Algos stockholders electing to receive non-
transferable warrants will not recognize gain on the exchange. Although the
matter is not free from doubt, the transferable warrants also should not be
treated as boot, and Algos stockholders receiving transferable warrants also
should not recognize gain on the exchange. Although existing case law supports
the position that transferable contingent stock rights are not boot, the IRS
has published administrative guidance indicating that it will follow the case
law only where the contingent stock rights are non-transferable and, therefore,
we cannot assure you that the IRS would not be able to successfully treat the
transferable warrants as boot.
If the transferable warrants are considered boot, an Algos stockholder who
receives transferable warrants and whose tax basis in its Algos common stock is
less than the fair market value of Endo common stock and Endo warrants received
in the merger will recognize gain in the merger in an amount equal to the
lesser of that excess or the fair market value of the transferable warrants
received. Any such gain recognized by an Algos stockholder will be taxed as a
dividend, to the extent of the Algos stockholder's ratable share of Endo's
accumulated earnings and profits, if the receipt of the transferable warrants
has "the effect of the distribution of a dividend." Gain recognized in excess
of a stockholder's ratable share of Endo's accumulated earnings and profits
will be capital gain.
To determine if the receipt of boot in the merger has "the effect of the
distribution of a dividend," an Algos stockholder will be treated as if it
solely received Endo common stock in the merger and then exchanged the extra
shares of Endo common stock for the boot (the warrants). The receipt of
transferable warrants will be treated as having "the effect of the distribution
of a dividend" unless the deemed redemption of Endo common stock for these
transferable warrants is (a) "substantially disproportionate" or (b) "not
essentially equivalent to a dividend," each within the meaning of Section
302(b) of the Code. A deemed redemption is not essentially equivalent to a
dividend if it results in a "meaningful reduction" in the stockholder's
interest in Endo.
In general, a stockholder who owns a relatively small percentage of Endo
stock and who exercises no control over Endo, taking into account the
constructive ownership rules of Section 318 of the Code, and whose interest in
Endo is reduced as a result of the deemed redemption should be treated as
having experienced a meaningful reduction in its interest in Endo common stock.
There can be no certainty, however, as to whether a "meaningful reduction" has
occurred because the applicable test is not based on numerical criteria.
Satisfaction of the "substantially disproportionate" test is dependent upon
compliance with the objective tests set forth in Section 302(b)(2) of the Code.
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<PAGE>
Each Algos stockholder should consult its own tax advisor as to the ability,
in light of its own particular circumstances, to satisfy the foregoing tests.
Additionally, corporate Algos stockholders should consult their own tax
advisors concerning the availability of the corporate dividends received
deduction and the possible application of the extraordinary dividend rules of
Section 1059 of the Code to an exchange by a corporate Algos stockholder for
whom the distribution is taxable as a dividend.
Basis and Holding Period of Merger Consideration
Assuming the warrants are not treated as boot, the aggregate tax basis of
the Endo common stock and the warrants (whether transferable or non-
transferable) received by the Algos stockholders pursuant to the merger will be
the same as the aggregate tax basis of the Algos stockholder's surrendered
common stock exchanged therefor, or the historic basis. The historic basis of
each Algos stockholder will be allocated among the warrants and the Endo common
stock as though the Algos stockholder received the maximum number of shares
that can be issued under the warrants.
An adjustment to the Algos stockholder's basis in the Endo common stock
received and the warrants should be made once it becomes known how many shares
(if any) the holders of the warrants are entitled to receive. It is unclear how
this adjustment should be made, particularly if an Algos stockholder no longer
retains all the Endo common stock or warrants received in the merger.
The IRS has not issued guidelines on how a stockholder should make this
adjustment. An Algos stockholder could recalculate its basis in any remaining
Endo common stock or additional Endo common stock received upon exercise or
lapse of the warrants, without recalculating the basis that had been allocated
to any disposed merger consideration. Alternatively, the Algos stockholder
could recalculate its basis in both the warrants, even if the Algos stockholder
has disposed of these warrants, and all of its, including already disposed of,
Endo common stock. Each Algos stockholder should consult its own tax advisors
as to the allocation of its historic basis among the Endo common stock and the
warrants.
If the warrants are treated as taxable boot, then an Algos stockholder who
receives Endo common stock and transferable warrants will have an aggregate tax
basis in the Endo common stock received equal to the Algos stockholder's
historic basis decreased by the fair market value of the transferable warrants
and increased by the amount of gain the Algos stockholder recognized on the
exchange, not including any portion of the gain that was treated as a dividend.
This Algos stockholder will have a basis in the transferable warrants equal to
the fair market value of these warrants when received.
The holding period of the Endo common stock in the hands of an Algos
stockholder will include the holding period of the Algos stockholder's common
stock exchanged for the Endo common stock pursuant to the merger. If the
warrants are not boot, the holding period of the warrants in the hands of an
Algos stockholder will include the holding period of the Algos stockholder's
common stock exchanged for the Endo common stock pursuant to the merger. If the
warrants are boot, the holding period of the warrants in the hands of an Algos
stockholder will not include the holding period of the Algos stockholder's
common stock exchanged for the Endo common stock pursuant to the merger.
Disposition of Endo Common Stock and the Warrants
Because, as described above, the exercise price of each warrant will be a
nominal amount, it is likely that the warrants will be treated as contingent
stock rights, rather than as warrants for federal income tax purposes. If,
however, the warrants were treated as warrants for tax purposes, the cash
exercise of the warrants would not be taxable to the exercising Algos
stockholder, except with respect to cash, if any, received in lieu of a
fractional share. An Algos stockholder would have a tax basis in the shares of
Endo common stock received upon exercise of the warrants equal to the Algos
stockholder's tax basis in the warrants exercised, plus the amount of cash used
to pay the exercise price, minus the portion of the Algos stockholder's basis
in the warrants and cash used to pay the exercise price attributable to cash,
if any, received in lieu of fractional shares. An Algos stockholder would have
a holding period in shares of Endo common stock received upon exercise of the
warrants that commences on the day after the date of the exercise.
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The tax consequences to a holder who elects to exercise warrants on a
"cashless" basis are uncertain. Holders should consult their own tax advisors
regarding the proper treatment of a "cashless" exercise.
In addition, if the warrants are treated as warrants for tax purposes, an
adjustment to the exercise price or conversion ratio of the warrants, or the
failure to make such adjustments, may, in a limited number of circumstances,
result in constructive distributions to the warrant holders, which could be
taxable as dividends under Section 305 of the Code. In this event, a warrant
holder's tax basis in the warrant would be increased by the amount of any
dividend.
Further, if the warrants are treated as warrants for tax purposes, an Algos
stockholder will recognize gain or loss upon the sale, lapse or other taxable
disposition of the warrants in an amount equal to the difference between the
amount of cash and the fair market value of other property received, if any, by
the Algos stockholder and the stockholder's tax basis in the warrants. Any gain
or loss realized on the sale, lapse, or other taxable disposition of the
warrants will generally be capital gain or loss.
If the warrants are not treated as warrants for tax purposes and treated
instead as a contingent right to receive Endo common stock:
. notgain or loss would be recognized to an Algos stockholder upon the
cash exercise of the contingent right, except with respect to cash
received in lieu of a fractional share;
. the tax basis in the Endo common stock received on exercise will equal
the Algos stockholder's tax basis in the warrants, plus the amount of
cash used to pay the exercise price, minus the portion of the Algos
stockholder's basis in the warrants and cash used to pay the exercise
price attributable to cash, if any, received in lieu of fractional
shares;
. the holding period of the Endo common stock received will include the
holding period of the warrants; and
. the Algos stockholder will generally recognize capital gain or loss upon
the sale or other taxable disposition of the warrants in an amount equal
to the difference between the amount the Algos stockholder realizes for
the warrants and its tax basis in the warrants.
No loss would be recognized upon the lapse of a warrant, however, except
perhaps in the case of transferable warrants, if these warrants are treated as
taxable boot.
When an Algos stockholder sells or otherwise disposes of warrants or its
shares of Endo common stock received in the merger or upon exercise of the
warrants, the Algos stockholder will generally recognize capital gain or loss
in an amount equal to the difference between the amount the stockholder
realizes for the shares and its tax basis in the shares. Algos stockholders who
are individuals are entitled to a reduced rate of tax on capital gains with
respect to property held for more than one year.
Reporting Requirements and Backup Withholding
Each Algos stockholder receiving Endo common stock and warrants as a result
of the merger will be required to retain certain records and file with its
federal income tax return a statement setting forth certain facts relating to
the merger.
Backup withholding at a rate of 31% may apply with respect to cash payments
received by Algos stockholders unless the recipient is (a) a corporation or
other exempt recipient and when required demonstrates this fact or (b) provides
a correct taxpayer identification number, certifies as to no loss to exemption
from back-up withholding and otherwise complies with applicable requirements of
the backup withholding rules. An Algos stockholder who does not provide Endo
with its correct taxpayer identification number may be subject to penalties
imposed by the IRS. Any amounts withheld under the backup withholding rules may
be allowed as a refund or a credit against the stockholder's federal income tax
liability provided that certain required information is furnished to the IRS.
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Regulatory Matters
U.S. Antitrust
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or the HSR
Act, we cannot complete the merger until we have given to the Federal Trade
Commission, or the FTC, and the Antitrust Division of the United States
Department of Justice, or the DOJ:
. notification that Endo and Algos desire to merge; and
. specific information relating to the competitive nature of the businesses
and industries in which Endo and Algos operate; and
one or more specified waiting periods expire or are earlier terminated.
Both Endo and Algos filed notification and report forms under the HSR Act
with the FTC and the DOJ on December , 1999. Pursuant to the HSR Act, Endo
and Algos requested early termination of the waiting period applicable to the
merger. There can be no assurances given, however, that the 30-day HSR Act
waiting period will be terminated early. If either the FTC or the DOJ were to
request additional information or documentary material, the waiting period
would expire at 11:59 p.m., Eastern time, on the twentieth calendar day after
the date of substantial compliance by Endo and Algos with such request.
Thereafter, the waiting period could be extended only by agreement or by court
order. Only one extension of the waiting period pursuant to a request for
additional information is authorized by the rules promulgated under the HSR
Act, except by agreement or by court order. Expiration or termination of all
waiting periods under the Hart-Scott-Rodino Act is a condition to completing
the merger. Endo and Algos do not expect to be required to receive any other
material regulatory approval in order to consummate the merger.
FDA and DEA
Endo and Algos believe that no filings with the FDA or the DEA will be
necessary until after the closing.
General
It is possible that other state or local governmental entities or third
parties may seek to challenge the merger. In addition, it is possible that
governmental entities having jurisdiction over Endo and Algos may seek
regulatory concessions as conditions for granting approval of the merger.
Under the merger agreement, Endo and Algos have both agreed to use their
reasonable best efforts to take all actions to obtain all necessary regulatory
and governmental approvals necessary to complete the merger and to address
concerns of regulators and governmental officials. While Endo and Algos do not
expect the closing of the merger to be prevented or materially delayed by any
challenge by regulatory authorities within the United States, we can give no
assurance that the required regulatory approvals will be obtained on terms
that satisfy the conditions to completion of the merger or within the time
frame contemplated by Endo and Algos. See "THE MERGER AGREEMENT--Conditions
Precedent to the Merger" on page 69.
Appraisal Rights
Algos is incorporated under Delaware law. Under applicable Delaware law,
the holders of Algos common stock are not entitled to dissenters' or appraisal
rights in connection with the merger.
Federal Securities Laws Consequences; Resale Restrictions
This proxy statement/prospectus does not cover any resales of shares of the
Endo common stock or warrants to be received by Algos stockholders in the
merger, and no person is authorized to make any use of this proxy
statement/prospectus in connection with any resale.
All shares of Endo common stock and transferable warrants received by Algos
stockholders in the merger will be freely transferable, except that shares of
Endo common stock received by persons who are deemed to be "affiliates" of
Algos under the Securities Act of 1933 at the time of the Algos special
meeting may resell those
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shares only in transactions permitted by Rule 145 or as otherwise permitted
under the Securities Act. Persons who may be affiliates of Algos for those
purposes generally include individuals or entities that control, are controlled
by, or are under common control with Algos, and would not include stockholders
who are not officers, directors or principal stockholders of Algos.
The merger agreement requires that, prior to the completion of the merger,
Algos deliver to Endo a letter identifying all persons who may be, as of the
date the merger is submitted for approval by Algos stockholders, an affiliate
of Algos. Algos is also required to use its reasonable best efforts to cause
each person who is identified as an affiliate in the letter described above to
deliver to Endo, at least 30 days prior to completion of the merger, an
executed letter agreement from each affiliate to the effect that the affiliate
will not offer, sell or otherwise dispose of any of the shares of Endo common
stock or warrants issued to that affiliate in the merger or otherwise owned or
acquired by that affiliate (1) for a period beginning 30 days prior to the
merger and continuing until results covering at least 30 days of post-merger
combined operations of Endo have been publicly filed by the combined Endo or
(2) in violation of the Securities Act.
Delisting and Deregistration of Algos Common Stock
If the merger is completed, the shares of Algos common stock will be
delisted from the NASDAQ and will be deregistered under the Securities Exchange
Act. The stockholders of Algos will become stockholders of Endo, and their
rights as stockholders will be governed by Endo's amended and restated
certificate of incorporation, Endo's amended and restated by-laws and the laws
of the State of Delaware. See "COMPARISON OF STOCKHOLDER RIGHTS" on page 98 and
Appendix D and Appendix E to this proxy statement/prospectus.
Conduct of the Business if the Merger is Not Completed
The merger is subject to several conditions, in addition to the approval of
the merger by the holders of a majority of the Algos common stock. These
conditions include, among others: (1) the absence of any legal restraints,
proceedings or prohibitions that prevent consummation of the merger and (2) the
obtaining of all required governmental consents and approvals. See "THE MERGER
AGREEMENT--Conditions Precedent to the Merger."Accordingly, even if the
requisite stockholder approval is obtained, there can be no assurance that the
merger will be completed.
If the merger is not completed, Algos would continue to pursue its senior
management's current business plan, which includes seeking FDA approval for
MorphiDex(R) and its other products in development. Algos would consider other
strategic opportunities as they present themselves. In addition, whether or not
the merger is completed, the collaboration agreement between Endo
Pharmaceuticals and Algos will continue. For a discussion of the collaboration
agreement, see "ADDITIONAL AGREEMENTS--Collaboration Agreement."
43
<PAGE>
FINANCIAL PROJECTIONS
Endo does not as a matter of course make public projections as to future
sales, earnings, or other results. However, the management of Endo has prepared
the prospective financial information set forth below only because the
information was made available to representatives of Algos. The accompanying
prospective financial information was not prepared with a view toward public
disclosure or with a view toward complying with the guidelines established by
the American Institute of Certified Public Accountants with respect to
prospective financial information, but, in the view of Endo's management, was
prepared on a reasonable basis, reflect the best currently available estimates
and judgments and present, to the best of management's knowledge and belief,
the expected course of action and the expected future financial performance of
Endo. However, this information is not fact and should not be relied upon as
necessarily indicative of future results, and readers of this proxy
statement/prospectus are cautioned not to place undue reliance on the
prospective financial information.
Neither Endo's independent auditors, nor any other independent accountants,
have compiled, examined, or performed any procedures with respect to the
prospective financial information contained herein, nor have they expressed any
opinion or any other form of assurance on such information or its
achievability, and assume no responsibility for, and disclaim any association
with, the prospective financial information.
The assumptions and estimates underlying the prospective financial
information are inherently uncertain and, though considered reasonable by the
management of Endo as of the date hereof, are subject to a wide variety of
significant business, economic, and competitive risks and uncertainties that
could cause actual results to differ materially from those contained in the
prospective financial information, including, among others, risks and
uncertainties. See "RISK FACTORS." Accordingly, there can be no assurance that
the prospective results are indicative of the future performance of Endo or
that actual results will not differ materially from those presented in the
prospective financial information. Inclusion of the prospective financial
information in this proxy statement/prospectus should not be regarded as a
representation by any person that the results contained in the prospective
financial information will be achieved.
Endo's projected increase in net sales, gross profit and cash gross profit
is assumed to be primarily due to the contribution from products introduced in
the second half of 1999, including Percocet(R) 2.5/325, Percocet(R) 7.5/500 and
Percocet(R) 10.0/650 (each of which were launched in November 1999),
Lidoderm(R) (launched in September 1999). In addition, Endo has assumed a
continued growth in net sales, gross profit and cash gross profit from products
introduced earlier in 1999 and the fourth quarter of 1998 including Zydone(R)
and Morphine Sulphate ER. It has been assumed that these products experience
market penetration similar to other product line extensions and substitution
rates typical of similar products. Projected net sales, gross profit and cash
gross profit for the existing Percocet(R) 5.0/325 have been estimated based on
the product's historical performance.
Endo's projected increase in gross profit in relation to projected net sales
is substantially due to the fixed nature of Endo's most significant contract
relationship with DuPont Pharmaceuticals.
Endo's projected increase in profitability and projected consolidated EBITDA
is due to a favorable change in business mix, more heavily weighted towards
higher margin brand products and the relative fixed nature of Endo's
manufacturing and other operating costs.
Endo's financial projections are based on many significant estimates and
assumptions, including but not limited to, the following:
.continuation of certain historical trends;
.comparison with similar products;
.manufacturing agreements;
.proprietary market research data;
.management's experience and expectations; and
.estimated product introduction dates (including competing products).
44
<PAGE>
Endo provided Algos with certain non-public financial projections that were
prepared by Endo's management for Algos' use in connection with its evaluation
of the merger. The material portions of these projections are set forth below:
<TABLE>
<CAPTION>
Projected Fiscal Year
--------------------------
2000 2001 2002
-------- -------- --------
(amounts in thousands)
<S> <C> <C> <C>
Projected net sales.............................. $220,573 $294,183 $317,939
Projected gross profit........................... 154,329 215,831 237,195
Projected cash gross profit(1)................... 174,814 237,797 252,528
Projected consolidated EBITDA(2)(3).............. 100,322 146,569 155,574
</TABLE>
- --------
(1) Projected cash gross profit is defined by the merger agreement and has been
determined to be a meaningful measure of financial performance because,
unless Endo achieves a cash gross profit of $147.4 million for fiscal year
2000, Endo Pharma LLC will, as set forth in the merger agreement, return a
number of its shares of Endo common stock to Endo's treasury, which will
increase the percentage ownership in Endo of the Algos stockholders by an
additional five percentage points. See "THE MERGER AGREEMENT--Additional
Agreements--Formation of Endo Pharma LLC" for the definition of cash gross
profit. Projected non-cash manufacturing charges excluded from projected
gross profit (as defined by generally accepted accounting principles) to
arrive at projected cash gross profit are $20,485, $21,966 and $15,333 for
2000, 2001 and 2002, respectively. Included in the projected non-cash
manufacturing charges are charges which reflect the projected present value
of non-interest bearing promissory notes issued to Dupont Pharmaceuticals
over the initial five-year term of the manufacturing and supply agreement.
These amounts have been excluded from projected gross profit, per the
definition of cash gross profit.
(2) Does not reflect the impact of non-cash compensation charges related to
variable plan accounting for the current Endo stock option plan. These
charges, if they occur, would be substantial but would not result in the
issuance of additional Endo shares. See "THE COMPANIES--Endo--Description
of Endo Stock Option Plans Following the Merger."
(3) Consolidated EBITDA is defined by Endo's credit facility as consolidated
net income for the applicable period plus, without duplication and to the
extent deducted from revenues in determining consolidated net income for
that period, the sum of (a) the aggregate amount of consolidated cash
interest expense for the period, (b) the aggregate amount of letter of
credit fees paid during the period, (c) the aggregate amount of income tax
expense for the period, (d) all amounts attributable to depreciation and
amortization for the period, (e) all extraordinary charges during the
period and (f) all other non-cash charges during the period; and minus,
without duplication and to the extent added to revenues in determining
consolidated net income for such period, the sum of (i) all extraordinary
gains during the period and (ii) all other non-cash gains during such
period, all as determined on a consolidated basis with respect to Endo and
subsidiaries in accordance with generally accepted accounting principles.
Consolidated EBITDA is used for management presentation purposes and does
not purport to represent net income or net cash provided by operating
activities as those terms are defined under generally accepted accounting
principles. Consolidated EBITDA is not a substitute for operating cash
flow.
These projections are forward-looking statements within the meaning of the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
See "CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION."
45
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial statements
have been derived by the application of pro forma adjustments to Endo's
historical consolidated financial statements included elsewhere in this proxy
statement/prospectus. The Unaudited Pro Forma Condensed Combined Balance Sheet
as of September 30, 1999 gives effect to the merger as if it had occurred on
that date. The Unaudited Pro Forma Condensed Combined Statement of Operations
for the Year Ended December 31, 1998 and for the Nine Months Ended September
30, 1999 gives effect to the merger as if it had occurred on January 1, 1998.
You should read the following Unaudited Pro Forma Condensed Combined
Financial Statements together with Endo's historical audited and unaudited
financial statements and the related notes included elsewhere in this proxy
statement/prospectus.
In connection with the merger, Endo anticipates issuing approximately 17.9
million shares of common stock and 17.9 million warrants in the aggregate for
the shares of the Algos common stock then outstanding. The actual number of
Endo common shares to be issued in connection with the merger is based on the
one-for- one exchange ratio.
Endo will account for the merger using the purchase method of accounting. In
accordance with the purchase method of accounting, the purchase price will be
allocated to Algos' assets and liabilities based on their respective estimated
fair values on the date of the merger. The excess of the purchase price over
the fair value of the net tangible assets will be allocated to identifiable
intangible assets, including intellectual property and in-process research and
development, and the remainder to goodwill. The estimated fair values, as
presented in the Unaudited Pro Forma Condensed Combined Financial Statements,
are preliminary in nature and may not be indicative of the final purchase price
allocations. A final determination of the purchase accounting adjustments will
be made following the completion of an independent valuation to determine the
fair value of certain of Algos' assets and liabilities, including intangible
assets. Any amounts that may be allocable to in-process research and
development would be recorded as a one-time charge immediately following the
completion of the merger. See the notes to the Unaudited Pro Forma Condensed
Combined Financial Statements for a discussion of the changes to earnings that
may occur as a result of the final allocation of purchase price.
The following Unaudited Pro Forma Condensed Combined Financial Statements
and notes thereto contain forward-looking statements that involve risks and
uncertainties. Assuming completion of the merger, Endo's financial position and
results of operations will differ, perhaps significantly, from the pro forma
amounts reflected in this proxy statement/prospectus because of a variety of
factors, including access to additional information, changes in value not
currently identified and changes in operating results between the dates of the
pro forma financial information and the date on which the merger is completed.
These Unaudited Pro Forma Condensed Combined Financial Statements are presented
for illustrative purposes only and are not necessarily indicative of the
operating results or financial position that would have been achieved had the
merger been completed as of the date indicated, or the results that may be
obtained in the future.
46
<PAGE>
Endo Pharmaceuticals Holdings Inc.
Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 1999
(In thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Historical
------------------
Endo Algos Adjustments Pro Forma
--------- -------- ----------- ---------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents......... $ 20,258 $ 33,430 $ 53,688
Marketable securities............. -- 4,022 4,022
Interest receivable............... -- 244 244
Accounts receivable............... 39,866 -- 39,866
Inventories....................... 19,842 -- 19,842
Prepaid expenses and other current
assets........................... 811 400 1,211
Deferred income taxes............. 8,364 -- 8,364
--------- -------- -------- ---------
Total current assets.............. 89,141 38,096 -- 127,237
--------- -------- -------- ---------
Property and equipment, net....... 5,696 1,008 6,704
Goodwill and other intangibles.... 190,855 -- 194,238 (1) 385,093
Deferred income taxes............. 14,005 -- 14,005
Restricted cash................... -- 150 150
Other assets...................... 4,778 -- 4,778
--------- -------- -------- ---------
Total assets...................... $ 304,475 $ 39,254 $194,238 $ 537,967
========= ======== ======== =========
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
<S> <C> <C> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses......................... $ 40,539 $ 2,982 $ 7,500 (2) $ 51,021
Current portion of long-term
debt............................. 8,750 -- -- 8,750
--------- -------- -------- ---------
Total current liabilities......... 49,289 2,982 7,500 59,771
--------- -------- -------- ---------
Long-term debt, less current
portion.......................... 181,715 -- -- 181,715
Other liabilities................. 1,760 -- -- 1,760
Stockholders' equity.............. 71,711 36,272 (36,272)(3) 294,721
223,010 (4)
--------- -------- -------- ---------
Total liabilities and
stockholders' equity............. $ 304,475 $ 39,254 $194,238 $ 537,967
========= ======== ======== =========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements for
discussion of pro forma adjustments.
47
<PAGE>
Endo Pharmaceuticals Holdings Inc.
Unaudited Pro Forma Condensed Combined Statement of Operations
(In thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
-------------------------------------------
Historical Adjustments Pro Forma
----------------- ----------- ---------
Endo Algos
-------- --------
<S> <C> <C> <C> <C>
Net sales......................... $108,370 $ -- $108,370
Cost of sales..................... 54,731 -- 54,731
Selling, general &
administrative................... 25,540 4,671 30,211
Research & development............ 5,893 13,086 18,979
Depreciation and amortization..... 7,373 142 19,424 (5) 26,939
Purchased in-process research and
development...................... -- -- -- (1) --
-------- -------- -------- --------
Operating income (loss)........... 14,833 (17,899) (19,424) (22,490)
Interest expense (income), net.... 14,451 (2,029) 12,422
-------- -------- -------- --------
Income (loss) before income tax
(benefit)........................ 382 (15,870) (19,424) (34,912)
Income tax (benefit).............. 181 -- (181)(6) --
-------- -------- -------- --------
Net income (loss)................. $ 201 $(15,870) $(19,243) $(34,912)
======== ======== ======== ========
Pro forma net loss per share (7)
Basic............................ $ 0.00 $ (0.98) $ (0.39)
======== ======== ========
Diluted.......................... $ 0.00 $ (0.98) $ (0.39)
======== ======== ========
Shares used to compute earnings
per share (7)
Basic............................ 71,585 16,144 89,486
======== ======== ========
Diluted.......................... 71,585 16,144 89,486
======== ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements for
discussion of pro forma adjustments.
48
<PAGE>
Endo Pharmaceuticals Holdings Inc.
Unaudited Pro Forma Condensed Combined Statements of Operations
(In thousands, except per share data)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1999
------------------------------------------
Historical Adjustments Pro Forma
----------------- ----------- ---------
Endo Algos
------- --------
<S> <C> <C> <C> <C>
Net sales.......................... $87,296 $ -- $ -- $ 87,296
Costs of sales..................... 40,804 -- -- 40,804
Selling, general & administrative.. 29,743 7,543 37,286
Research & development............. 6,106 7,602 13,708
Depreciation and amortization...... 6,073 175 14,568 (5) 20,816
Purchased in-process research and
development....................... -- -- -- (1) --
------- -------- -------- --------
Operating income (loss)............ 4,570 (15,320) (14,568) (25,318)
Interest expense (income), net..... 10,407 (1,569) 8,838
------- -------- -------- --------
Loss before income tax (benefit)... (5,837) (13,751) (14,568) (34,156)
Income tax (benefit)............... (2,215) -- 2,215(6) --
------- -------- -------- --------
Net loss........................... $(3,622) $(13,751) $(16,783) $(34,156)
======= ======== ======== ========
Pro forma net loss per share (7)
Basic............................ $ (0.05) $ (0.79) $ (0.38)
======= ======== ========
Diluted.......................... $ (0.05) $ (0.79) $ (0.38)
======= ======== ========
Shares used to compute net loss per
share (7)
Basic............................ 71,613 17,341 89,513
======= ======== ========
Diluted.......................... 71,613 17,341 89,513
======= ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements for
discussion of pro forma adjustments.
49
<PAGE>
Endo Pharmaceuticals Holdings Inc.
Notes to Unaudited Pro Forma Condensed Combined Financial Statements
(dollars in thousands, except share and per share data)
(1) Reflects the excess of the estimated purchase price of the merger over the
estimated fair value of the net identifiable assets acquired, as follows:
<TABLE>
<S> <C>
Common stock and equivalents of Algos............................ 17,900,445
Average closing price in two days subsequent to and inclusive of
November 29, 1999............................................... $ 12.4583
-----------
Market capitalization of Algos following announcement............ $ 223,010
Estimated merger fees............................................ 7,500
-----------
Total estimated purchase price................................... 230,510
Net assets acquired.............................................. (36,272)
-----------
Preliminary goodwill and other intangibles....................... $ 194,238
===========
</TABLE>
A preliminary allocation of the estimated purchase price has been made for
illustration purposes to certain identifiable tangible and intangible assets
and liabilities, according to their book value. Endo has referred to the excess
of the estimated purchase price over the net identified tangible assets as
preliminary goodwill and other intangibles. The final allocation of the excess
purchase price over net tangible assets will include, if applicable,
recognition of adjustments of the tangible assets and liabilities to their fair
values, the fair value of identifiable intangible assets, including
intellectual property and in-process research and development, and residual
goodwill. Consideration allocated to in-process research and development will
be recorded as a charge against net income (loss) in the period the merger
occurs. Endo has assumed an average amortization of preliminary goodwill and
other intangibles of ten years for illustration purposes, which is the simple
average of the estimated intellectual property blended useful life of 17 years
and the estimated goodwill life of three years. Each $1,000 of consideration
allocated to in-process research and development will increase future annual
income incrementally by $100, due to the reduction in future goodwill and other
intangible amortization. A preliminary estimate of in-process research and
development and any adjustments to intangible assets will not be available
until the completion of an independent valuation as of the date of the merger.
Assuming completion of the merger, Endo's financial position and results of
operations will differ, perhaps significantly, from the pro forma amounts
reflected in this proxy statement/prospectus because of a variety of factors,
including access to additional information, changes in value not currently
identified and changes in operating results between the dates of the pro forma
financial information and the date on which the merger is consummated.
(2) Reflects the estimated merger fees from the transaction.
(3) Reflects the elimination of Algos' historical stockholders' equity as of
September 30, 1999.
(4) Reflects the issuance of 17,900,445 common shares and common share
equivalents at $12.46 per share (the average closing price of Algos' common
stock for the two days subsequent to and inclusive of November 29, 1999,
the announcement date). The actual number of Endo common shares to be
issued in connection with the merger is based on the exchange ratio of one-
to-one. Due to the availability of a public market for Algos common stock,
it has been determined that the fair value of the consideration received is
a more readily determinable value for purposes of determining the purchase
price.
(5) Reflects the amortization of preliminary goodwill and other intangibles
resulting from the merger over the blended estimated useful life of ten
years.
(6) Reflects recording of deferred tax benefits associated with pro forma
losses for the year ended December 31, 1998. Reflects a valuation allowance
on Endo's income tax (benefit) due to the pro forma uncertainty of its
utilization for the period ended September 30, 1999.
(7) Historical shares used to compute earnings per share for Endo have been
adjusted to reflect the pro forma recapitalization for the year ended
December 31, 1998 and the nine months ended September 30, 1999. Pro forma
shares outstanding include the shares to be issued in the merger.
50
<PAGE>
INTERESTS OF CERTAIN PERSONS IN THE MERGER
AND RELATED MATTERS
Some members of the Algos board of directors and some executive officers of
Algos have interests in the merger that are in addition to the interests of the
Algos stockholders generally.
Board of Directors
Under the merger agreement, John W. Lyle, Michael Hyatt and Roger H. Kimmel,
current directors of Algos, will become members of the Endo board of directors
upon the completion of the merger. In addition, Mr. Lyle, currently President
and Chief Executive Officer of Algos, will serve as the chairman of the board
of Endo following the merger. For a discussion of Endo director compensation,
see "DIRECTORS AND MANAGEMENT OF ENDO FOLLOWING THE MERGER--Directors of Endo
Following the Merger."
Indemnification and Insurance
Algos currently maintains a directors and officers liability insurance
policy covering all of its directors and officers. Algos also currently
maintains a $6.0 million life insurance policy on Mr. Lyle.
For not less than six years after completing the merger, Endo will be
required to indemnify, to the fullest extent allowed under law, each individual
who is or was an officer, director or employee of Algos for all actions taken
by them in their capacities as such or at the request of Algos prior to the
completion of the merger and to honor all indemnification obligations of Algos
to those persons, whether pursuant to Algos's certificate of incorporation, by-
laws or an indemnification agreement. Endo will also be required to indemnify
and hold harmless those officers, directors and employees of Algos to the
fullest extent allowed under law for acts or omissions occurring in connection
with the approval of the merger agreement and the consummation of the
transactions contemplated by the merger agreement.
For not less than six years after completing the merger, Endo will also
provide officer's and director's liability insurance for acts or omissions
prior to the completion of the merger for each individual covered under the
comparable Algos policy as of the date of the merger agreement. Endo will not
be required to pay, in total, an annual premium for the insurance described in
this paragraph in excess of 200% of the current annual premium paid by Algos
for its existing coverage prior to the merger.
Compensation Arrangements for Algos Officers
Lyle Employment Agreement
In connection with the merger agreement, an employment agreement to employ
Mr. Lyle in a senior executive capacity with Endo will be executed upon
completion of the merger. The employment agreement provides for a term ending
on the fifth anniversary of the merger. Mr Lyle will work on a part-time basis
on those dates and at those times that Mr. Lyle and Endo mutually agree.
Mr. Lyle will receive an annual base salary of not less than $325,000 and
medical and other similar benefits set forth in the agreement. Mr. Lyle will
also have the opportunity to receive annual performance bonuses. The Endo board
of directors will determine the terms and conditions under which Mr. Lyle will
receive all or a portion of this bonus opportunity.
If the employment agreement is terminated by Endo without cause or by
involuntary termination, Mr. Lyle will be entitled to severance benefits
consisting of the payment of the remainder of his base salary for the full
five-year term of the agreement and continued medical and similar benefits
through the remainder of the term of the agreement. Termination for Cause is
defined in the agreement as any action taken by Mr. Lyle that would constitute
willful and grossly negligent conduct, the commission of a crime or fraud, or
the breach of, or default under, any of Mr. Lyle's covenants not to compete and
confidentiality covenants under the agreement. Involuntary Termination is
defined as illness, disability or other incapacity.
51
<PAGE>
Stay Bonuses
Algos is considering the payment of "stay bonuses" to specified executive
officers, provided that those executive officers remain employees of Endo
through the six-month anniversary of the merger, regardless of whether these
executive officers are terminated following this six-month anniversary.
Effect of Merger on Algos Stock Options and Warrants
There are three Algos stock option plans: the Incentive Stock Option Plan,
the Stock Option Plan and the Non-Employee Director Plan.
In accordance with these plans, the Algos board of directors has agreed in
the merger agreement to accelerate the vesting of all options granted under the
plans, to allow any holder of Algos stock options who wishes to exercise the
options prior to the merger to do so. Upon the completion of the merger, each
outstanding option to purchase Algos common stock will expire, and the Algos
stock option plans will cease to exist. Endo may adopt an employee stock option
plan following the merger under which the former Algos employees who remain
with Endo following the merger may receive stock options to purchase shares of
Endo common stock. This new plan, if adopted, would be in addition to the Endo
stock option plans that are currently outstanding and described below.
At December 14, 1999, there were outstanding options to purchase 777,690
shares of Algos common stock, exercisable at prices ranging from $0.1205 per
share to $37.25 per share. Of these options, there were options to purchase
32,550 shares that were exercisable for a price of $15.00 per share, the
closing price of Algos common stock on November 26, 1999, the last trading day
prior to the announcement of this transaction, or less. Of the options that are
exercisable for a price of $15.00 per share or less, the following Algos
directors and officers hold options to purchase the number of shares at the
exercise prices set forth below:
<TABLE>
<CAPTION>
Exercise
Number Price
of per
Director or Officer Shares Share
- ------------------- ------- --------
<S> <C> <C>
John W. Lyle................................................... 132,800 $ 0.1325
15,000 $15.0000
Frank S. Caruso................................................ 8,300 $ 0.1205
24,000 $15.0000
Gary Anthony................................................... 12,450 $ 0.1205
Roger H. Kimmel................................................ 10,000 $12.0000
5,000 $15.0000
Michael Hyatt.................................................. 10,000 $12.8750
5,000 $15.0000
James R. Ledley................................................ 5,000 $15.0000
Donald G. Drapkin.............................................. 5,000 $15.0000
Dieter A. Sulser............................................... 5,000 $15.0000
</TABLE>
52
<PAGE>
Additionally, Algos has from time to time issued warrants to purchase shares
of Algos common stock in connection with private placement transactions. These
warrants are governed by the terms of their respective warrant agreements. The
merger will affect the warrants as follows:
. BB Biotech Warrants. If these warrants are not exercised prior to the
merger, they will expire. These warrants have an exercise price of
$25.00 per share. On December 15, 1999, there were outstanding
BB Biotech warrants to purchase 250,000 shares of Algos common stock.
. Series A Warrants. If these warrants are not exercised prior to the
merger, they will become warrants to purchase an equivalent amount of
shares in the combined entity, which will have the effect of diluting
only the Algos stockholders' ownership in Endo. These warrants have an
exercise price of $1.20 per share. On December 15, 1999, there were
outstanding Series A warrants to purchase 229,661 shares of Algos common
stock.
Ownership of Algos Common Stock by Certain Owners and Management of Algos
The following table provides information regarding the ownership of Algos
common stock as of December 2, 1999 by: (1) each stockholder who is known to
Algos to own beneficially more than 5% of Algos common stock; (2) Algos' chief
executive officer and the other named executive officers of Algos; (3) each
director of Algos; and (4) all directors and executive officers as a group.
<TABLE>
<CAPTION>
Shares
Beneficially
Owned
-----------------
Name of Beneficial Owner Number Percent
- ------------------------ --------- -------
<S> <C> <C>
Directors and Executive Officers:
John W. Lyle(a)............................................. 1,755,316 10.0%
Frank S. Caruso(b).......................................... 419,700 2.4
Ronald Goldblum(c).......................................... 15,000 *
W. Bradford Middlekauff(d).................................. 23,750 *
Robert E. Sosnowski(e)...................................... 4,250 *
Donald A. Johnson(f)........................................ 112,050 *
Terence S. Novak(f)......................................... 500 *
Donald G. Drapkin(g)........................................ 26,600 *
Michael Hyatt(h)............................................ 1,854,244 10.6
Roger H. Kimmel(i).......................................... 928,526 5.3
James R. Ledley(j).......................................... 122,950 *
Dieter A. Sulser(k)......................................... 163,550 *
Directors and Executive Officers as a group(f)(l)........... 4,769,261 26.9
Other Principal Stockholders:
Unifina Holding, A.G. and related investors(m).............. 1,734,700 9.9
Karen Lyle(n)............................................... 1,755,316 10.0
Biotech Target S.A.(o)...................................... 1,415,000 8.0
Lawrence Canarelli(p)....................................... 871,500 5.0
</TABLE>
- --------
* Represents less than one percent.
(a) Includes (i) 224,100 shares of Algos common stock owned directly by Mr.
Lyle, (ii) 1,344,916 shares of Algos common stock and options to purchase
3,500 shares of Algos common stock owned by Karen Lyle, wife of Mr. Lyle,
as to which Mr. Lyle disclaims beneficial ownership, (iii) 38 shares owned
by Mr. Lyle's son and (iv) options to purchase 181,900 shares of Algos
common stock owned directly by Mr. Lyle. Excludes 660,000 shares of Algos
common stock held in a trust for the benefit of the children of Mr. and
Mrs. Lyle, as to which shares Mr. Lyle has neither the power of
disposition nor the power to vote.
53
<PAGE>
(b) Includes (i) 1,000 shares of Algos common stock owned directly by Mrs.
Caruso, wife of Dr. Caruso, as to which Dr. Caruso disclaims beneficial
ownership, (ii) 7,200 shares of Algos common stock held in a trust for
which Dr. Caruso serves as trustee and as to which shares Dr. Caruso holds
either the sole or the shared power of disposition and the power to vote
and (iii) options to purchase 14,500 shares of Algos common stock. Excludes
a total of 24,900 shares held in trust for the benefit of the children of
Dr. and Mrs. Caruso, as to which shares Dr. Caruso has neither the power of
disposition nor the power to vote.
(c) Includes options to purchase 15,000 shares of Algos common stock. Dr.
Goldblum ceased to be employed by Algos on December 15, 1999.
(d) Includes options to purchase 23,750 shares of Algos common stock.
(e) Includes options to purchase 3,750 shares of Algos common stock.
(f) Mr. Johnson ceased to be employed by Algos in February 1999. Mr. Novak
ceased to be employed by Algos in June 1999. As a result, information
regarding the share holdings of Mr. Johnson and Mr. Novak are no longer
available to Algos. Accordingly, the share numbers shown represent the
number of shares each of them had at the respective times they left their
employment at Algos.
(g) Includes (i) 16,600 shares owned directly by Mr. Drapkin and (ii) options
to purchase 10,000 shares of Algos common stock. Excludes a total of
809,244 shares of Algos common stock held in six trusts for the benefit of
the children of Mr. Drapkin, as to which shares Mr. Drapkin has neither the
power of disposition nor the power to vote.
(h) Includes (i) 829,751 shares of Algos common stock owned directly by Mr.
Hyatt, (ii) 1,004,473 shares held in trusts for which Mr. Hyatt serves as
trustee and as to which shares Mr. Hyatt holds either the sole or the
shared power of disposition or the power to vote and (iii) options to
purchase 20,000 shares of Algos common stock. Excludes 221,333 shares of
Algos common stock held in a trust for the benefit of the children of Mr.
Hyatt, as to which shares Mr. Hyatt has neither the power of disposition
nor the power to vote.
(i) Includes (i) 30,000 shares owned directly by Mr. Kimmel, (ii) 878,526
shares held in trusts for which Mr. Kimmel serves as trustee and as to
which shares Mr. Kimmel holds either the sole or the shared power of
disposition and power to vote and (iii) options to purchase 20,000 shares
of Algos common stock. Excludes 171,530 shares of Algos common stock held
in trusts for the benefit of Mr. Kimmel's son, as to which shares Mr.
Kimmel has neither the power of disposition nor the power to vote.
(j) Includes (i) 109,450 shares owned directly by Mr. Ledley, (ii) a total of
3,500 shares of Algos common stock held in trusts, as to which shares Mr.
Ledley holds either the sole or the shared power of disposition and power
to vote and (iii) options to purchase 10,000 shares of Algos common stock.
(k) Includes (i) options to purchase 10,000 shares of Algos common stock and
(ii) 141,100 shares of Algos common stock and 12,450 warrants to purchase
shares of Algos common stock owned directly by Gaby Tschofen Sulser, wife
of Mr. Sulser, as to which Mr. Sulser disclaims beneficial ownership.
Excludes 1,734,700 shares beneficially owned by Unifina Holding AG, as to
which shares Mr. Sulser disclaims beneficial ownership. Mr. Sulser is the
General Manager of Unifina Holding AG.
(l) Includes options and warrants to purchase 352,550 shares of Algos common
stock.
(m) Consists of 1,577,000 shares of Algos common stock and 157,700 warrants to
purchase shares of Algos common stock held by EBC Zurich AG. The address of
Unifina Holding AG is Zurcherstrasse 62; CH 8406, Winterthur, Switzerland
and the address of EBC Zurich AG is Bellariastrasse 23; CH 8027, Zurich,
Switzerland. Excludes (i) 166,000 shares of Algos common stock and warrants
to purchase 16,600 shares of Algos common stock held by Mr. Rolf P. Erb,
Chairman of EBC Zurich AG and a member of the board of directors of Unifina
Holding AG, as to which shares each of Unifina Holding AG and EBC Zurich AG
disclaim beneficial ownership and (ii) 141,100 shares of Algos common
stock, warrants to purchase 12,450 shares of Algos common stock and options
to purchase 10,000 shares of Algos common stock beneficially owned by Mr.
Sulser, General Manager of Unifina Holding AG, as to which shares Unifina
Holding AG disclaims beneficial ownership.
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<PAGE>
(n) Includes (i) 1,344,916 shares of Algos common stock and options to purchase
3,500 shares of Algos common stock, owned directly by Mrs. Lyle and (ii)
224,100 shares of Algos common stock and options to purchase 181,800 shares
of Algos common stock owned directly by John W. Lyle, husband of Mrs. Lyle,
as to which Mrs. Lyle disclaims beneficial ownership.
(o) Includes warrants to purchase 250,000 shares of Algos common stock.
(p) Includes 660,000 shares of Algos common stock deemed to be beneficially
owned by Mr. Canarelli in his capacity as trustee for a trust as to which
shares Mr. Canarelli has shared power of disposition and the power to vote.
Current Holdings of Stockholders, Directors and Executive Officers of Endo
The following table sets forth, as of December 13, 1999, the name, address,
where required, and holdings of each person, including any "group" as defined
in Section 13(d)(3) of the Exchange Act, known by Endo to be the beneficial
owner of more than 5% of Endo common stock, and the amount of Endo common stock
beneficially owned by each of the directors and executive officers of Endo, and
by all directors and executive officers of Endo as a group.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
--------------------
Percent
Name of Beneficial Owner Number of Class
------------------------ ---------- --------
<S> <C> <C>
Kelso Investment Advisors V, L.P.(a)(b)............... 918,300 83.16%
Kelso Equity Partners V, L.P.(a)(b)................... 918,300 83.16%
Joseph S. Schuchert(b)................................ (d)
Frank T. Nickell(b)................................... (d)
Thomas R. Wall, IV(b)................................. (d)
George E. Matelich(b)................................. (d)
Michael B. Goldberg(b)(c)............................. (d)
David I. Wahrhaftig(b)................................ (d)
Frank K. Bynum, Jr.(b)(c)............................. (d)
Philip E. Berney(b)................................... (d)
Greenwich Street Capital Partners, L.P.(e)............ 108,531.16 9.83%
Carol A. Ammon(f)(g).................................. 4,000
Mariann T. MacDonald(f)(g)............................ 3,000
Louis J. Vollmer(f)(g)................................ 3,000
Jeffrey R. Black(f)(g)................................ 500
Osagie O. Imasogie(f)(g).............................. 400
David A.H. Lee, M.D., Ph.D.(f)(g)..................... 250
All current directors and executive officers of Endo
(8 persons) ......................................... 11,150 1.01%
</TABLE>
- --------
* Represents less than one percent.
(a) As part of the 1997 acquisition of Endo from the then DuPont Merck
Pharmaceutical Company, Kelso Investment Associates V, L.P., or KIA V, and
Kelso Equity Partners V, L.P., or KEP V, acquired respectively 847,028 and
71,722 shares of Endo common stock, representing 77.0% and 6.5%,
respectively of the 1,100,000 shares of Endo common stock then outstanding.
Subsequent to the acquisition, KEP V transferred 500 shares to an affiliate
of Kelso. KIA V and KEP V, due to their common control, could be deemed to
beneficially own each other's shares, but disclaim this beneficial
ownership.
(b) The business address for these entities is c/o Kelso & Company, 320 Park
Avenue, 24th Floor, New York, NY 10022.
55
<PAGE>
(c) Messrs. Goldberg and Wahrhaftig are directors of Endo.
(d) Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig, Bynum and
Berney may be deemed to share beneficial ownership of shares of Endo common
stock owned of record by KIA V and KEP V. Messrs. Schuchert, Nickell, Wall,
Matelich, Goldberg, Wahrhaftig, Bynum and Berney share investment and
voting power with respect to securities owned by KIA V and KEP V. Messrs.
Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig, Bynum and Berney
disclaim beneficial ownership of shares of common stock owned of record by
KIA V and KEP V.
(e) The business address for this person is 338 Greenwich Street, 36th Floor,
New York, New York 10013.
(f) The business address for these persons is c/o Endo Pharmaceuticals Holdings
Inc., 223 Wilmington-West Chester Pike, Chadds Ford, Pennsylvania 19317.
(g) These amounts do not include any Endo employee stock options that these
individuals hold.
56
<PAGE>
DIRECTORS AND MANAGEMENT OF ENDO
FOLLOWING THE MERGER
General
In connection with the merger, Endo intends to amend and restate its
certificate of incorporation and by-laws. Forms of the proposed amended and
restated certificate of incorporation and proposed amended and restated by-laws
for Endo, to be put into effect immediately prior to the merger, are attached
as Appendices D and E, respectively, to this proxy statement/prospectus and are
incorporated in this proxy statement/prospectus by reference. See "COMPARISON
OF STOCKHOLDER RIGHTS."
Directors of Endo Following the Merger
The amended and restated certificate of incorporation provides that the Endo
board will consist of between seven and eleven members, three of whom will be
designated by Algos. The initial board of directors of Endo will consist of
nine individuals with an initial term expiring at the annual meeting of
stockholders to be held in 2001. Each director is elected for a one-year term.
Under the merger agreement, John W. Lyle, Michael Hyatt and Roger H. Kimmel,
current directors of Algos, will become members of the Endo board of directors
upon the completion of the merger. The merger agreement and the amended and
restated by-laws of Endo also provide that these Algos nominees will remain on
the board of directors for a period of three years. Pursuant to the terms of
the merger agreement, Mr. Lyle will serve as the chairman of the board of
directors of Endo following the merger.
Set forth below is information with respect to the nine individuals who have
been designated as the initial members of the Endo board of directors:
<TABLE>
<CAPTION>
Position with Endo Current Position
Name Age Following the Merger with Endo or Algos
---- --- -------------------- ------------------
<S> <C> <C> <C>
John W. Lyle............ 55 Chairman of the Board Chief Executive Officer
and President of Algos
Carol A. Ammon.......... 48 President, Chief Executive President, Chief Executive
Officer and Director Officer and Director of
Endo
Michael B. Goldberg..... 52 Director Director of Endo
David I. Wahrhaftig..... 42 Director Director of Endo
Michael Hyatt........... 53 Director Director of Algos
Roger H. Kimmel......... 52 Director Director of Algos
[Others]................
</TABLE>
JOHN W. LYLE, 55, has been President and Chief Executive Officer and a
Director of Algos since its formation in January 1992. Mr. Lyle served as
President and Chief Executive Officer of OmniCorp Holdings, Inc., in 1991.
Prior to founding Algos, Mr. Lyle was one of the founders of Osteotech, Inc., a
public orthopaedic pharmaceutical company formed in 1986. He served as
Osteotech, Inc.'s Chairman and Chief Executive Officer from 1989 to 1991 and as
President from 1986 to 1989. From 1981 to 1986, Mr. Lyle served as President of
CIBA-GEIGY Corporation's Self-Medication Division. From 1975 to 1981, Mr. Lyle
held various positions at Johnson & Johnson.
CAROL A. AMMON, 48, is President, Chief Executive Officer and Director of
Endo. Prior to joining Endo from 1996 to 1997, Ms. Ammon was the President of
DuPont Merck's U.S. Pharmaceuticals Division, and from 1993 to 1995 she was the
President of Endo Laboratories, L.L.C. She also serves as a director on the
boards of the Medical Center of Delaware, the Arnold & Marie Schwartz School of
Pharmacy in Brooklyn, New York and the Pete DuPont Delaware Public Policy
Committee.
MICHAEL B. GOLDBERG, 52, is currently Chairman of the Board and Director of
Endo. Mr. Goldberg joined Kelso & Company as Managing Director in 1991. Mr.
Goldberg is also a director of Consolidated Vision Group, Inc., HCI Direct,
Inc., Netspeak Corporation and Unilab Inc. He also serves as a member of the
Phoenix House Foundation Board of Directors and The Wilson Council of the
Woodrow Wilson International Center for Scholars.
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<PAGE>
DAVID I. WAHRHAFTIG, 42, is a Director of Endo. Mr. Wahrhaftig became
Managing Director of Kelso & Company in April 1997, after joining the firm in
1987. Mr. Wahrhaftig is also a director of Consolidated Vision Group, Inc.,
Unilab Inc. and Humphreys, Inc.
MICHAEL HYATT, 53, has been a Director of Algos since November 1996. For
more than five years, Mr. Hyatt has been a Senior Managing Director of Bear
Stearns & Co., Inc.
ROGER H. KIMMEL, 52, has been a Director of Algos since July 1996. Mr.
Kimmel has been a partner of the law firm of Latham & Watkins for more than
five years. Mr. Kimmel is also a director of Weider Nutrition International,
Inc. and TSR Paging, Inc.
[OTHERS TO COME]
Executive Officers of Endo Following the Merger
The executive officers of Endo following the merger are expected to be:
<TABLE>
<CAPTION>
Name Age Position and Offices
---- --- --------------------
<C> <C> <S>
President and Chief Executive Officer and
Carol A. Ammon.......... 48 Director
Mariann T. MacDonald.... 52 Executive Vice President, Operations
Louis J. Vollmer........ 43 Executive Vice President, Sales & Marketing
Senior Vice President, Chief Financial Officer
Jeffrey R. Black........ 35 and Treasurer
Osagie O. Imasogie...... 38 Senior Vice President, Business Development,
General Counsel and Secretary
David A.H. Lee, M.D.,
Ph.D. ................. 49 Senior Vice President, Research & Development
</TABLE>
MARIANN T. MACDONALD, 52, is Executive Vice President, Operations of Endo.
Prior to joining Endo, Ms. MacDonald was Vice President of Business
Information, Training, Administration & Technology for the U.S. Pharmaceuticals
Division of DuPont Merck from 1996 to 1997 and Vice President of Operations for
Endo Laboratories, L.L.C. from 1995 to 1996. From 1993 to 1995, Ms. MacDonald
held various management positions in DuPont Merck.
LOUIS J. VOLLMER, 43, is Executive Vice President, Sales and Marketing of
Endo. Prior to joining Endo, Mr. Vollmer was Vice President for Multi-Source
Brands of DuPont Merck from 1996 to 1997 and Vice President of Sales &
Marketing at Endo Laboratories, L.L.C. from 1994 to 1996. From 1993 to 1995,
Mr. Vollmer held sales and marketing management positions in DuPont Merck.
JEFFREY R. BLACK, 35, is Senior Vice President, Chief Financial Officer and
Treasurer of Endo. Prior to joining Endo, Mr. Black became a Partner in June
1997 with Deloitte & Touche LLP in the New York Merger and Acquisition Services
Group, after joining that firm in 1986.
OSAGIE O. IMASOGIE, 38, is Senior Vice President, Business Development,
General Counsel and Secretary of Endo. Immediately prior to joining Endo, Mr.
Imasogie was Senior Counsel with SmithKline Beecham Corporation where he was
Lead Counsel for the Health Management Services business unit. From 1995 to
1996, Mr. Imasogie was initially an Associate General Counsel and then
subsequently was Vice President, International Division, for DuPont Merck. Mr.
Imasogie has also been a Partner in Price Waterhouse's Corporate Finance and
Information Technology departments and the Managing Director and Chief
Executive Officer of a financial and management consulting firm.
DAVID A.H. LEE, M.D. Ph.D., 49, is Senior Vice President, Research &
Development and Regulatory Affairs of Endo. Prior to joining Endo, Dr. Lee was
Executive Vice President, Research and Development for CoCensys, Inc., an
emerging pharmaceuticals company based in Irvine, California, from 1992 through
1997. Prior to joining CoCensys, Dr. Lee held various positions at Solvary
Pharmaceuticals in the Netherlands, ranging from head of global clinical
development programs to his final position as V.P. Research and Development.
Dr. Lee received his M.D. and PH.D. degrees from the University of London and
specialized in internal medicine and gastroenterology, prior to joining the
pharmaceutical industry.
58
<PAGE>
Certain Relationships and Related Transactions of Endo
Endo has a pre-existing agreement with Kelso & Company to pay Kelso an
annual fee of $347,000 for financial advisory services, to indemnify Kelso in
providing its services, and to reimburse Kelso for out-of-pocket expenses
incurred. In connection with the completion of the merger, this agreement to
pay an annual fee to Kelso will be terminated by Endo making a one-time payment
to Kelso of $1.5 million. However, the arrangements for indemnification and
reimbursement of specific expenses will survive the termination of this annual
fee arrangement.
Kelso, formed in 1971, is a private New York based investment firm
specializing in leveraged buyouts. Since 1980, Kelso has acquired more than 67
companies requiring total capital of more than $16 billion. Kelso has a
successful track record of investments including: American Standard, Charter
Communications, Club Car, General Medical, International House of Pancakes, iXL
Enterprises, MJD Communications and Universal Outdoor. After completion of the
merger, affiliates of Kelso & Company will have contributed to Endo Pharma LLC
approximately 83.2% of the Endo common stock to be held by Endo Pharma LLC.
After the merger, Endo Pharma LLC will own 80% of the Endo common stock.
59
<PAGE>
THE MERGER AGREEMENT
General
The following is a summary of the material terms of the merger agreement.
This summary is not complete and is qualified in its entirety by reference to
the merger agreement. A copy of the merger agreement is attached as Appendix A
to this proxy statement/prospectus and is incorporated in this proxy
statement/prospectus by reference. You should read the full text of the merger
agreement because it, and not this proxy statement/prospectus, is the legal
document that governs the merger.
The Merger
When the merger contemplated by the merger agreement occurs, Algos will
merge with and into Endo Inc., a wholly-owned subsidiary of Endo
Pharmaceuticals Holdings Inc. As a result, Algos will cease to exist as a
separate corporate entity and Endo Inc. will continue as the surviving
corporation and retain its name. Endo Inc., as the surviving corporation, will
assume all rights and obligations of Algos. Endo Inc. will be governed by the
laws of the State of Delaware. The merger will have the effects specified in
Section 259 of the Delaware General Corporation Law.
Each share of Algos common stock, par value $.01 per share, issued and
outstanding immediately before the merger, other than those held in the
treasury of Algos and those owned by Endo or Endo Inc., will be converted into
(a) one validly issued, fully paid and non-assessable share of Endo common
stock, par value $.01 per share, and (b) one warrant to be governed by the
terms and conditions of a warrant agreement. All shares of Algos common stock
that are converted will be cancelled and retired. Each holder of a certificate
representing any shares of Algos common stock will no longer have any rights
regarding Algos common stock. Shares of Algos common stock (a) held in the
treasury of Algos and (b) owned by Endo or Endo Inc. will be cancelled without
any payment.
The officers and directors of Endo Inc. immediately prior to the merger will
be the officers and directors of the surviving corporation. The certificate of
incorporation and by-laws of Endo Inc. in effect immediately prior to the
effective time will be the certificate of incorporation and by-laws of the
surviving corporation until they are amended or changed.
Effective Time and Closing of the Merger
Promptly after the satisfaction of the terms and conditions of the merger
agreement, Algos will file a certificate of merger with the Secretary of State
of Delaware as required by the Delaware General Corporation Law. The merger
will be effective when the certificate of merger is filed. However, Algos and
Endo Inc. may agree to a later date or time and specify that date or time in
the certificate of merger. We expect to complete the merger on or promptly
after , 2000, the date scheduled for the special meeting of Algos
stockholders to approve and adopt the merger agreement and the merger.
Procedure to Exchange Certificates
Endo will authorize a commercial bank to act as exchange agent. The exchange
agent will mail letters of transmittal and instructions regarding the exchange
process to each record holder of shares of Algos common stock promptly
following the merger. Upon surrender of Algos common stock certificates, the
Algos record holders will receive certificates representing Endo common stock
and warrants. Once the holders of certificates previously representing Algos
common stock surrender these certificates, they will receive any dividends or
other distributions on the Endo common stock that have a record date after the
merger and a payment date before the holder surrenders the Algos common share
certificate. However, Endo will not pay any dividends until the holder of the
Algos share certificate surrenders that certificate. The holder will also
receive any dividends or other distributions with a record date after the
merger but before the surrender, and a payment date after the surrender. In
each case, taxes will be withheld as required. No interest will be paid or
accrued on unpaid dividends or distributions, if any, which will be paid on
surrender of Algos common share certificates.
60
<PAGE>
At the merger, the stock transfer books of Algos will be closed. No transfer
of shares of Algos common stock outstanding prior to the merger will be made on
the records of Algos after the merger. If, after the merger, Algos certificates
are presented to the surviving corporation, the exchange agent or Endo, these
certificates will be canceled and exchanged as described above.
Any Endo common share certificates and warrant certificates issued in the
merger and any dividends or distributions deposited by Endo with the exchange
agent that remain unclaimed by the former Algos stockholders six months after
the merger will be delivered to Endo. Any former Algos stockholders who have
not complied with the exchange procedures before the six-month anniversary of
the merger may only look to Endo for payment of Endo common stock and warrants,
and any unpaid dividends and distributions on Endo common stock. Neither Algos,
Endo, the exchange agent nor any other person will be liable to you for any
amount properly delivered to a public official under applicable abandoned
property, escheat or similar laws.
The exchange agent will deliver Endo common stock and warrants in exchange
for lost, stolen, or destroyed certificates if the record holder of such Algos
common stock certificates signs an affidavit of loss, theft or destruction. The
surviving corporation may also, in its discretion, require the holder of a
lost, stolen or destroyed certificate to deliver a bond in reasonable sum as
indemnity against any claim that might be made against the surviving
corporation regarding the alleged lost, stolen or destroyed certificate.
Representations and Warranties
Except as discussed in the paragraphs below, the merger agreement contains
essentially reciprocal representations and warranties made by each of Endo and
Algos to the other. These representations and warranties relate to the
following matters:
. due organization, power and standing, and other corporate matters;
. capital structure;
. authority to enter into and enforce the merger agreement;
. required consents and approvals, and absence of violations of law;
. financial statements;
. the accuracy of the information contained in the registration statement
of which this proxy statement/prospectus forms a part;
. absence of any material adverse change;
. permits and licenses;
. tax matters;
. actions and proceedings;
. agreements relating to employee benefits that will be affected by the
merger;
. ERISA matters;
. compliance with applicable laws, including laws relating to the
environment, health and the FDA;
. liabilities;
. labor matters;
. intellectual property;
. ownership of shares;
. brokers' fees and expenses with respect to the merger;
61
<PAGE>
. state takeover statutes;
. year 2000 compliance;
. required vote of stockholders with respect to the merger; and
. interests in other entities.
Endo and Endo Inc. also made additional representations and warranties to Algos
relating to the following matters:
. accuracy of information furnished to Algos; and
. operation of Endo Inc.
Algos also made an additional representation and warranty to Endo and Endo Inc.
relating to the opinion of its financial advisor.
As defined in the merger agreement, a material adverse change or material
adverse effect would not include any change or development relating to
MorphiDex(R) or any other of Algos' products under development, including the
FDA or DEA approval relating to these products.
Covenants Relating to Conduct of Business
Endo has agreed that, during the period from the date of the merger
agreement through the merger, Endo and each of its subsidiaries will, in all
material respects:
. carry on its business in the ordinary course as currently conducted;
. use its reasonable best efforts to preserve intact its current business
organizations;
. keep available the services of its current officers and employees; and
. preserve its relationships with customers, suppliers and others having
business dealings with it.
In addition, unless Algos agrees in writing or the merger agreement provides
otherwise, Endo has agreed that before the merger neither it nor any of its
subsidiaries will:
. declare, set aside or pay any dividends or make distributions on any of
its capital stock;
. split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock;
. other than pursuant to any existing shareholder agreement, purchase,
redeem or otherwise acquire any shares of capital stock of Endo or its
subsidiaries or any rights, warrants or options to acquire any of these
shares;
. institute or amend any share repurchase program;
. issue, deliver, sell, pledge, dispose of, grant, transfer or otherwise
encumber any shares of its capital stock or any rights, warrants or
options to acquire any of these shares, voting securities, equity
equivalent or convertible securities, other than (a) the issuance of
stock options and shares under Endo's incentive plans and in the ordinary
course of business consistent with past practice and (b) the issuance by
any wholly-owned subsidiary of Endo of its capital stock to Endo or
another wholly-owned subsidiary of Endo;
. amend its certificate of incorporation or by-laws;
. acquire or agree to acquire any (a) business, corporation, partnership,
association or other business organization or division or (b) assets,
other than acquisitions of assets in the ordinary course of business
consistent with past practice in an amount not to exceed $20 million;
62
<PAGE>
. sell, lease or dispose of any of its rights or other assets, other than
(a) sales of inventory, merchandise and finished goods in the ordinary
course of business and (b) transactions that are in the ordinary course
of business consistent with past practice and that, individually or in
the aggregate, are not material to Endo and its subsidiaries, taken as a
whole;
. incur any indebtedness for borrowed money, guarantee any of this
indebtedness or make any loans, advances or capital contributions to, or
other investments in, any other entity, other than (a) indebtedness
incurred in the ordinary course of business consistent with past practice
in an amount not to exceed $20 million, (b) indebtedness, loans,
advances, capital contributions and investments between Endo and any of
its wholly owned subsidiaries or between any of these subsidiaries, (c)
indebtedness that may be necessary to fund permissible acquisitions of
any (x) business, corporation, partnership, association or other business
organization or division or (y) assets and (d) indebtedness that may be
necessary in connection with a refinancing of Endo's existing credit
agreement;
. knowingly violate or fail to perform any material obligation required
under any applicable federal, state or local law, rule, regulation,
guideline or ordinance;
. take any action, other than reasonable and usual actions in the ordinary
course of business consistent with past practice, regarding accounting
policies or procedures and other than actions required to be taken by
generally accepted accounting principles;
. enter into any contract, agreement, commitment or arrangement to take any
action prohibited by the merger agreement; or
. take any action that would, or that could reasonably be expected to, make
any of the representations and warranties of Endo and Endo Inc. in the
merger agreement to become untrue.
Algos has guaranteed that, during the period from the date of the merger
agreement through the merger, it will carry out the following actions:
. carry on its business in the ordinary course as currently conducted;
. use its reasonable best efforts to preserve intact its current business
organizations;
. keep available the services of its current officers and employees; and
. preserve its relationships with customers, suppliers and others having
business dealings with it.
In addition, unless Endo agrees in writing or the merger agreement provides
otherwise, Algos has agreed that before the merger it will not:
. declare, set aside or pay any dividends or make any distributions on any
of its capital stock;
. split, combine or reclassify any of its capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of
or in substitution for shares of its capital stock;
. purchase, redeem or otherwise acquire any shares of capital stock of
Algos or any other securities of Algos or any rights, warrants or options
to acquire any of these shares or other securities;
. institute or amend any share repurchase program;
. issue, deliver, sell, pledge, dispose of, grant, transfer or otherwise
encumber any shares of its capital stock, any other voting securities or
equity equivalent or any securities convertible or exchangeable into, or
exercisable for, or any rights, warrants or options to acquire any of
these shares, voting securities, equity equivalent or convertible
securities, other than the issuance of shares of Algos common stock upon
the exercise of Algos stock options outstanding on the date of the merger
agreement;
. amend its certificate of incorporation or by-laws;
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. acquire or agree to acquire any (a) business, corporation, partnership,
association or other business organization or division or (b) assets
other than acquisitions of assets in the ordinary course of business
consistent with past practice, the value of which do not exceed $500,000
in the aggregate;
. sell, lease or otherwise dispose of, or agree to sell, lease or dispose
of, any of its rights or other assets other than (a) sales of inventory,
merchandise and finished goods in the ordinary course of business and (b)
transactions that are in the ordinary course of business consistent with
past practice, not material to Algos and in an aggregate amount no
greater than $250,000;
. incur any indebtedness for borrowed money, guarantee any such
indebtedness or make any loans, advances or capital contributions to, or
other investments in, any other entity, other than investments relating
to permissible acquisitions of any (a) business, corporation,
partnership, association or other business organization or division and
(b) assets and other than indebtedness incurred in the ordinary course of
business consistent with past practice in an amount not to exceed $50,000
in the aggregate;
. alter, through merger, liquidation, reorganization, restructuring or in
any other fashion, the corporate structure or ownership of Algos other
than as a result of the regular trading of Algos common stock on the
NASDAQ;
. enter into or adopt, or amend any existing, severance plan, agreement or
arrangement or enter into or amend any Algos deferred compensation, bonus
or incentive compensation, stock purchase, stock option and other equity
compensation, or other plan, or employment or consulting agreement, other
than (a) as required by applicable law, (b) as expressly contemplated by
the merger agreement or (c) stay bonuses as reasonably approved by Endo;
. (a) increase the compensation payable to its officers, employees or
directors except for increases in the ordinary course of business
consistent with past practice, (b) grant any additional rights to
severance or termination pay to any director or officer of Algos, (c)
enter into any employment or severance agreement with any director or
officer of Algos or (d) enhance or accelerate any rights or benefits
under any labor, collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, severance or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
director, officer or employee;
. knowingly violate or fail to perform any material obligation or duty
imposed upon it by any applicable federal, state or local law, rule,
regulation, guideline or ordinance;
. take any action, other than reasonable and usual actions in the ordinary
course of business consistent with past practice, with respect to
accounting policies or procedures and other than actions required to be
taken by generally accepted accounting principles;
. make any tax election, change its method of accounting, or settle or
compromise any material federal, state, local or foreign income tax
liability or refund;
. except for purchases of MorphiDex(R) and clinical supplies, as needed,
enter into any contract that cannot be canceled on 30 days' notice
pursuant to which Algos is obligated in an amount in excess of $500,000;
. make any capital expenditure in the aggregate in excess of $100,000,
subject to specified exceptions;
. enter into any agreement, arrangement or contract that provides for the
allocation or sharing of, or indemnification for, taxes;
. enter into any contract, agreement, commitment or arrangement to take any
action prohibited by the merger agreement; or
. take any action that would, or could reasonably be expected to, make any
of the representations and warranties of Algos in the merger agreement to
become untrue.
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No Solicitation
Algos has agreed to not, and has agreed to use its best efforts to cause its
officers, directors, employees, investment bankers, consultants, attorneys,
accountants, agents, advisors or representatives not to:
. take any action to solicit, initiate, encourage, facilitate, enter into
or approve any agreement or agreement-in-principle that will result in,
participate or engage in any discussions or negotiations regarding, or
furnish to any Person any information that will lead to, any company
takeover proposal.
Company takeover proposal is defined in the merger agreement as any proposal
for a merger or other business combination involving Algos or the acquisition
or purchase of more than 25% of any class of equity securities of Algos, or any
tender offer, including a self-tender offer, or exchange offer that, if
concluded, would result in any person beneficially owning more than 25% of any
class of equity securities of Algos or a majority of the assets of Algos, other
than the transactions contemplated by the merger agreement.
The "no solicitation" provision in the merger agreement does not prohibit
Algos or the board of directors of Algos from:
. taking and disclosing to Algos' stockholders a position with respect to a
tender or exchange offer by a third party,
. exercising their fiduciary duties by providing information about Algos to
third parties or conducting negotiations with respect to a takeover
proposal that was not solicited by Algos, or
. making any disclosure required by applicable law.
Algos has agreed to promptly advise Endo orally and in writing in the event
that Algos receives any company takeover proposal or any inquiry that could
reasonably be expected to lead to any company takeover proposal. Algos has
agreed to (a) keep Endo fully informed of the status of any company takeover
proposal or inquiry and (b) provide to Endo as soon as practicable, copies of
all correspondence and other written material sent to Algos in connection with
any company takeover proposal.
Additional Agreements
Stockholder Meeting. Algos has agreed to call a meeting of its stockholders
for the purposes of considering the approval of the merger agreement as
promptly as practicable after a registration statement relating to the shares
of Endo common stock and warrants issuable in the merger becomes effective. The
board of directors of Algos has agreed not to withdraw or modify, in a manner
adverse to Endo, its approval or recommendation of the merger agreement or the
merger, except in the case of a superior third party proposal. The board of
directors of Algos has also agreed not to recommend or propose any third party
proposal to acquire Algos unless the Algos board of directors determines in its
good faith judgment that this third party proposal is superior, from a
financial point of view, to the stockholders of Algos. Regardless of any
permissible change in the recommendation of the Algos board of directors
regarding the merger agreement and the merger, Algos has agreed to submit the
merger agreement and the merger to the Algos stockholders for approval at the
special meeting in order to give Algos stockholders the opportunity to vote on
the merger agreement and the merger in order to obtain the requisite approval
of Algos' stockholders.
Preparation of the Registration Statement and Proxy Statement. Endo and
Algos have agreed to cooperate in the prompt preparation and filing of
documents under federal and state securities laws and with applicable
governmental authorities.
Access to Information; Regulatory Communication. Endo and Algos have agreed
to provide to the accountants, counsel, financial advisors and other
representatives of the other company reasonable access to all properties,
books, contracts, commitments and records during the period between the date of
the merger agreement and the merger.
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Algos has agreed to keep Endo promptly informed of any communication with or
from the FDA or the DEA. Algos has also agreed to keep Endo promptly informed
of any communication relating to Algos' intellectual property. Algos has agreed
to not make any submission to, or have discussions with, the FDA or the DEA
without either the prior consultation or the inclusion of Endo. Endo has agreed
to keep Algos promptly informed of any communications from the FDA or the DEA
with respect to specified drugs.
Compliance with the Securities Act of 1933. Algos has agreed to deliver to
Endo a list of names and addresses of affiliates of Algos as defined in Rule
145 of the Securities Act. Algos has agreed to exercise all reasonable efforts
to deliver to Endo an affiliate letter from each of the affiliates no later
than 30 days prior to the merger.
Designation of Directors. After the merger, Endo has agreed to:
. appoint three (3) designees of Algos to its board of directors to serve
as directors and
. appoint John W. Lyle as the Non-Executive Chairman of the board of
directors of Endo.
During the three-year period from and including the effective time of the
merger, Endo has agreed to, among other things:
. use its reasonable best efforts to have at least three designees of Algos
on the board of directors of Endo at all times,
. nominate designees of Algos at stockholder meetings convened for the
purpose of electing Endo's board of directors, and
. appoint one designee of Algos to the compensation committee or such other
committee that will have power with respect to the granting of employee
stock options.
NASDAQ Listing. Endo has agreed to use its reasonable best efforts to list
the Endo common stock and the Endo warrants on the NASDAQ.
Fees and Expenses. Endo and Algos have agreed that the party incurring costs
and expenses in connection with the merger agreement will pay for these costs
and expenses. However, all filing fees and printing expenses related to this
proxy statement/prospectus and the registration statement will be shared
equally by Algos and Endo. If the merger agreement is terminated as a result of
a breach, the breaching party will reimburse the non-breaching party for all
out-of-pocket expenses. In addition, Algos has agreed to reimburse Endo for all
out-of-pocket expenses if the Algos stockholders do not approve and adopt the
merger agreement so long as Endo is not then in material breach of its
obligations under the merger agreement. There are no other termination fees.
Algos Stock Options. Algos has agreed to cause each unexpired and
unexercised Algos stock option that is outstanding under its stock plans to
become fully vested and exercisable for the thirty (30)-day period immediately
prior to the merger. If any Algos stock option is unexpired or unexercised at
the end of such period, Algos will terminate such stock option.
Endo Stock Options. Endo has agreed to take all actions necessary and to use
its reasonable best efforts to obtain the consent of its option holders to
amend their options so as to provide that each Endo stock option which is
outstanding at the effective time of the merger will, after the merger, be
exercisable solely into shares of Endo common stock which are beneficially
owned by the holders of Endo common stock who hold such shares prior to the
merger.
Reasonable Efforts. Endo and Algos have each agreed to use its reasonable
efforts to take all actions, and to do all things, necessary, proper or
advisable to conclude and make effective the merger and any transactions
contemplated by the merger agreement, including, among other things:
. obtaining all consents, approvals and actions by governmental entities;
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. obtaining all necessary consents, approvals or waivers from third
parties;
. defending any lawsuits or legal proceedings that challenge the merger
agreement; and
. consulting and cooperating with one another in all actions taken in
connection with proceedings under the Hart-Scott-Rodino Act or any other
federal, state or foreign antitrust or fair trade law.
Indemnification; Directors and Officers Insurance.
. For a period of six years from the merger, Endo has agreed to, and to
cause Endo Inc. to, indemnify each present and former director, officer
and employee of Algos to the same extent such persons are indemnified as
of November 26, 1999 by Algos pursuant to Algos' certificate of
incorporation, by-laws and any indemnification agreements in existence on
November 26, 1999 for acts or omissions occurring at or prior to the
merger.
. Endo has also agreed that it will indemnify these persons for a period of
six years after the merger to the fullest extent permitted by law for
acts or omissions occurring in connection with the approval of the merger
agreement and the merger.
. For a period of six years after the merger, Endo has agreed to provide
Algos' current directors and officers an insurance and indemnification
policy for events occurring prior to the merger with coverage that is no
less favorable than Algos' existing policy. Endo, however, is not
required to pay an annual premium for such insurance in excess of 200
percent of the last annual premium paid by Algos.
Notification of Certain Matters. Endo and Algos have agreed to use their
reasonable best efforts to give prompt notice to each other of:
. any occurrence or non-occurrence of an event that would render any
representation or warranty of any covenant or condition of the merger
agreement untrue or incapable of satisfaction;
. any material litigation or governmental complaints, investigations or
hearings; and
. any change or event that will reasonably be likely to have a material
adverse effect on Endo or Algos.
Employee Matters. Endo has agreed to give continuing employees full credit
for purposes of eligibility and vesting under any employee benefit plan.
Tax Treatment. Endo and Algos have each agreed to use their reasonable
efforts before and after the completion of the merger to have the merger
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code.
Conveyance Taxes. Endo and Algos have agreed to cooperate in the
preparation, execution and filing of all returns, questionnaires, applications
or other documents regarding:
. any real property gains, sales, use, transfer, value-added, stock
transfer and stamp taxes;
. any recording, registration and other fees; and
. any similar taxes and fees that become payable in connection with the
merger.
Additional Agreements. At or before the merger:
. Endo and Endo Pharma LLC have agreed to enter into a tax sharing
agreement under which Endo will pay to Endo Pharma LLC the amount of the
tax benefits it receives as a result of the exercise of these current
Endo stock options into shares of Endo common stock held by Endo Pharma
LLC for the years in which these tax benefits arise; and
. Endo and John W. Lyle have agreed to enter into an employment agreement
as described under "INTERESTS OF CERTAIN PERSONS IN THE MERGER AND
RELATED MATTERS--Compensation Arrangements for Algos Officers."
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The forms of these agreements are attached as exhibits to the merger
agreement, which is attached as Appendix A to the proxy statement/prospectus.
Issuance of Warrants to Endo. Immediately prior to the merger, Endo and
Algos have agreed that Endo will issue one warrant with respect to each share
of Endo common stock outstanding prior to the merger.
Formation of Endo Pharma LLC.
Endo has covenanted in the merger agreement to form immediately prior to the
merger a limited liability company to which each of the then current holders of
Endo common stock will contribute all of the shares of Endo owned by them in
exchange for membership interests in this limited liability company. This
covenant will be deemed to have occurred if holders of at least 85% of Endo
common stock prior to the merger contribute their shares to Endo Pharma LLC.
On or before March 31, 2001, Endo will determine the cash gross profit of
Endo (as defined below) for fiscal year 2000 and an adjustment event will be
deemed to occur or not occur on that date. An adjustment event will occur if:
. (x) the cash gross profit of Endo for the fiscal year ended December 31,
2000 does not equal or exceed $147.4 million and (y) the FDA has approved
MorphiDex(R) prior to March 31, 2001, then 13.8 shares of Endo common
stock that are then owned by Endo Pharma LLC will be transferred for no
consideration to Endo, which will deposit these shares in its treasury;
and
. (x) the cash gross profit of Endo for the fiscal year ended December 31,
2000 does not equal or exceed $147.4 million and (y) the FDA has not
approved MorphiDex(R) prior to March 31, 2001, then 17.9 shares of Endo
common stock that are then owned by Endo Pharma LLC will be transferred
for no consideration to Endo, which will deposit these shares in its
treasury.
Endo and Algos have agreed that there will be an adjustment to the number of
shares of Endo common stock required to be transferred by Endo Pharma LLC to
Endo's treasury prior to the merger:
. to ensure that after giving effect to the number of shares so
transferred, the shares of Endo common stock issued to Algos stockholders
in the merger and the shares of Endo common stock issuable upon exercise
of the Endo warrants (if the warrants were then exercisable), will
represent 40% of the outstanding Endo common stock on a fully diluted
basis in the event that the adjustment event (described above) has
occurred and the FDA has approved MorphiDex(R) by December 31, 2002.
For purposes of the merger agreement, "cash gross profit of Endo" means the
difference between:
. the gross invoice price of current Endo products and products currently
under development by Endo sold to any third party less (1) cash, trade,
promotional or quantity discounts and/or rebates and chargebacks, (2)
retroactive price reductions, (3) sales, use or other excise taxes and
(4) returns and allowances; and
. the cost of sales of Endo determined in accordance with generally
accepted accounting principles used by Endo attributable to current Endo
products and products currently under development by Endo less all non-
recurring charges and non-cash charges included in cost of sales,
including, but not limited to, depreciation, amortization and other non-
cash manufacturing charges.
Effect of Recapitalization. Endo has agreed that its recapitalization will
adjust the outstanding Endo common stock immediately prior to the merger such
that, as a result of the merger, those persons who had been holders of:
. Algos common stock immediately prior to the merger will hold, in the
aggregate, immediately after the merger 20% of the outstanding Endo
common stock, on a fully diluted basis, excluding the effect of the
warrants; and
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. Endo common stock immediately prior to the merger will hold, in the
aggregate, immediately after the merger 80% of the outstanding Endo
common stock, on a fully diluted basis, excluding the effect of the
warrants.
Conditions Precedent to the Merger
Endo and Algos are required to complete the merger only if each of the
following conditions is met:
. Stockholder Approval. The holders of a majority of the outstanding shares
of Algos common stock have approved and adopted the merger agreement and
approved the merger.
. Listing on the NASDAQ. The Endo common stock to be issued in the merger
has been authorized for listing on the NASDAQ.
. Hart-Scott-Rodino Act. The waiting period applicable to the consummation
of the merger under the Hart-Scott-Rodino Act has expired or terminated.
. Registration Statement. The registration statement on Form S-4 of which
this proxy statement/prospectus is a part has been declared effective
under the Securities Act. No stop order suspending the effectiveness of
the registration statement has been issued by the SEC. All necessary
state securities or "blue sky" authorizations have been received.
. No Governmental Action/Order. There is no action, suit or proceeding by
any governmental entity that challenges or enjoins the merger. No court
or governmental entity has enacted, issued, promulgated or enforced any
law, rule, regulation, order, decree or injunction that has the effect of
making the merger or other transactions contemplated by the merger
agreement illegal.
Additionally, the merger agreement obligates Endo, on the one hand, and
Algos on the other hand, to complete the merger only if, before the merger, the
following additional conditions are satisfied or waived:
. The other party has performed in all material respects its agreements and
covenants contained in the merger agreement and required to be performed
before completion of the merger.
. Each of the representations and warranties of the other party in the
merger agreement that is qualified by materiality is true and correct as
of the effective time of the merger as if made on and as of such date,
except for those representations and warranties made as of an earlier
date, and each of the representations and warranties of the other party
that is not so qualified is true and correct in all material respects as
of the effective time of the merger as if made on and as of this date,
with the same force and effect as if made on and as of the effective time
except for those representations and warranties made as of an earlier
date.
. This party has received an opinion of tax counsel to the effect that the
merger will qualify for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code.
In addition, Endo is obligated to complete the merger only if the letters
from affiliates are executed and delivered.
Also, Algos is obligated to complete the merger only if Endo Pharma LLC is
formed in accordance with the terms of the merger agreement.
Termination; Amendment and Waiver
Conditions to Termination. Endo and Algos may terminate the merger
agreement at any time prior to the merger, even if the stockholders of Algos
approve matters related to the merger, by their mutual written consent. Either
Endo or Algos may also terminate the merger agreement if:
. the other fails to comply in any material respect with any of its
covenants or agreements contained in the merger agreement, and if the
failure to comply has not been cured within ten (10) business days
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following a written notice; however, if this breach is curable by the
breaching party through the exercise of its best efforts, and so long as
the breaching party uses its best efforts to cure the breach, the non-
breaching party may not terminate the merger agreement;
. there has been a breach by the other party of any representation or
warranty that is (a) not qualified as to materiality which has the effect
of making this representation or warranty not true and correct in all
material respects or (b) qualified as to materiality and, in each case,
the breach has not been cured within ten business days following receipt
of written notice of the breach; however, if this breach is curable by
the breaching party through the exercise of best efforts and so long as
the breaching party uses its best efforts to cure this breach, the non-
breaching party may not terminate the merger agreement;
. any governmental entity issues an order, decree or ruling or takes any
action to permanently enjoin, restrain or prohibit the merger, and this
order, decree or ruling has become final and nonappealable;
. any condition or obligation of a party to consummate the merger becomes
incapable of satisfaction prior to June 30, 2000, so long as the
terminating party is not then in material breach of any representation,
warranty or covenant contained in the merger agreement;
. the merger has not been effected on or prior to the close of business on
June 30, 2000, which will be the termination date; however, this right to
terminate the merger agreement will not be available to any party whose
failure to fulfill any of its obligations contained in the merger
agreement has been the cause of the failure of the merger to have
occurred on or prior to the termination date; or
. the stockholders of Algos do not approve the merger agreement at the
special meeting or any adjournment or postponement of the special
meeting.
Effect of Termination. In the event of a termination of the merger
agreement by either Endo or Algos, the merger agreement will terminate
immediately, and there will be no liability on the part of Algos, Endo,
Endo Inc. or their respective officers or directors. However, no party is
relieved from liability for (a) any willful breach of a representation or
warranty or (b) the breach of any covenant contained in the merger agreement.
Amendment. The merger agreement may be amended by the parties at any time
before or after the approval of the merger by the stockholders of Algos.
However, after stockholder approval, no amendment will be made which by law
requires further approval by the stockholders of Algos without this further
stockholder approval. The merger agreement may not be amended except by a
written instrument signed on behalf of each of the parties to the merger
agreement.
Waiver. At any time prior to the merger, Endo and Algos may, in writing:
. extend the time for performance of any obligations;
. waive any inaccuracies in the representations and warranties; and
. waive compliance with any of the agreements or conditions of the merger
agreement.
Procedure for Termination, Amendment, Extension or Waiver. In order to be
effective,
. termination of the merger agreement;
. amendment of the merger agreement; and
. extension or wavier of provisions in the merger agreement
will require action by the board of directors, or the authorized designee of
the board of directors of, Endo, Endo Inc. or Algos, as the case may be.
December 17, 1999 Amendment to Merger Agreement
On December 17, 1999, Endo, Algos and Endo Inc. amended the merger
agreement to provide, among other things, that Endo may terminate the merger
if, on or before January 25, 2000, Endo determines, in good faith, that any of
Algos' intellectual property representations contained in the merger agreement
is inaccurate or untrue (other than solely by reason of Algos' act of
disclosing information to Endo after November 26, 1999 and prior to December
17, 1999), provided further that the representation must be materially
inaccurate or untrue if it is not qualified by materiality.
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ADDITIONAL AGREEMENTS
Voting Agreements
Voting and Proxies
In order to induce Endo to enter into the merger agreement, fourteen Algos
stockholders, including five of Algos' six directors (each in his capacity as a
stockholder and without limiting or affecting his obligations as a director),
have each entered into a voting agreement, at Endo's request. These
stockholders are: Michael Hyatt, the Trust Under the Will of Inez L. Kimmel,
the Todd Kimmel Trust, the Melissa Kimmel Trust, the Anita Hyatt Family Trust,
Roger H. Kimmel, the Hyatt Family Trust, James R. Ledley, Donald G. Drapkin,
John W. Lyle, Karen B. Lyle, Frank S. Caruso, the Frank S. Caruso Irrevocable
Trust and Patricia Caruso. Pursuant to and during the terms of the voting
agreements, each stockholder party to a voting agreement has agreed to vote, or
cause to be voted, all of the Algos common stock owned by the stockholder and
all shares of Algos common stock subsequently acquired by the stockholder:
(1) to adopt and approve the merger agreement and each of the other actions
contemplated by the merger agreement or the stockholder's voting
agreement; and
(2) against the following actions (other than the merger or the merger
agreement):
(a) any extraordinary corporate transaction, such as a merger,
consolidation or other business combination involving Algos;
(b) a sale, lease or transfer of a material amount of assets of Algos
or a reorganization, recapitalization, dissolution or liquidation
of Algos;
(c) any change in the majority of the Algos board of directors;
(d) any material change in the present capitalization or Algos or any
amendment of the Algos certificate of incorporation;
(e) any other material change in the corporate structure or business of
Algos; or
(f) any other action which, in the case of each of the matters referred
to in clauses (c), (d) and (e) above, is intended or could
reasonably expected to impede, interfere with, delay, postpone,
discourage or materially adversely affect the contemplated economic
benefits to Endo of the merger or the transactions contemplated by
the merger agreement or the voting agreement.
In addition, each of the Algos stockholders party to a voting agreement has
granted Endo an irrevocable proxy to vote shares of the Algos common stock held
by the stockholder in the manner described above. The voting agreements
terminate upon the earlier to occur of the termination of the merger agreement
or the completion of the merger.
The aggregate number of shares of Algos common stock that is subject to the
voting agreements is 4,176,022, or approximately 24% of all Algos common stock
outstanding on December 15, 1999.
Prohibited Actions
Each of the Algos stockholders party to a voting agreement has also agreed
with respect to the shares of Algos common stock subject to the voting
agreement that the stockholder will not:
. sell, transfer, give, pledge or otherwise dispose of, or enter into any
contract, option, agreement or other understanding to sell, transfer,
give, pledge or otherwise dispose of the shares,
. grant any proxy, power-of-attorney or other authorization in or with
respect to the shares,
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. deposit the shares into a voting trust or enter into a voting agreement
or arrangement with respect to the shares,
. request that Algos register the transfer of any certificate or
uncertificated interest in the shares except in accordance with the
voting agreement,
. exercise any rights of appraisal or rights to dissent from the merger or
. take any other action that would in any way restrict, limit or interfere
with the performance of the stockholder's obligations under the voting
agreement or the merger agreement.
A copy of the form of voting agreement is attached as Exhibit B to the
merger agreement, which is attached as Appendix A to this proxy
statement/prospectus.
Collaboration Agreement
On November 26, 1999, Algos and Endo Pharmaceuticals entered into a
collaboration agreement, pursuant to which Algos and Endo Pharmaceuticals will
work together exclusively to develop, manufacture and commercialize pain
management products containing the combination of oxycodone and
dextromethorphan. Pursuant to the collaboration agreement, each party granted
to the other a sole and exclusive worldwide license to its respective know-how,
patent rights and trademark rights used in connection with the collaboration.
Algos and Endo Pharmaceuticals will share equally the costs associated with,
and profits generated by, the collaboration, after adjustments are made with
respect to reduced sales of Endo products resulting from sales of products
developed under the collaboration agreement. The collaboration agreement will
continue in effect until the parties to the agreement mutually agree in writing
to terminate or the patent rights licensed under the collaboration agreement
expire.
Kelso Side Letter
Kelso Investment Associates V, L.P. and Kelso Equity Partners V, L.P., the
majority stockholders of Endo, have agreed in a binding letter agreement with
Algos and Endo, dated November 26, 1999, that, for a period of two years from
the completion of the merger, they will not, and will not permit any of their
affiliates to which they have transferred any of their shares of Endo common
stock, including Endo Pharma LLC to, sell their shares except pursuant to:
(a) Rule 144 under the Securities Act,
(b) an effective registration statement filed under the Securities
Act,
(c) privately negotiated sales to any person or group of affiliated
persons that do not aggregate more than 5.0% of the issued and
outstanding Endo common stock at the time of the sale,
(d) a transaction in which all of the Endo stockholders are permitted
to participate on equal economic terms and on a pro rata basis in
accordance with their ownership, or
(e) any transfer, sale or distribution to any affiliate of these Kelso
entities.
In addition, these majority stockholders agreed that, for a period of two
years from the completion of the merger, they would not engage in any
transaction that would be a "going private" transaction within the meaning of
Rule 13e-3 of the Securities Exchange Act unless the transaction has been
approved by a vote of, or other action by, the holders of the majority of then
outstanding Endo common stock not affiliated with a majority stockholder.
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ENDO PHARMA LLC
Formation; Purpose
Immediately prior to the merger, Endo Pharma LLC, a Delaware limited
liability company, will be formed, whereby each of the then current holders of
Endo common stock will contribute all of their shares of Endo to Endo Pharma
LLC in exchange for membership interests in this limited liability company. Due
to these exchanges, Endo Pharma LLC will, following the merger, be the majority
holder of Endo common stock, holding approximately 80% of the outstanding
shares. The managing member of this LLC will be , a corporation.
Endo Pharma LLC will be formed for the purpose of ensuring that the Endo
employee stock options that are outstanding immediately prior to the merger
will only affect those holders of Endo common stock who held these shares prior
to the merger. As discussed above under "THE COMPANIES--Endo--Description of
Endo Stock Option Plans," these current Endo employee stock options will be
exercisable only into shares of Endo common stock that are held by Endo Pharma
LLC. Holders of these Endo employee stock options must consent to this
amendment to their stock options. The holders of approximately 90% of the
outstanding Endo employee stock options have already consented to this
amendment.
Tax Sharing Agreement
Under U.S. federal income tax law, the exercise of options by Endo employees
for Endo common stock held by Endo Pharma LLC, generally will result in
compensation deductions to Endo. In general, to the extent that Endo is
permitted to deduct these amounts in computing its income tax liability, Endo's
income tax liability would be reduced. Because the shares issued upon exercise
of the options will be provided by Endo Pharma LLC (and not Endo), Endo, Endo
Inc. and Endo Pharma LLC have agreed to enter into an agreement under which, in
general, Endo will pay to Endo Pharma LLC the amount of the tax benefits it
receives as a result of the exercise of these current Endo stock options into
shares of Endo common stock held by Endo Pharma LLC for the years in which
these tax benefits arise.
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THE ALGOS SPECIAL MEETING
At the Algos special meeting, the Algos stockholders will consider and vote
to approve and adopt the merger agreement.
Time and Place; Purposes
This proxy statement/prospectus is being furnished to the Algos stockholders
in connection with the solicitation of proxies by the board of directors of
Algos for use at the special meeting of the Algos stockholders to be held at
on , 2000, commencing at , local time.
At the Algos special meeting, the Algos stockholders will consider and vote
upon the merger agreement. Only business described in the Algos notice of
special meeting of stockholders may be conducted at the Algos meeting.
Recommendation
The Algos board has approved the merger agreement and recommends that you
vote for approval and adoption of the merger agreement.
Record Date
The Board of Directors of Algos has fixed the close of business on
, 2000 as the Algos record date for determining holders entitled to notice of
and to vote at the Algos special meeting.
Quorum
The presence in person or by properly executed proxy of holders of a
majority of the issued and outstanding shares of Algos common stock is
necessary to constitute a quorum at the Algos special meeting. Abstentions and
broker non-votes will each be included in determining whether a quorum is
present.
Vote Required
Approval of the merger proposal requires the affirmative vote of a majority
of the outstanding shares of Algos common stock. Accordingly, abstentions and
broker non-votes will have the same effect as negative votes for purposes of
approving the merger agreement.
Voting Rights; Proxies
As of the Algos record date, there were shares of Algos common
stock issued and outstanding, each of which entitles its holder to one vote.
All shares of Algos common stock represented by properly executed proxies will,
unless these proxies have been previously revoked, be voted in accordance with
the instructions indicated in the proxies. In addition, each Algos stockholder
who submits a proxy should indicate, where specified on the proxy, whether the
Algos stockholder wants to receive transferable or non-transferable warrants.
If no election is made, the Algos stockholder will receive transferable
warrants.
If you return your proxy card but no instructions are indicated, the shares
of Algos common stock will be voted in favor of approval and adoption of the
merger agreement.
No additional matters other than as described in the accompanying notice of
the Algos special meeting will come before the Algos special meeting. If any
other matter or matters are properly presented for action at the Algos special
meeting, the persons named in the enclosed form of proxy and acting thereunder
will have the discretion to vote on the matters in accordance with their best
judgment, unless authorization is withheld.
Votes cast by proxy or in person at the Algos special meeting will be
tabulated by the inspector of election appointed for the meeting, and the
inspector(s) will determine whether or not a quorum is present.
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John W. Lyle, Michael Hyatt, Roger H. Kimmel, Donald G. Drapkin and entities
and individuals associated with members of the board of directors and officers
of Algos, collectively holding 4,176,022 shares of Algos common stock,
representing approximately 24% of the outstanding Algos common stock as of the
record date for the Algos special meeting, have each entered into a voting
agreement with Endo and Endo Inc., pursuant to which these holders have agreed
to vote their shares of Algos common stock in favor of approval and adoption of
the merger agreement.
Solicitation of Proxies
The expenses of the solicitation of proxies for use at the Algos special
meeting will be borne by Algos. In addition to solicitation by mail, proxies
may be solicited by directors, officers or other employees of Algos or, at the
request of Algos, in person or by telephone, telegram or other means of
communication. These persons will receive no additional compensation for
solicitation of proxies, but may be reimbursed for reasonable out-of-pocket
expenses in connection with the solicitation. Arrangements will be made with
brokerage houses and other custodians, nominees and fiduciaries to send the
proxy materials to beneficial owners; and Algos will, upon request, reimburse
these brokerage houses and custodians for their reasonable expenses in so
doing. Stockholders are urged to send in their proxies without delay.
Voting and Revocation of Proxies
All Algos shares represented by properly executed proxies received prior to
or at the Algos special meeting and not revoked will be voted in accordance
with the instructions indicated in their proxies. If no instructions are
indicated on a properly executed returned proxy, the proxy will be voted FOR
the approval and adoption of the merger agreement. Proxies voted against the
merger agreement will not be voted in favor of any adjournment or postponement
of the Algos special meeting for the purpose of soliciting additional proxies.
Abstentions may be specified. A properly executed proxy marked "ABSTAIN"
with respect to the merger agreement will be counted as present for purposes of
determining whether there is a quorum. Because the approval of the merger
agreement requires the affirmative vote of a majority of the outstanding
shares, a proxy marked "ABSTAIN" with respect to the merger agreement will have
the effect of a vote against it. In addition, the failure of an Algos
stockholder to return a proxy and to vote in person at the Algos special
meeting will have the effect of a vote against the merger agreement.
Shares represented by "broker non-votes," i.e., shares held by brokers or
nominees that are represented at a meeting but with respect to which the broker
or nominee is not empowered to vote on the merger agreement, will also be
counted for purposes of determining whether there is a quorum at the Algos
special meeting but will not be voted. Accordingly, broker non-votes will have
the same effect as a vote cast against the merger agreement.
A stockholder may revoke his, her or its proxy at any time prior to its use
by delivering to the Secretary of Algos a signed notice of revocation or a
later-dated, signed proxy or by attending the Algos special meeting and voting
in person. Attendance at the Algos special meeting will not in itself
constitute the revocation of a proxy.
Stockholders should not send in any stock certificates with their proxy
cards. As soon as practicable after the consummation of the merger, a
transmittal letter will be sent to former stockholders of Algos with
instructions for surrendering their certificates in exchange for certificates
representing Endo common stock and warrants.
The matters to be considered at the Algos special meeting are of great
importance to the Algos stockholders. Accordingly, you are urged to read and
carefully consider the information presented in this proxy
statement/prospectus, and to complete, date, sign and promptly return the
enclosed proxy in the enclosed postage pre-paid envelope.
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THE COMPANIES
Algos
Background
Algos is a leader in developing proprietary pain management products. The
company's products combine analgesics and anesthetics with NMDA-receptor
antagonist drugs to enhance the efficacy of existing pain management drugs such
as morphine. Algos' products in development include opioid analgesics
(MorphiDex(R), HydrocoDex(TM) and OxycoDex(TM)) for moderate to severe pain, a
non-opioid analgesic (NeuroDex(TM)) for neuropathic pain, an intranasal
anaesthetic (LidoDex(TM) NS) for migraine pain and products for the treatment
of opiate and nicotine addictions. Algos has also licensed certain of its
worldwide rights to McNeil Consumer Products Company (a Johnson & Johnson
company) to develop two over-the-counter pain medications that combine an NMDA-
receptor antagonist with acetaminophen and ibuprofen, respectively.
On August 2, 1999, Algos received a not approvable letter from the FDA for
its lead product, MorphiDex(R), an NMDA enhanced opioid analgesic. Algos had
submitted a New Drug Application for MorphiDex(R) in August 1998 for the
treatment of moderate to severe cancer pain. MorphiDex(R) is a patented
combination of morphine and the NMDA-receptor antagonist dextromethorphan. FDA
approval of a New Drug Application is required for Algos to sell MorphiDex(R)
in the United States. Not approvable letters are issued by the FDA for various
reasons and outline deficiencies that must be corrected prior to approval. In
its letter to Algos, the FDA raised issues specifically related to the adequacy
of clinical trials, Algos' preclinical animal toxicology models and a high-dose
pharmacokinetic study. If the FDA requires Algos to perform further clinical
work, the potential approval of MorphiDex(R) could be substantially delayed.
Algos was incorporated in 1992 under the laws of the state of Delaware and
has its principal executive offices at 1333 Campus Parkway, Neptune, New Jersey
07753-6815 (telephone number: (732) 938-5959).
Algos has incorporated certain information by reference into this proxy
statement/prospectus. See "WHERE YOU CAN FIND MORE INFORMATION."
Recent Developments
On December 13, 1999, Algos met with the FDA to discuss Algos' New Drug
Application for MorphiDex(R). Discussion at the meeting focused on efficacy and
safety issues raised in the FDA's "not approvable" letter for MorphiDex(R)
received by Algos on August 2, 1999. At the meeting, Algos resolved a number of
issues and intends to submit a plan to the FDA to address the remaining issues.
The plan will include the submission of data from an additional large single-
dose post-operative pain clinical trial that has already been initiated.
However, no assurance can be given as to whether or if MorphiDex(R) will be
approved by the FDA or if additional studies will be required.
Endo
Endo, through its wholly owned subsidiary, Endo Pharmaceuticals, is engaged
in the research, development, sales and marketing of branded and generic
prescription pharmaceuticals used primarily for the treatment and management of
pain. Branded products comprised approximately 69% and 65% of net sales for
fiscal year 1998 and the nine months ended September 30, 1999, respectively.
Through a national dedicated contract sales force of approximately 300
individuals, Endo markets branded pharmaceutical products to doctors, drug
wholesalers and other healthcare professionals. Endo markets its generics
through sales and marketing activities as well as customer service activities
directly with wholesale drug distributors and chain and independent retail
pharmacists. Endo's portfolio of branded products includes recognized brand
names such as Percocet(R), Percodan(R), Zydone(R) and Lidoderm(R). Endo's
portfolio of generic products includes approximately 20 products for various
indications, including pain management, hypertension, Parkinson's Disease and
ulcers. Endo seeks to continually expand its product portfolio through on-going
investment in research and development and product acquisitions.
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All of Endo's products are manufactured by third parties. Endo's primary
suppliers of contract manufacturing services are DuPont Pharmaceuticals, Merck
& Co. and Teikoku Seiyaku Pharmaceuticals.
Endo's business strategy is to continue to strengthen its leading position
in pain management by:
.leveraging the established Endo brand names through focused marketing and
promotion;
. developing product line extensions for existing Endo brands through new
formulations, dosages or indications;
. pursuing acquisitions and licensing of molecules and compounds in the
late stages of pre-clinical and the early stages of clinical development
and furthering the development through commercialization; and
. pursuing strategic acquisitions and alliances that provide complementary
product lines or technologies in the area of pain.
Competitive Strengths
Endo believes that its competitive position is attributable to a number of
key strengths, including the following:
Portfolio of Established Branded Products. Endo's portfolio of established
branded pharmaceutical products are used primarily for the treatment and
management of pain, and include the following:
. Percocet(R) 2.5/325, Percocet(R) 5.0/325, Percocet(R) 7.5/500 and
Percocet(R) 10.0/650 (oxycodone & acetaminophen) for the relief of
moderate to severe pain;
.Percodan(R) (oxycodone & aspirin) for the relief of moderate to severe
pain;
.Zydone(R) (hydrocodone & acetaminophen) for the relief of moderate to
severe pain; and
.Lidoderm(R) (lidocaine 5%) for the pain of post-herpetic neuralgia.
Endo also maintains approximately 10 other off-patent brand products in
various therapeutic categories.
Selective Focus on Generic Products. Endo's generic product portfolio
includes approximately 20 products for various indications including pain
management, hypertension, Parkinson's Disease and ulcers. Endo's strategy is
to selectively develop and market generic products that are generally in its
therapeutic niche, pain, and may include complex formulation or development
characteristics, regulatory or legal challenges or difficulty in raw material
sourcing. For example, in November 1998, Endo launched Morphine Sulfate
Extended Release Tablets, the therapeutic equivalent version of MS Contin(R),
a registered trademark of Purdue Pharma, for moderate to severe pain. Endo's
Morphine Sulfate Extended Release Tablets are currently the sole therapeutic
equivalent to the innovator and, since the time of their launch, have gained
significant market share.
Outsourced Manufacturing. Endo contracts with leading pharmaceutical
companies for the manufacture of its finished goods. Companies providing Endo
with contract manufacturing services include DuPont Pharmaceuticals, Merck &
Co. and Teikoku Seiyaku Pharmaceuticals. Endo believes that by outsourcing
manufacturing to these companies, the company benefits from their substantial
manufacturing expertise and reduced capital investment. Currently, DuPont
Pharmaceuticals is Endo's largest provider of contract manufacturing services.
Through its agreement with DuPont, Endo has two FDA- and DEA-approved and
compliant facilities available for the manufacture of its products.
National Sales and Marketing Infrastructure. Endo's products are marketed
directly to physicians through a dedicated contract sales force of
approximately 300 individuals. These sales representatives are provided under
an exclusive contract with Ventiv Healthcare and market Endo's brands by
focusing on those physicians who are high prescribers of pain management
products.
The strategy employed by the sales representatives to increase the sales of
Endo's branded products includes one-on-one meetings with physicians, known as
"detailing," and promotional efforts including
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sampling, advertising and direct mail. Endo believes that this focused
marketing approach enables it to develop highly knowledgeable and dedicated
sales representatives and foster close professional relationships with
physicians. Endo markets its branded products under the label Endo
Laboratories and its generic products under the label Endo Generic Products.
Research and Development Expertise. Endo seeks to continually expand its
product portfolio through ongoing investment in research and development. Endo
believes that it has a balanced research and development portfolio, including
patent-protected new chemical entities, new formulations, strengths and
delivery forms of its existing proprietary brand products and generic
pharmaceuticals.
Endo devotes significant resources to its pipeline and incurred research
and development expenses of $2.9 million, $5.9 million and $6.1 million for
the period from August 26, 1997, the date of the acquisition of Endo from the
then DuPont Merck Pharmaceutical Company, to December 31, 1997, fiscal year
1998 and the nine months ended September 30, 1999, respectively. Endo
maintains its research and development facilities in Garden City, New York.
Endo has a broad portfolio of branded, products, including many proprietary
analgesic compounds, for which a substantial market exists. Depending on the
product being developed, marketing authorization from the FDA may require a
limited development program with the submission of an Abbreviated New Drug
Application or a more extensive development program with the submission of a
New Drug Application. Endo focuses its brand research and development efforts
in pain management.
In addition, Endo pursues the development and marketing of generic
pharmaceuticals that have one or more barriers to entry. The characteristics
of the products that Endo pursues may include:
. complex formulation or development characteristics;
. regulatory or legal challenges; or
. difficulty in raw material sourcing.
Endo believes products with these barriers will face limited competition
and therefore provide longer product life cycles and/or higher profitability
than commodity generic products.
Experienced and Dedicated Management Team. Endo has an experienced and
dedicated management team with an average of approximately 20 years of
experience in the pharmaceutical industry.
Product Overview
Branded Products
The following table provides an overview of a portion of Endo's branded
pain management product line.
<TABLE>
<CAPTION>
Product Indication
------- ----------
<C> <S>
Percocet(R).. Relief of moderate to severe pain
Percodan(R).. Relief of moderate to severe pain
Lidoderm(R).. For the pain of post-herpetic neuralgia
Zydone(R).... Relief of moderate to severe pain
</TABLE>
Except for Lidoderm(R), patients generally use these products on a short-
term basis to relieve various degrees of pain, from moderate to severe.
Despite generic competition, Endo maintains a leading position in the pain
management segment due to its broad portfolio of well-known products. Launched
in September 1999, Lidoderm(R) is used to treat the pain of post-herpetic
neuralgia.
Two of Endo's brands, Percocet(R) and Percodan(R), are considered "gold
standards" of the pain management segment. Although Percocet(R) has been off
patent for more than fifteen years, in 1998,
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according to IMS National Prescription Audit, approximately 9.3 million
prescriptions for this combination of oxycodone HCl and acetaminophen were
written for the brand name Percocet(R), of which, due to generic substitution,
only approximately 15% were filled with the brand Percocet(R). Similarly, in
1998, according to IMS National Prescription Audit, approximately 633,000
prescriptions for oxycodone hydrochloride and oxycodone terephthalate in
combination with aspirin were written for the brand name Percodan(R), of which,
due to generic substitution, only approximately 34% were filled with
Percodan(R). Because Percocet(R) and Percodan(R) have been off patent for over
fifteen years, generic penetration in their markets has generally stabilized,
and the potential of new generic competitors is minimal.
During the fourth quarter of 1999, Endo introduced three new strengths of
Percocet(R): Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650,
complementing the existing Percocet(R) 5.0/325. Physician prescribing practices
indicate that over 80% of current prescriptions are written for amounts other
than the label amount. As an example, the current prescription information for
Percocet(R) 5.0/325 calls for one tablet every six hours. Approximately 30% of
prescriptions are written to take two tablets every four hours, translating
into a dosage of 10mg every four hours. By creating new prescription strengths,
physicians will be able to prescribe one tablet of the proper dose for their
patients, facilitating greater ease and compliance. There are currently no
generic substitutes for Percocet(R) 2.5/325, Percocet(R) 7.5/500 and
Percocet(R) 10.0/650.
Endo launched Zydone(R) tablets in February 1999, a branded
hydrocodone/acetaminophen product offering for the relief of moderate to severe
pain. Zydone is available in three strengths, 5.0mg., 7.5mg. and 10.0mg. each
in combination with 400mg acetaminophen. Although not patent protected, these
three products have no generic competition because there is no bioequivalent
form of the product approved by the FDA. Zydone(R) competes in the $1 billion
dollar (branded dollars) hydrocodone/acetaminophen market for the relief of
moderate to severe pain.
Endo launched Lidoderm(R) in September 1999. Lidoderm(R), a patch product
containing lidocaine, is the first and only FDA approved product for the relief
of the pain of post-herpetic neuralgia, which is the chronic painful condition
that often follows an attack of shingles. There are approximately 200,000
patients per year that suffer from post-herpetic neuralgia in the U.S., the
majority of whom are elderly. The FDA has granted Lidoderm(R) orphan status.
Orphan status in this context means that no other lidocaine-containing patch
product can be approved for post-herpetic neuralgia for a period of seven years
or until March 2006.
Generic Products
Endo's generic portfolio is currently comprised of approximately 20 products
which cover a broad range of indications include pain relief, hypertension,
Parkinson's Disease and the treatment of ulcers. Endo's strategy is to select
molecules that generally center on pain management and complement the company's
brand offering.
Endo principally pursues the development and marketing of generic
pharmaceuticals that have one or more barriers to entry. The characteristics of
the products that Endo may target for generic development may include:
.complex formulation or development characteristics;
.regulatory or legal challenges; or
.difficulty in raw material sourcing.
Endo believes products with these barriers will face limited competition,
and, therefore provide longer product life cycles and/or higher profitability
than commodity generic products.
Competition
The pharmaceutical industry is highly competitive and regulated. Endo's
competitors vary depending upon therapeutic and product categories. Competitors
include the major brand name and generic manufacturers of
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pharmaceuticals, especially those doing business in the United States. Many
competitors have been in business for a longer period of time than Endo, have a
greater number of products on the market and have greater financial and other
resources. Endo competes principally through its targeted product development
strategies. In addition to product development, other competitive factors in
the pharmaceutical industry include product quality and price, reputation and
access to technical information.
The competitive environment with brands requires an intensive worldwide
search for technological innovations and Endo's ability to market the products
effectively, including capitalizing on the brand equity and name recognition of
certain of the products.
Newly introduced generic products with limited or no other generic
competition are typically sold at higher selling prices. As competition from
generic companies increases, selling prices of the generic products typically
decline. Consequently, the maintenance of profitable operations in generics
depends, in part, on Endo's ability to maintain efficient, high quality
manufacturing relationships and to select, develop and launch new products in a
timely and cost efficient manner.
Net sales and gross profits derived from generics tend to follow a pattern
based on certain regulatory and competitive factors. As patents for brand name
products expire, the first generic company to receive regulatory approval is
generally able to achieve a relatively high market share. As competing generic
companies receive regulatory approval on similar products, market share, net
sales and gross profit typically decline. Accordingly, the level of market
share, net sales and gross profit from generic products typically relate to the
number of competitors and the timing of the product launch in relation to the
competition.
There are, however, a number of factors which enable products to remain
profitable once patent protection has ceased. These factors include the
establishment of a strong brand image with the prescriber or consumer,
supported by the development of a broader range of alternative formulations
than the manufacturers of generic products typically supply.
Endo has witnessed a consolidation of its customers as chain drug stores and
wholesalers merge or consolidate. In addition, a number of Endo's customers
have instituted source and bundling programs that enhance the access suppliers
who participate in the source program have to the customers of the wholesaler.
Consequently, there is heightened competition among generic drug companies for
the business of this smaller and more selective customer base of large
wholesalers.
Seasonality
Endo's business is not materially impacted by seasonality.
Customers
Endo sells its products through wholesale drug distributors who, in turn,
supply products to pharmacies, hospitals, governmental agencies and physicians.
Three wholesale customers individually accounted for 28%, 16% and 14% of net
sales for the nine months ended September 30, 1999. Three wholesale customers
individually accounted for 26%, 21% and 14% of net sales in 1998. Five
wholesale customers individually accounted for 22%, 18%, 15%, 15% and 12% of
net sales in 1997. Endo's business is affected by the purchasing patterns and
concentration of its customers. Generally, the fourth fiscal quarter has
relatively higher net sales than each of the first three fiscal quarters.
Patents, Trademarks, Licenses and Proprietary Property
With respect to its products, Endo holds two issued U.S. patents and two
foreign issued patents, two U.S. patent applications pending and eleven foreign
patent applications pending and has exclusive licenses for 22 issued U.S.
patents and 64 foreign issued patents.
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Endo believes that its patents, the protection of discoveries in connection
with its development activities, its proprietary products, technologies,
processes and know-how and all of its intellectual property are important to
its business. All of Endo's brand products and certain generic products are
sold under trademarks. To achieve a competitive position, Endo relies on trade
secrets, non-patented proprietary know-how and continuing technological
innovation, where patent protection is not believed to be appropriate or
attainable. In addition, Endo has a number of patent licenses from third
parties. See "--Summary of Recent Transactions." There can be no assurance that
any of Endo's patents, licenses or other intellectual property will afford Endo
any protection from competition.
Endo relies on confidentiality agreements with its employees, consultants
and other parties to protect, in part, trade secrets and other proprietary
technology. There can be no assurance that these agreements will not be
breached, that Endo will have adequate remedies for any breach, or that others
will not independently develop equivalent proprietary information or other
third parties will not otherwise gain access to its trade secrets and other
intellectual property.
Endo may find it necessary to initiate litigation to enforce its patent
rights, to protect its intellectual property and to determine the scope and
validity of the proprietary rights of others. Litigation can be costly and
time-consuming, and there can be no assurance that Endo's litigation expenses
will not be significant in the future or that the outcome of such litigation
will ultimately be favorable to Endo.
Governmental Regulation
The manufacture, testing, packaging, labeling, distribution, sales and
marketing of Endo's products and its ongoing product development activities are
subject to extensive and rigorous regulation at both the federal and state
levels. The Federal Food, Drug and Cosmetic Act and other federal statutes and
regulations govern or influence the testing, manufacture, safety, labeling,
storage, record keeping, approval, advertising, promotion, sale and
distribution of pharmaceutical products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production and/or distribution, refusal of the government
to enter into supply contracts or to approve New Drug Applications and
Abbreviated New Drug Applications, civil sanctions and criminal prosecution.
The FDA also has the authority to revoke previously granted drug approvals.
From time to time, the FDA issues notices and warning letters to pharmaceutical
companies that request or require the company to modify certain activities.
The FDA's current good manufacturing practices standards have become more
complex in recent years. The Abbreviated New Drug Application development and
approval process now averages approximately two to five years. FDA approval is
required before each dosage form of any new drug can be marketed. Applications
for FDA approval must contain information relating to bioequivalency, product
formulation, raw material suppliers, stability, manufacturing processes,
packaging, labeling and quality control. FDA procedures require full-scale
manufacturing equipment to be used to produce test batches for FDA approval.
Validation of manufacturing processes by the FDA also is required before a
company can market new products. The FDA conducts pre-approval and post-
approval reviews and plant inspections to enforce these rules. Supplemental
filings are required for approval to transfer products from one manufacturing
site to another and may be under review for over a year or more. In addition,
certain products may only be approved for transfer once new bioequivalency
studies are conducted.
The evolving and complex nature of regulatory requirements, the broad
authority and discretion of the FDA and the generally high level of regulatory
oversight results in a continuing possibility that from time to time, Endo will
be adversely affected by regulatory actions despite ongoing efforts and
commitment to achieve and maintain full compliance with all regulatory
requirements.
Endo also sells products that are "controlled substances" as defined in the
Controlled Substances Act, which establishes certain security and record
keeping requirements administered by the DEA, a division of the Department of
Justice. The DEA has a dual mission, law enforcement and regulation. The DEA's
regulatory responsibilities are concerned with the control of licensed handlers
of controlled substances, and with the
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substances themselves, equipment and raw materials used in their manufacture
and packaging, in order to prevent such articles from being diverted into
illicit channels of commerce. Endo has not experienced restrictions or fines
for non-compliance with the foregoing regulations but no assurance can be given
that restrictions or fines which could have a material adverse effect upon its
business, financial condition and results of operations will not be imposed
upon Endo in the future.
Product development and approval within this regulatory framework requires a
number of years and involves the expenditure of substantial resources. Endo
cannot determine what effect changes in regulations or legal interpretations,
when and if promulgated, may have on its business in the future. Changes could,
among other things, require expanded or different labeling, the recall or
discontinuance of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on Endo's business, financial condition and results of operations.
Endo believes that it and/or its contract manufacturers and other third
parties with which it interacts have the proper FDA, DEA or other regulatory
approval and authority for its drugs.
The Hatch-Waxman Act of 1984 extended the established Abbreviated New Drug
Application forms of brand-name drugs, which were originally marketed before
1962 or whose market exclusivity has expired. The Hatch-Waxman Act also
provides market exclusivity provisions that could preclude the submission or
delay the approval of a competing Abbreviated New Drug Application. One such
provision allows a five-year market exclusivity period for New Drug
Applications involving new chemical compounds and a three-year market
exclusivity period for New Drug Applications, including different dosage forms,
containing new clinical investigations essential to the approval of the
application. The market exclusivity provisions apply equally to patented and
non-patented products.
Medicaid, Medicare and other reimbursement legislation or programs govern
reimbursement levels, including requiring that all pharmaceutical companies
rebate to individual states a percentage of their net sales arising from
Medicaid-reimbursed products. The federal and/or state governments may continue
to enact measures in the future aimed at reducing the cost of prescription
pharmaceuticals to the public. Endo cannot predict the nature of such measures
or their impact on its profitability.
Service Agreements; Property
Endo contracts with various third parties to provide certain critical
services including manufacturing, its sales representatives, warehousing,
distribution, customer service, certain financial functions, certain research
and development activities and medical affairs.
Endo contracts with various third party manufacturers to provide it with its
finished goods including, among others, DuPont Pharmaceuticals, Merck & Co. and
Teikoku Seiyaku Pharmaceuticals. A majority of Endo's products are manufactured
under a contract with DuPont Pharmaceuticals, which has a five-year initial
term expiring August 26, 2002 and is renewable at Endo's option up through
2007.
Under the terms of its manufacturing agreement with Dupont, Endo has
available to it substantially all of the capacity available at two DuPont
facilities located in Manati, Puerto Rico and Garden City, New York. These
facilities are FDA- and DEA-approved. Under the terms of this agreement, Endo
is able to introduce the manufacture of new products that Endo has developed in
those plants.
The majority of active drug substances for Endo's key products are covered
by a supplier agreement with Mallinckrodt, Inc. While Endo has generally not
had difficulty obtaining finished goods, raw materials and components from
suppliers in the past, there can be no assurance that such finished goods, raw
materials and components will continue to be available on commercially
acceptable terms in the future. Although Endo has no reason to believe it will
be unable to procure adequate supply of finished goods, raw materials and
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components on a timely basis, if for any reason it is unable to obtain
sufficient quantities of any of the finished goods, raw materials or components
required for its products, it may have a materially adverse effect on its
business, financial condition and results of operations.
In addition to the long-term manufacturing agreement with DuPont, Endo has
arrangements with Livingston Healthcare Services, Inc. for customer service and
certain financial functions, DuPont Pharmaceuticals for warehousing and
distribution, Kunitz and Associates Inc. for medical affairs, Ventiv Healthcare
for sales and various clinical research organizations for its clinical studies.
Although Endo has no reason to believe that such agreements will not be
honored, failure by any of these third parties to honor their contractual
obligations would have a materially adverse effect on Endo's business,
financial condition and results of operations.
Endo leases its research and development facility located in Garden City,
New York and also leases its corporate headquarters in Chadds Ford,
Pennsylvania.
Environmental Matters
Endo's operations are subject to substantial and evolving federal, state and
local environmental laws and regulations concerning, among other matters, the
generation, handling, storage, transportation, treatment and disposal of toxic
and hazardous substances. Endo believes that its facilities and the facilities
of its third party service providers are in substantial compliance with all
provisions of federal, state and local laws concerning the environment and does
not believe that future compliance with such provisions will have a material
adverse effect on its financial condition or results of operations.
Summary of Recent Transactions
On August 26, 1997, Endo commenced operations by acquiring certain
pharmaceutical products, related rights and certain assets of The DuPont Merck
Pharmaceutical Company, which subsequently became the DuPont Pharmaceuticals
Company. Endo, a Delaware corporation, was incorporated on November 18, 1997
and Endo Pharmaceuticals Inc., a Delaware corporation, was incorporated on
April 2, 1997.
In 1997, Endo entered into a collaboration agreement with Penwest
Pharmaceuticals to exclusively co-develop opioid analgesic products for pain
management, using Penwest's patent-protected proprietary Timerx(R) technology.
Under the terms of this agreement, the parties are currently developing an
opioid product for the treatment of chronic pain. The parties share on a
fifty/fifty basis the costs and profits of products developed under this
agreement. Endo has exclusive marketing rights with regards to products
developed under this collaboration.
On November 23, 1998, Endo entered into a license agreement with Hind
Healthcare Inc. for the sole and exclusive right to develop, use, market,
promote and sell Lidoderm(R) (Lidocaine Patch 5%) in the United States. In
September 1999, Endo launched Lidoderm(R) the first and only FDA approved
product for the treatment of the pain of post-herpetic neuralgia. In addition
to its approval, the FDA granted Lidoderm(R) orphan status which means seven
years of exclusive marketing approval. In other words, for seven years, the FDA
will not approve a Lidocaine containing patch product for the indication of the
relief of the pain associated with post-herpetic neuralgia.
In November 1999, Endo entered into a collaboration with Lavipharm
Laboratories Inc. under which Endo obtained exclusive, worldwide rights to
Lavipharm's existing Quick-Dis and transdermal technologies for use in the
field of pain management. Under the terms of the collaboration agreement, Endo
and Lavipharm will work jointly on the formulation and development of pain
management products using Lavipharm's unique Quick-Dis and transdermal
technologies. In addition, if Lavipharm acquires and/or develops additional
drug delivery technology, such technology will be made available for Endo's use
under the collaboration agreement, provided
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that there are no contrary encumbrances with regards to such acquired
technology. Lavipaharm will manufacture products that are jointly developed
while Endo will exclusively market and sell these products on a worldwide
basis. The collaboration agreement involves the payment by Endo to Lavipharm of
up-front and milestone fees, reimbursement of Lavipharm's development cost
associated with the products, manufacturing charges and a royalty on sales of
jointly developed products by Endo.
On November 26, 1999, Endo entered into a collaboration agreement with Algos
under which the parties will co-develop oxycodone-based products using Algos'
proprietary technology and Endo's established brands. Endo will be the
exclusive worldwide marketer of these products. See "ADDITIONAL AGREEMENTS--The
Collaboration Agreement."
Description of Credit Agreement
Endo Pharmaceuticals entered into a credit agreement on August 26, 1997 with
a number of lenders and The Chase Manhattan Bank, as administrative agent.
Under this credit agreement, Endo, as of December 15, 1999, had outstanding a
Tranche A Term Loan in the amount of $47.0 million and a Tranche B Term Loan in
the amount of $103.0 million. Under the credit agreement, Endo Pharmaceuticals
has the ability to borrow on a revolving basis up to $25 million, none of which
was outstanding as of December 15, 1999. The Tranche A Term Loan amortizes
quarterly and has a final maturity date of December 31, 2002. The Tranche B
Term Loan also amortizes quarterly and has a final maturity date of June 30,
2004. The revolving loans may be borrowed, repaid and reborrowed and have a
final maturity of December 31, 2002.
These loans bear interest at an agreed-upon spread over the applicable base
rate (as defined in the credit agreement) or over the London Interbank Offered
Rate. The loans outstanding under the credit agreement are secured by a first
priority security interest in substantially all of the assets of Endo
Pharmaceuticals. These loans are subject to mandatory repayment in limited
circumstances. Voluntary prepayments of these loans and voluntary reductions of
the credit facility are permitted, in whole or in part, at the option of Endo
Pharmaceuticals in minimum principal amounts, without premium or penalty,
subject to reimbursement of the lenders' costs under specified circumstances.
The credit agreement contains representations and warranties, covenants,
events of default and other provisions customarily found in similar agreements.
Litigation
Endo is involved in, or have been involved in, arbitrations or legal
proceedings which arise from the normal course of its business. Endo cannot
predict the timing or outcome of these claims and proceedings. Currently, Endo
is not involved in any arbitration and/or legal proceeding that Endo expects to
have a material effect on its business, financial condition or results of
operations and cash flows.
Employees
As of December 1999, Endo had 87 employees, of which 29 are engaged in
research and development, 19 in sales and marketing, nine in quality and
approximately 30 in general and administrative capacities. Employees are not
represented by unions and Endo believes its relations with its employees are
good.
Dividend Policy
Endo has never paid cash dividends on its common stock. Furthermore, the
payment of cash dividends from earnings is currently restricted by its credit
facility. Assuming removal of this restriction, the payment of cash dividends
is subject to the discretion of the Endo board of directors and will be
dependent on may factors, including Endo's earnings, capital needs and general
financial condition. Endo anticipates that, for the foreseeable future, it will
retain its earnings in order to finance the expansion of its business.
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Industry
According to IMS, sales of pharmaceutical products in the United States were
estimated to be in excess of $100 billion in 1998. Growth in the pharmaceutical
industry, and the pain management sector in particular, is being driven
primarily by:
. the aging population;
. managed care's preference for drug therapy over surgery since drug
therapy is generally less costly;
. the medical communities increasing treatment of pain; and
. technological breakthroughs that have increased the number of ailments
which are treatable with drugs.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Except for the historical information contained in this proxy
statement/prospectus, this proxy statement/prospectus, including the following
discussion, contains forward-looking statements that involve risks and
uncertainties. Such risks and uncertainties are discussed below in "Forward-
Looking Statements."
General
On August 26, 1997, Endo commenced operations by acquiring certain
pharmaceutical products, related rights and certain assets of DuPont Merck,
which subsequently became DuPont Pharmaceuticals. The financial information of
this predecessor company is not comparable to Endo's financial information as
the business was operated as a portion of the predecessor company, and
historical financial statements were not prepared for the business. The
financial information for the predecessor company includes estimates and
allocations that may not necessarily be indicative of the costs that would have
resulted if the business has been operated as a separate entity. As such,
Management's Discussion and Analysis of Financial Condition and Results of
Operations only discusses Endo for the periods subsequent to the acquisition.
Consequently, Results of Operations discusses only the results for the nine
months ended September 30, 1999 compared to the nine months ended September 30,
1998, and Liquidity, and Capital Resources discusses only the cash flow from
operations, investing and financing for the nine months ended September 30,
1999 compared to the nine months ended September 30, 1998 and as of September
30, 1999 compared to December 31, 1998.
Overview
Endo, through its wholly owned subsidiary, Endo Pharmaceuticals, is engaged
in the research, development, sales and marketing of branded and generic
prescription pharmaceuticals used primarily for the treatment and management of
pain. Branded products comprised approximately 69% and 65% of net sales for
fiscal year 1998 and the nine months ended September 30, 1999, respectively.
Percocet(R) 5.0/325 comprised approximately 41% and 35% of Endo's net sales in
1998 and for the nine months ended September 30, 1999, respectively. On August
26, 1997, an affiliate of Kelso & Company and existing management entered into
an asset purchase agreement with the then DuPont Merck Pharmaceutical Company
to acquire certain branded and generic pharmaceutical products and exclusive
worldwide rights to a number of new chemical entities in the DuPont research
and development pipeline from DuPont Merck through the newly-formed Endo
Pharmaceuticals. Endo was formed as a holding company and incorporated on
November 18, 1997 under the laws of the state of Delaware and has its principal
executive offices at 233 Wilmington-West Chester Pike, Chadds Ford,
Pennsylvania 19317 (telephone number: (610) 558-9800).
Results of Operations
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Net sales for the nine months ended September 30, 1999 increased by 17% to
$87.3 million from $74.9 million in the comparable 1998 period. The increase in
net sales is primarily due to the launch of several new
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products. In April 1998, Endo terminated a promotional agreement with a third
party regarding Moban(R) tablets and liquid, and began its own promotion of the
product for the management of psychotic disorders. In November 1998, Endo
launched Morphine Sulfate Extended Release Tablets, the therapeutic equivalent
version of MS Contin(R), for moderate to severe pain. In February 1999, Endo
launched Zydone(R) tablets, a hydrocodone/acetaminophen offering for moderate
to moderately severe pain. In September 1999, Endo launched Lidoderm(R), the
first and only FDA approved product for the treatment of the pain of post-
herpetic neuralgia.
Gross profit for the nine months ended September 30, 1999 increased by 36%
to $46.5 million from $34.1 million in the comparable 1998 period. Gross profit
margins increased to 53% from 46%. Gross profit margins increased substantially
due to the fixed cost nature of Endo's most significant contract manufacturing
relationship with DuPont Pharmaceuticals. In addition, the increase in gross
profit margins is due to Endo's continued focus since the asset purchase
transaction in August 1997 on a more favorable mix of higher margin products
both through product launches, as discussed above, as well as discontinuation
of some lower margin non-core products.
Selling, general and administrative expenses for the nine months ended
September 30, 1999 increased by 57% to $29.7 million from $18.9 million in the
comparable 1998 period. This increase is substantially due to the increased
sales and promotional efforts to support the launches of Zydone(R) and
Lidoderm(R), as well as the increased sales and promotional efforts of the
Percocet(R) product line in anticipation of the fourth quarter 1999 launches of
Percocet(R) 2.5/325, Percocet(R) 7.5/500 and Percocet(R) 10.0/650 to complement
the existing Percocet(R) 5.0/325. In February 1999 Endo deployed a dedicated
field force of approximately 300 sales representatives to promote these new
products, which was an increase from the prior field force of approximately 100
sales representatives.
Research and development expenses for the nine months ended September 30,
1999 increased by 64% to $6.1 million from $3.7 million in the comparable 1998
period. This increase is due to increased spending on products under
development focused in pain management.
Depreciation and amortization for the nine months ended September 30, 1999
increased by 11% to $6.1 million from $5.5 million in the comparable 1998
period. This increase is primarily due to the increase in capital spending
required since Endo's inception in August 1997.
Interest expense, net for the nine months ended September 30, 1999 decreased
by 4% to $10.4 million from $10.8 million in the comparable 1998 period. This
decrease is primarily due to a reduction in borrowings outstanding under the
credit facility due to a voluntary prepayment of a portion of the borrowings in
June 1998 and a decrease in interest rates applicable to the credit facility.
This decrease is partially offset by an increase in interest expense applicable
to the manufacturing notes issued to one of our contract manufacturers pursuant
to the terms of a manufacturing and supply agreement.
Income tax benefit for the nine months ended September 30, 1999 increased by
24% to $2.2 million from $1.8 million for the comparable 1998 period.
Liquidity and Capital Resources
Endo's working capital increased to $39.9 million at September 30, 1999 from
$37.7 million at December 31, 1998. This $2.2 million increase was primarily
due to cash flows from operations of $10.5 million, offset by payment of $6.0
million for the license of Lidoderm(R) and capital expenditures of $1.6
million.
Net cash provided by operating activities decreased to 10.5 million for the
nine months ended September 30, 1999 from $15.9 million for the nine months
ended September 30, 1998.
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This decrease is primarily due to an increase in accounts receivable due to
increased net sales and the build up of inventories to support the launch of
Lidoderm(R).
Net cash utilized in investing activities increased to $7.6 million for the
nine months ended September 30, 1999 from $1.0 million for the nine months
ended September 30, 1998. This increase is due to a $6.0 million payment for
the license of Lidoderm(R) and an increase in capital expenditures of $.6
million primarily due to implementation of an enterprise software system during
1999.
Net cash utilized in financing activities decreased to nil in the nine
months ended September 30, 1999 from $14.5 million for the nine months ended
September 30, 1998 substantially due to the $15 million voluntary prepayment in
1998 of the credit facility.
Endo's cash and cash equivalents totaled $20.3 million at September 30,
1999. Endo believes that its (a) cash and cash equivalents, (b) cash flow from
operations and (c) existing credit facility, which has an unused line of credit
available of $25 million, will be sufficient to meet its normal operating,
investing and financing requirements. In the event that Endo makes any
significant acquisitions or other strategic investments, it may be required to
raise additional funds, through the issuance of additional debt or equity
securities.
Endo continues to evaluate growth opportunities including strategic
investments, licensing arrangements and acquisitions of product rights or
technologies, which could require significant capital resources.
Endo currently has no operations outside of the United States. As a result,
fluctuations in foreign currency exchange rates do not have a material effect
on the financial statements.
Endo does not believe that inflation had a material adverse effect on the
financial statements for the periods presented.
A substantial portion of Endo's net sales are through wholesale drug
distributors who in turn supply Endo's products to pharmacies, hospitals and
physicians.
Quantitative and Qualitative Disclosures about Market Risk
Endo does not utilize financial instruments for trading purposes and holds
no derivative financial instruments that could expose Endo to significant
market risk. Endo has entered into an interest rate cap agreement with a
notional amount of $82.5 million for the purpose of minimizing its exposure to
fluctuation in interest rates. The interest rate cap agreement sets a maximum
LIBOR rate of 8% that Endo will pay on the related notional amounts. Endo's
primary market risk exposure is with regard to debt instrument amounts in
excess of the notional amount of the interest rate cap ($108.0 million at
September 30, 1999).
Legal Proceedings and Government Regulations
Endo is involved in, or has been involved in, arbitrations or legal
proceedings which arise from the normal course of its business. Endo cannot
predict the timing or outcome of these claims and proceedings. Currently, Endo
is not involved in any arbitration and/or legal proceeding that Endo expects to
have a material effect on its business, financial condition or results of
operations and cash flows.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segment of an Enterprise and Related Information", (SFAS 131). SFAS 131
supercedes SFAS 14, "Financial Reporting for Segments of a Business
Enterprise," and replaces the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating
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decisions and assessing performance as the source of Endo's reportable
segments. Adoption of this statement did not result in additional disclosure by
Endo.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognizes all derivatives as either assets or
liabilities in the statement of financial position and measures those
instruments at fair value. This statement as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133," is in effect for fiscal years
beginning after June 15, 2000, although early adoption is encouraged. Endo has
not yet assessed what the impact of this statement will be on its future
earnings or financial position.
In 1998, Endo adopted AICPA Statement of Position (SOP) No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This SOP provides guidance on accounting for certain costs in
connection with obtaining or developing computer software for internal use and
requires that entities capitalize such costs once certain criteria are met.
Year 2000
Endo has performed a review of its critical information and operating
systems for Year 2000 compliance. Since Endo's inception in August 1997,
hardware and software has been purchased and installed which is Year 2000
compliant. A project team has identified systems critical to its business and
for systems non-Year 2000 compliant, program modifications or replacement
programs have been performed. Contact has been initiated and followed up with
customers, vendors, service suppliers and banks to verify their Year 2000
readiness, and testing is performed where appropriate. The project to identify
and remediate Year 2000 issues is proceeding on schedule. Endo has developed a
contingency plan for unanticipated Year 2000 exposure as part of its overall
efforts to ensure that its systems are Year 2000 compliant on a timely basis.
This contingency plan includes procurement of additional finished goods
inventory and the planning and implementation of parallel procedures in key
operating areas, among other measures.
Endo's management believes that an adequate program is in place in order to
be Year 2000 compliant, however, there can be no assurance that this program
ultimately will be successful. Any unanticipated failures in Endo's internal
systems to be Year 2000 compliant, or any failure by a material third party to
bring its own systems into compliance, could have a material adverse effect on
Endo's business, its financial position and its results of operations.
The foregoing represents a Year 2000 readiness disclosure entitled to
protection as provided in the Year 2000 Information and Readiness Disclosure
Act.
Current Directors and Executive Officers of Endo
Set forth below is information regarding each current director and executive
officer of Endo:
<TABLE>
<CAPTION>
Name Age Position and Offices
---- --- --------------------
<S> <C> <C>
Michael B. Goldberg..... 52 Director
Carol A. Ammon.......... 48 President, Chief Executive Officer and Director
Mariann T. MacDonald.... 52 Executive Vice President, Operations
Louis J. Vollmer........ 43 Executive Vice President, Sales & Marketing
Jeffrey R. Black........ 35 Senior Vice President, Chief Financial Officer and Treasurer
Osagie O. Imasogie...... 38 Senior Vice President, Business Development, General Counsel
and Secretary
David A.H. Lee, M.D.,
Ph.D................... 49 Senior Vice President, Research & Development
David I. Wahrhaftig..... 42 Director
</TABLE>
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Executive Compensation of Endo Executives
The following table summarizes the compensation paid or accrued to each of
the executive officers of Endo whose total annual salary and bonus exceeded
$100,000 for services in the capacity indicated.
<TABLE>
<CAPTION>
Long-Term
Name and Principal Annual Compensation
Position Compensation Awards
------------------ ----------------- ------------
Securities
Underlying All Other
Year Salary Bonus Options Compensation
---- ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Carol A. Ammon ...................
President and Chief Executive
Officer
Mariann T. MacDonald..............
Executive Vice President,
Operations
Louis J. Vollmer..................
Executive Vice President, Sales &
Marketing
Jeffrey R. Black..................
Senior Vice President, Chief
Financial Officer and Treasurer
Osagie O. Imasogie................
Senior Vice President, Business
Development, General Counsel and
Secretary
David A.H. Lee, M.D., Ph.D. ......
Senior Vice President, Research &
Development
</TABLE>
Description of Endo Stock Option Plans
As contemplated by the merger agreement, Endo's current executive and
employee stock option plans will be amended prior to the merger to provide,
among other things, that the stock options granted pursuant to these plans will
be exercisable solely into shares of Endo common stock held by Endo Pharma LLC.
Other than those persons who contributed their shares to Endo Pharma LLC and to
the extent current holders of those options do not consent to this amendment to
the current stock options plan, the ownership by Endo stockholders will not be
diluted on account of the exercise of these options.
The following table sets forth information concerning individual grants of
options that have been granted under the currently existing Endo stock option
plan as of December 13, 1999, without giving effect to the anticipated
amendment to the Endo option plan or Endo's planned recapitalization:
<TABLE>
<CAPTION>
% of Total
Number of Options
Shares Granted to Exercise
Underlying Employees Price
Options in Fiscal per Date of Expiration
Name Granted Year Share Grant Date
- ---- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Carol A. Ammon.......... 127,404 0 $100(1) 11/19/1997 11/19/2012
Mariann T. MacDonald.... 94,570 0 $100(2) 11/19/1997 11/19/2012
Louis J. Vollmer........ 94,570 0 $100(2) 11/19/1997 11/19/2012
Jeffrey R. Black........ 28,133 0 $100(3) 11/19/1997 11/19/2012
Osagie O. Imasogie...... 28,133 0 $100(3) 11/19/1997 11/19/2012
David A.H. Lee, M.D.,
Ph.D. ................. 28,133 0 $100(3) 12/15/1997 11/19/2012
</TABLE>
- --------
(1) While most of these options do have an exercise price of $100 per share,
options exercisable into 9,691 shares of Endo common stock have an exercise
price of $141.59 per share.
(2) While most of these options do have an exercise price of $100 per share,
options exercisable into 7,190 shares of Endo common stock have an exercise
price of $141.59 per share.
(3) While most of these options do have an exercise price of $100 per share,
options exercisable into 2,236 shares of Endo common stock have an exercise
price of $141.59 per share.
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Of the outstanding Endo stock options as of December 15, 1999, 48,738 shares
become vested and exercisable ratably over service periods of five years and
54,931 shares become vested and exercisable at the end of nine years from the
date of grant. The vesting and exercisability of these options may be
accelerated at the discretion of the board of directors of Endo or upon the
occurrence of specified events. The remaining 343,194 current Endo stock
options become exercisable only upon satisfaction of other conditions
including:
(1) the occurrence of a sale, disposition or transfer of Endo common stock,
after which Kelso no longer owns any shares of Endo common stock and
(2) the value received by holders of Endo common stock on the date of such
transfer exceeds three to twelve times Kelso's initial investment in
Endo.
On December 15, 1999, there were 18,848 Endo stock options that were vested
and exercisable.
As discussed above, it is anticipated that the stock option plan will be
amended, such that there will be six discrete tranches of options, four of
which will vest only if Endo's stock price exceeds progressive price targets
for a 90-day period and two of which will vest in other circumstances. It is
anticipated that the stock price targets will correspond roughly with the
original return hurdles described in (2) above. Under the anticipated terms of
the amended option plan, plan participants may be vested in options which in
the aggregate entitle the holders to approximately 36% of Endo Pharma LLC's
equity interest in Endo.
If these share price targets are achieved resulting in the vesting of each
tranche of options, Endo will record up to four non-cash compensation charges
related to the vesting of certain of the options. Under performance-based
options, the measurement of expense is calculated and recorded as a non-cash
charge at the time performance is achieved as the difference between the fair
market value of the stock and the exercise price of the options. If these
charges are recorded by Endo in connection with the above options, they will be
significant. They will, however, not result in the issuance of additional Endo
shares.
The shares of Endo common stock that the Endo executives receive upon
exercise of their stock options are currently subject to significant
restrictions that are set forth in stockholders agreements. These stockholders
agreements will be amended prior to the merger.
Forward-Looking Statements
This proxy statement/prospectus contains forward-looking statements. Endo
desires to take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, and includes this statement for the
express purpose of availing itself of the protections of the safe harbor with
respect to all forward-looking statements. Several important factors, in
addition to the specific factors discussed in connection with these forward-
looking statements individually, could affect the future results of the Endo
and could cause those results to differ materially from those expressed in the
forward-looking statements contained in this proxy statement/prospectus.
Endo's estimated or anticipated future results, product performance or other
non-historical facts are forward-looking and reflect Endo's current perspective
on existing trends and information. These statements involve risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by these forward-
looking statements. These risks and uncertainties include, among others,
. market acceptance of Endo's products and the impact of competitive
products and pricing;
. dependence on sole source suppliers:
. the success of Endo's product development activities and the timeliness
with which regulatory authorizations and product launches may be
achieved;
. successful compliance with extensive, costly, complex and evolving
governmental regulations and restrictions;
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. the availability on commercially reasonable terms of raw materials and
other third party manufactured products;
. exposure to product liability and other lawsuits and contingencies;
. the success of Endo's Year 2000 Readiness Program;
. the ability to timely and cost effectively integrate acquisitions; and
. other risks and uncertainties detailed throughout this proxy
statement/prospectus.
Therefore, Endo wishes to caution each reader of this proxy
statement/prospectus to consider carefully these factors as well as the
specific factors that may be discussed with each forward-looking statement in
this proxy statement/prospectus as factors, in some cases, that have affected,
and in the future, together with other factors, could affect, the ability of
Endo to implement its business strategy, and may cause actual results to differ
materially from those contemplated by the statements expressed in this proxy
statement/prospectus.
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DESCRIPTION OF ENDO CAPITAL STOCK
The following summary of the current terms of the capital stock of Endo is
not meant to be complete and is qualified by reference to the amended and
restated certificate of incorporation and amended and restated by-laws of Endo.
Copies of the Endo amended and restated certificate of incorporation and
amended and restated by-laws were filed as exhibits to the registration
statement of which this proxy statement/prospectus forms a part.
Authorized Capital Stock
Under its current charter, Endo has the authority to issue up to 2,000,000
shares of Endo common stock, 200,000 shares of class A common stock and 500,000
shares of preferred stock. Prior to the completion of the merger, Endo intends
to amend its certificate of incorporation to eliminate its class A common stock
and to authorize 142,656,279 shares of Endo common stock and 32,421,882 shares
of Endo preferred stock. In connection with this recapitalization, Endo will
issue shares in the form of a to its stockholders immediately prior
to the merger.
Endo Common Stock
Endo Common Stock Outstanding
The outstanding shares of Endo common stock are, and the shares of common
stock issued pursuant to the merger will be, duly authorized, validly issued,
fully paid and non-assessable. At November 30, 1999, there were 71,601,780
shares of Endo common stock outstanding, as adjusted to give effect to the
.
American Stock Transfer & Trust Company is the transfer agent and registrar
for the Endo common stock. Shares of Endo common stock will be listed on the
NASDAQ and will trade under the symbol " ."
Dividends
Owners of shares of Endo common stock are entitled to receive dividends
when, as and if declared by the Endo board of directors, out of funds legally
available for their payment, subject to the rights of holders of any
outstanding shares of preferred stock.
Voting Rights
Owners of shares of Endo common stock are entitled to one vote per share.
Subject to the rights of the holders of any preferred stock pursuant to
applicable law or the provision of any future certificate of designations
creating a specific series of preferred stock, all voting rights are vested in
the owners of shares of Endo common stock. Owners of shares of Endo common
stock have noncumulative voting rights, which means that the holders of more
than 50% of the shares voting for the election of directors can elect 100% of
the directors.
Rights Upon Liquidation
In the event of Endo's voluntary or involuntary liquidation, dissolution or
winding up, the owners of shares of Endo common stock will be entitled to share
equally in any assets available for distribution after the payment in full of
all debts and distributions and after the owners of any outstanding Endo
preferred stock have received their liquidation preferences in full.
Other Rights
Owners of shares of Endo common stock are not entitled to pre-emptive rights
with respect to the future issuances of Endo common stock. Endo may, however,
enter into contracts with stockholders to grant holders pre-emptive rights.
Shares of Endo common stock are not convertible into shares of any other class
of
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<PAGE>
capital stock. If Endo merges or consolidates with or into another company and,
as a result, the shares of Endo common stock are converted into or exchangeable
for other securities or property including cash, all owners of shares of Endo
common stock will be entitled to receive the same kind and amount of such
consideration for each share of common stock.
Endo Preferred Stock
No shares of preferred stock are outstanding. The board of directors of Endo
may, without further action by the stockholders of Endo, issue a series of Endo
preferred stock and fix the rights and preferences of those shares, including
the dividend rights, dividend rates, conversion rights, exchange rights, voting
rights, terms of redemption, redemption price or prices, liquidation
preferences, the number of shares constituting any series and the designation
of such series.
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<PAGE>
DESCRIPTION OF THE ENDO WARRANTS
Warrants Issued to Current Algos Stockholders in the Merger
The following is a summary of the material terms of the warrant agreement
for the warrants that Algos stockholders will receive in the merger. This
summary is not complete and is qualified in its entirety by reference to the
warrant agreement. A copy of the warrant agreement is attached to this proxy
statement/prospectus as Appendix C and is incorporated in this proxy
statement/prospectus by reference. You should read the text of the warrant
agreement because it, and not this proxy statement/prospectus, is the legal
document that governs the warrants that you will receive in the merger.
In the merger, current Algos stockholders will receive, for each of their
Algos common shares, one Endo warrant exercisable, for $0.01 per share, into a
specified number of shares of Endo common stock depending on the timing of the
FDA's approval of MorphiDex(R) for one or more pain indications.
If FDA approval of MorphiDex(R) is obtained on or before December 31, 2001,
then upon exercise of these warrants, each warrant will be exercisable into:
. 1.153846 shares of Endo common stock in the event the cash gross profit
of Endo for the fiscal year ended December 31, 2000 equals or exceeds
$147.4 million or
. 1.000000 share of Endo common stock in the event the cash gross profit of
Endo for the fiscal year ended December 31, 2000 does not equal or exceed
$147.4 million and a specified number of shares of Endo common stock the
owned by the Endo LLC are transferred for no consideration to Endo
(thereby increasing the percentage ownership of the Algos stockholders by
5 percentage points).
These ratios will be adjusted prior to the issuance of the Endo warrants in
order to ensure that, in the merger, holders of Algos common shares receive a
total of 35% and 40%, respectively, of the shares of Endo common stock on a
fully diluted basis.
If FDA approval of MorphiDex(R) is obtained after December 31, 2001 and on
or prior to June 30, 2002, then upon exercise of these warrants, each warrant
will be exercisable into:
. 0.714286 shares of Endo common stock in the event the cash gross profit
of Endo for the fiscal year ended December 31, 2000 equals or exceeds
$147.4 million or
. 0.615385 shares of Endo common stock in the event the cash gross profit
of Endo for the fiscal year ended December 31, 2000 does not equal or
exceed $147.4 million and a specified number of shares of Endo common
stock the owned by the Endo LLC are transferred for no consideration to
Endo (thereby increasing the percentage ownership of the Algos
stockholders by 5 percentage points).
These ratios will be adjusted prior to the issuance of the Endo warrants in
order to ensure that, in the merger, holders of Algos common shares receive a
total of 30% and 35%, respectively, of the shares of Endo common stock on a
fully diluted basis.
If FDA approval of MorphiDex(R) is obtained after June 30, 2002 and on or
prior to December 31, 2002, then upon exercise of these warrants, each warrant
will be exercisable into:
. 0.333333 shares of Endo common stock in the event the cash gross profit
of Endo for the fiscal year ended December 31, 2000 equals or exceeds
$147.4 million or
. 0.285714 shares of Endo common stock in the event the cash gross profit
of Endo for the fiscal year ended December 31, 2000 does not equal or
exceed $147.4 million and a specified number of shares of Endo common
stock the owned by the Endo LLC are transferred for no consideration to
Endo (thereby increasing the percentage ownership of the Algos
stockholders by 5 percentage points).
These ratios will be adjusted prior to the issuance of the Endo warrants in
order to ensure that, in the merger, holders of Algos common shares receive a
total of 25% and 30%, respectively, of the shares of Endo common stock on a
fully diluted basis.
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<PAGE>
If FDA approval of MorphiDex(R) is not obtained on or before December 31,
2002, each of these Endo warrants becomes void and all rights in respect of
these Endo warrants will cease.
Exercisability and Expiration
These warrants become exercisable on the fifth business day following the
date on which Endo receives approval from the FDA with respect to MorphiDex(R)
for the treatment of one or more pain indications. These warrants will remain
exercisable for a period of six months after the exercisability date, at which
time they will expire. If FDA approval of MorphiDex(R) is not obtained on or
before December 31, 2002, each of these Endo warrants expires without any
payment therefor.
Transferability
Each Algos stockholder will be able to elect whether to receive transferable
or non-transferable warrants. See "THE MERGER--Material U.S. Federal Income Tax
Consequences of the Merger" and "THE ALGOS SPECIAL MEETING--Voting Rights;
Proxies." Transferable warrants will be listed on the NASDAQ National Market
and will trade under the symbol " " and will be freely tradeable following
the merger. is the transfer agent and registrar for the Endo warrants.
Dividends and Other Distributions
Prior to the Endo warrants becoming exercisable, if Endo authorizes:
. the issuance of subscription rights options or warrants to all holders of
Endo common stock or
. the distribution of indebtedness or assets or cash to all holders of Endo
common stock;
then, upon exercise, each holder of Endo warrants will receive his, her or its
pro rata share of such dividends or other distributions.
Reorganization, Consolidation, Merger or Sale
In the event of any:
. capital reorganization (other than any capital reorganization that does
not result in any reclassification of Endo common stock);
. consolidation or merger of Endo with and into another corporation (other
than a consolidation or merger in which Endo is the continuing
corporation and which does not result in any reclassification of Endo
common stock); or
. sale of all or substantially all of the assets of Endo;
then, upon exercise, each holder of Endo warrants will receive the number of
shares of stock or other securities or property to which they would have been
entitled upon such event if the warrant had been exercised in full immediately
prior to such event.
Antidilution Provisions
The number of shares of Endo common stock issuable upon exercise of the
warrants and the exercise price of the warrants are subject to adjustment in
the event Endo:
. pays a dividend or makes a distribution on its common stock in shares of
Endo common stock or other capital stock of Endo or
. subdivides, splits, combines or reclassifies its outstanding shares of
Endo common stock into a different number of securities of the same
class.
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The number of shares of Endo common stock issuable upon exercise of the
warrants and the exercise price of the warrants are also subject to adjustment
in the event Endo:
. issues or sells to any of its affiliates shares of Endo common stock at a
price per share less than the then current market value of Endo common
stock or
. distributes to any of its affiliates any rights, options or warrants
entitling them to purchase shares of Endo common stock or securities
convertible into or exchangeable for Endo common stock at a price per
share less than the then current market value of Endo common stock,
and prior to such issuance, sale or distribution Endo did not first offer to
issue, sell or distribute such shares, rights, options, warrants or convertible
or exchangeable securities to all holders of Endo common stock on the same
economic terms and on a pro rata basis with the issuance, sale or distribution
to the Endo affiliates.
No Other Rights
No holder of a Endo warrant will be entitled to any of the rights of a Endo
common stockholder, including, without limitation, the right to vote or to
attend or receive any notice of meetings of stockholders or any other
proceedings of Endo.
Warrants Issued to Current Endo Stockholders Immediately Prior to the Merger
Immediately prior to the merger, current Endo stockholders will receive, for
each of their Endo common shares, one Endo warrant exercisable, for $0.01 per
share, into a specified number of shares of Endo common stock if the FDA does
not approve MorphiDex(R) for any pain indication prior to December 31, 2002.
The number of shares issuable depends on whether Endo achieves a cash gross
profit of Endo for the fiscal year ended December 31, 2000 of $147.4 million.
If FDA approval of MorphiDex(R) is not obtained before December 31, 2002,
then these warrants become exercisable and upon exercise, each warrant will be
exercisable into:
. 0.416667 shares of Endo common stock in the event the cash gross profit
of Endo for the fiscal year ended December 31, 2000 equals or exceeds
$147.4 million or
. 0.250000 shares of Endo common stock in the event the cash gross profit
of Endo for the fiscal year ended December 31, 2000 does not equal or
exceed $147.4 million and a specified number of shares of Endo common
stock the owned by the Endo LLC are transferred for no consideration to
Endo (thereby increasing the percentage ownership of the public Endo
stockholders by 5 percentage points).
These numbers will be adjusted prior to the issuance of these Endo warrants
in order to ensure that upon exercise holders of Endo common shares who had
been holders prior to the merger own a total of 85% and 80%, respectively, of
the shares of Endo common stock on a fully diluted basis.
Other Terms
All of the other terms of these warrants are substantially identical to the
Endo warrants that are being issued to the Algos stockholders in the merger and
that are described above.
Series A Warrants
Holders of Algos' outstanding Series A warrants will, to the extent they do
not exercise their warrants prior to the completion of the merger, hold
warrants to purchase Endo common stock with substantially the same terms and
conditions as their current Series A warrants. Each warrant can be exercised to
purchase one share of Endo common stock and one Endo warrant for each share of
Algos common stock into which this warrant would have been exercisable prior to
the merger. In addition, the warrants will have the same exercise price, which
is currently $1.20 per share. On December 15, 1999, there were outstanding
Series A warrants to purchase 229,661 shares of Algos common stock.
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<PAGE>
Exercisability and Expiration
The Series A warrants are currently exercisable, and will remain exercisable
following completion of the merger. These warrants expire on September 25,
2001.
Transferability
These warrants will not be registered with the Securities and Exchange
Commission and will not be listed on any national securities exchange. In
addition, holders of these warrants may not transfer the warrants without the
prior written consent of Endo.
Dividends and other Distributions
Prior to the expiration of these warrants, if there is any stock dividend or
any other distribution other than ordinary cash dividends payable out of
earnings or surplus legally available for dividends, then the number of shares
of Endo common stock subject to these warrants and the exercise price of the
warrants will be adjusted to reflect this distribution.
Reorganization, Consolidation, Merger or Sale
In the event of any consolidation, merger or sale of all or substantially
all of the assets of Endo, Endo will be required to use reasonable efforts to
make adequate provisions so that the holders of these warrants will be entitled
to purchase the number of shares of stock or other securities or property to
which they would have been entitled upon the event if the warrant had been
exercised immediately prior to the event.
Antidilution Provisions
Prior to the expiration of these warrants, if there is any stock split or
other reclassification of the Endo common stock, then the number of shares of
Endo common stock subject to these warrants and the exercise price of the
warrants will be adjusted to reflect this stock split or reclassification.
No Other Rights
The holders of these warrants will not be entitled to any of the rights of
an Endo common stockholder, including, without limitation, the right to vote or
to attend or receive any notice of meetings of stockholders or any other
proceedings of Endo.
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COMPARISON OF STOCKHOLDER RIGHTS
Both Endo and Algos are Delaware corporations governed by Delaware law. In
addition to the applicable provisions of the Delaware General Corporation Law,
currently the rights of Endo's stockholders are governed by Endo's current
amended and restated certificate of incorporation and amended and restated by-
laws, and the rights of Algos stockholders are currently governed by Algos'
amended and restated certificate of incorporation and amended and restated by-
laws.
If we complete the merger, Algos stockholders will become Endo stockholders.
Endo intends to amend and restate its certificate of incorporation and by-laws
immediately prior to the merger and, therefore, after the merger the rights of
Algos stockholders will be governed by Endo's amended and restated certificate
of incorporation, amended and restated by-laws and applicable provisions of the
Delaware General Corporation Law.
Set forth below is a summary describing material differences between the
rights of Endo's stockholders and the rights of Algos' stockholders. Because
both Endo and Algos are Delaware corporations, differences between the rights
of Endo's stockholders and Algos' stockholders will arise from differences in
the respective certificates of incorporation and by-laws of Endo and Algos,
rather than from differences in applicable state law.
While we believe that this summary covers the material differences between
the two companies, this summary may not contain all of the information that is
important to you. This summary is not intended to be a complete discussion of
the certificates of incorporation and by-laws of Endo and Algos, and it is
qualified in its entirety by reference to applicable Delaware law as well as to
Endo's and Algos' respective certificates of incorporation and by-laws. You
should carefully read this summary and the documents that are referenced in
this summary for a more complete understanding of the differences between being
a stockholder of Endo and a stockholder of Algos. Copies of Endo's amended and
restated certificate of incorporation and amended and restated by-laws are
attached as Appendices D and E, respectively, to this proxy
statement/prospectus and are incorporated in this proxy statement/prospectus by
reference. Algos' amended and restated certificate of incorporation and amended
and restated by-laws are on file with the SEC and are incorporated by
reference, and will also be sent to you upon request. See "WHERE YOU CAN FIND
MORE INFORMATION" on page 111.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN CURRENT RIGHTS OF
ALGOS STOCKHOLDERS AND RIGHTS THOSE STOCKHOLDERS WILL HAVE AS
ENDO STOCKHOLDERS FOLLOWING THE MERGER
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Authorized Capital The total number of shares of The total number of shares of
Stock authorized capital stock is authorized capital stock is
60,000,000 consisting of: 175,078,160 consisting of:
. 50,000,000 shares of common . 142,656,279 shares of common
stock, par value $.01 per stock, par value $.01 per
share, and share, and
. 10,000,000 shares of preferred . 32,421,881 shares of preferred
stock, par value $.01 per stock, par value $.01 per
share. share.
- ------------------------------------------------------------------------------------------
Board of Directors
- ------------------------------------------------------------------------------------------
Size of the Board The by-laws provide that the The certificate of incorporation
of Directors number of directors will be at provides that the number of
least three but not more than directors will be at least seven
nine persons. but not more than eleven persons.
By a vote of a majority of the The by-laws provide that the
directors, the board may increase exact number of directors are to
or decrease the number of be fixed
directors and appoint directors to . by the resolution of the board,
newly created directorships. . by resolution adopted by the
vote of a majority of the
stockholders of common stock,
or
. by consent executed on behalf
of the stockholders.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
- -------------------------------------------------------------------------------------------
<S> <C> <C>
The current board consists of six The board immediately after the
directors. merger will consist of 9
directors.
- -------------------------------------------------------------------------------------------
Classification of The board is divided into three No classified board.
the Board of classes and the directors are
Directors elected to three-year terms.
- -------------------------------------------------------------------------------------------
Election of Directors are chosen by a Directors are chosen by a
Directors plurality of the votes cast by plurality of the votes cast by
the stockholders at the election. the stockholders at the election.
All elections of the directors Election of directors need not be
will be by written ballot. by written ballot.
- -------------------------------------------------------------------------------------------
Resignation of Directors may resign at any time Directors may resign at any time
Directors by a written resignation. if they give notice to Endo.
- -------------------------------------------------------------------------------------------
Removal of The by-laws provide that a The certificate of incorporation
Directors director can only be removed for and by-laws are silent regarding
cause by the majority vote of all the requirements for removal of
of the shares of stock directors.
outstanding.
- -------------------------------------------------------------------------------------------
Vacancies on the Vacancies in the number of The by-laws provide that
Board of Directors directorships may be filled by a vacancies on the board may be
majority vote of the remaining filled by a vote of a majority of
directors, though less than a the remaining board, though less
quorum. than a quorum, or even by a sole
remaining director. The three
Algos directors on the board will
fill any vacancies created by
them for other than cause with a
nominee of the remaining Algos-
nominated directors.
- -------------------------------------------------------------------------------------------
Quorum A majority of the directors in A majority of the entire board
office will constitute a quorum. will constitute a quorum.
- -------------------------------------------------------------------------------------------
Special Meetings of The president or the secretary, The chairman, the president, or
the Board of on the written request of two or any director may call a special
Directors more directors, may call a meeting of the board on twenty-
special meeting of the board on four hours' notice, or on a
at least two days' notice to each shorter notice as the person(s)
director. The president or a calling the special meeting may
majority of the members of a deem necessary or appropriate.
committee may call at any time a
special meeting of the committee.
- -------------------------------------------------------------------------------------------
Stockholders
Meetings
- -------------------------------------------------------------------------------------------
Annual Meetings The annual meeting will be held The annual meeting will be held
on a date and at a time and place on a
designated by the board. date and at a time designated by
the board.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Special Meetings Callable at any time but only by Callable by any officer at the
the chairman of the board, the written request of a majority of
president or the majority of the the board or at the written
whole board. request of stockholders owning a
majority of the capital stock
issued and outstanding and
entitled to vote.
- ------------------------------------------------------------------------------------------
Advance Notice Stockholders must receive notice Each stockholder entitled to vote
Provisions of a special meeting no more than at a stockholder meeting will
ninety days before the special receive a
meeting and not later than the written notice of the meeting not
later of either (a) sixty days less
before the special meeting or (b) than ten nor more than sixty days
ten days following the public before the date of the meeting.
announcement of the meeting by
the company.
- ------------------------------------------------------------------------------------------
Quorum The holders of a majority of the Same.
capital stock entitled to vote
pursuant in person or represented
by proxy will constitute a
quorum.
- ------------------------------------------------------------------------------------------
Voting Rights The certificate of incorporation The holders of common stock are
provides that, subject to the entitled to one vote per share on
laws of Delaware and by-laws, all all matters to be voted on by the
rights to vote and all voting common stockholders.
power will be exclusively vested
in the common stock. Every
stockholder of record will be
entitled at every meeting of the
stockholders to one vote for each
share of common stock.
All questions brought before the All questions brought before the
meeting of stockholders will be meeting of stockholders will be
decided by a majority vote except decided by a majority vote.
regarding (a) certain amendments
to the certificate of
incorporation or by-laws and (b)
a business combination involving
a transaction between the company
and an interested stockholder or
an affiliate of the interested
stockholder; both (a) and (b)
requiring a 66 2/3% affirmative
vote.
Voting will be by ballot if it is Votes can be cast in person or by
required by law or if it is proxy but no proxy will be voted
demanded by a stockholder on or after three years from its
entitled to vote. If a voting by date, unless the
ballot is not required or proxy provides for a longer
requested, voting may be by voice period. The board or the officer
vote. Votes can be cast by proxy. presiding at a
meeting of stockholders may
require that votes cast in the
stockholder meetings be cast by a
written ballot.
- ------------------------------------------------------------------------------------------
Action by Consent Any action required or permitted The by-laws provide that actions
of Stockholders to be taken by stockholders must permitted to be taken at the
be effected at a duly called meeting of the stockholders may
annual or special meeting and may be taken without
not be effected by a consent in (a) a meeting, (b) prior notice
writing. and (c) a vote, if a consent in
writing is signed by the holders
of outstanding stock having not
less than the minimum number of
votes that would be necessary to
authorize or take actions at the
stockholder meeting.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Inspection Rights The secretary will prepare and Same; except that the officer in
make a complete list of charge of the stock ledger will
stockholders entitled to vote at prepare and make the complete
a stockholders' meeting at least list of stockholders entitled to
ten days before the meeting of vote at the meeting of the
the stockholders. The stockholder stockholders.
list will be open to the
examination of stockholders for
purposes germane to the meeting
as long as the examination is
conducted
. during ordinary business hours,
. for a period of at least ten
days before the meeting, and
. either at a place within the
city where the meeting is to be
held or at the place where the
meeting is held.
The stockholder list will be
produced and kept at the place
and duration of the meeting for
the inspection by the
stockholders present at the
meeting.
- ------------------------------------------------------------------------------------------
Amendments to
Organizational
Documents
- ------------------------------------------------------------------------------------------
Certificate of Provisions of the certificate of Provisions of the certificate of
Incorporation incorporation may be amended, incorporation may be amended,
altered, changed or repealed by altered, changed or repealed by
the affirmative vote of the board the affirmative vote of the board
of directors and approval by the of directors and approval by the
holders of a majority of the holders of a majority of the
outstanding voting stock, except outstanding voting stock.
that (a) the amendment or repeal
of the articles relating to
"Action by Consent of
Stockholders" (see above),
"Exculpation and Indemnification"
(see below) and "Amendments," or
(b) the reduction of the number
of authorized shares of common
stock and preferred stock require
the affirmative vote of the
holders of at least 66 2/3% of
the outstanding voting stock.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
- -----------------------------------------------------------------------------------------
<S> <C> <C>
By-Laws The by-laws may be altered or The by-laws may be altered,
repealed, or new by-laws may be amended or repealed, or new by-
adopted at the meeting of the laws may be adopted by the
stockholders if notice of the stockholders or by the board.
proposed alteration or repeal of Notice of alteration, amendment
the by-laws is contained in the or repeal of the by-laws or the
notice of the meeting. An adoption of new by-laws will be
affirmative vote of 66 2/3% contained in the notice of the
of the stock issued and meeting of stockholders or the
outstanding and entitled to vote board. All changes to the by-laws
is required at the stockholder must be approved either by the
meeting to alter or repeal by- holders of a majority of the
laws or adopt new by-laws. The outstanding capital stock
by-laws can also be altered or entitled to vote or by a majority
repealed or new by-laws adopted of the entire board.
by the affirmative vote of a
majority of the board at any
meeting if notice of the proposed
alteration or repeal is contained
in the notice of the meeting.
- -----------------------------------------------------------------------------------------
Dividends and Other The certificate of incorporation The certificate of incorporation
Distributions provides that dividends on provides that, when dividends are
outstanding shares of preferred declared, the holders of the
stock will be paid or declared common stock will be entitled to
and set apart for payment before share equally, share for share,
dividends are paid on the common in the dividends. The board may
stock. The by-laws provide that declare dividends at regular or
the board may: special meetings
. declare and pay dividends or and may decide to pay in cash, in
make other distributions on the property, or in shares of capital
outstanding shares of capital stock. Before payment of the
stock, dividend, the board
. use and apply surplus of the can set aside out of funds of
company in purchasing or Endo available for dividends,
acquiring the company's sums that in its absolute
securities, and discretion, the board deems
. set aside out of surplus or net necessary for the purpose of a
profits a sum that the board reserve of funds to meet
deems necessary for the purpose contingencies, or for equalizing
of a reserve of funds to meet dividends, or for repairing or
contingencies, or for maintaining the property of Endo.
equalizing dividends, or for
repairing or maintaining the
property of Algos.
If upon liquidation, dissolution Not applicable.
or winding up of the company, the
assets available for distribution
to the holders of preferred stock
are insufficient to pay to those
holders the full preferential
amount, then the assets will be
distributed ratably among the
shares of preferred stock.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Exculpation and
Indemnification
- ----------------------------------------------------------------------------------------
Exculpation No director will be personally Same.
liable to the company or the
stockholders for monetary damages
for breach of fiduciary duty,
except for liability
. for a breach of the duty of
loyalty to the company and its
stockholders,
. for acts or omissions not in
good faith or which involve
intentional misconduct or a
knowing violation of law,
. pursuant to section 174 of the
Delaware General Corporation
Law, or
. for transactions from which the
director derived improper
personal benefit.
The certificate of incorporation A contract or transaction between
and by-laws are silent regarding the company and its directors or
the validity of contracts or officers, or between the company
transactions between the company and any other entity in which its
and its directors or officers, or directors or officers are
between the company and any other directors or officers of the
entity in which its directors and company will not be void or
officers are directors or voidable solely for the reason
officers of the company. that
. it is a contract or a
transaction that involves an
interested director or officer,
. the interested director or
officer is present at or
participates in the meeting of
the board or committee that
authorizes the contract or
transaction, or
. the interested director's votes
are counted in authorizing the
contract or transaction.
</TABLE>
103
<PAGE>
<TABLE>
<CAPTION>
ALGO ENDO
---- ----
- ----------------------------------------------------------------------------------------
<S> <C> <C>
However, in order for the
contract or transaction with an
interested director or officer to
be valid, one of the following
conditions must be met:
. Material facts as to the
interested director's or
officer's relationship or
interest are disclosed or are
known to the board or the
committee and the board or the
committee in good faith
authorizes the contract or
transaction by the affirmative
vote of a majority of the
disinterested directors, even
though the disinterested
directors represent less than a
quorum;
. Material facts as to the
interested director's or
officer's relationship or
interest are disclosed or are
known to the stockholders
entitled to vote and the
contract or transaction is
specifically approved in good
faith by the vote of the
stockholders; or
. The contract or transaction is
fair to the company as of the
time it is authorized, approved
or ratified, by the board,
committee or the stockholders.
- ----------------------------------------------------------------------------------------
Indemnification The company will indemnify its Same; except the right to
directors, officers, employees indemnification is not originally
and agents to the fullest extent extended to employees and agents
authorized or permitted by law of the company. The board may
against expenses, judgments, provide rights to indemnification
fines and amounts paid in and to the advancement of
settlement. expenses to employees and agents
of the company.
The directors' and officers' Same.
right to indemnification
continues to persons who have
ceased to be directors or
officers and to his or her heirs,
executors and personal and legal
representatives.
The board has the express The authorization as to whether a
authority to enter into director or officer should be
indemnification agreements indemnified is made
with present or future directors . by a majority vote of the
and officers. directors who are not parties
to the action, suit or
proceeding, even though less
than a quorum,
</TABLE>
104
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
<S> <C>
. by independent legal counsel in
a written opinion if there are
no directors who are not
parties to the action, suit or
proceeding, or
. by the stockholders.
However, if a director or officer
has been successful on the merits
or defense of the action, suit or
proceeding, then that person will
be indemnified without
authorization.
Unless a proceeding is authorized Same.
or consented to by the board, the
company is not obligated to
indemnify a director or officer
regarding a proceeding initiated
by the same director or officer.
If a written claim of indemnity If the director or officer is
by an officer, director, employee adjudged to be liable to the
or agent is not paid in full company by a court of law there
within ninety days after the would be no right of
claim is received by the company, indemnification unless the court
then that officer, director, determines upon application that,
employee or agent can bring a despite the adjudication of
suit against the company. If the liability but in view of all the
suit is successful in whole or in circumstances of the case, the
part, the officer, director, director or officer is fairly and
employee or agent is entitled to reasonably entitled to indemnity.
be paid expenses of prosecuting
the suit.
Neither the certificate of Directors or officers may apply
incorporation nor the by-laws to the Court of Chancery in the
contemplate application to the State of Delaware for
Court of Chancery in the State of indemnification.
Delaware for indemnification.
The right to indemnification Same.
includes the right to be
reimbursed for the expenses
incurred in defending or
participating in proceedings in
advance of its final disposition.
A repeal or modification of the Same.
indemnification provisions by the
stockholders must not adversely
affect the rights to
indemnification of directors and
officers regarding any acts or
omissions that occurred before
the repeal or modification.
</TABLE>
105
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
- --------------------------------------------------------------------------------
<S> <C> <C>
The company may purchase and Same.
maintain insurance on behalf of
persons who are or were directors or
officers whether or not the company
would have the power or the
obligation to indemnify those
persons.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Appraisal Rights Under Delaware law, the rights of Same.
dissenting stockholders to obtain
the fair value for their shares,
which are referred to as appraisal
rights, may be available in
connection with a statutory merger
or consolidation in certain specific
situations. Appraisal rights are not
available to a corporation's
stockholders under Delaware law when
the corporation is to be the
surviving corporation and no vote of
its stockholders is required to
approve the merger.
In addition, unless otherwise
provided in the certificate of
incorporation, no appraisal rights
are available under Delaware law to
holders of shares of any class of
stock which is either (a) listed on
a national securities exchange or
designated as a national market
system security on an interdealer
quotation system by the NASD or (b)
held of record by more than 2,000
stockholders, unless these
stockholders are required by the
terms of the merger to accept
anything other than:
. shares of stock of the surviving
corporation;
. shares of stock of another
corporation which, as of the
effective date of the merger or
consolidation, are of the kind
described in clauses (a) and (b)
above;
. cash instead of fractional shares
of such stock; or
. any combination of the above three
bullets.
Appraisal rights are not available
under Delaware law in the event of
the sale of all or substantially all
of a corporation's assets or the
adoption of an amendment
</TABLE>
106
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
- -----------------------------------------------------------------------------------------
<S> <C> <C>
to its certificate of incorpora-
tion, unless such rights are
granted in the corporation's cer-
tificate of incorporation. The
certificate of incorporation does
not grant these rights.
- -----------------------------------------------------------------------------------------
Shareholder Rights None. None.
Plan
- -----------------------------------------------------------------------------------------
Ownership The company may impose on the Neither the certificate of
Limitations holder of restricted capital incorporation nor the by-laws
stock, or the successor or imposes limitations on the
transferee of that holder, a ownership of capital stock.
written restriction on the
transfer or registration of
transfer of the capital stock if
it is (a) permitted by section
202 of the Delaware General
Corporation Law and (b) noted
conspicuously on the stock
certificate. Unless noted
conspicuously on the certificate,
a restriction on the transfer or
registration of transfer will be
ineffective except against the
holders who had actual knowledge
of the restriction. No
restriction will be binding to
the capital stock issued before
the adoption of the restriction
unless the holders of the capital
stock are parties to an agreement
or voted in favor of the
restriction.
If the company securities are Neither the certificate of
offered to a non-United States incorporation nor the by-laws
person, the company will require imposes this requirement.
the non-United States person to
deliver an opinion of counsel
satisfactory to the company that
the transfer of the securities is
permitted under the U.S. federal
securities laws.
- -----------------------------------------------------------------------------------------
Business A business combination involving The certificate of incorporation
Combinations a transaction between the company states that the company elects
and an interested stockholder or not to be governed by section 203
an affiliate of the interested of the Delaware
stockholder requires the General Corporation Law pursuant
affirmative vote of the holders to section 203(b)(3) of the
of at least 66 2/3% of the Delaware General Corporation Law.
outstanding shares of capital
stock.
A business combination is defined Not applicable.
in the certificate of
incorporation to include the
following transactions between
the company or its subsidiary and
an interested stockholder or its
affiliate:
. a merger or consolidation;
</TABLE>
107
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
<S> <C>
. a sale, lease, exchange,
mortgage, pledge, transfer or
other disposition of the assets
of the company that has an
aggregate fair market value of
more than 25% of the fair value
of the company's common stock;
. the issuance or transfer by the
company or its subsidiary of
the securities of the company
or its subsidiary in exchange
for cash, securities or other
property that has an aggregate
fair market value of more than
25% of the fair value of the
company's common stock;
. the adoption of a plan or
proposal for the liquidation or
dissolution of the company
proposed by an interested
stockholder or an affiliate of
the interested stockholder; or
. a reclassification of
securities, recapitalization of
the company, or a merger or
consolidation of the company
with its subsidiaries that has
the effect of increasing the
proportionate ownership
interest of the interested
stockholder or an affiliate of
the interested stockholder.
A business combination will not Not Applicable
require the affirmative vote of
the holders of at least 66 2/3%
of the outstanding shares of
capital stock if either (a) the
business combination has been
approved by a majority of the
whole board of the company or (b)
the aggregate amount of the
consideration to be received per
share by holders of common stock
as a result of the business
combination is at least equal to
the highest of the following:
. the highest share price paid by
the interested stockholder
within the two-year period
prior to the business
combination,
</TABLE>
108
<PAGE>
<TABLE>
<CAPTION>
ALGOS ENDO
----- ----
- --------------------------------------------------------------------------------
<S> <C> <C>
. the fair value per share of
company common stock on the
date on which the interested
stockholder became an
interested stockholder, and
. the fair value per share of
company common stock on the
date of the first public
announcement of any proposed
business combination.
A repeal or amendment of the Not applicable.
business combination provision in
</TABLE> the certificate of incorporation
or adoption of a provision that
is inconsistent with the business
combination provision requires
the affirmative vote of the
holders of at least 66 2/3% of
the voting power of all shares of
the company's capital stock.
109
<PAGE>
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
Any statements in this proxy statement/prospectus, including the documents
that are incorporated by reference as set forth under the captions "THE MERGER"
and "WHERE YOU CAN FIND MORE INFORMATION," about the expected impact of the
merger on Algos' and Endo's businesses, financial performance and condition,
accounting and tax treatment, the extent of the charges to be incurred by Endo
relating to the merger and are forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Further, any statements contained in this proxy statement/prospectus that
are not statements of historical fact may be deemed to be forward-looking
statements. The words "projects," "believes," "anticipates," "plans,"
"expects," "intends" and similar expressions are intended to identify forward-
looking statements. There are a number of important factors that could cause
the results of the combined company to differ materially from those indicated
by these forward-looking statements, including, but not limited to:
. the significant transaction charges and the potential dilutive effect to
holders of Algos common stock that will result from the merger,
. significant fluctuations in operating results,
. the ability to develop, manufacture and ship planned products,
. the risk that the anticipated strategic benefits from the merger will not
be realized,
. the ability of the combined company to obtain FDA approval of
MorphiDex(R) in a timely manner if at all,
. the ability to recruit, train and retain qualified sales and other
personnel,
. the ability to secure additional funding, and
. other factors described in this proxy statement/prospectus under the
caption "RISK FACTORS."
Neither Algos nor Endo undertakes any obligation to update any forward-
looking statements.
LEGAL MATTERS
The validity of the issuance of the Endo common stock and the Endo warrants
will be passed upon for Endo by Skadden, Arps, Slate, Meagher & Flom LLP, New
York, New York. Latham & Watkins, New York, New York, counsel to Algos, and
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York, counsel to Endo,
will be delivering opinions concerning federal income tax consequences of the
merger. See "THE MERGER--Material U.S. Federal Income Tax Consequences." From
time to time, Skadden, Arps, Slate, Meagher & Flom LLP provides advice to Kelso
& Company. Roger H. Kimmel, a member of the Algos board of directors and a
stockholder of Algos, is a partner at Latham & Watkins. In addition, several
members of Latham & Watkins from time to time own or have owned Algos common
stock.
110
<PAGE>
FUTURE STOCKHOLDER PROPOSALS
Due to the contemplated consummation of the merger, Algos does not currently
intend to hold an annual meeting of stockholders in 2000. In the event that an
annual meeting is held in 2000, any proposals of stockholders intended to be
presented at this meeting must have been received by the Secretary of Algos no
later than December 31, 1999.
SEC rules set forth standards as to what stockholder proposals are required
to be included in a proxy statement for an annual meeting.
WHERE YOU CAN FIND MORE INFORMATION
Algos files annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any reports, statements
or other information Algos files at the SEC's public reference rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC
at 1-800-SEC-0330 for further information on the public reference rooms. Algos'
SEC filings are also available to the public from commercial document retrieval
services and at the Internet world wide web site maintained by the SEC at
www.sec.gov.
Endo has filed a Registration Statement on Form S-4 to register with the SEC
the Endo common stock and warrants to be issued to Algos stockholders in the
merger. This proxy statement/prospectus is a part of that registration
statement and constitutes a prospectus of Endo, as well as being a proxy
statement of Algos for its special meeting.
As allowed by SEC rules, this proxy statement/prospectus does not contain
all the information you can find in the registration statement or the exhibits
to the registration statement.
The SEC allows Algos to "incorporate by reference" information into this
proxy statement/prospectus, which means that Algos can disclose important
information to you by referring you to another document filed separately with
the SEC. The information incorporated by reference is deemed to be part of this
proxy statement/prospectus, except for any information superseded by
information contained directly in this proxy statement/prospectus. This proxy
statement/prospectus incorporates by reference the documents set forth below
that Algos has previously filed with the SEC. These documents contain important
information about Algos and its financial condition.
Algos SEC Filings
Annual Reports on Form 10-K:
Year ended December 31, 1998 (as amended on April 30, 1999).
Quarterly Reports on Form 10-Q:
Quarters ended March 31, 1999, June 30, 1999 and September 30, 1999.
Current Reports on Form 8-K:
Filed on November 29, 1999 and December 3, 1999.
Proxy Statements on Form 14A:
Dated April 30, 1999.
111
<PAGE>
Algos can also incorporate by reference into this proxy statement/prospectus
additional documents that may be filed with the SEC from the date of this proxy
statement/prospectus to the date of the special meeting of Algos stockholders.
These include periodic reports, such as Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K, as well as proxy
statements.
Algos has supplied all information contained or incorporated by reference in
this proxy statement/prospectus relating to Algos.
If you are a stockholder, Algos may have sent you some of the documents
incorporated by reference, but you can obtain any of them through Algos, the
SEC or the SEC's Internet world wide web site as described above. Documents
incorporated by reference are available from Algos without charge, excluding
all exhibits unless Algos has specifically incorporated by reference an exhibit
in this proxy statement/prospectus. Stockholders may obtain documents
incorporated by reference in this proxy statement/prospectus by requesting them
in writing or by telephone from the Algos at the following address:
Algos Pharmaceutical Corporation
1333 Campus Parkway
Neptune, NJ 07753-6815
Attention: Corporate Secretary
If you would like to request documents from us, please do so by ,
2000 to receive them before the Algos special meeting.
You should rely only on the information contained or incorporated by
reference in this proxy statement/prospectus to vote on the transactions. We
have not authorized anyone to provide you with information that is different
from what is contained in this proxy statement/prospectus. This proxy
statement/prospectus is dated , 2000. You should not assume that the
information contained in this proxy statement/prospectus is accurate as of any
date other than that date, and neither the mailing of this proxy
statement/prospectus to you nor the issuance of Endo common stock and warrants
in the merger shall create any implication to the contrary.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ENDO PHARMACEUTICALS HOLDINGS INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
DECEMBER 31, 1998 AND 1997
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............. F-3
Consolidated Statements of Operations for the Year Ended December 31,
1998 and the Period from August 26, 1997 (Date of Acquisition) to
December 31, 1997....................................................... F-4
Consolidated Statements of Stockholders' Equity for the Year Ended
December 31, 1998 and the Period from August 26, 1997 (Date of
Acquisition) to December 31, 1997....................................... F-5
Consolidated Statements of Cash Flows for the Year Ended December 31,
1998 and the Period from August 26, 1997 (Date of Acquisition) to
December 31, 1997....................................................... F-6
Notes to Consolidated Financial Statements for the year ended December
31, 1998 and the Period from August 26, 1997 (Date of Acquisition) to
December 31, 1997....................................................... F-7
ENDO PHARMACEUTICALS HOLDINGS INC.
SEPTEMBER 30, 1999 AND 1998
Consolidated Balance Sheets as of September 30, 1999 and 1998
(Unaudited)............................................................. F-16
Consolidated Statements of Operations for Nine Months Ended September 30,
1999 and 1998 (Unaudited)............................................... F-17
Consolidated Statements of Cash Flows for Nine Months Ended September 30,
1999 and 1998
(Unaudited)............................................................. F-18
Notes to Consolidated Financial Statements for Nine Months Ended
September 30, 1999 and 1998 (Unaudited)................................. F-19
DUPONT PHARMACEUTICALS COMPANY
AUGUST 26, 1997 AND DECEMBER 31, 1996
Report of Independent Accountants........................................ F-20
Statements of Earnings for the Year Ended December 31, 1996 and the
Period from January 1, 1997 to August 26, 1997.......................... F-21
Statements of Assets to be Sold as of December 31, 1996 and August 26,
1997.................................................................... F-22
Notes to the Statements of Earnings and Assets to be Sold for the Year
Ended December 31, 1996 and the Period from January 1, 1997 to August
26, 1997................................................................ F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Endo Pharmaceuticals Holdings Inc.
We have audited the accompanying consolidated balance sheets of Endo
Pharmaceuticals Holdings Inc. and subsidiary (the "Company") as of December 31,
1998 and 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1998 and
the period from August 26, 1997 (Date of Acquisition) to December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997 and the results of their operations and their cash flows for the
year ended December 31, 1998 and the period from August 26, 1997 (Date of
Acquisition) to December 31, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
December 6, 1999
F-2
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(In thousands except share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 17,367 $ 14,521
Accounts receivable, net of allowance for possible losses
of $315 and $182 at December 31, 1998 and 1997,
respectively............................................ 33,009 21,256
Inventories.............................................. 14,461 13,093
Prepaid expenses......................................... 1,925 486
Deferred income taxes.................................... 6,278 769
-------- --------
Total current assets................................... 73,040 50,125
-------- --------
PROPERTY AND EQUIPMENT, Net................................ 5,014 4,344
GOODWILL, Net of amortization of $8,742 and $2,185 at
December 31, 1998 and 1997, respectively.................. 187,964 194,521
DEFERRED INCOME TAXES...................................... 13,876 19,549
OTHER ASSETS............................................... 7,724 6,957
-------- --------
TOTAL ASSETS............................................... $287,618 $275,496
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable......................................... $ 11,951 $ 6,852
Accrued expenses......................................... 23,413 20,614
Current portion of long-term debt........................ 5,000
-------- --------
Total current liabilities.............................. 35,364 32,466
-------- --------
LONG-TERM DEBT, Less current portion....................... 170,544 162,472
OTHER LIABILITIES.......................................... 6,352 5,852
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 500,000 shares
authorized; none issued
Common Stock, $.01 par value; 2,000,000 shares
authorized; 929,950 and 928,800 shares issued and
outstanding in 1998 and 1997, respectively.............. 9 9
Class A Common Stock, $.01 par value; 200,000 shares
authorized; 174,560 and 171,200 shares issued and
outstanding in 1998 and 1997, respectively.............. 2 2
Additional paid-in capital............................... 110,440 109,989
Accumulated deficit...................................... (35,093) (35,294)
-------- --------
Total Stockholders' Equity............................. 75,358 74,706
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $287,618 $275,496
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM AUGUST 26, 1997
(DATE OF ACQUISITION) TO DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
NET SALES................................................... $108,370 $ 39,431
COST OF SALES............................................... 54,731 29,779
-------- --------
GROSS PROFIT................................................ 53,639 9,652
-------- --------
COSTS AND EXPENSES:
Selling, general and administrative....................... 25,540 8,707
Research and development.................................. 5,893 2,865
Depreciation and amortization............................. 7,373 2,340
Purchased in-process research and development............. 46,000
-------- --------
OPERATING INCOME (LOSS)..................................... 14,833 (50,260)
-------- --------
INTEREST EXPENSE, Net....................................... 14,451 5,352
-------- --------
INCOME (LOSS) BEFORE INCOME TAX (BENEFIT)................... 382 (55,612)
-------- --------
INCOME TAX (BENEFIT)........................................ 181 (20,318)
-------- --------
NET INCOME (LOSS)........................................... $ 201 $(35,294)
======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM AUGUST 26, 1997
(DATE OF ACQUISITION) TO DECEMBER 31, 1997
(In thousands except share data)
<TABLE>
<CAPTION>
Class A
Common Common Additional Total
Number Stock at Stock at Paid-in Accumulated Stockholders'
of Shares Par Value Par Value Capital Deficit Equity
--------- --------- --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common
Stock.................. 928,800 $ 9 $ 92,871 $ 92,880
Issuance of Class A
Common Stock........... 171,200 $ 2 17,118 17,120
Net Loss................ $(35,294) (35,294)
--------- --- --- -------- -------- --------
BALANCE, DECEMBER 31,
1997................... 1,100,000 9 2 109,989 (35,294) 74,706
Issuance of Common
Stock.................. 1,150 115 115
Issuance of Class A
Common Stock........... 3,360 336 336
Net Income.............. 201 201
--------- --- --- -------- -------- --------
BALANCE, DECEMBER 31,
1998................... 1,104,510 $ 9 $ 2 $110,440 $(35,093) $ 75,358
========= === === ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM AUGUST 26, 1997
(DATE OF ACQUISITION) TO DECEMBER 31, 1997
(In thousands)
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................................... $ 201 $ (35,294)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization......................... 7,373 2,340
Purchased in-process research and development......... 46,000
Accretion of Promissory Notes......................... 675 79
Deferred income taxes................................. 164 (20,318)
Amortization of deferred financing costs.............. 1,283 387
Other noncash charges................................. 133 182
Changes in assets and liabilities which provided
(used) cash:
Accounts receivable................................. (11,886) (21,438)
Inventories......................................... (1,368) 10,549
Other assets........................................ (640)
Accounts payable.................................... 5,099 6,852
Accrued expenses.................................... 18,758 20,614
Other liabilities................................... 500 5,852
-------- ---------
Net cash provided by operating activities......... 20,932 15,165
-------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment...................... (1,487) (1,076)
Acquisition of Licensing Rights......................... (2,050)
Acquisition of business................................. (267,378)
-------- ---------
Net cash used in investing activities............. (3,537) (268,454)
-------- ---------
FINANCING ACTIVITIES:
Issuance of Common Stock................................ 115 92,880
Issuance of Class A Common Stock........................ 336 17,120
Deferred financing costs paid........................... (7,190)
Proceeds of long-term debt.............................. 165,000
Repayments of long-term debt............................ (15,000)
-------- ---------
Net cash (used in) provided by financing
activities....................................... (14,549) 267,810
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 2,846 14,521
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 14,521 0
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 17,367 $ 14,521
======== =========
SUPPLEMENTAL INFORMATION:
Interest paid........................................... $ 14,401 $ 3,656
======== =========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Promissory note issued in acquisition................... $ 2,393
=========
Promissory note issued under Manufacturing and Supply
Agreement.............................................. $ 17,397
========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1998 AND THE PERIOD FROM AUGUST 26, 1997
(DATE OF ACQUISITION) TO DECEMBER 31, 1997
1.ORGANIZATION AND ACQUISITION
Endo Pharmaceuticals Holdings Inc. (the "Company") through its wholly owned
subsidiary, Endo Pharmaceuticals Inc. ("Endo"), is engaged in the sales,
marketing, research and development of branded and generic pharmaceutical
products primarily in the United States.
On August 26, 1997, Endo commenced operations by acquiring certain branded
and generic pharmaceutical products, related rights and certain assets of
Dupont Pharmaceuticals Company ("Dupont", formerly The Dupont Merck
Pharmaceutical Company, Dupont Merck Pharma and Endo Laboratories, L.L.C.) (the
"Acquisition"). The purchase price for the Acquisition of approximately $277
million (including approximately $15 million in transaction fees) was financed
with approximately $275 million in cash from (i) borrowings of $165 million
under a credit facility with a group of banks and (ii) the issuance of
$110 million of Common Stock and Class A Common Stock of Endo for cash to
certain affiliates and designees of Kelso & Company, Inc. ("Kelso"), management
and certain other investors; and the issuance of a promissory note to Dupont of
approximately $2 million.
The Acquisition was accounted for using the purchase method of accounting.
In accordance with the purchase method of accounting, the purchase price was
allocated to the underlying assets of the business acquired based on their
estimated fair values at the date of acquisition. The final value assigned to
acquired in-process research and development was $46 million and charged to
expense at the date of the Acquisition. The excess of the purchase price over
the tangible and identifiable intangible assets was allocated to goodwill. In
consideration of services provided by an individual prior to the Acquisition,
such individual was granted contingent consideration of $2 million only upon
the occurrence of certain events.
The allocation of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Inventories........................................................ $ 23,642
Property and equipment............................................. 3,423
Acquired in-process research and development....................... 46,000
Goodwill........................................................... 196,706
Debt issuance costs................................................ 7,190
--------
$276,961
========
</TABLE>
On November 18, 1997, the Company, a Delaware corporation, was established
for the sole purpose of holding all of the shares of capital stock of Endo. As
of December 1, 1997, the stockholders of Endo became the stockholders of the
Company, owning the same interests in the Company that they formerly owned in
Endo. The stock of Endo is the sole asset of the Company, and the Company has
no other operations or business. This transaction was only a change in legal
structure and was accounted for in a manner similar to a pooling of interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of Endo Pharmaceuticals Holdings Inc. (the "Company") and
subsidiary. All significant intercompany balances and transactions have been
eliminated.
Nature of Operations and Customer and Supplier Concentration--The Company is
engaged in the marketing and sales of pharmaceuticals. The Company's sales are
substantially through wholesale drug
F-7
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
distributors who in turn supply products to pharmacies, hospitals and
physicians. Three wholesale customers individually accounted for 26%, 21% and
14% of net sales in 1998. Five wholesale customers individually accounted for
22%, 18%, 15%, 15% and 12% of net sales in 1997. The Company is potentially
subject to a concentration of credit risk with respect to its trade
receivables. The Company performs ongoing credit evaluations of its customers
and maintains sufficient allowances for estimated uncollectible accounts.
Generally, the Company does not require collateral from its customers.
The Company has an agreement with Dupont for the manufacture and supply of
substantially all of its existing and new pharmaceutical products (see Note 8).
In the event of any interruption in the manufacture and supply of these
products due to regulatory or other causes, there can be no assurance that the
Company could make alternative arrangements on a timely basis, if at all. Such
interruption could have a material adverse effect on the Company's business,
financial condition and results of operations.
One of the Company's products accounted for approximately 41% and 43% of net
sales for 1998 and the period August 26, 1997 through December 31, 1997,
respectively.
Revenue Recognition--Revenues are recognized when products are shipped.
Revenues are recorded net of reserves for estimated chargebacks, sales
allowances, returns and losses.
Research and Development--Expenditures for research and development are
expensed as incurred.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity date of three months or less to be cash
equivalents.
Derivative Financial Instruments--The Company uses derivative financial
instruments, including interest rate cap agreements ("Caps"), to manage its
exposure to fluctuations in interest rates. Caps are matched with debt and
periodic cash payments and are accrued on a net basis as an adjustment to
interest expense. Any fees associated with these instruments are amortized over
their term.
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out method. Inventories are comprised
entirely of finished goods.
Property and Equipment--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed over the estimated useful
lives of the related assets on a straight-line basis. Machinery and equipment
are depreciated over three to ten years, computer equipment over three to five
years, and furniture and fixtures over three to seven years. Computer software
and related third-party design, development and implementation fees which
benefit future periods are capitalized and amortized using the straight-line
method over a useful life of three to five years.
License Fees--The cost of license fees are capitalized and amortized on a
straight-line basis over the periods estimated to be benefited.
Goodwill--Goodwill, which represents the excess of purchase price over the
fair value of net assets acquired, is being amortized on a straight-line basis
over its estimated useful life of thirty years.
Long-Lived Assets--The Company reviews for the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows expected to result
from the use of the asset are less than its carrying amount. The Company has
not identified any such impairment losses with respect to long-lived assets at
December 31, 1998 and 1997.
F-8
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Marketing Costs--Marketing costs, including advertising costs, are expensed
as incurred. Such costs were approximately $2.6 million and $1 million for the
year ended December 31, 1998 and the period ended December 31, 1997.
Deferred Financing Costs--Costs incurred in connection with the issuance of
debt are deferred and amortized as a component of interest expense over the
term of the related debt using the straight-line method.
Income Taxes--The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes.
Use of Estimates--The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Segment Information--The Company reports segment information in accordance
with SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. The Company has one reportable segment, pharmaceutical products.
Recent Accounting Pronouncements--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as "derivatives") and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement, as amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities Deferral of the
Effective Date of FASB Statement No. 133, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. Management has not yet
determined what effect, if any, this statement will have on the Company.
Reclassifications--Certain reclassifications have been made to the prior
year's financial statements to conform to those classifications used in 1998.
3. LICENSE AGREEMENT
On November 23, 1998, the Company entered into a license agreement (the
"License Agreement") with Hind Healthcare Inc. ("Hind") for the sole and
exclusive right to develop, use, market, promote and sell Lidoderm(R) in the
United States. Under the terms of the License Agreement, the Company is
required to pay Hind approximately $10 million (the "License Fee") based upon
the achievement of certain milestones. During 1998, the Company paid Hind
approximately $2 million in accordance with the terms of the License Agreement.
Such costs are included in Other Assets at December 31, 1998. In addition, the
Company will pay Hind royalties based on net sales of the product.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Machinery and equipment..................................... $ 3,535 $3,332
Computer equipment and software............................. 2,003 985
Furniture and fixtures...................................... 406 182
------- ------
5,944 4,499
Less accumulated depreciation............................... (930) (155)
------- ------
$ 5,014 $4,344
======= ======
</TABLE>
F-9
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Tranche A Term Loan...................................... $ 47,000 $ 60,000
Tranche B Term Loan...................................... 103,000 105,000
Notes payable............................................ 20,544 2,472
--------- --------
170,544 167,472
Less current portion..................................... (5,000)
--------- --------
$ 170,544 $162,472
========= ========
</TABLE>
On August 26, 1997, the Company entered into a revolving credit and term
loan agreement (the "Credit Agreement") with a group of banks to provide funds
for the Acquisition, working capital and general corporate purposes. The Credit
Agreement is secured by substantially all of the assets of the Company. The
Credit Agreement provides a term loan facility of $165 million and a revolving
commitment of $25 million. The term loans are segregated into two tranches,
Tranche A Term Loan and Tranche B Term Loan. The Tranche A Term Loan is due in
quarterly installments ranging from $2 million to $5 million beginning December
31, 1998, with a final payment due December 31, 2002. On June 3, 1998, the
Company made an optional prepayment of the Tranche A Term Loan in the amount of
$13 million. The Tranche B Term Loan is due in quarterly installments ranging
from $250,000 to $27 million beginning December 31, 1998 with a final payment
due June 30, 2004. On June 3, 1998, the Company made an optional prepayment of
the Tranche B Term Loan in the amount of $2 million. The prepayments made for
both the Tranche A Term Loan and Tranche B Term Loan are to be applied to the
most current payments due under the original payment schedules. As a result,
there are no amounts due under either the Tranche A Term Loan or the Tranche B
Term Loan for 1999. The revolving commitment has availability of $25 million
and matures December 31, 2002. No borrowings were made under the revolving
commitment in 1998 and 1997.
Borrowings under the Tranche A Term Loan bear interest, which is payable at
least quarterly, at a rate equal to the bank's floating alternate base rate
plus a premium ranging from .25% to 1.25%, or at a rate equal to LIBOR plus a
premium ranging from 1.25% to 2.25%, depending on the type of borrowing and the
Company's performance against certain criteria. The effective borrowing rate
was 7.4% and 8.1% as of December 31, 1998 and 1997, respectively.
Borrowings under the Tranche B Term Loan bear interest, which is payable at
least quarterly, at a rate equal to the bank's floating alternate base rate
plus a premium ranging from 1.25% to 1.75%, or at a rate equal to LIBOR plus a
premium ranging from 2.25% to 2.75%, depending on the type of borrowing and the
Company's performance against certain criteria. The effective borrowing rate
was 7.9% and 8.6% as of December 31, 1998 and 1997, respectively.
Additionally, fees are charged on the average daily unused amount of the
revolving commitment at a rate ranging from .375% to .50% depending on the
Company's performance against certain criteria. This commitment fee is payable
quarterly.
The Company financed a portion of the purchase price of the Acquisition
through the issuance of a promissory note to Dupont. The note has a face value
of $3.9 million and is payable on August 26, 2002. The promissory note bears no
interest and therefore has been discounted in the accompanying financial
statements using 9.75% which approximates the Company's borrowing rate for
similar instruments. The promissory note has a balance of $2.7 million and $2.5
million at December 31, 1998 and 1997, respectively.
F-10
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On August 26, 1998, the Company issued promissory notes to Dupont in
consideration for manufacturing and supply services provided under the
Manufacturing and Supply Agreement (see Note 8). The notes have a face value of
$23 million and are payable on August 26, 2002. The promissory notes bear no
interest and therefore have been discounted in the accompanying financial
statements using 7%, which approximates the Company's borrowing rate for
similar instruments. The promissory notes have a balance of $17.8 million as of
December 31, 1998.
The Credit Agreement contains limitations and restrictions concerning, among
other things, additional indebtedness, acquisition or disposition of assets,
dividend payments and transactions with affiliates. In addition, the Credit
Agreement requires the Company to maintain certain ratios (as defined therein).
The aggregate annual maturities of long-term debt for the five years
subsequent to December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999............................................................... $ 0
2000............................................................... 12,000
2001............................................................... 17,000
2002............................................................... 47,889
2003............................................................... 46,000
</TABLE>
The Company entered into an interest rate cap agreement with a notional
amount of $82.5 million and an effective date of February 27, 1998 for the
purpose of minimizing its exposure to fluctuations in interest rates. The
Company does not enter into such transactions for trading or speculative
purposes. The cost of the interest rate cap of $154,000 is amortized over the
term of the agreement as a component of interest expense. The agreement set a
maximum LIBOR rate the Company will pay on the related notional amount of 8.0%.
The unamortized cost for such agreement is included in other assets in the
accompanying balance sheet.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued
Expenses--The carrying amounts of these items are a reasonable estimate of
their fair values because of the current maturities of these instruments.
Notes Payable--The carrying amount of this item is a reasonable estimate of
its fair value. The carrying value and the estimate of fair value were
determined by discounting the future cash flows using rates currently available
to the Company for similar instruments.
Other Long-Term Debt Including Current Portion --The carrying amounts
reported for other long-term debt approximate fair value because the interest
rates on these instruments are subject to changes with market interest rates.
Interest Rate Cap--The carrying amount of this item approximates fair value
as there were no significant changes in the underlying interest rate from
November 1997 (the date the contract was entered into) to December 31, 1998.
F-11
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. INCOME TAXES
Income tax (benefit) consists of the following for 1998 and the period
August 26, 1997 to December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- --------
<S> <C> <C>
Current:
State...................................................... $ 17
Deferred:
Federal.................................................... 119 $(18,170)
State...................................................... 45 (2,148)
---- --------
164 (20,318)
---- --------
Total income tax (benefit)................................... $181 $(20,318)
==== ========
</TABLE>
A reconciliation of income tax (benefit) at the federal statutory income tax
rate to the total income tax provision (benefit) for 1998 and the period August
26, 1997 to December 31, 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- --------
<S> <C> <C>
Federal income tax (benefit) at the statutory rate........... $130 $(18,908)
State income tax (benefit)................................... 33 (1,835)
Other........................................................ 18 425
---- --------
Total income tax (benefit)................................... $181 $(20,318)
==== ========
</TABLE>
The tax effects of temporary differences which comprise the current and non-
current deferred income tax amounts shown on the balance sheets at December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Purchased in-process research and development............ $13,766 $16,035
Net operating loss carryforward.......................... 2,649 4,296
Other.................................................... 6,325 893
------- -------
Total gross deferred income tax assets................. 22,740 21,224
------- -------
Deferred tax liabilities:
Depreciation and amortization............................ (2,276) (736)
Other.................................................... (310) (170)
------- -------
Total gross deferred income tax liabilities............ (2,586) (906)
------- -------
Net deferred income tax asset.............................. $20,154 $20,318
======= =======
</TABLE>
The Company has evaluated the available evidence about future taxable income
and other possible sources of realization of deferred tax assets and believes
that no valuation allowance is required at December 31, 1998 and 1997.
8. SERVICE AGREEMENTS
On August 26, 1997, the Company entered into various agreements with Dupont
to provide manufacturing and supply of products (the "Manufacture and Supply
Agreement"), warehousing and distribution (the "Warehousing and Distribution
Agreement"), research and development facilities (the "R&D Lease") and certain
administrative services (the "Administrative Services Agreement").
F-12
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Manufacture and Supply Agreement has a term of five years, with options
to renew for up to five additional years in the aggregate. The Manufacture and
Supply Agreement covers substantially all of the Company's existing and new
pharmaceutical products.
The Warehousing and Distribution Agreement has a term of two years, with
options to renew for up to two additional years in the aggregate. The
Warehousing and Distribution Agreement covers substantially all of the
Company's existing and new pharmaceutical products.
The R&D Lease has a term of five years, with options to renew for up to five
additional years in the aggregate provided the Manufacture and Supply Agreement
has been renewed.
The Administrative Services Agreement has a term of up to two years except
for those services that relate to the Manufacture and Supply Agreement and the
R&D Lease which then correspond to the terms of those respective agreements.
The Administrative Services Agreement covers various administrative functions
including customer service, certain accounting functions, medical affairs and
selected regulatory and research and development functions.
Any interruption or failure by Dupont to meet its obligations under the
aforementioned agreements could have a material adverse effect on the Company's
business, financial condition and results of operations.
9. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain members of
management.
The Company leases office and laboratory facilities under certain
noncancelable operating leases that expire through October 2002. These leases
are renewable at the Company's option. A summary of minimum future rental
payments required under operating leases as of December 31, 1998 is as follows
(in thousands):
<TABLE>
<S> <C>
1999.................................................................. $ 456
2000.................................................................. 472
2001.................................................................. 487
2002.................................................................. 356
------
$1,771
======
</TABLE>
Rent expense incurred under operating leases was $452,000 and $114,000 for
the year ended December 31, 1998 and the period ended December 31, 1997,
respectively.
The Company is subject to various claims arising out of the normal course of
business with respect to commercial matters, including product liabilities,
governmental regulation and other actions. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or liquidity of the
Company.
10. SAVINGS AND INVESTMENT PLAN
On September 1, 1997, the Company established a defined contribution Savings
and Investment Plan covering all employees. Employee contributions are made on
a pre-tax basis under section 401(k) of the Internal Revenue Code (the "Code").
The Company matches up to six percent of the participants' contributions
subject to limitations under section 401(k) of the Code. Participants are fully
vested with respect to their own contributions. The Company's contributions are
generally fully vested after five years of continuous service. Contributions by
the Company amounted to $264,000 and $65,000 for the year ended December 31,
1998 and the period ended December 31, 1997, respectively.
F-13
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. STOCKHOLDERS' EQUITY
The Company has Common Stock and Class A Common Stock. Rights and privileges
of holders of shares of Class A Common Stock are identical to the rights and
privileges of holders of shares of Common Stock, except that the Class A Common
Stock is non-voting and convertible into the same number of shares of Common
Stock upon or subsequent to any public offering. Payment of dividends is
restricted under terms of the Credit Agreement.
On November 25, 1997, the Company established the 1997 Employee Stock Option
Plan and the 1997 Executive Stock Option Plan (collectively, the "Stock Option
Plans"). The Stock Option Plans reserve for issuance of an aggregate of 618,750
shares of Common Stock of the Company. Stock options granted under the Stock
Option Plans expire at the end of the fifteenth fiscal year of the Company
unless an initial public offering occurs, in which case the stock options
granted will expire on August 26, 2007.
A summary of the activity under the Stock Option Plans from August 26, 1997
through December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding, August 26, 1997...................... 0
Granted........................................... 418,232 $103.23
Forfeited......................................... (101) $104.12
------- -------
Outstanding, December 31, 1997.................... 418,131 $103.23
Granted........................................... 23,804 $104.29
Forfeited......................................... (1,151) $104.16
------- -------
Outstanding, December 31, 1998.................... 440,784 $103.28
======= =======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
--------------------
Weighted
Average Weighted
Remaining Average
Contractual Exercise
Number Outstanding at 12/31/98 Life Price
------------------------------ ----------- --------
<C> <S> <C> <C>
406,023 .......................................... 14 years $100.00
34,761 .......................................... 14 years $141.59
-------
440,784
=======
</TABLE>
Of the outstanding stock options as of December 31, 1998, 48,005 shares
become vested and exercisable ratably over service periods of five years and
54,112 shares become vested and exercisable at the end of nine years from the
date of grant. The vesting and exercisability of options may be accelerated at
the discretion of the Board of Directors or upon the occurrence of certain
defined events. The remaining 338,667 stock options become exercisable only
upon the satisfaction of certain other conditions including (i) the occurrence
of a sale, disposition or transfer ("Transfer") of Common Stock, after which
Kelso no longer owns any shares of Common Stock and (ii) the value received by
the holders of Common Stock on the date of such Transfer exceeds certain
thresholds. Stock options exercisable as of December 31, 1998 and 1997 were
9,039 and none, respectively.
F-14
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123,
while following APB No. 25 and related interpretations in accounting for its
Stock Option Plans. Under APB No. 25, because the exercise price of the
Company's stock options equals at least the fair value of the underlying stock
at the date of grant or a measurement date has not yet been reached, no
compensation expense has been recognized. If the Company were to have adopted
the accounting provisions of SFAS No. 123, it would have been required to
record compensation expense based on the fair value of the stock options on the
date of grant.
Pro-forma information regarding net income is required as if the Company has
accounted for its stock options under the provisions of SFAS No. 123. The
Company estimated the fair value of its stock options, as of the respective
date of grant, using the Black-Scholes option-pricing model. The following
assumptions were used for such estimates: no dividend yield; no expected
volatility as the Company's stock is not publicly traded; risk-free interest
rate of 5.1% and 6.5% for 1998 and 1997, respectively; and a weighted average
expected life of the options of 5 years. Had the accounting provisions of SFAS
No. 123 been adopted, net income for 1998 would have decreased and net loss for
the period ended December 31, 1997 would have increased to the pro-forma
amounts as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
----- --------
<S> <C> <C>
Net income (loss) as reported.............................. $ 201 $(35,294)
Net loss pro-forma......................................... $(249) $(45,796)
</TABLE>
On November 25, 1997, the Company established the 1997 Employee Stock
Purchase Plan (the "Stock Purchase Plan"). The Stock Purchase Plan provided
employees the opportunity to purchase shares of Class A Common Stock, par value
$.01 per share at a purchase price of $100 per share. The Stock Purchase Plan
expired on January 23, 1998 with the Company selling 2,860 shares.
12. RELATED PARTY TRANSACTIONS
Kelso provides ongoing financial advisory services to the Company for an
annual fee plus the reimbursement of expenses. Payment for these services and
reimbursement of expenses totaled $353,000 and $124,000 for the year ended
December 31, 1998 and the period ended December 31, 1997, respectively.
13. SUBSEQUENT EVENT
On November 29, 1999, the Company and Algos Pharmaceutical Corporation
("Algos") announced that they had entered into a definitive merger agreement.
The merger, which is subject to certain closing conditions including Algos'
shareholder approval, will be accounted for by the Company using the purchase
method of accounting. The merger is expected to be completed by the second
quarter of 2000.
* * * *
F-15
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(In thousands except share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 20,258 $ 17,367
Accounts receivable, net of allowance for possible losses
of $411 and $315 at September 30, 1999 and December 31,
1998, respectively....................................... 39,866 33,009
Inventories............................................... 19,842 14,461
Prepaid expenses.......................................... 811 1,924
Deferred income taxes..................................... 8,364 6,279
-------- --------
Total current assets................................... 89,141 73,040
-------- --------
PROPERTY AND EQUIPMENT, Net................................ 5,696 5,014
GOODWILL AND OTHER INTANGIBLES, Net of amortization of
$13,849 and $8,742 at September 30, 1999 and December 31,
1998, respectively........................................ 190,855 187,964
DEFERRED INCOME TAXES...................................... 14,005 13,876
OTHER ASSETS............................................... 4,778 7,724
-------- --------
TOTAL ASSETS............................................... $304,475 $287,618
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable.......................................... $ 12,771 $ 11,951
Accrued expenses.......................................... 27,768 23,413
Current portion of long-term debt......................... 8,750
-------- --------
Total current liabilities.............................. 49,289 35,364
-------- --------
LONG-TERM DEBT, Less current portion....................... 181,715 170,544
OTHER LIABILITIES.......................................... 1,760 6,352
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 500,000 shares
authorized; none issued
Common Stock, $.01 par value; 2,000,000 shares authorized;
929,950 shares issued and outstanding in 1999 and 1998,
respectively............................................. 9 9
Class A Common Stock, $.01 par value; 200,000 shares
authorized; 174,560 shares issued in 1999 and 1998,
respectively; 174,330 and 174,560 shares outstanding in
1999 and 1998, respectively.............................. 2 2
Additional paid-in capital................................ 110,440 110,440
Treasury stock, at cost; 230 shares in 1999............... (25)
Accumulated deficit....................................... (38,715) (35,093)
-------- --------
Total Stockholders' Equity............................. 71,711 75,358
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $304,475 $287,618
======== ========
</TABLE>
See notes to consolidated financial statements.
F-16
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September
30,
----------------
1999 1998
------- -------
<S> <C> <C>
NET SALES.................................................... $87,296 $74,864
COST OF SALES................................................ 40,804 40,730
------- -------
CASH GROSS PROFIT............................................ 46,492 34,134
------- -------
COSTS AND EXPENSES:
Selling, general and administrative........................ 29,743 18,916
Research and development................................... 6,106 3,724
Depreciation and amortization.............................. 6,073 5,477
------- -------
OPERATING INCOME............................................. 4,570 6,017
INTEREST EXPENSE, Net........................................ 10,407 10,840
------- -------
LOSS BEFORE INCOME TAX BENEFIT............................... (5,837) (4,823)
------- -------
INCOME TAX BENEFIT........................................... 2,215 1,786
------- -------
NET LOSS..................................................... $(3,622) $(3,037)
======= =======
</TABLE>
See notes to consolidated financial statements.
F-17
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September
30,
-----------------
1999 1998
------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(3,622) $ (3,037)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization........................... 6,073 5,477
Accretion of Promissory Notes........................... 1,268 288
Deferred income taxes................................... (2,214) (1,786)
Amortization of deferred financing costs................ 896 1,082
Changes in assets and liabilities which provided (used)
cash:
Accounts receivable..................................... (6,857) 864
Inventories............................................. (5,381) (1,190)
Other assets............................................ 1,113 (875)
Accounts payable........................................ 820 (1,074)
Accrued expenses........................................ 4,355 2,851
Other liabilities....................................... 14,063 13,262
------- --------
Net cash provided by operating activities............. 10,514 15,862
------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (1,648) (978)
Acquisition of Licensing Rights........................... (5,950) (50)
------- --------
Net cash used in investing activities................. (7,598) (1,028)
------- --------
FINANCING ACTIVITIES:
Issuance of Common Stock.................................. 115
Issuance of Class A Common Stock.......................... 336
Repurchase of Class A Common.............................. (25)
Repayments of long-term debt.............................. (15,000)
------- --------
Net cash used in financing activities................. (25) (14,549)
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 2,891 285
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 17,367 14,521
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $20,258 $ 14,806
======= ========
SUPPLEMENTAL INFORMATION:
Interest paid............................................. $ 8,888 $ 9,951
======= ========
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Promissory note issued under Manufacturing and Supply
Agreement................................................ $18,655 $ 17,397
======= ========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
ENDO PHARMACEUTICALS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of Endo's management, the accompanying condensed consolidated
financial statements of Endo Pharmaceuticals Holdings Inc. (the "Company") and
subsidiary, which are unaudited. The Consolidated Balance Sheet as of December
31, 1998 is derived from audited financial statements, include all normal and
recurring adjustments necessary to present fairly the Company's financial
position as of September 30, 1999 and the results of operations and cash flows
for the nine month ended September 30, 1999 and September 30, 1998. Certain
information and footnote disclosure normally included in financial statements
have been condensed or omitted as promulgated by APB Opinion No. 28 and Rule 10
of Regulation S-X. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto as of and for the year ended December 31, 1998.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as "derivatives") and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Management has not yet determined what effect,
if any, this statement will have on the Company.
3. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain members of
management.
The Company is subject to various claims arising out of the normal course of
business with respect to commercial matters, including product liabilities,
governmental regulation and other actions. In the opinion of management, the
amount of ultimate liability with respect to these actions will not materially
affect the financial position, results of operations or liquidity of the
Company.
Kelso provides ongoing financial advisory services to the Company for an
annual fee of $347,000 plus the reimbursement of expenses.
4. SUBSEQUENT EVENT
On November 29, 1999, the Company and Algos Pharmaceutical Corporation
("Algos") announced that they had entered into a definitive merger agreement
(the "Merger"). The Merger, which is subject to certain closing conditions
including Algos' shareholder approval, will be accounted for by the Company
using the purchase method of accounting. The Merger is expected to be completed
by the second quarter of 2000.
In connection with the Merger, the Company will effect a recapitalization of
its Common Stock, Class A Common Stock and Preferred Stock (the
"Recapitalization"). The Recapitalization will be effected through an
approximate 64.844 to 1 stock split. The actual stock split may be adjusted as
provided in the merger agreement for actual shares of Algos and the Company
outstanding at the effective time of the Merger.
F-19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partnership Board, and to the Partners of
DuPont Pharmaceuticals Company:
We have audited the accompanying statement of assets to be sold as of August
26, 1997 and December 31, 1996 and the related statement of earnings of Generic
and U.S. Multi-Source Products of DuPont Pharmaceuticals Company (the
"Products") for the period from January 1, 1997 to August 26, 1997 and for the
year ended December 31, 1996 (the "Statements"). These Statements are the
responsibility of management. Our responsibility is to express an opinion on
these Statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the Statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying Statements were prepared to present the assets to be sold
and the earnings associated with the Products, on the basis of presentation
described in Notes 1 and 2, and are not intended to be a complete presentation
of financial position, results of operations or cash flows.
In our opinion, the Statements audited by us present fairly, in all material
respects, the assets to be sold at August 26, 1997 and December 31, 1996 and
the related earnings for the Products for the period from January 1, 1997 to
August 26, 1997 and for the year ended December 31, 1996, in conformity with
generally accepted accounting principles in the United States.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
October 25, 1999
F-20
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U. S. MULTI-SOURCE PRODUCTS
STATEMENTS OF EARNINGS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the period
from
January 1,
For the year 1997 to
ended August 26,
December 31, 1996 1997
----------------- --------------
<S> <C> <C>
NET SALES AND OTHER OPERATING REVENUE.......... $102,325 $65,077
COST OF GOODS SOLD............................. 48,369 30,551
-------- -------
GROSS MARGIN................................... 53,956 34,526
MARKETING AND SELLING EXPENSES:
Direct....................................... 4,425 1,543
Allocated.................................... 4,577 2,648
RESEARCH AND DEVELOPMENT EXPENSES.............. 6,856 5,253
ALLOCATED ADMINISTRATIVE EXPENSES.............. 3,284 1,430
-------- -------
NET INCOME..................................... $ 34,814 $23,652
-------- -------
UNAUDITED PRO FORMA DATA:
Income before income taxes................... 34,814 23,652
Income taxes................................. 13,926 9,461
-------- -------
NET INCOME..................................... $ 20,888 $14,191
======== =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U. S. MULTI-SOURCE PRODUCTS
STATEMENT OF ASSETS TO BE SOLD
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31, August 26,
1996 1997
------------ ----------
<S> <C> <C>
Assets to be sold:
Finished goods inventories............................ $11,493 $ 9,979
Research equipment, net............................... 3,107 3,423
------- -------
Total assets to be sold............................. $14,600 $13,402
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-22
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U. S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD
1. DESCRIPTION OF COMPANY AND OF CERTAIN PRODUCTS:
The DuPont Merck Pharmaceutical Company was formed on January 1, 1991 by E.
I. du Pont de Nemours and Company (DuPont) and Merck Enterprises, Inc.,
formerly Calgon Corporation (Merck), an indirect wholly-owned subsidiary of
Merck & Co., Inc., as a joint venture general partnership engaged in the
research, development, manufacturing, distribution, marketing and sale of human
pharmaceutical and radiopharmaceutical products and other related product
lines. On January 1, 1991, DuPont and Merck also formed DuPont Merck Pharma, a
separate joint venture general partnership, which operates in Puerto Rico.
While there is no direct ownership relationship between The DuPont Merck
Pharmaceutical Company and DuPont Merck Pharma (collectively, "DuPont Merck"),
both partnerships are owned beneficially by DuPont and Merck, and their
businesses are highly integrated.
In 1994, DuPont Merck formed Endo Laboratories, L.L.C. to develop and market
generic pharmaceutical products.
On August 26, 1997, DuPont Merck sold certain products listed below (the
"Generic and U.S. Multi-Source Products" or "the Products"), related rights and
certain assets to Endo Pharmaceuticals Inc. a wholly owned subsidiary of Endo
Pharmaceuticals Holdings Inc. ("Endo").
<TABLE>
<CAPTION>
General Products Multi-Source Products
- ---------------- ---------------------
<S> <C>
Amantadine HCL Carbex(R)
Amiloride HCL/HCTZ Hycodan(R)
Captopril Hycomine(R)
Carbidopa/Levodopa Hycotuss(R)
Chlorothiazide Moban(R)
Cimetidine/Cimetidine HCL Narcan(R)
Cyclobenzaprine HCL Nubain(R)
Dicyclomine HCL Numorphan(R)
Diflunisal Percocet(R)
Endocet(R) Percodan(R)
Endodan(R) Symmetrel(R)
Etodolac
Glipizide Zydone(R)
Hydrocodone Bitartrate/APAP
Hydrochlorothiazide
Hydromorphone
Indomethacin/Indomethacin ER
Methyldopa/Methyldopa/HCTZ
Selegiline HCL
Sunlindac
Timolol Maleate
</TABLE>
The Products are manufactured in DuPont Merck manufacturing facilities in
Garden City, New York, and Manati, Puerto Rico, or are obtained under
contractual arrangements, including supply agreements with Merck (See Note 6).
Other DuPont Merck products are also manufactured at the Garden City, New York
and Manati, Puerto Rico sites.
On July 1, 1998 DuPont acquired Merck's 50 percent interest in the DuPont
Merck partnerships and now operates as the DuPont Pharmaceuticals Company.
F-23
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U.S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD--(Continued)
2. BASIS OF PRESENTATION:
The accompanying statements of earnings for the period from January 1, 1997
to August 26, 1997 and for the year ended December 31, 1996 and statements of
assets to be sold as of August 26, 1997 and December 31, 1996 (the
"Statements") have been prepared for the purpose of presenting the financial
results associated with the Products and the assets to be sold and are not
intended to be a complete presentation of financial position, results of
operations or cash flows.
The Statements include those net sales, other operating revenue, costs and
expenses directly related to the manufacture and distribution of the Products,
including the allocation of certain manufacturing and distribution overhead
costs. The Statements also include direct and allocated expenses for marketing
and selling, general and administrative, research and development and income
taxes. Allocated manufacturing and distribution expenses amounted to
approximately $15,900 in 1996 and $9,900 in 1997 and allocated research and
development expenses amounted to approximately $2,700 in 1996 and $1,700 in
1997. Management believes the allocations are reasonable, but not necessarily
indicative of the expenses which would have been recognized had the Products
been manufactured and sold by a separate entity.
The statement of earnings also includes an unaudited pro forma provision for
income taxes which would have been recorded if the Products had been owned by a
separate taxable entity, based on tax laws in effect during the period
presented.
The Statements also include the assets to be sold with the Products. These
assets include the finished goods inventory of the Products at the Company's
distribution center in Atlanta, Georgia and certain equipment at a research and
development facility in Garden City, New York.
Historically, financial statements were not prepared for the Products. The
accompanying Statements have been derived from DuPont Merck's historical
records.
3. SUMMARY OF ACCOUNTING POLICIES:
Revenue Recognition:
Sales, and the related cost of goods sold, are recognized when products are
invoiced and shipped to the customer. Net sales include the aggregate of the
gross amount invoiced to customers after deducting (to the extent not already
deducted in the amount invoiced), as applicable, cash discounts, Medicaid
rebates, customer incentive programs, chargebacks and other amounts paid on
sale, resale or dispensing of the Products and estimated returns and
allowances. Additionally, other operating revenue, principally royalties, is
recognized when earned under contractual arrangements by the sale of products
by third parties. Such amounts totaled $5,300 and $3,500 in 1996 and 1997,
respectively.
Cost of Goods Sold:
Cost of goods sold includes both the cost of manufacturing and finished
product distribution costs. Cost of manufacturing includes the sum of variable
manufacturing costs (ingredients and direct labor), and an allocation of fixed
manufacturing expenses and other manufacturing expenses incurred by DuPont
Merck at its plant sites and headquarters based primarily on the ratio of
direct labor of the products to other Dupont Merck product. Additionally, cost
of manufacture includes acquisition cost of products purchased from third
parties under contractual arrangements. Finished product distribution costs
include direct freight and other related shipping costs, including an allocated
share of warehousing expenses.
F-24
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U.S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD--(Continued)
Marketing and Selling Expense:
Direct marketing and selling expenses include expenses directly attributable
to the Products, including advertising and promotion, Food and Drug
Administration user fees and contract fees related to certain selling
activities. Allocated marketing and selling expenses include allocations of
customer service, medical affairs, regulatory affairs, information resource,
and site service expenses based primarily on employee headcount and effort and
utilization. Allocated marketing and selling expenses also include bad debt
expense of $1,550 in 1996 and $80 in 1997, including approximately $1,400 in
1996 related to a specific customer in bankruptcy.
General and Administrative Expenses:
General and administrative expenses include costs for finance, legal, human
resource, business development, public affairs and other corporate level
administrative functions. General and administrative expenses are allocated
based primarily on the ratio of sales of the Products to either U. S. or
worldwide sales of all DuPont Merck products.
Research and Development Expenses:
Research and development costs are expensed when incurred. Research and
development expenses include all expenses directly attributable to the
development of products for the multisource and generic markets, primarily
salaries and benefits of employees at the Garden City, New York research and
development facility, laboratory supplies and clinical trial expenses, and an
allocation of certain expenses, primarily from the Garden City, New York
facility, based primarily on employee headcount and on effort and utilization.
Income Taxes:
As DuPont Merck is a general partnership, it is not subject to federal
income taxes, as the tax effects of its operations accrue directly to the
Partners, and therefore, DuPont Merck does not record a provision for income
taxes on income generated in the U. S. or in Puerto Rico. The pro forma
provision for income taxes calculated for these Statements has been separately
determined for the Products and assets to be sold as if the Products had been
owned by a separate taxable entity, based on tax laws in effect during these
periods.
Finished Goods Inventories:
Inventory is valued at the lower of cost or market, with cost being
determined by the average cost method. Elements of cost in inventory include
ingredients, direct labor and manufacturing overhead.
Research Equipment:
Equipment is stated at historical cost. DuPont Merck provides depreciation
over the estimated useful life of the equipment, principally using the
straight-line method. The estimated useful life for research equipment is 15
years, except for computer equipment which has a useful life of 5 years.
Use of Estimates:
Generally accepted accounting principles require management to make
estimates and assumptions that affect assets and liabilities, contingent assets
and liabilities, and revenues and expenses. Actual results could differ from
those estimates.
F-25
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U.S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD--(Continued)
4. RECONCILIATION OF GROSS SALES TO NET SALES:
<TABLE>
<CAPTION>
For the year For the period
ended ended
December 31, August 26,
1996 1997
------------ --------------
<S> <C> <C>
Gross sales...................................... $161,096 $ 98,558
Less:
Cash discounts................................. (3,616) (2,089)
Medicaid rebates............................... (1,499) (1,087)
Chargebacks.................................... (48,225) (27,468)
Customer incentive programs.................... (5,431) (2,837)
-------- --------
Net sales........................................ $102,325 $ 65,077
======== ========
</TABLE>
5. CUSTOMER INCENTIVE PROGRAMS:
Customer incentive programs include shelf price equalization programs
(DuPont Merck has at times offered rebates of the difference between the amount
invoiced to the customer and the current purchase price available), bundling
rebates (DuPont Merck has at times offered a rebate on the stocking of a group
of generic pharmaceutical products), source rebates (wholesalers establish a
"source" program of generic pharmaceuticals which they actively promote and
obtain a rebate on the amount of "source" product purchased), and year-end
rebates (DuPont Merck offered special rebates to customers who stocked the
entire generic product line for the period from January 1, 1997 to August 26,
1997 and for the year ended December 31, 1996).
6. RELATED PARTY TRANSACTIONS:
DuPont Merck has various supply and distribution agreements with Merck or
Merck affiliates which include some of the products listed in Note 1.
Effective March 1, 1995, DuPont Merck entered into an agreement for the
distribution of certain generic products manufactured by Merck through December
31, 1999. The agreement also contains a provision for a five-year extension or
renewal period. Under the agreement, Merck supplies generic products to DuPont
Merck generally at a cost of eighty-five percent of the net selling price.
Purchases under this agreement amounted to approximately $7,700 and $6,800 in
1996 and 1997, respectively.
DuPont Merck also purchases Carbidopa/Levodopa from Merck at a cost of
thirty-five percent of DuPont Merck's net sales or Merck's cost of manufacture,
whichever is greater. Purchases of Carbidopa/Levodopa were approximately $2,800
and $1,250 in 1996 and 1997, respectively.
DuPont Merck sells certain of the Products to Merck-Medco Managed Care, Inc.
(Medco), a leading pharmaceutical benefits manager. Medco is a wholly-owned
subsidiary of Merck. Sales of the Products to Medco were approximately $2,300
and $769 in 1996 and 1997, respectively.
F-26
<PAGE>
DuPONT PHARMACEUTICALS COMPANY
GENERIC AND U.S. MULTI-SOURCE PRODUCTS
NOTES TO THE STATEMENTS OF EARNINGS AND ASSETS TO BE SOLD--(Continued)
7. RESEARCH EQUIPMENT, NET:
DuPont Merck has specifically identified certain research equipment at the
Garden City, New York to be included in the sale of the Products. This research
equipment does not include the research and development facility at Garden
City, New York or certain building improvements made to the site.
<TABLE>
<CAPTION>
December 31, August 26,
1996 1997
------------ ----------
<S> <C> <C>
Research equipment, at cost.......................... $3,755 $4,266
Less: Accumulated depreciation....................... (648) (843)
------ ------
Research equipment, net.............................. $3,107 $3,423
====== ======
</TABLE>
8. SIGNIFICANT COMPETITION:
The Products are subject to intense generic competition. The competitive
factors in the industry can result in significant adverse fluctuations on
operating results, including certain retroactive rebates on previously sold
generic products, as described in Notes 3 and 5.
9. COMMITMENTS AND CONTINGENCIES:
DuPont Merck has entered into certain purchase commitments for raw
materials, supplies and other items directly related to the Products. In the
aggregate, such commitments are not at prices in excess of current market.
10. Pro Forma Provision for Income Taxes (Unaudited):
The statement of earnings includes a pro forma provision for income taxes
which would have been recorded if the Products had been owned by a separate
taxable entity, based on tax laws in effect during the period from January 1,
1997 to August 26, 1997 and for the year ended December 31, 1996.
<TABLE>
<CAPTION>
For the year For the
ended period ended
December 31, August 26,
1996 1997
------------ ------------
<S> <C> <C>
Tax expense:
U. S. Federal.................................... $12,185 $8,278
U. S. State...................................... 1,741 1,183
------- ------
Total provision for income taxes............... $13,926 $9,461
======= ======
</TABLE>
An analysis of the effective tax rate follows:
<TABLE>
<CAPTION>
For the year For the
ended period ended
December 31, August 26,
1996 1997
------------ ------------
<S> <C> <C>
Statutory U. S. Federal tax rate................... 35% 35%
U. S. State income taxes........................... 5% 5%
--- ---
Effective tax rate............................... 40% 40%
=== ===
</TABLE>
F-27
<PAGE>
P R O X Y
Algos Pharmaceutical Corporation
1333 Campus Parkway
Neptune, NJ 07753-6815
This proxy is solicited on behalf of the Board of Directors for the Special
Meeting on , 2000.
The undersigned hereby appoints and as proxies with the
powers the undersigned would possess if personally present, and with full power
of substitution, to vote all common shares of the undersigned in Algos at the
special meeting of stockholders to be held at on , 2000 at
(local time), and at any adjournment of this special meeting, upon all subjects
that may properly come before the meeting, including the matters described in
the proxy statement/prospectus furnished with this proxy card, subject to any
directions indicated on the other side of the proxy card. If no directions are
given, the proxies will vote in accord with the Directors' recommendations on
the subjects listed on the other side of the proxy card. Please sign on the
other side and return promptly to . If you do not sign and return a
proxy card, vote by telephone or Internet, or attend the meeting and vote by
ballot, your shares will not be voted.
Form of Proxy Card-1
<PAGE>
[X] Please mark votes as in this example.
Your Board of Directors recommends a vote "FOR" item 1:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
----- ------- -------
<C> <S> <C> <C> <C>
1. To approve and adopt the merger agreement in [_] [_] [_]
connection with the merger of Algos
Pharmaceutical Corporation with and into
Endo Inc., a newly formed, wholly owned
subsidiary of Endo Pharmaceuticals Holdings Inc.
</TABLE>
MARK HERE [_] IF YOU PLAN TO ATTEND THE SPECIAL MEETING.
MARK HERE [_] IF YOU ELECT TO RECEIVE NON-TRANSFERABLE WARRANTS IN THE MERGER.
<TABLE>
<S> <C>
Signature(s): Date:
</TABLE>
Please sign this proxy as name(s) appears above and return it promptly
whether or not you plan to attend the meeting. If signing for a corporation or
partnership or as agent, attorney or fiduciary, indicate the capacity in which
you are signing. If you do attend the meeting and decide to vote by ballot,
that vote will supersede this proxy.
Form of Proxy Card-2
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
by and among
ENDO PHARMACEUTICALS HOLDINGS INC.,
ENDO INC.
and
ALGOS PHARMACEUTICAL CORPORATION
__________________
Dated as of November 26, 1999
__________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
THE MERGER
Section 1.1 The Merger..............................
Section 1.2 Effective Time..........................
Section 1.3 Effects of the Merger...................
Section 1.4 Directors of the Surviving Corporation..
Section 1.5 Officers of the Surviving Corporation...
Section 1.6 Charter and By-Laws.....................
Section 1.7 Conversion of Securities................
Section 1.8 Parent to Make Certificates Available...
Section 1.9 Dividends; Transfer Taxes; Withholding..
Section 1.10 [Intentionally Omitted.]................
Section 1.11 Return of Exchange Fund.................
Section 1.12 Adjustment of Conversion Number.........
Section 1.13 No Further Ownership Rights in Company
Common Stock............................
Section 1.14 Closing of Company Transfer Books.......
Section 1.15 Lost Certificates.......................
Section 1.16 Affiliates..............................
Section 1.17 Further Assurances......................
Section 1.18 Closing.................................
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Section 2.1 Organization, Standing and Power............
Section 2.2 Capital Structure...........................
Section 2.3 Authority...................................
Section 2.4 Consents and Approvals; No Violation........
Section 2.5 Financial Statements........................
Section 2.6 Registration Statement and Proxy Statement..
Section 2.7 Absence of Certain Changes or Events........
Section 2.8 Permits and Compliance......................
Section 2.9 Tax Matters.................................
Section 2.10 Actions and Proceedings.....................
Section 2.11 Certain Agreements..........................
Section 2.12 ERISA.......................................
Section 2.13 Compliance with Certain Laws................
Section 2.14 Liabilities.................................
Section 2.15 Labor Matters...............................
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 2.16 Intellectual Property.......................
Section 2.17 Ownership of Shares.........................
Section 2.18 Operations of Sub...........................
Section 2.19 Brokers.....................................
Section 2.20 State Takeover Statutes.....................
Section 2.21 Year 2000...................................
Section 2.22 Accuracy of Information Furnished...........
Section 2.23 Required Vote of Parent and Sub
Stockholders................................
Section 2.24 Interests in Other Entities.................
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Section 3.1 Organization, Standing and Power............
Section 3.2 Capital Structure; Subsidiaries.............
Section 3.3 Authority...................................
Section 3.4 Consents and Approvals; No Violation........
Section 3.5 SEC Documents and Other Reports.............
Section 3.6 Registration Statement and Proxy Statement..
Section 3.7 Absence of Certain Changes or Events........
Section 3.8 Permits and Compliance......................
Section 3.9 Tax Matters.................................
Section 3.10 Actions and Proceedings.....................
Section 3.11 Certain Agreements..........................
Section 3.12 ERISA.......................................
Section 3.13 Compliance with Certain Laws................
Section 3.14 Liabilities.................................
Section 3.15 Labor Matters...............................
Section 3.16 Intellectual Property.......................
Section 3.17 Opinion of Financial Advisor................
Section 3.18 Required Vote of Company Stockholders.......
Section 3.19 Ownership of Shares.........................
Section 3.20 Brokers.....................................
Section 3.21 State Takeover Statutes.....................
Section 3.22 Year 2000...................................
Section 3.23 Interests in Other Entities.................
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business Pending the Merger......
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 4.2 No Solicitation...................................
Section 4.3 Tax Representation Letters........................
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Stockholder Meeting..............................
Section 5.2 Preparation of the Registration Statement
and the Proxy Statement..........................
Section 5.3 Access to Information; Regulatory
Communications...................................
Section 5.4 Compliance with the Securities Act...............
Section 5.5 Designation of Directors.........................
Section 5.6 NASDAQ Listing...................................
Section 5.7 Fees and Expenses................................
Section 5.8 Company Stock Options............................
Section 5.9 Parent Options...................................
Section 5.10 Reasonable Efforts...............................
Section 5.11 Public Announcements.............................
Section 5.12 State Takeover Laws..............................
Section 5.13 Indemnification; Directors and Officers
Insurance........................................
Section 5.14 Notification of Certain Matters..................
Section 5.15 Employee Matters.................................
Section 5.16 Tax Treatment....................................
Section 5.17 Conveyance Taxes.................................
Section 5.18 Ownership of Shares..............................
Section 5.19 Additional Agreements............................
Section 5.20 Issuance of Warrants to Parent...................
Section 5.21 Formation of Parent LLC..........................
Section 5.22 Effect of Parent Recapitalization................
</TABLE>
iii
<PAGE>
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect the
Merger............................................
Section 6.2 Conditions to Obligation of the Company to Effect
the Merger........................................
Section 6.3 Conditions to Obligations of Parent and Sub to
Effect the Merger.................................
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination.........................................
Section 7.2 Effect of Termination...............................
Section 7.3 Amendment...........................................
Section 7.4 Waiver..............................................
Section 7.5 Procedure for Termination, Amendment, Extension
or Waiver.........................................
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations and Warranties......
Section 8.2 Notices.............................................
Section 8.3 Interpretation......................................
Section 8.4 Counterparts........................................
Section 8.5 Entire Agreement; No Third-Party Beneficiaries......
Section 8.6 Governing Law.......................................
Section 8.7 Assignment..........................................
Section 8.8 Severability........................................
Section 8.9 Enforcement of this Agreement.......................
List of Exhibits
- ----------------
Exhibit A-1 Form of Charter Amendment
Exhibit A-2 Summary of Parent Recapitalization
Exhibit B Form of Stockholder Voting Agreement
Exhibit C Form of Algos Warrant
Exhibit D-1 Parent's Year 2000 Representation
Exhibit D-2 Company's Year 2000 Representation
Exhibit E-1 Form of Representation Letter (Parent's)
Exhibit E-2 Form of Representation Letter (the Company's)
Exhibit F Form of Affiliate Letter (the Company's)
iv
<PAGE>
Exhibit G Form of Tax Sharing Agreement
Exhibit H Form of Lyle Agreement
Exhibit I Form of Endo Warrant
v
<PAGE>
Index of Defined Terms
<TABLE>
<CAPTION>
Term Page
- ---- ----
<S> <C>
Adjustment Event............................................
Affiliates..................................................
Agreement...................................................
Applicable Laws.............................................
Cash Cost of Sales..........................................
Cash Gross Profit of Parent.................................
Certificate of Merger.......................................
Certificates................................................
Change in the Company Recommendation........................
Charter Amendment...........................................
Closing.....................................................
Closing Date................................................
COBRA.......................................................
Code........................................................
Company.....................................................
Company Business Personnel..................................
Company By-Laws.............................................
Company Charter.............................................
Company Common Stock........................................
Company Copyrights..........................................
Company Designees...........................................
Company Disclosure Schedule.................................
Company Intellectual Property...............................
Company License Agreements..................................
Company Multiemployer Plan..................................
Company Patents.............................................
Company Permits.............................................
Company Plan................................................
Company Preferred Stock.....................................
Company SEC Documents.......................................
Company Software............................................
Company Stock Options.......................................
Company Stock Plans.........................................
Company Stockholder Approvals...............................
Company Takeover Proposal...................................
Company Technology..........................................
Company Trademarks..........................................
</TABLE>
vi
<PAGE>
<TABLE>
<S> <C>
Constituent Corporations.....................................
Conversion Number............................................
Credit Agreement.............................................
Current Endo Options.........................................
D&O Insurance................................................
DEA..........................................................
DGCL.........................................................
Effective Time...............................................
Endo Products................................................
Endo Warrant Agreement.......................................
Endo Warrants................................................
Environmental Laws...........................................
ERISA........................................................
Exchange Act.................................................
Exchange Agent...............................................
Exchange Fund................................................
FDA..........................................................
FDCA.........................................................
GAAP.........................................................
Governmental Entity..........................................
hazardous materials..........................................
HSR Act......................................................
IND..........................................................
Independent Accounting Firm..................................
IRS..........................................................
Knowledge of Parent..........................................
Knowledge of the Company.....................................
Lyle Agreement...............................................
Material Adverse Change......................................
Material Adverse Effect......................................
Merger.......................................................
Merger Consideration.........................................
MorphiDex(R) Application.....................................
NASDAQ.......................................................
NDA..........................................................
Net Sales....................................................
NOLs.........................................................
Non-Transferable Warrants....................................
Parent.......................................................
Parent Business Personnel....................................
Parent By-Laws...............................................
Parent Charter...............................................
</TABLE>
vii
<PAGE>
<TABLE>
<S> <C>
Parent Class A Common Stock.................................
Parent Common Stock.........................................
Parent Copyrights...........................................
Parent Disclosure Schedule..................................
Parent Financial Statements.................................
Parent Incentive Plans......................................
Parent Intellectual Property................................
Parent License Agreements...................................
Parent LLC..................................................
Parent LLC Agreement........................................
Parent Material Contracts...................................
Parent Multiemployer Plan...................................
Parent Patents..............................................
Parent Permits..............................................
Parent Plan.................................................
Parent Preferred Stock......................................
Parent Recapitalization.....................................
Parent Software.............................................
Parent Stock Options........................................
Parent Stock Plans..........................................
Parent Stock Purchase Plan..................................
Parent Technology...........................................
Parent Trademarks...........................................
Permits.....................................................
Person......................................................
Position Paper..............................................
Proxy Statement.............................................
Registration Statement......................................
SEC.........................................................
Securities Act..............................................
State Takeover Approvals....................................
Stockholder Meeting.........................................
Stockholder Voting Agreement................................
Stockholder Voting Agreements...............................
Sub.........................................................
Subsidiary..................................................
Superior Company Proposal...................................
Surviving Corporation.......................................
Tax Representation Letters..................................
Tax Returns.................................................
Tax Sharing Agreement.......................................
Taxes.......................................................
</TABLE>
viii
<PAGE>
<TABLE>
<S> <C>
Termination Date............................................
Transaction Agreements......................................
Warrant Agreement...........................................
</TABLE>
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of November 26, 1999 (this
"Agreement"), by and among ENDO PHARMACEUTICALS HOLDINGS INC., a Delaware
- ----------
corporation ("Parent"), ENDO INC., a Delaware corporation and a newly-formed
------
wholly-owned subsidiary of Parent ("Sub"), and ALGOS PHARMACEUTICAL CORPORATION,
---
a Delaware corporation (the "Company") (Sub and the Company being hereinafter
-------
collectively referred to as the "Constituent Corporations").
------------------------
WITNESSETH:
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have each determined that the Merger is advisable and in the best interest of
their respective stockholders and is in furtherance of and consistent with their
respective long-term business strategies;
WHEREAS, the respective Boards of Directors of Parent, Sub and the Company
have each (a) approved and declared advisable the merger of the Company with and
into Sub (the "Merger"), upon the terms and subject to the conditions set forth
------
herein, whereby each issued and outstanding share of common stock, par value
$.01 per share, of the Company ("Company Common Stock") not owned directly or
--------------------
indirectly by Parent or the Company will be converted into the Merger
Consideration (as defined in Section 1.7(c) hereof) and (b) approved this
Agreement upon the terms and subject to the conditions set forth herein;
WHEREAS, concurrently with the execution of this Agreement, the Board of
Directors of Parent will have approved this Agreement and the Merger and, in its
capacity as the sole stockholder of Sub, will have approved this Agreement upon
the terms and subject to the conditions set forth herein;
WHEREAS, following the execution of this Agreement and prior to the Closing
(as defined in Section 1.18 hereof), Parent will (a) duly adopt and declare
advisable an amendment and restatement of the Certificate of Incorporation of
Parent substantially in the form attached hereto as Exhibit A-1 (the "Charter
-------
Amendment") and (b) declare and pay a stock dividend to the then current holders
- ---------
of shares of common stock, par value $.01 per share, of Parent ("Parent Common
-------------
Stock") or effect some other form of recapitalization, the results of which are
- -----
substantially set forth on Exhibit A-2 attached hereto (the "Parent
------
Recapitalization");
- ----------------
<PAGE>
WHEREAS, simultaneous with the execution and delivery of this Agreement,
Parent and each stockholder of the Company listed on Annex I attached hereto
have each entered into an agreement substantially in the form of Exhibit B
hereto (each, a "Stockholder Voting Agreement" and collectively, "Stockholder
---------------------------- -----------
Voting Agreements") pursuant to which such stockholder has agreed to vote the
- ------------------
shares of Company Common Stock beneficially owned by such stockholder in favor
of the Merger (the Stockholder Voting Agreements, the Warrant Agreement (as
defined in Section 1.7(c) hereof) and this Agreement are collectively referred
to herein as the "Transaction Agreements");
-----------------------
WHEREAS, following the execution of this Agreement and prior to the
Closing, Parent and certain stockholders of Parent shall enter into a
registration rights agreement pursuant to which Parent will grant certain rights
to such Persons regarding the registration of Parent Common Stock owned by them
following the Merger;
WHEREAS, for U.S. federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code") and that this
----
Agreement shall be, and hereby is, adopted as a plan of reorganization for
purposes of Section 368 of the Code;
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions
----------
hereof, and in accordance with the Delaware General Corporation Law (the
"DGCL"), the Company shall be merged with and into Sub at the Effective Time
----
(as hereinafter defined). Following the Merger, the separate corporate existence
of the Company shall cease and Sub shall (i) continue as the surviving
corporation (sometimes referred to herein as the "Surviving Corporation"), (ii)
---------------------
succeed to and assume all the rights and obligations of the Company in
accordance with the DGCL, (iii) continue to be governed by the laws of the State
of Delaware and (iv) continue under the name "Endo Inc."
2
<PAGE>
Section 1.2 Effective Time. The Merger shall become effective when a
--------------
Certificate of Merger (the "Certificate of Merger"), duly executed in accordance
---------------------
with the relevant provisions of the DGCL, is filed with the Secretary of State
of the State of Delaware; provided, however, that, upon mutual consent of the
-------- -------
Constituent Corporations, the Certificate of Merger may provide for a later date
or time of effectiveness of the Merger. When used in this Agreement, the term
"Effective Time" shall mean the later of the date and time at which the
--------------
Certificate of Merger is filed or such later date and time established by the
Certificate of Merger. The filing of the Certificate of Merger in accordance
with the DGCL shall be made on the date of the Closing, or as promptly
thereafter as practicable.
Section 1.3 Effects of the Merger. The Merger shall have the effects set
---------------------
forth in Section 259 of the DGCL.
Section 1.4 Directors of the Surviving Corporation. The directors of Sub
--------------------------------------
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation as of the Effective Time and shall hold office until their
successors are duly appointed or elected in accordance with applicable law and
the Certificate of Incorporation and By-laws of the Surviving Corporation.
Section 1.5 Officers of the Surviving Corporation. The officers of Sub
-------------------------------------
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation as of the Effective Time and shall hold office until their
successors are duly appointed or elected in accordance with applicable law and
the certificate of incorporation and by-laws of the Surviving Corporation.
Section 1.6 Charter and By-Laws. The Certificate of Incorporation of Sub
-------------------
in effect immediately prior to the Effective Time shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter changed or amended
as provided therein or by applicable law. The By-laws of Sub as in effect
immediately prior to the Effective Time shall be the By-laws of the Surviving
Corporation until thereafter changed or amended as provided therein or by the
certificate of incorporation of the Surviving Corporation or by applicable law.
Section 1.7 Conversion of Securities. As of the Effective Time, by
------------------------
virtue of the Merger and without any action on the part of Sub, the Company or
the holders of any securities of the Constituent Corporations:
(a) Each issued and outstanding share of common stock of Sub shall remain
outstanding as one validly issued, fully paid and nonassessable share of common
stock of the Surviving Corporation.
3
<PAGE>
(b) All shares of Company Common Stock that are held in the treasury of
the Company and any shares of Company Common Stock owned by Parent or Sub shall
be canceled and no capital stock of Parent or other consideration shall be
delivered in respect thereof.
(c) Subject to the provisions of Section 1.12 hereof, each share of
Company Common Stock issued and outstanding immediately prior to the Effective
Time (other than shares to be canceled in accordance with Section 1.7(b) hereof)
shall be converted into (i) one (the "Conversion Number") validly issued, fully
-----------------
paid and nonassessable share of Parent Common Stock and (ii) one warrant which
shall be subject to the terms and conditions of a warrant agreement (the
"Warrant Agreement") substantially in the form attached hereto as Exhibit C (an
- ------------------
"Algos Warrant" and, together with the shares of Parent Common Stock referred to
-------------
in clause (i), the "Merger Consideration"). All such shares of Company Common
--------------------
Stock, when so converted, shall no longer be outstanding and shall automatically
be canceled and retired and each holder of a certificate formerly representing
any such shares shall cease to have any rights with respect thereto, except for
the right to receive any dividends and other distributions in accordance with
Section 1.9 hereof, certificates representing the shares of Parent Common Stock
and Algos Warrants into which such shares are converted upon surrender of such
certificates in accordance with Section 1.8 hereof. Each certificate shall,
from and after the Effective Time until surrendered in exchange for Parent
Common Stock and Algos Warrants, for all purposes be deemed to represent the
shares of Parent Common Stock and Algos Warrants into which such Company Common
Stock was converted in the Merger.
Section 1.8 Parent to Make Certificates Available.
-------------------------------------
(a) Exchange of Certificates. Parent shall authorize a commercial bank
------------------------
reasonably acceptable to the Company (or such other Person (as defined in
Section 1.8(a) hereof) or Persons as shall be reasonably acceptable to Parent
and the Company) to act as Exchange Agent hereunder (the "Exchange Agent"). As
--------------
soon as practicable after the Effective Time, Parent shall deposit with the
Exchange Agent, in trust for the holders of shares of Company Common Stock
converted in the Merger, certificates representing the shares of Parent Common
Stock and certificates representing the Algos Warrants, including certificates
representing Algos Warrants subject to the transfer restrictions set forth in
the Warrant Agreement (the "Non-Transferable Warrants"), each issuable pursuant
-------------------------
to Section 1.7(c) hereof in exchange for outstanding certificates representing
shares of Company Common Stock (such shares of Parent Common Stock and Algos
Warrants, together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange
--------
4
<PAGE>
Fund"). Except as contemplated by this Section 1.8, and Section 1.11 hereof,
- -----
the Exchange Fund shall not be used for any other purpose. For purposes of this
Agreement, "Person" means any natural person, firm, individual, corporation,
------
limited liability company, partnership, association, joint venture, company,
business trust, trust or any other entity or organization, whether incorporated
or unincorporated, including a government or political subdivision or any agency
or instrumentality thereof.
(b) Exchange Procedures. As soon as practicable after the Effective Time,
-------------------
Parent shall cause the Exchange Agent to mail to each record holder of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Common Stock converted in the Merger
(the "Certificates") a letter of transmittal (in customary form), which shall
------------
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon actual delivery of the Certificates to the
Exchange Agent, and shall contain instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Parent Common Stock, certificates representing Algos Warrants. Upon
surrender to the Exchange Agent for cancellation of a Certificate, together with
such letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor (i) a certificate representing that
number of whole shares of Parent Common Stock into which the shares of Company
Common Stock represented by the surrendered Certificate shall have been
converted at the Effective Time pursuant to this Article I, (ii) a certificate
representing that number of Algos Warrants (or, if requested, Non-Transferable
Warrants) into which the shares of Company Common Stock represented by the
surrendered Certificate shall have been converted at the Effective Time pursuant
to this Article I and (iii) any dividends and other distributions payable in
accordance with Section 1.9 hereof, and any Certificate so surrendered shall
forthwith be canceled.
Section 1.9 Dividends; Transfer Taxes; Withholding.
--------------------------------------
(a) No dividends or other distributions that are declared on or after the
Effective Time on Parent Common Stock, or are payable to the holders of record
thereof on or after the Effective Time, will be paid to any Person entitled by
reason of the Merger to receive a certificate representing Parent Common Stock
and a certificate representing Algos Warrants, until such Person surrenders such
certificates in accordance with Section 1.8 hereof. Subject to the effect of
applicable law, there shall be paid to each record holder of a new certificate
representing such Parent Common Stock: (i) at the time of such surrender or as
promptly as practicable thereafter, the amount of any dividends or other
distributions theretofore paid with
5
<PAGE>
respect to the shares of Parent Common Stock represented by such new certificate
and having a record date on or after the Effective Time and a payment date prior
to such surrender; (ii) at the appropriate payment date or as promptly as
practicable thereafter, the amount of any dividends or other distributions
payable with respect to such shares of Parent Common Stock and having a record
date on or after the Effective Time, but prior to such surrender and a payment
date on or subsequent to such surrender. In no event shall (1) the Person
entitled to receive such dividends or other distributions be entitled to receive
interest on such dividends or other distributions and (2) any dividends or
distributions be payable on the Algos Warrants or to the holders of record
thereof unless and until such Algos Warrants are exercised in accordance with
the terms of the Warrant Agreement.
(b) If any cash or certificates representing shares of Parent Common Stock
or Algos Warrants are to be paid to or issued in a name other than that in which
the Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Certificate so surrendered shall be properly
endorsed and otherwise in proper form for transfer, subject to the limitations
set forth in Section 1.8 hereof and in the Warrant Agreement with respect to
Non-Transferable Warrants, and that the Person requesting such exchange shall
pay to the Exchange Agent any transfer or other Taxes (as defined in Section 2.9
hereof) required by reason of the issuance of certificates representing such
shares of Parent Common Stock or such Algos Warrants in a name other than that
of the registered holder of the Certificate surrendered, or shall establish to
the satisfaction of the Exchange Agent that such Tax has been paid or is not
applicable. Except as otherwise provided in Section 5.17 hereof, Parent or the
Exchange Agent shall be entitled to deduct and withhold from the consideration
otherwise payable pursuant to this Agreement to any holder of shares of Company
Common Stock such amounts as Parent or the Exchange Agent are required to
deduct and withhold with respect to the making of such payment under the Code or
under any provision of state, local or foreign Tax law. To the extent that
amounts are so withheld by Parent or the Exchange Agent, such withheld amounts
shall be treated for all purposes of this Agreement as having been paid to the
holder of the Company Common Stock in respect of which such deduction and
withholding were made by Parent or the Exchange Agent.
Section 1.10 [Intentionally Omitted.]
6
<PAGE>
Section 1.11 Return of Exchange Fund. Any portion of the Exchange Fund
-----------------------
that remains undistributed to the former stockholders of the Company for six
months after the Effective Time shall be delivered to Parent, upon demand of
Parent, and any such former stockholders who have not theretofore complied with
this Article I shall thereafter look only to Parent for payment of their claim
for Parent Common Stock, Algos Warrants and any dividends or distributions with
respect to Parent Common Stock. Neither Parent nor either Constituent
Corporation shall be liable to any former holder of Company Common Stock for any
such shares of Parent Common Stock, Algos Warrants, cash and dividends and
distributions held in the Exchange Fund which are delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
Section 1.12 Adjustment of Conversion Number. In the event of any
-------------------------------
reclassification, recapitalization, stock split, reverse stock split, stock
dividend (including any dividend or distribution of securities convertible into
Parent Common Stock) or subdivision with respect to Parent Common Stock, any
change or conversion of Parent Common Stock into other securities, any other
dividend or distribution with respect to the Parent Common Stock as the same may
be adjusted from time to time pursuant to the terms of this Agreement (or if a
record date with respect to any of the foregoing should occur), prior to the
Effective Time, appropriate and proportionate adjustments shall be made to the
Conversion Number, and all references to the Conversion Number in this Agreement
shall be deemed to be to the Conversion Number as so adjusted; provided that in
-------- ----
no event shall any such adjustment occur on account of the Charter Amendment or
the Parent Recapitalization.
Section 1.13 No Further Ownership Rights in Company Common Stock. All
---------------------------------------------------
shares of Parent Common Stock and all Algos Warrants issued pursuant to the
terms hereof (including any cash paid pursuant to Section 1.10 hereof) shall be
deemed to have been issued in full satisfaction of all rights pertaining to the
shares of Company Common Stock represented by such Certificates.
Section 1.14 Closing of Company Transfer Books. At the Effective Time,
---------------------------------
the stock transfer books of the Company shall be closed and no transfer of
shares of Company Common Stock outstanding prior to the Effective Time shall
thereafter be made on the records of the Company. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, the Exchange Agent or
Parent, such Certificates shall be canceled and exchanged as provided in this
Article I.
7
<PAGE>
Section 1.15 Lost Certificates. If any Certificate shall have been lost,
-----------------
stolen or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen or destroyed and, if reasonably
required by the Surviving Corporation, the posting by such Person of a bond, in
such reasonable amount as the Surviving Corporation may direct, as indemnity
against any claim that may be made against it with respect to such Certificate,
the Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of Parent Common Stock, the Algos Warrants and any
dividends or other distributions to which the holder thereof is entitled
pursuant to Section 1.9 hereof.
Section 1.16 Affiliates. Certificates surrendered for exchange by each
----------
Affiliate (as defined in Section 5.4 hereof) of the Company for purposes of Rule
145(c) under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (the "Securities Act") that has been identified and
--------------
required to provide an Affiliate letter pursuant to Section 5.4 hereof shall not
be exchanged until Parent has received such Affiliate letter from such Person as
provided in Section 5.4 hereof.
Section 1.17 Further Assurances. If at any time after the Effective Time
------------------
the Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (i) to vest, perfect or confirm, of record or otherwise, in
the Surviving Corporation its right, title or interest in, to or under any of
the rights, privileges, powers, franchises, properties or assets of either of
the Constituent Corporations or (ii) otherwise to carry out the purposes of this
Agreement, the Surviving Corporation and its proper officers and directors or
their designees shall be authorized to execute and deliver, in the name and on
behalf of either of the Constituent Corporations, all such deeds, bills of sale,
assignments and assurances and to do, in the name and on behalf of either
Constituent Corporation, all such other acts and things as may be necessary,
desirable or proper to vest, perfect or confirm the Surviving Corporation's
right, title or interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets of such Constituent Corporation and otherwise
to carry out the purposes of this Agreement.
Section 1.18 Closing. Subject to the satisfaction or waiver of the
-------
conditions set forth in Article VI hereof, the closing of the transactions
contemplated by this Agreement (the "Closing") and all actions specified in this
-------
Agreement to occur at the Closing shall take place at the offices of Skadden,
Arps, Slate, Meagher & Flom LLP in New York, New York at 10:00 a.m. (New York
time) on a date to be specified by the parties hereto, but no later than the
business day immediately following the satisfaction or waiver of the conditions
set forth in Section 6.1(a), (b), (c) and (d)
8
<PAGE>
hereof or at such other time, date or place as Parent and the Company shall
agree. The date on which the Closing occurs is referred to herein as the
"Closing Date."
------------
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub jointly and severally represent and warrant to the Company
as follows:
Section 2.1 Organization, Standing and Power. Each of Parent and Sub is a
--------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority to
carry on its business as now being conducted and to enter into and perform this
Agreement and the other Transaction Agreements and the transactions contemplated
hereby and thereby. Each Subsidiary (as hereinafter defined) of Parent (other
than Sub) is duly organized, validly existing and in good standing under the
laws of the jurisdiction in which it is organized and has the requisite
corporate or other power and authority to carry on its business as now being
conducted, except where the failure to be so organized, existing or in good
standing or to have such power or authority would not, individually or in the
aggregate, have a Material Adverse Effect (as hereinafter defined) on Parent.
Each of Parent and its Subsidiaries is duly qualified to do business, and is in
good standing, in each jurisdiction where the character of its properties owned
or held under lease or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified would not, individually
or in the aggregate, have a Material Adverse Effect on Parent. For purposes of
this Agreement, (a) each of "Material Adverse Change" or "Material Adverse
----------------------- ----------------
Effect" means, when used with respect to Parent, Sub or the Company, as the case
- ------
may be, any change or effect that is materially adverse to the business, assets,
liabilities, results of operation or condition (financial or otherwise) of
Parent and its Subsidiaries, taken as a whole, or the Company, as the case may
be, excluding, in either case, any changes, circumstances or effects resulting
from or related to changes or developments in the economy, financial markets or
regulatory or political climate generally, any changes in conditions or
developments generally applicable to the industries in which Parent and
Subsidiaries of Parent or the Company, as the case may be, are involved, any
changes or developments related to the general relationship of Parent and
Subsidiaries of Parent or the Company, as the case may be, with the U.S. Food
and Drug Administration ("FDA") or the U.S. Drug Enforcement Administration
---
("DEA") and in the case of the Company, any change or development relating to
---
MorphiDex(R) or any other of the Company's products under
9
<PAGE>
development (including the FDA or DEA approval process relating thereto) and
except for any such changes or effects resulting from this Agreement, the
transactions contemplated hereby or the announcement thereof and (b)
"Subsidiary" means any corporation, partnership, joint venture or other legal
----------
entity of which Parent or the Company, as the case may be (either alone or
through or together with any other Subsidiary), owns, directly or indirectly,
50% or more of the stock or other equity interests the holders of which
generally are entitled to vote for the election of the board of directors or
other governing body of such corporation, partnership, joint venture or other
legal entity. Parent has heretofore delivered to the Company complete and
correct copies of Parent's certificate of incorporation ("Parent Charter") and
--------------
by-laws ("Parent By-Laws") and Sub's certificate of incorporation and by-laws,
--------------
each as in effect on the date of this Agreement.
Section 2.2 Capital Structure. As of the date of this Agreement, the
-----------------
authorized capital stock of Parent consists of (i) 2,000,000 shares of Parent
Common Stock, (ii) 200,000 shares of class A common stock, par value $.01 per
share, of Parent ("Parent Class A Common Stock") and (iii) 500,000 shares of
---------------------------
preferred stock, par value $.01 per share, of Parent (the "Parent Preferred
----------------
Stock"). At the close of business on November 15, 1999, (i) 929,950 shares of
- -----
Parent Common Stock were issued and outstanding, all of which were validly
issued, fully paid and nonassessable and free of preemptive rights; (ii) 174,560
shares of Parent Class A Common Stock were issued and outstanding, all of which
were validly issued, fully paid and nonassessable and free of preemptive rights,
and 290 of which are held in the treasury of the Parent; (iii) 618,750 shares of
Parent Common Stock were reserved for future issuance pursuant to Parent's 1997
Executive Stock Option Plan and Parent's 1997 Employee Stock Option Plan
(collectively, the "Parent Stock Plans"); (iv) 6,000 shares of Parent Common
------------------
Stock were reserved for future issuance pursuant to Parent's 1997 Employee
Stock Purchase Plan (the "Parent Stock Purchase Plan" and, together with the
--------------------------
Parent Stock Plans, the "Parent Incentive Plans"); and (v) no shares of Parent
----------------------
Preferred Stock were issued or outstanding. All of the shares of Parent Common
Stock and all of the Algos Warrants issuable in exchange for Company Common
Stock at the Effective Time in accordance with this Agreement will be, when so
issued, duly authorized, validly issued, free of preemptive rights and, in the
case of the shares of the Parent Common Stock, fully paid and nonassessable.
Each share of Parent Common Stock issuable upon exercise of the Algos Warrants
will be fully paid and nonassessable at the time of exercise. As of the date of
this Agreement, except for (a) this Agreement, (b) stock options covering not in
excess of 618,750 shares of Parent Common Stock (collectively, the "Parent Stock
------------
Options") and (c) the Parent Stock Purchase Plan, there are no options,
- -------
warrants, calls, rights or agreements to which Parent or any of its Subsidiaries
is a party or by which any of them is bound obligating Parent or any of its
Subsidiaries to
10
<PAGE>
issue, deliver or sell, or cause to be issued, delivered or sold, additional
shares of capital stock of Parent or any of its Subsidiaries, or securities
convertible into or exchangeable for such capital stock, or obligating Parent or
any of its Subsidiaries to grant, extend or enter into any such option, warrant,
call, right or agreement. Since November 15, 1999, Parent has not issued any
shares of its capital stock, or securities convertible into or exchangeable for
such capital stock, other than shares issued in the ordinary course pursuant to
the Parent Stock Plans. Except as set forth in Schedule 2.2 of that separate
disclosure letter delivered by Parent to the Company at or prior to the
execution and delivery by Parent of this Agreement (the "Parent Disclosure
-----------------
Schedule"), there are no outstanding contractual obligations of Parent or any of
- --------
Parent's Subsidiaries (i) restricting the transfer of, (ii) affecting the voting
rights of, (iii) requiring the repurchase, redemption or disposition of, (iv)
requiring the registration for sale of, or (v) granting any preemptive or
antidilutive right with respect to, any shares of Parent Common Stock, Parent
Class A Common Stock, Parent Preferred Stock or any capital stock of any
Subsidiary of Parent. The execution and delivery of the Transaction Agreements
do not, and the consummation of the transactions contemplated hereby and thereby
and the compliance with the provisions hereof and thereof will not, except as
set forth in such Transaction Agreements, give rise to any preemptive right or
antidilutive right of any Person with respect to any shares of Parent Common
Stock, Parent Class A Common Stock, Parent Preferred Stock or any capital stock
of any Subsidiary of Parent. Each outstanding share of capital stock or other
equity interests of each Subsidiary of Parent is duly authorized, validly
issued, fully paid, nonassessable and free of preemptive rights, and each such
share is owned by Parent or another Subsidiary of Parent, free and clear of all
security interests, liens, claims, pledges, options, rights of first refusal,
agreements, limitations on voting rights, charges and other encumbrances of any
nature whatsoever.
Section 2.3 Authority. Each of Parent and Sub has all requisite corporate
---------
power and authority to enter into the Transaction Agreements to which it is a
party and to consummate the transactions contemplated hereby and thereby. On or
prior to the date of this Agreement, the respective Boards of Directors of
Parent and Sub have each declared the Merger advisable and in the best interest
of their respective stockholders and have each approved execution and delivery
of this Agreement in accordance with applicable law; the Board of Directors of
Sub has recommended to Parent, as the sole stockholder of Sub, that it approve
this Agreement in accordance with the DGCL; the Board of Directors of Parent has
authorized that it approve this Agreement in its capacity as the sole
stockholder of Sub in accordance with the DGCL; and concurrently with the
execution of this Agreement, Parent is approving this Agreement as the sole
stockholder of Sub in accordance with the DGCL. On or prior to the date of this
Agreement, the stockholders of Parent, in accordance with
11
<PAGE>
the DGCL and the Parent Charter, shall have approved the Charter Amendment. The
execution and delivery by each of Parent and Sub of the Transaction Agreements
to which it is a party and the consummation by Parent and Sub of the
transactions contemplated hereby and thereby, including the Share Issuance, have
been duly authorized by all necessary corporate action on the part of Parent and
Sub, subject to the filing of the Certificate of Merger pursuant to the DGCL.
Each of Parent and Sub have duly executed and delivered the Transaction
Agreements to which it is a party and (assuming the valid authorization,
execution and delivery thereof by the other parties thereto) each such
Transaction Agreement constitutes the valid and binding obligation of Parent and
Sub enforceable against each of them in accordance with their terms, except as
the enforceability hereof and thereof may be limited (1) by applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws in effect
that affect the enforcement of creditors rights generally or (2) general
principals of equity, whether considered in a proceeding at law or in equity.
Prior to the filing thereof, the filing of a registration statement on Form S-4
with the Securities and Exchange Commission ("SEC") by Parent under the
---
Securities Act for the purpose of registering the shares of Parent Common Stock
and the Algos Warrants to be issued in the Merger and the shares of Parent
Common Stock to be issued upon exercise of the Algos Warrants (together with any
amendments or supplements thereto, whether prior to or after the effective date
thereof, the "Registration Statement") and the taking of all actions in
----------------------
connection therewith will have been duly authorized by Parent's Board of
Directors.
Section 2.4 Consents and Approvals; No Violation. Assuming that all
------------------------------------
consents, approvals, authorizations and other actions described in the second
sentence of this Section 2.4 have been obtained and all filings and obligations
described in the second sentence of this Section 2.4 have been made, the
execution and delivery of the Transaction Agreements do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, conflict with, result in any
violation of, or breach or default (with or without due notice or lapse of time,
or both) under, or give to others a right of termination, cancellation or
acceleration of any obligation or the loss of any benefit under, or result in
the creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of Parent or any of its Subsidiaries under, any
provision of (i) the Parent Charter or Parent By-Laws, (ii) any provision of the
comparable charter or organization documents of any of Parent's Subsidiaries,
(iii) any loan or credit agreement, note, bond, mortgage, lease, indenture, or
other contract, agreement, instrument, permit, concession, franchise or license
applicable to Parent or any of its Subsidiaries, (iv) any license, permit or
other instrument, contract or agreement granted by, or entered into with, the
FDA or the DEA or (v) any judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to
12
<PAGE>
Parent or any of its Subsidiaries or any of their respective properties or
assets, other than, in the case of clauses (ii), (iii), (iv) or (v), any such
conflicts, violations, breaches, defaults, rights, liens, security interests,
charges or encumbrances that, individually or in the aggregate, would not have a
Material Adverse Effect on Parent, or prevent or materially delay the
consummation of any of the transactions contemplated hereby or thereby. No
filing, notification or registration with, or authorization, consent or approval
of, any domestic (federal and state), or foreign court, commission,
governmental body, regulatory or administrative agency, authority or tribunal (a
"Governmental Entity") is required by or with respect to Parent or any of its
-------------------
Subsidiaries in connection with the execution, delivery and performance of the
Transaction Agreements by Parent or Sub or is necessary for the consummation of
the Merger and the other transactions contemplated by the Transaction
Agreements, except for (i) in connection, or in compliance, with the provisions
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), the Securities Act and the Securities Exchange Act of 1934, as
-------
amended (together with the rules and regulations promulgated thereunder, the
"Exchange Act"), (ii) the filing of the Certificate of Merger with the Secretary
------------
of State of the State of Delaware and the filing of the appropriate documents
with the relevant authorities of other states in which Parent or any of its
Subsidiaries is qualified to do business, each of which is set forth in Schedule
2.4 of the Parent Disclosure Schedule, (iii) such filings and consents as may be
required under any environmental, health or safety law or regulation (including
any rules and regulations of the FDA and the DEA ) pertaining to any
notification, disclosure or required approval triggered by the Merger or by the
transactions contemplated by the Transaction Agreements, each of which is set
forth in Schedule 2.4 of the Parent Disclosure Schedule, (iv) such filings,
authorizations, orders and approvals as may be required by state takeover laws
(the "State Takeover Approvals"), each of which is set forth in Schedule 2.4 of
------------------------
the Parent Disclosure Schedule, (v) applicable requirements, if any, of "blue
sky" laws and the NASDAQ National Market (the "NASDAQ") and (vi) such other
------
consents, orders, authorizations, registrations, declarations and filings the
failure of which to be obtained or made would not, individually or in the
aggregate, have a Material Adverse Effect on Parent, or prevent or materially
delay the consummation of any of the transactions contemplated by the
Transaction Agreements. The execution and delivery of the Transaction Agreements
do not, and the consummation of the transactions contemplated hereby and
thereby and compliance with the provisions hereof and thereof will not, conflict
with, result in any violation of, or breach or default (with or without due
notice or lapse of time, or both) under, or give to others a right of
termination, cancellation or acceleration of any obligation or the loss of any
benefit under, or result in the creation of any lien, security interest, charge
or encumbrance upon any of the properties or assets of Parent or any of its
Subsidiaries under, any of the license agreements to which it is a
13
<PAGE>
party, except for such conflicts, violations, breaches, defaults, rights or
liens as would not, individually or in the aggregate, have a Material Adverse
Effect on Parent. All material license agreements of Parent or any of its
Subsidiaries are listed in Schedule 2.4 of the Parent Disclosure Schedule.
Section 2.5 Financial Statements. Parent has previously provided the
--------------------
Company with true and accurate copies of (x) Parent's audited financial
statements for the years ended December 31, 1997 and December 31, 1998, and (y)
Parent's unaudited financial statements for the six-month periods ended June 30,
1998 and June 30, 1999 (collectively, the "Parent Financial Statements"). The
---------------------------
Parent Financial Statements, as of their respective dates, fairly present in all
material respects in accordance with generally accepted accounting principles
("GAAP") the consolidated financial position of Parent and its consolidated
----
Subsidiaries as at the respective dates thereof and the consolidated results of
their operations and their consolidated cash flows for the periods then ended
(subject, in the case of unaudited statements, to any other adjustments
described therein and normal year-end audit adjustments and to any other
adjustments described therein). Except as required by GAAP, Parent has not,
since December 31, 1998, made any change in the accounting practices or policies
applied in the preparation of the financial statements. The books and records of
Parent and its Subsidiaries have been, and are being, maintained in all material
respects in accordance with GAAP and other applicable legal and accounting
requirements.
Section 2.6 Registration Statement and Proxy Statement. None of the
------------------------------------------
information to be supplied by Parent or Sub for inclusion or incorporation by
reference in the Registration Statement or the proxy statement/prospectus
included therein (together with any amendments or supplements thereto, the
"Proxy Statement") relating to the Stockholder Meeting (as hereinafter defined)
---------------
will (i) in the case of the Registration Statement, at the time it becomes
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading or (ii) in the case of the Proxy Statement, at
the time of the mailing of the Proxy Statement, the time of the Stockholder
Meeting and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading. If, at any time prior to the
Effective Time, any event with respect to Parent, its officers and directors or
any of its Subsidiaries shall occur which is required to be described in the
Proxy Statement or the Registration Statement, such event shall be so described,
and an appropriate amendment or supplement shall be promptly filed with the SEC
and, as required by law, disseminated to the stockholders of the Company. The
Registration Statement
14
<PAGE>
will comply (excluding any matters relating to the Company, as to which Parent
and Sub make no representations) as to form in all material respects with the
provisions of the Securities Act.
Section 2.7 Absence of Certain Changes or Events. Except as disclosed in
------------------------------------
Schedule 2.7 of the Parent Disclosure Schedule, since September 30, 1999, (A)
none of Parent or any of its Subsidiaries has incurred any liability or
obligation (indirect, direct or contingent), or entered into any oral or written
agreement or other transaction, that is not in the ordinary course of business
or that would, individually or in the aggregate, result in a Material Adverse
Effect on Parent, except for any such changes or effects resulting from this
Agreement, the transactions contemplated hereby or the announcement thereof; (B)
none of Parent or any of its Subsidiaries has sustained any loss or interference
with their business or properties from fire, flood, windstorm, accident or other
calamity (whether or not covered by insurance) that would, individually or in
the aggregate, have a Material Adverse Effect on Parent; (C) there has been no
action taken by Parent or any of its Subsidiaries that, if taken during the
period from the date of this Agreement through the Effective Time, would
constitute a material breach of Section 4.1(a) hereof; and (D) there has been no
event, circum stance or development that would, individually or in the
aggregate, have a Material Adverse Effect on Parent.
Section 2.8 Permits and Compliance.
----------------------
(a) Each of Parent and its Subsidiaries is in possession of all
franchises, grants, authorizations, licenses, permits, easements, variances,
exceptions, consents, certificates, approvals and orders of any Governmental
Entity ("Permits") necessary for it to own, lease and operate its properties or
-------
to carry on its business as it is now being conducted (the "Parent Permits"),
--------------
except where the failure to have any of the Parent Permits would not,
individually or in the aggregate, have a Material Adverse Effect on Parent, and,
as of the date of this Agreement, no suspension or cancellation of any of the
Parent Permits is pending or, to the Knowledge of Parent (as hereinafter
defined), threatened, except where the suspension or cancellation of any of the
Parent Permits would not, individually or in the aggregate, have a Material
Adverse Effect on Parent; provided that no representation is being made by the
-------- ----
Company in this sentence with respect to any investigational new drug
application (an "IND") or new drug application (an "NDA") of Parent filed with
--- ---
the FDA (which are the subject of Section 2.13 hereof). None of Parent or any
of its Subsidiaries is in violation of (A) its charter, by-laws or other
organizational documents, (B) any applicable law, ordinance, administrative or
governmental rule or regulation or (C) any order, decree or judgment of any
Governmental Entity having jurisdiction over Parent or any of its Subsidiaries,
except, in the case of clauses (B) and (C), for any violations that,
15
<PAGE>
individually or in the aggregate, would not have a Material Adverse Effect on
Parent.
(b) Schedule 2.8(b) of the Parent Disclosure Schedule contains a true and
complete list of all written agreements (i) that would be required to be listed
as exhibits to a registration statement of Parent on Form S-1 under the rules
and regulations of the SEC if such registration statement were filed on the date
of this Agreement, (ii) relating to indebtedness for money borrowed by Parent or
any of its Subsidiaries, which, individually or in the aggregate, represent an
amount greater than $1.0 million, excluding trade credit or payables arising in
the ordinary course of business, (iii) creating any guarantee arrangement or
other agreement to be liable for the obligations of a Person other than Parent
or any of its wholly owned Subsidiaries, (iv) providing for payment or the
receipt of payment or the sale of purchase or exchange of goods worth in excess
of $20.0 million, (v) with any distributor or sales contractor for Parent's
products, (vi) providing for any joint venture or partnership, (vii) with E.I.
du Pont de Nemours and Company or The Dupont Merck Pharmaceutical Company or
any of its Subsidiaries or (viii) containing any provision or covenant
materially limiting the ability of Parent or its Subsidiaries or any of its or
their Affiliates to sell any products of or to any other Person, engage in any
line of business or compete with or to obtain products or services from any
Person or materially limiting the ability of any Person to provide products or
services to Parent or any of its Subsidiaries or Affiliates (collectively, the
"Parent Material Contracts"). Parent has previously provided the Company with
-------------------------
true and correct copies of each of the Parent Material Contracts, as in effect
on the date of this Agreement. Except as disclosed in Schedule 2.8(b) of the
Parent Disclosure Schedule, the execution and delivery of the Transaction
Agreements do not, and the consummation of the transactions contemplated hereby
and thereby and compliance with the provisions hereof and thereof will not,
conflict with, result in any violation of, or breach or default (with or without
due notice or lapse of time, or both) under, or give to others a right of
termination, cancellation or acceleration of any obligation or the loss of any
benefit under, or result in the creation of any lien, security interest, charge
or encumbrance upon any of the properties or assets of Parent or any of its
Subsidiaries under, any indenture, mortgage, loan agreement, note or other
agreement or instrument for borrowed money, any guarantee of any agreement or
instrument for borrowed money or any lease, contractual license or other
contract, agreement or instrument to which Parent or any of its Subsidiaries is
a party or by which Parent or any of its Subsidiaries is bound or to which any
of the properties, assets or operations of Parent or any of its Subsidiaries is
subject, other than such conflicts, violations, breaches, defaults, rights or
liens as would not, individually or in the aggregate, have a Material Adverse
Effect on Parent. As used in this Agreement, "Knowledge of Parent" means the
-------------------
actual knowledge of any of the Chief Executive Officer, Chief
16
<PAGE>
Operating Officer, Chief Financial Officer, General Counsel of Parent or Senior
Vice President-Research and Development.
Section 2.9 Tax Matters.
-----------
Except as set forth in Schedule 2.9 of the Parent Disclosure Schedule:
(a) All federal, state, local and foreign Tax Returns required to be
filed (taking into account extensions) by or on behalf of Parent and each of its
Subsidiaries (i) have been timely filed, except for such Tax Returns that the
failure by Parent or such Subsidiary to timely file would not, individually or
in the aggregate, have a Material Adverse Effect on Parent, and (ii) are true,
complete and correct in all material respects.
(b) All Taxes payable by or with respect to Parent and any of its
Subsidiaries have been timely paid, or adequately reserved for (in accordance
with GAAP) in the most recent Parent Financial Statements, except for Taxes that
the failure of which to pay would not, individually or in the aggregate, have a
Material Adverse Effect on Parent.
(c) No deficiencies for any Taxes have been proposed, asserted or
assessed either orally or in writing against Parent or any of its Subsidiaries
that are not adequately reserved for (in accordance with GAAP) in the most
recent Parent Financial Statements, except for such deficiencies as would not,
individually or in the aggregate, have a Material Adverse Effect on Parent. All
assessments for Taxes due and owing by or with respect to Parent or any of its
Subsidiaries with respect to completed and settled examinations or concluded
Litigation have been paid.
(d) No examinations have been completed or are presently being conducted
with respect to the Parent or any of its Subsidiaries' federal or material state
income Tax Returns.
(e) Parent and each of its Subsidiaries have complied with all rules and
Treasury regulations relating to the payment and withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Sections 1441
and 1442 of the Code or similar provisions under any foreign Laws) and have,
within the time and in the manner required by law, withheld from employee wages
and paid over to the proper Governmental Entities all amounts required to be so
withheld and paid over under all Applicable Laws, except where the failure to be
in such compliance or to withhold and pay over such amounts would not,
individually or in the aggregate, have a Material Adverse Effect on Parent.
17
<PAGE>
(f) Parent and each of its Subsidiaries (i) have not waived any statutory
period of limitations in respect of its or their Taxes or Tax Returns or (ii)
are not a party to, not bound by, or have no obligation under any agreement,
contract or arrangement for the sharing, allocation, or indemnification of Taxes
(other than indemnification agreements where Taxes incidental to the primary
obligation so indemnified are also indemnified).
(g) No property of Parent or any of its Subsidiaries is "tax-exempt use
property" (as such term is defined in Section 168 of the Code).
(h) Neither Parent nor any of its Subsidiaries has filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply to any disposition of a "Subsection (f) asset" (as such term is
defined in Section 341(f)(4) of the Code) owned by Parent or any of its
Subsidiaries.
(i) Parent is not, and has not been for the five years preceding the
Closing, a "United States real property holding company" (as such term is
defined in Section 897(c)(2) of the Code).
(j) Parent has no reason to believe that any condition exists, nor has
Parent, nor any of its Subsidiaries, taken any action or failed to take any
action, that could reasonably be expected to prevent the Merger from qualifying
as a reorganization within the meaning of Section 368(a) of the Code.
For purposes of this Agreement the term (i) "Taxes" will mean any and all
-----
federal, state, local, foreign, provincial, territorial or other taxes, imposts,
tariffs, fees, levies or other similar assessments or liabilities and other
charges of any kind, including income taxes, ad valorem taxes, excise taxes,
withholding taxes, stamp taxes or other taxes of or with respect to gross
receipts, premiums, real property, personal property, windfall profits, sales,
use, transfers, licensing, employment, social security, workers' compensation,
unemployment, payroll and franchises imposed by or under any Law; and such terms
will include any interest, fines, penalties, assessments or additions to tax
resulting from, attributable to or incurred in connection with any such tax or
any contest or dispute thereof and (ii) "Tax Returns" will mean any declaration,
-----------
return, report, schedule, certificate, statement or other similar document
(including relating or supporting information) required to be filed with a
Governmental Entity, or where none is required to be filed with a Governmental
Entity, the statement or other document issued by a Governmental Entity in
connection with any Tax, including, without limitation, any information return,
claim for refund, amended return or declaration of estimated Tax.
18
<PAGE>
Section 2.10 Actions and Proceedings. Except as set forth in Schedule
-----------------------
2.10 the Parent Disclosure Schedule, (a) there are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against or
involving Parent or any of its Subsidiaries, against or involving any of the
present directors or officers of Parent or any of its Subsidiaries, as such, or
involving any of its or their properties, assets or business that, individually
or in the aggregate, would have a Material Adverse Effect on Parent and (b) as
of the date of this Agreement, there are no actions, suits or claims or legal,
administrative or arbitrative proceedings or investigations pending or, to the
Knowledge of Parent, threatened against or involving Parent or any of its
Subsidiaries against or involving any of the present directors or officers of
Parent or any of its Subsidiaries, as such, or involving any of its or their
properties, assets or business before any court or arbitration tribunal or
before any Governmental Entity that, individually or in the aggregate, would
have a Material Adverse Effect on Parent. As of the date of this Agreement,
there are no actions, suits, labor disputes or other litigation, legal or
administrative proceedings or governmental investigations pending, or, to the
Knowledge of Parent, threatened against or affecting Parent or any of its
Subsidiaries or any of its or their present directors or officers, as such, or
any of its or their properties, assets or business before any court or
arbitration tribunal or before any Governmental Entity relating to the
transactions contemplated by the Transaction Agreements.
Section 2.11 Certain Agreements. Schedule 2.11 of the Parent Disclosure
------------------
Schedule sets forth each material oral or written stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan to which
Parent or any of its Subsidiaries is a party. Except as set forth in Schedule
2.11 of the Parent Disclosure Schedule, as of the date of this Agreement,
neither Parent nor any of its Subsidiaries is a party to any oral or written
agreement or plan, including any stock option plan, stock appreciation rights
plan, restricted stock plan or stock purchase plan, any of the benefits of which
will be increased, or the vesting of the benefits of which will be accelerated,
by the occurrence of any of the transactions contemplated by this Agreement or
the value of any of the benefits of which will be calculated on the basis of any
of the transactions contemplated by this Agreement. No holder of any option to
purchase shares of Parent Common Stock, or shares of Parent Common Stock granted
in connection with the performance of services for Parent or its Subsidiaries,
is or will be entitled to receive cash from Parent or any Subsidiary in lieu of
or in exchange for such option or shares as a result of the transactions
contemplated by this Agreement (other than in lieu of fractional shares).
Neither Parent nor any Subsidiary is a party to any termination benefits
agreement or severance agreement or employment agreement which would be
triggered by the consummation of the transactions contemplated by this
Agreement.
19
<PAGE>
Section 2.12 ERISA.
-----
(a) Schedule 2.12(a) of the Parent Disclosure Schedule lists each Parent
Plan (as hereinafter defined). With respect to each material Parent Plan,
Parent has made (or as soon as practicable will make) available to the Company a
true and correct copy of (i) the three most recent annual reports (Form 5500)
filed with the Internal Revenue Service (the "IRS"), (ii) such Parent Plan and
---
any amendments thereto, (iii) each trust agreement, insurance contract or
administration agreement relating to such Parent Plan and the latest financial
statements thereof, (iv) the most recent summary plan description of each Parent
Plan for which a summary plan description is required, (v) the most recent
actuarial report or valuation relating to a Parent Plan subject to Title IV of
ERISA, (vi) the most recent determination letter, if any, issued by the IRS with
respect to any Parent Plan intended to be qualified under section 401(a) of the
Code and (vii) any written description that exists as of the date of this
Agreement of any unwritten Parent Plan. Except as would not, individually or in
the aggregate, have a Material Adverse Effect on Parent, (i) each Parent Plan
complies with all applicable statutes and governmental rules and regulations,
including but not limited to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), the Code and the Consolidated Omnibus Budget
-----
Reconciliation Act of 1985, as amended ("COBRA"), and (ii) no "reportable
-----
event" (within the meaning of Section 4043 of ERISA) has occurred with respect
to any Parent Plan for which the 30-day notice requirement has not been waived,
(iii) none of Parent or its Subsidiaries is or has been obligated to contribute
or otherwise may have any liability with respect to any Parent Multiemployer
Plan (as hereinafter defined), (iv) no action has been taken, or is currently
being considered, to terminate any Parent Plan subject to Title IV of ERISA, (v)
Parent has complied with the continued medical coverage requirements of COBRA,
(vi) no Parent Plan has engaged in a "prohibited transaction" (as defined in
Section 4975 of the Code or Section 406 of ERISA) and (vii) no liability under
Title IV or Section 302 of ERISA or Section 412 of the Code has been incurred by
Parent that has not been satisfied in full, and no condition exists that
presents a risk to Parent of incurring any such liability. Except as would not,
individually or in the aggregate, have a Material Adverse Effect on Parent, no
Parent Plan subject to Title IV of ERISA, nor any trust created thereunder, has
incurred any "accumulated funding deficiency" (as defined in Section 302 of
ERISA), whether or not waived.
(b) With respect to any Parent Plan which is subject to Title IV of ERISA,
the present value of accrued benefit obligations, as determined in accordance
with FAS 87 in accordance with the actuarial assumptions used to prepare the
most recent reports of such Parent Plan, did not exceed the fair market value of
the Plan assets as of the most recent valuation date for which an actuarial
report has been
20
<PAGE>
prepared and to the Knowledge of Parent, there has not been any material adverse
change to such status. All contributions required to be made with respect to any
Parent Plan on or prior to the Closing Date have been timely made or are
reflected on the most recent balance sheet of Parent. With respect to the Parent
Plans, no event has occurred in connection with which Parent would be subject to
any liability under the terms of such Parent Plans, ERISA, the Code or any other
applicable law which would have, individually or in the aggregate, a Material
Adverse Effect on Parent. With respect to any current or former employee,
director, officer, consultant or contractor of Parent or its Subsidiaries,
consummation of the transactions contemplated by this Agreement shall not result
in the payment or provision of additional compensation or benefits or accelerate
the vesting, payment or funding of any compensation or benefits. No amounts
payable by reason of this transaction under the Parent Plans will fail to be
deductible for federal income tax purposes by virtue of either Section 280G or
Section 162(m) of the Code. All Parent Plans that are intended to be qualified
under Section 401(a) of the Code have been determined by the IRS to be so
qualified or a timely application for such determination is pending, and to the
Knowledge of Parent, there is no reason why any such Parent Plan is not so
qualified in operation. Parent does not have any liability or obligation under
any welfare plan to provide benefits after termination of employment to any
employee or dependent other than as required by ERISA or as disclosed in
Schedule 2.12 of the Parent Disclosure Schedule. There are no pending or, to
the Knowledge of Parent, threat ened, claims, suits, audits or investigations
related to any Parent Plan other than claims for benefits in the ordinary course
and other than claims, suits, audits or investigations that would not,
individually or in the aggregate, have a Material Adverse Effect on Parent. As
used herein, (i) "Parent Plan" means each deferred compensation and each bonus
-----------
or other incentive compensation, stock purchase, stock option and other equity
compensation or ownership plan, program, agreement or arrangement, each
severance or termination pay, medical, surgical, hospitalization, life insurance
and other "welfare" plan, fund or program (within the meaning of Section 3(1) of
the ERISA); each profit-sharing, stock bonus or other "pension" plan, fund or
program (within the meaning of Section 3(2) of ERISA); each employment,
retention, consulting, termination or severance agreement; and each other
employee benefit plan, fund, program, agreement or arrangement, in each case,
that is sponsored, maintained or contributed to or required to be contributed
to by Parent or its Subsidiaries, including any plan subject to Title IV of
ERISA maintained within the past five (5) years by Parent or any of its
Subsidiaries and (ii) "Parent Multiemployer Plan" means a "multiemployer plan"
-------------------------
(as defined in Section 4001(a)(3) of ERISA) to which Parent is or has been
obligated to contribute or otherwise may have any liability.
Section 2.13 Compliance with Certain Laws.
----------------------------
21
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(a) Except as disclosed in Schedule 2.13(a) of the Parent Disclosure
Schedule, the properties, assets and operations of Parent and its Subsidiaries
are in compliance with all Applicable Laws, except for any violations that,
individually or in the aggregate, would not have a Material Adverse Effect on
Parent. Except as disclosed in Schedule 2.13(a) of the Parent Disclosure
Schedule, with respect to such properties, assets and operations, including any
previously owned, leased or operated properties, assets or operations, there are
no past, present or reasonably anticipated future events, conditions,
circumstances, activities, practices, incidents, actions or plans of Parent or
any of its Subsidiaries that may interfere with or prevent compliance or
continued compliance with all Applicable Laws, other than any such interference
or prevention as would not, individually or in the aggregate with any such other
interference or prevention, have a Material Adverse Effect on Parent. For
purposes of this Agreement, "Applicable Laws" shall mean applicable federal,
---------------
state, local and foreign laws, rules and regulations, orders, decrees,
judgments, permits and licenses of all Governmental Entities (including, but not
limited to, those related to public and worker health and safety, controlled
substances and the protection and clean-up of the environment and activities or
conditions related thereto (including, without limitation, those relating to the
generation, handling, disposal, transportation or release of hazardous
materials) (collectively, "Environmental Laws")). The term "hazardous materials"
------------------ -------------------
shall mean those substances that are regulated by or form the basis for
liability under any applicable Environmental Laws. Parent will make available to
the Company such certificates and environmental studies with respect to such
properties as Parent has available on the date of this Agreement.
(b) Each of Parent's and its Subsidiaries' manufacturing, distribution,
development and marketing practices are in compliance with all applicable
federal and state laws, rules, regulations, orders, licenses, judgments, writs,
injunctions, decrees or demands, including, without limitation, laws and
regulations administered by the FDA and the DEA, except where the failure to be
in such compliance would not, individually or in the aggregate, have a Material
Adverse Effect on Parent.
(c) Each of Parent and its Subsidiaries possesses FDA approval or
allowance of all material investigational or marketed product applications as
are currently legally required and are necessary for the conduct of its business
as now being conducted, a list of which is attached hereto as Schedule 2.13(c)
of the Parent Disclosure Schedule, true and correct copies of which have been
provided to the Company by Parent.
(d) Since December 1, 1997, none of Parent or any of its Subsidiaries has
used the services of any person debarred under the provisions of the Generic
Drug
22
<PAGE>
Enforcement Act of 1992, 21 U.S.C. (S) 335(a)(b). Since December 1, 1997, none
of Parent, its Subsidiaries, nor any of their respective officers, employees,
agents or affiliates, has been convicted of any crime or engaged in any conduct
for which debarment is mandated by 21 U.S.C. (S) 335a(a) or authorized by
21 U.S.C. (S) 335a(b).
(e) Each of Parent and its Subsidiaries is in compliance with all (i)
federal and state laws applicable to the development, manufacture, processing,
packing, testing and sale of pharmaceutical products to the extent such laws are
applicable to it, (ii) rules and regulations of the FDA and the DEA to the
extent such rules and regulations are applicable to it, and (iii) product
applications (including INDs) has been approved by the FDA under which Parent or
any of its Subsidiaries has sold any product on or after November 1, 1999,
except in each case where the failure to be in such compliance would not,
individually or in the aggregate, have a Material Adverse Effect on Parent. All
manufacturing operations conducted by or for the benefit of Parent or any of its
Subsidiaries have been and are being conducted in compliance with the current
Good Manufacturing Practice regulations set forth in 21 C.F.R. Parts 210 and
211, except where the failure to be in such compliance would not, individually
or in the aggregate, have a Material Adverse Effect on Parent.
(f) As to each drug of Parent for which a product application has been
approved by, or an IND has been filed with, the FDA, the applicant and all
Persons performing operations covered by the application are in compliance with
the requirements of the Food, Drug and Cosmetics Act, as amended (the "FDCA"),
----
and the implementing regulations of the FDA, respectively, and all terms and
conditions of the application, except where the failure to be in such compliance
would not, individually or in the aggregate, have a Material Adverse Effect on
Parent.
(g) Each of Parent and its Subsidiaries is in material compliance with all
applicable registration and listing requirements set forth in 21 U.S.C. (S) 360
and 21 C.F.R. Part 207. To the extent required, each of Parent and its
Subsidiaries has obtained registrations from the DEA and are in material
compliance with all such registrations and all applicable regulations
promulgated by the DEA.
(h) Neither Parent, any of its Subsidiaries, nor their respective
officers, employees, or agents have made an untrue statement of material fact or
fraudulent statement to the FDA or the DEA, failed to disclose a material fact
required to be disclosed to the FDA or the DEA, or committed an act, made a
statement, or failed to make a statement that could reasonably be expected to
provide a basis for the FDA to invoke its policy respecting "Fraud, Untrue
Statements of Material Facts, Bribery, and Illegal Gratuities," set forth in 56
Fed. Reg. 46191 (September 10, 1991).
23
<PAGE>
(i) Parent has made available to the Company copies of any and all notices
of inspectional observations (FD 483's), establishment inspection reports,
warning letters and any other documents received from or issued by the FDA or
the DEA within the last three years that indicate or suggest lack of compliance
with the FDA or the DEA regulatory requirements by Parent, any Subsidiary of
Parent, or Persons covered by product applications or otherwise performing
services for the benefit of Parent or any of its Subsidiaries with respect to
services or products provided to Parent or any of its Subsidiaries.
(j) Neither Parent nor any of its Subsidiaries has received any written
notice that the FDA or the DEA has commenced or threatened to initiate (i) any
action to withdraw its approval or request the recall of any product of Parent
or any Subsidiary of Parent, (ii) any action to enjoin (A) production at any
facility owned or used by Parent, any of Parent's Subsidiaries or any Person on
behalf of Parent or any of Parent's Subsidiaries or (B) any facility (including
any clinical facility where testing and/or trials occur) owned or used by
Parent, any of Parent's Subsidiaries or any Person on behalf of Parent or any of
Parent's Subsidiaries, (iii) the withdrawal of approval of any product
application (including any IND), other than such withdrawals of approval that
would not, individually or in the aggregate, have a Material Adverse Effect on
Parent, or (iv) any material civil penalty, injunction, seizure or criminal
action.
(k) To the Knowledge of Parent, as to each article of drug or consumer
product currently manufactured and/or distributed by Parent or any Subsidiary of
Parent, or by any Person on behalf of Parent or any Subsidiary of Parent, such
article is not adulterated or misbranded within the meaning of the FDCA, 21
U.S.C. (S)(S) 301 et seq. and not in violation of 21 U.S.C. (S) 355.
(l) As to each drug referred to in subsection (c) above, Parent, its
Subsidiaries and their respective officers, employees, agents and affiliates
have included or caused to be included in the application for such drug, where
required, the certification described in 21 U.S.C. (S) 335a(k)(1) and the list
described in 21 U.S.C. (S) 335a(k)(2), and such certification and such list was
in each case true and accurate when made and remained true and accurate
thereafter.
(m) All pre-clinical trials and clinical trials Parent or its Subsidiaries
has conducted or has had conducted for it by third parties, to the Knowledge of
Parent, complies in all material respects with the requirements of Good Clinical
Practice, Informed Consent, and all requirements relating to protection of human
subjects, found in 21 C.F.R. (S)(S) 50, 54 and 56 and that all nonclinical
laboratory testing complies with the requirements of 21 C.F.R. (S) 58.
24
<PAGE>
(n) As to each product application submitted to, but not approved by, the
FDA, and not withdrawn by Parent or one of its Subsidiaries, or applicants
acting on its behalf as of the date of this Agreement, each of Parent and its
Subsidiaries has complied in all material respects with the requirements of the
FDCA and implementing FDA regulations and has provided, or will provide, all
additional information and taken, or will take, all additional action that has
been deemed appropriate by Parent in connection with the application.
(o) Parent and each of its Subsidiaries represent and warrant that in
connection with the exportation of certain FDA regulated products, it is in
compliance with the requirements of 21 U.S.C. (S)(S) 381 and 382 of the FDCA.
Section 2.14 Liabilities. Except as fully reflected or reserved against
-----------
in the consolidated balance sheet of Parent and its Subsidiaries as of December
31, 1998 (included in the Parent Financial Statements) or as disclosed in
Schedule 2.14 of the Parent Disclosure Schedule, Parent and its Subsidiaries
have no liabilities (including, without limitation, tax liabilities) absolute or
contingent, that would be required to be reflected on a balance sheet or in
notes thereto prepared in accordance with GAAP, other than liabilities incurred
in the ordinary course of business or that, individually or in the aggregate,
would not have a Material Adverse Effect on Parent.
Section 2.15 Labor Matters. Except as set forth in Schedule 2.15 of the
-------------
Parent Disclosure Schedule, neither Parent nor any of its Subsidiaries is a
party to any collective bargaining agreement or labor contract. Neither Parent
nor any of its Subsidiaries has engaged in any unfair labor practice with
respect to any Persons employed by or otherwise performing services for Parent
or any of its Subsidiaries (the "Parent Business Personnel"), and there is no
-------------------------
unfair labor practice complaint or grievance against Parent or any of its
Subsidiaries by the National Labor Relations Board or any comparable state
agency pending or, to Parent's Knowledge, threatened in writing with respect to
the Parent Business Personnel, except where such unfair labor practices,
complaints or grievances would not, individually or in the aggregate, have a
Material Adverse Effect on Parent. There is no labor strike, dispute, slow down
or stoppage pending or, to the Knowledge of Parent, threatened against or
affecting Parent or any of its Subsidiaries which may interfere with the
respective business activities of Parent or any of its Subsidiaries, except
where such disputes, strikes or work stoppages would not, individually in the
aggregate, have a Material Adverse Effect on Parent. Parent and its
Subsidiaries are in compliance with all labor, employment and wage payment-
related laws, regulations and rules, except where the failure to be in such
compliance would not, individually or in the aggregate, have a Material Adverse
Effect on Parent.
25
<PAGE>
Section 2.16 Intellectual Property.
---------------------
(a) Except as set forth in Schedule 2.16(a) of the Parent Disclosure
Schedule or as would not, individually or in the aggregate, have a Material
Adverse Effect on Parent, Parent and each of its Subsidiaries are the owners of
or have the valid and enforceable right to make, use, sell, offer to sell and
import all Parent Intellectual Property to the extent used in or necessary for
the conduct of Parent or any of its Subsidiaries' business, free and clear of
all liens, security interests, charges or encumbrances of any kind and, except
for the Parent License Agreements set forth in Schedule 2.16(b) of the Parent
Disclosure Schedule, free and clear of all licenses to third parties granting
any right to use or practice any rights under any Parent Intellectual Property.
As used in this Agreement, the term "Parent Intellectual Property" shall mean:
----------------------------
(i) Parent's or any of its Subsidiaries' registered and unregistered trade
marks, service marks (including registrations, recordings and applications in
the United States Patent and Trademark Office, any state of the United States or
any other Governmental Entity worldwide), slogans, trade names, logos and trade
dress (collectively, together with the good will symbolized thereby or
associated with each, "Parent Trademarks"); (ii) all of Parent's or any of its
-----------------
Subsidiaries' national (including, but not limited to, the United States) and
multinational statutory invention registrations, patents, patent registrations
and patent applications (including, but not limited to, all reissues, divisions,
continuations, continuations-in-part, extensions and reexaminations, and all
rights therein provided by law, multinational treaties or conventions)
(collectively, "Parent Patents"); (iii) all of Parent's or any of its
--------------
Subsidiaries' national and multinational registered and material unregistered
copyrights, including, but not limited to, copyrights in software programs and
databases (collectively, "Parent Copyrights"); (iv) Parent's or any of its
-----------------
Subsidiaries' software programs documentation and manuals used in connection
therewith and databases (together, "Parent Software"); (v) all of Parent's or
---------------
any of its Subsidiaries' (A) inventions, whether patentable or not patentable,
whether or not reduced to practice, and not yet made the subject of a pending
patent application or applications, (B) ideas and conceptions of potentially
patentable subject matter, including, without limitation, any patent
disclosures, whether or not reduced to practice and not yet made the subject of
a patent application, (C) trade secrets and confidential, technical information
(including ideas, formulas, compositions, inventions and conceptions of
inventions whether patentable or not patentable and whether or not reduced to
practice), (D) technology (including, without limitation, know-how and
show-how), manufacturing and production processes and techniques, service and
repair manuals, research and development information, drawings, specifications,
designs, plans, proposals, technical data and copyrightable works, whether
secret or confidential or not, and all proprietary or confidential business
information, (E) all rights to obtain
26
<PAGE>
and rights to apply for patents, and to register trademarks and copyrights and
(F) all records (including, but not limited to, laboratory, research and
testing notebooks) in any accessible format (including, but not limited to,
paper records, photographs, audio and visual tape recordings and computer
storage media and other information storage media) pertaining to patentable or
potentially patentable subject matter and all technical manuals and
documentation made or used in connection with any of the foregoing
(collectively, "Parent Technology"); and (vi) agreements pursuant to which
-----------------
Parent or any of its Subsidiaries has obtained or granted the right to use any
of the foregoing (collectively, and together with other agreements to which
Parent or any of its Subsidiaries are a party relating to the development,
acquisition, use, sale, offer for sale or importation of Parent Intellectual
Property, "Parent License Agreements").
-------------------------
(b) Schedule 2.16(b) of the Parent Disclosure Schedule sets forth a true,
complete and accurate list of the following Parent Intellectual Property items
owned by or under obligation of assignment to Parent or any of its Subsidiaries:
(i) all registrations of and applications to register Parent Trademarks
material to the business of Parent or any of its Subsidiaries as conducted on
the date of this Agreement; (ii) all unregistered Parent Trademarks which are
material to the business of Parent or any of its Subsidiaries as conducted on
the date of this Agreement; (iii) all Parent Patents; (iv) all registrations of
and applications to register any Parent Copyrights; (v) all Parent Software; and
(vi) all Parent License Agreements, other than off-the-shelf Parent Software
licenses.
(c) Except as set forth in Schedule 2.16(c) of the Parent Disclosure
Schedule, either Parent or one of its Subsidiaries is the sole and exclusive
owner of Parent Intellectual Property items set forth in Schedule 2.16(b) of the
Parent Disclosure Schedule and Parent or one of its Subsidiaries, as
applicable, is listed in the records of the appropriate Governmental Entity as
the sole owner of record. Except as set forth in Schedule 2.16(c) of the Parent
Disclosure Schedule, there is no lien, security interest, charge or encumbrance
of any kind on the right of Parent or any of its Subsidiaries to transfer any of
Parent Intellectual Property. Except as otherwise indicated in Schedule 2.16(b)
of the Parent Disclosure Schedule, (i) all issued patents set forth thereon are
valid and enforceable and (ii) (A) as of the date of this Agreement, no such
trademark registrations, trademark applications, issued patents or patent
applications set forth in Schedule 2.16(b) of the Parent Disclosure Schedule are
subject to any pending proceedings, including opposition, cancellation,
interference or similar adversarial proceeding by or before any Governmental
Entity and no such proceedings are threatened and (B) at the Effective Time, no
such trademark registrations, trademark applications, issued patents or patent
applications set forth in Schedule 2.16(b) of the Parent Disclosure Schedule are
subject to any pending proceedings, including opposition, cancellation,
interference or similar adversarial proceeding by or before any Governmental
Entity and no such proceedings are
27
<PAGE>
threatened, other than such proceedings that would not, individually or in the
aggregate, have a Material Adverse Effect on Parent.
(d) There are no royalties, honoraria, fees or other payments payable by
Parent or any of its Subsidiaries in respect of the use or the right to use any
Parent Intellectual Property to any Person or Governmental Entity (excluding
Taxes, governmental or attorneys' fees required in the normal course of
obtaining patent, trademark or copyright rights and excluding governmental
maintenance fees), except as set forth in the Parent License Agreements listed
in Schedule 2.16(b) of the Parent Disclosure Schedule and pursuant to off-the-
shelf Parent Software licenses. The Parent License Agreements set forth in
Schedule 2.16(b) of the Parent Disclosure Schedule are valid and binding
obligations of the parties thereto, enforceable in accordance with their terms,
except as the enforceability thereof may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws in effect that affect the
enforcement of creditors rights generally or general principals of equity,
whether considered in a proceeding at law or in equity, and there exists no
event or condition which will result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default by Parent or any
of its Subsidiaries (or, to the Knowledge of Parent or any of its Subsidiaries,
any other party thereto) under any Parent License Agreement, except where such
violations, breaches or defaults would not, individually or in the aggregate,
have a Material Adverse Effect on Parent.
(e) Except as disclosed in Schedule 2.16(e) of the Parent Disclosure
Schedule or as would not, individually or in the aggregate, have a Material
Adverse Effect on Parent, (i) none of the use by Parent or any of its
Subsidiaries of any Parent Intellectual Property, the exercise of rights
relating to Parent Patents, Parent Trademarks and Parent Copyrights contained
within Parent Intellectual Property or the conduct of the business of Parent or
any of its Subsidiaries infringes or otherwise violates any intellectual
property rights (either directly or indirectly, such as through contributory
infringement or inducement to infringe) of any third party and (ii) no such
claims have been asserted or, to the Knowledge of Parent, threatened against
Parent or any of its Subsidiaries which have not been resolved. Except as
disclosed in Schedule 2.16(e) of Parent Disclosure Schedule, (A) as of the date
of this Agreement, (i) to the Knowledge of Parent, no third party is infringing
or otherwise violating any Parent Intellectual Property rights of Parent or
any of its Subsidiaries and (ii) no such claims are pending or threatened by
Parent or any of its Subsidiaries against any third party and (B) at the
Effective Time, (i) to the Knowledge of Parent, no third party is infringing or
otherwise violating any Parent Intellectual Property rights of Parent that are
material to the business of Parent as conducted or proposed to be conducted on
the date of this Agreement and (ii) no such claims are pending or
28
<PAGE>
threatened by Parent against any third party, which involve any Parent
Intellectual Property that is material to the business of Parent as conducted or
proposed to be conducted on the date of this Agreement.
(f) Except as disclosed in Schedule 2.16(f) of the Parent Disclosure
Schedule, (i) as of the date of this Agreement, there are no suits or any other
proceedings pending or, to the Knowledge of Parent, threatened before any
Governmental Entity to which Parent or any of its Subsidiaries is a party
challenging (A) Parent's or such Subsidiary's rights to own or use any Parent
Intellectual Property or (B) the validity, enforceability or scope of the Parent
Intellectual Property and (ii) at the Effective Time, there are no such suits to
which Parent or any of its Subsidiaries is a party challenging (A) Parent's or
such Subsidiary's rights to own or use any Parent Intellectual Property that
is material to the business of the Company as conducted or proposed to be
conducted on the date of this Agreement or (B) the validity, enforceability or
scope of the Parent Intellectual Property that is material to the business of
the Company as conducted or proposed to be conducted on the date of this
Agreement. There are no settlement agreements, consents, judgments, orders,
forebearances to sue or similar obligations which materially restrict any rights
of Parent or any of its Subsidiaries to (i) make, use, sell, offer for sale,
import or license under any Parent Intellectual Property or (ii) conduct its
business in order to accommodate a third party's intellectual property rights.
(g) Parent and each of its Subsidiaries employ reasonable measures to
protect the confidentiality of the Parent Technology. Parent and each of its
Subsidiaries require employees with access to the Parent Technology to execute
a nondisclosure agreement substantially in accordance with the form(s)
previously provided by Parent to the Company. Except as set forth in Schedule
2.16(g) of the Parent Disclosure Schedule, none of the current or former
employees, officers or directors of Parent or any of its Subsidiaries (i) is
suspected to be in violation of any such agreement or (ii) is suspected of
having disclosed any Parent Technology to any third party except subject to an
appropriate confidentiality agreement or as required by a Governmental Entity.
(h) Except as set forth in Schedule 2.16(h) of the Parent Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not result in the loss or impairment of any rights of Parent or any of its
Subsidiaries to own, use or license any Parent Intellectual Property, except
where such losses or impairments would not, individually or in the aggregate,
have a Material Adverse Effect on Parent.
29
<PAGE>
(i) Except as set forth in Schedule 2.16(i) of the Parent Disclosure
Schedule, since December 1, 1997, none of Parent or any of its Subsidiaries has
disposed of or permitted to lapse any rights to the use of any Parent
Intellectual Property, or disposed of or disclosed to any Person other than
representatives of the Company any Parent trade secret, formula, process or
know-how not theretofore a matter of public knowledge other than in the ordinary
course of business or pursuant to secrecy agreement.
Section 2.17 Ownership of Shares. As of the date of this Agreement, none
-------------------
of Parent, any Person deemed acting in concert with Parent or any of its
Subsidiaries or any of Parent's Subsidiaries owns any shares of Company Common
Stock.
Section 2.18 Operations of Sub. Sub is a direct, wholly-owned subsidiary
-----------------
of Parent, was formed solely for the purpose of engaging in the transactions
contemplated hereby, has engaged in no other business activities and has
conducted its operations only as contemplated hereby.
Section 2.19 Brokers. No broker, investment banker or other Person
-------
(other than (a) Goldman, Sachs & Co. and Salomon Smith Barney, the fees and
expenses of which have been previously disclosed to the Company and will be paid
by Parent and (b) Kelso & Co. (or an Affiliate thereof) to whom a fee (in an
amount previously disclosed to the Company) will be paid in connection with the
transactions contemplated by this Agreement), is entitled to any broker's,
finder's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
Parent.
Section 2.20 State Takeover Statutes. Assuming the accuracy of the
-----------------------
Company's representations and warranties contained in Section 3.19 hereof (Owner
ship of Shares), as of the date of this Agreement, no state takeover statutes or
other state statutes, including, without limitation, any business combination
act, with respect to Parent or Sub are applicable to the Merger or the
Transaction Agreements.
Section 2.21 Year 2000. With respect to year 2000, Parent and Sub
---------
represent and warrant that the statement contained in Exhibit D-1 hereto is true
and accurate.
30
<PAGE>
Section 2.22 Accuracy of Information Furnished. No representation or
---------------------------------
warranty of Parent and Sub contained in this Agreement (taken together with the
other Transaction Agreements and the exhibits, schedules, certificates and lists
attached hereto or specifically referred to herein or delivered by or on behalf
of Parent or Sub pursuant to this Agreement) contains or will contain, in light
of the circumstances in which they were made, any untrue statement of a material
fact, or omits or will omit to state any material fact that is necessary to make
the statement contained herein or therein not misleading.
Section 2.23 Required Vote of Parent and Sub Stockholders. Under
--------------------------------------------
applicable Delaware law and the Parent Charter and Parent By-laws and the
certificate of incorporation and by-laws of Sub, respectively, the affirmative
vote of the holder(s) of (A) not less than a majority of the outstanding shares
of Parent Common Stock and (B) not less than a majority of the outstanding
shares of common stock of Sub is in each case required to approve the Merger.
Such votes have been obtained as of the date of this Agreement. No other vote
of the stockholders of Parent or of Sub is required by law, the Parent Charter,
the Parent By-laws or the certificate of incorporation or by-laws of Sub or
otherwise for Parent and Sub to consummate the Merger and the transactions
contemplated hereby.
Section 2.24 Interests in Other Entities. As of the date of this
---------------------------
Agreement, none of Parent or its Subsidiaries, directly or indirectly, own or
have the right to acquire any equity interest in any other corporation,
partnership, joint venture or other business organization (other than any such
equity interest that is 1% or less of the equity interest of such a public
corporation). None of Parent or its Subsidiaries has made any material
investment in or advance of cash or other extension of credit to any Person, or
has any material commitment or obligation to do so.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent and Sub as follows:
Section 3.1 Organization, Standing and Power. The Company is a
--------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware and has the requisite corporate power and authority to
carry on its business as now being conducted and to enter into and perform this
Agreement and the other Transaction Agreements and the transactions contemplated
hereby and thereby. The Company is duly qualified to do business, and is in
good standing, in
31
<PAGE>
each jurisdiction where the character of its properties owned or held under
lease or the nature of their activities makes such qualification necessary,
except where the failure to be so qualified would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. The Company has
heretofore delivered to Parent complete and correct copies of the Company's
Certificate of Incorporation ("Company Charter") and by-laws
---------------
("Company By-Laws"), as in effect on the date of this Agreement.
---------------
Section 3.2 Capital Structure; Subsidiaries.
-------------------------------
(a) The authorized capital stock of the Company consists of 50,000,000
shares of Company Common Stock, par value $.0l per share, and 10,000,000 shares
of Company preferred stock, par value $.01 per share (the "Company Preferred
-----------------
Stock"). At the close of business on November 22, 1999, (i) 17,403,895 shares
- -----
of Company Common Stock were issued and outstanding, all of which were validly
issued, fully paid and nonassessable and free of preemptive rights, (ii) no
shares of Company Common Stock were held in the treasury of the Company, (iii)
not more than 23,240 and 1,146,100 shares of Company Common Stock were reserved
for future issuance pursuant to the Company's 1994 Stock Option Plan and the
Company's 1996 Stock Option Plan, respectively, (v) 283,000 shares of Company
Common Stock were reserved for issuance pursuant to the 1996 Non-Employee
Director Stock Option Plan (collectively with the Company's 1994 Stock Option
Plan and the Company's 1996 Stock Option Plan, the "Company Stock Plans") and
-------------------
(vi) no shares of Company Preferred Stock were issued and outstanding. As of
the date of this Agreement, except for (a) stock options covering not in excess
of 767,315 shares of Company Common Stock issued under the Company Stock Plans
(collectively, the "Company Stock Options") and (b) warrants exercisable into
---------------------
479,661 shares of Company Common Stock, there are no options, warrants, calls,
rights or agreements to which the Company is a party or by which any of them is
bound obligating the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of the Company or
securities convertible into or exchangeable for such capital stock, or
obligating the Company to grant, extend or enter into any such option, warrant,
call, right or agreement. Except as disclosed in the Company SEC Documents (as
hereinafter defined) filed prior to the date of this Agreement, since November
15, 1999, the Company has not issued any shares of its capital stock, or
securities convertible into or exchangeable for such capital stock, other than
shares issued in the ordinary course pursuant to the Company Stock Plans.
Except as disclosed in the Company SEC Documents filed prior to the date of this
Agreement or as set forth in Schedule 3.2 of the disclosure letter delivered by
the Company to Parent at or prior to the execution of this Agreement (the
"Company Disclosure Schedule"), there are no outstanding contractual obligations
---------------------------
of the Company (i)
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restricting the transfer of, (ii) affecting the voting rights of, (iii)
requiring the repurchase, redemption or disposition of, (iv) requiring the
registration for sale of or (v) granting any preemptive or antidilutive right
with respect to, any shares of Company Common Stock. The execution and delivery
of the Transaction Documents do not, and the consummation of the transactions
contemplated hereby and thereby and the compliance with the provisions hereof
and thereof will not, give rise to any preemptive right or antidilutive right of
any Person with respect to any shares of the Company Common Stock.
(b) The Company has no Subsidiaries.
Section 3.3 Authority. The Board of Directors of the Company has on or
---------
prior to the date of this Agreement (a) declared the Merger advisable and in the
best interest of the Company and its stockholders and approved this Agreement in
accordance with applicable law, (b) resolved to recommend the approval of this
Agreement by the Company's stockholders and (c) directed that this Agreement be
submitted to the Company's stockholders for approval. The Company has all
requisite corporate power and authority to enter into the Transaction Agreements
to which it is a party and, subject to approval by the stockholders of the
Company of this Agreement (which approval, for all purposes in this Agreement,
shall be deemed to include any necessary approval of amendments to the Company's
Stock Plans) (collectively, the "Company Stockholder Approval"), to consummate
----------------------------
the transactions contemplated hereby and thereby. The execution and delivery of
the Transaction Agreements to which it is a party by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate action on the part of the
Company, subject to (x) Company Stockholder Approval and (y) the filing of the
Certificate of Merger pursuant to the DGCL. The Transaction Agreements to which
it is a party have been duly executed and delivered by the Company and (assuming
the valid authorization, execution and delivery thereof by the other parties
thereto) each such Transaction Agreement constitutes the valid and binding
obligation of the Company enforceable against the Company in accordance with
their terms, except as the enforceability thereof may be limited by (1)
applicable bankruptcy, insolvency, moratorium, reorganization or similar laws in
effect that affect the enforcement of creditors rights generally or (2) general
principals of equity, whether considered in a proceeding at law or in equity.
Prior to the filing thereof, the filing of the Proxy Statement with the SEC and
the taking of all actions in connection therewith will have been duly authorized
by the Company's Board of Directors.
Section 3.4 Consents and Approvals; No Violation. Assuming all consents,
------------------------------------
approvals, authorizations and other actions described in the second
33
<PAGE>
sentence of this Section 3.4 have been obtained and all filings and obligations
described in the second sentence of this Section 3.4 have been made and except
as set forth in Schedule 3.4 of the Company Disclosure Schedule, the execution
and delivery of the Transaction Agreements do not, and the consummation of the
transactions contemplated hereby and thereby and compliance with the
provisions hereof and thereof will not, conflict with, result in any violation
of, or breach or default (with or without due notice or lapse of time, or both)
under, or give to others a right of termination, cancellation or acceleration of
any obligation or the loss of any benefit under, or result in the creation of
any lien, security interest, charge or encumbrance upon any of the properties or
assets of the Company under, any provision of (a) the Company Charter or Company
By-Laws, (b) any loan or credit agreement, note, bond, mort gage, lease,
indenture or other contract, agreement, instrument, permit, concession,
franchise or license applicable to the Company, (c) any license, permit or other
instrument, contract or agreement granted by, or entered into with, the FDA or
the DEA or (d) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or any of its properties or assets, other
than, in the case of clauses (b), (c) or (d), any such conflicts, violations,
breaches, defaults, rights, liens, security interests, charges or encumbrances
that, individually or in the aggregate, would not have a Material Adverse Effect
on the Company, or prevent or materially delay the consummation of any of the
transactions contemplated hereby or thereby. No filing, notification or
registration with, or authorization, consent or approval of, any Governmental
Entity is required by or with respect to the Company in connection with the
execution, delivery and performance of the Transaction Agreements by the Company
or is necessary for the consummation of the Merger and the other transactions
contemplated by the Transaction Agreements, except for (i) in connection, or in
compliance, with the provisions of the HSR Act, the Securities Act and the
Exchange Act, (ii) the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware and the filing of appropriate documents with the
relevant authorities of other states in which the Company is qualified to do
business, each of which is set forth in Schedule 3.4 of the Company Disclosure
Schedule, (iii) such filings and consents as may be required under any
environmental, health or safety law or regulation pertaining to any
notification, disclosure or required approval triggered by the Merger or by the
transactions contemplated by the Transaction Agreements, each of which is set
forth in Schedule 3.4 of the Company Disclosure Schedule, (iv) such filings,
authorizations, orders and approvals as may be required to obtain the State
Takeover Approvals, each of which is set forth in Schedule 3.4 of the Company
Disclosure Schedule, (v) applicable requirements, if any, of "blue sky" laws and
the NASDAQ Composite Index and (vi) such other consents, orders, authorizations,
registrations, declarations and filings the failure of which to be obtained or
made would not, individually or in the aggregate, have a Material Adverse Effect
on the Company or
34
<PAGE>
prevent or materially delay the consummation of any of the transactions
contemplated hereby or thereby or by any other Transaction Agreement. The
execution and delivery of the Transaction Agreements do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, conflict with, result in any
violation of, or breach or default (with or without due notice or lapse of time,
or both) under, or give to others a right of termination, cancellation or
acceleration of any obligation or the loss of a material benefit under, or
result in the creation of any lien, security interest, charge or encumbrance
upon any of the properties or assets of the Company under, any of the license
agreements to which it is a party, except for such conflicts, violations,
breaches, defaults, rights or liens as would not, individually or in the
aggregate, have a Material Adverse Effect on the Company. All license agreements
of the Company are listed in Schedule 3.4 of the Company Disclosure Schedule.
Section 3.5 SEC Documents and Other Reports. The Company has filed with
-------------------------------
the SEC all documents required by the Exchange Act to be filed by the Company
since September 25, 1996 (the "Company SEC Documents"). As of their respective
---------------------
dates, the Company SEC Documents complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as the case may be, and,
at the respective times they were filed, none of the Company SEC Documents
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading
(except, to the extent that any Company SEC Documents were subsequently amended
or modified by a filing prior to the date of this Agreement, such representation
is given only with respect to such Company SEC Document as so amended or
modified as of the date of such amendment or modification). The financial
statements (including, in each case, any notes thereto) of the Company included
in the Company SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, were prepared in accordance with GAAP (except, in
the case of the unaudited statements, as permitted by Form 10-Q of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated therein or in the notes thereto) and fairly present in all material
respects in accordance with GAAP the financial position of the Company as at the
respective dates thereof and the consolidated results of their operations and
their consolidated cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end audit adjustments and to any other
adjustments described therein). Except as disclosed in the Company SEC
Documents or as required by GAAP, the Company has not, since December 31, 1998,
made any change in the accounting practices or policies applied in the
preparation of its financial statements. The books and records of the Company
have
35
<PAGE>
been, and are being, maintained in accordance with GAAP and other applicable
legal and accounting requirements.
Section 3.6 Registration Statement and Proxy Statement. None of the
------------------------------------------
information to be supplied by the Company for inclusion or incorporation by
reference in the Registration Statement or the Proxy Statement will (i) in the
case of the Registration Statement, at the time it becomes effective, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading or include any statement that is materially different
from the representations and warranties of the Company contained in this
Agreement or the other Transaction Agreements or that discloses a liability,
condition or event that would constitute a Material Adverse Effect on the
Company, which liability, condition or event is not otherwise disclosed in the
representations and warranties of the Company contained in this Agreement or in
the Company Disclosure Schedule or (ii) in the case of the Proxy Statement, at
the time of the mailing of the Proxy Statement, the time of the Stockholder
Meeting and at the Effective Time, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading or include any statement that is
materially different from the representations and warranties of the Company
contained in this Agreement or the other Transaction Agreements or that
discloses a liability, condition or event that would constitute a Material
Adverse Effect on the Company, which liability, condition or event is not
otherwise disclosed in the representations and warranties of the Company
contained in this Agreement or in the Company Disclosure Schedule. If, at any
time prior to the Effective Time, any event with respect to the Company, its
officers or directors shall occur which is required to be described in the Proxy
Statement or the Registration Statement, such event shall be so described, and
an appropriate amendment or supplement shall be promptly filed with the SEC and,
as required by law, disseminated to the stockholders of the Company. The Proxy
Statement will comply (excluding any matters relating to Parent and Sub, as to
which the Company makes no representations) as to form in all material respects
with the provisions of the Exchange Act.
Section 3.7 Absence of Certain Changes or Events. Except as disclosed
------------------------------------
in the Company SEC Documents filed with the SEC prior to the date of this
Agreement or in Schedule 3.7 of the Company Disclosure Schedule, since December
31, 1998, (A) the Company has not incurred any liability or obligation
(indirect, direct or contingent), or entered into any oral or written agreement
or other transaction, that is not in the ordinary course of business or that
would, individually or in the aggregate, result in a Material Adverse Effect on
the Company, except for any such changes or
36
<PAGE>
effects resulting from this Agreement, the transactions contemplated hereby or
the announcement thereof; (B) the Company has not sustained any loss or
interference with their business or properties from fire, flood, windstorm,
accident or other calamity (whether or not covered by insurance) that would,
individually or in the aggregate, have a Material Adverse Effect on the Company;
(C) there has been no action taken by the Company, that, if taken during the
period from the date of this Agreement through the Effective Time, would
constitute a material breach of Section 4.1(b) hereof; and (D) there has been no
event, circumstance or development that would have a Material Adverse Effect on
the Company.
Section 3.8 Permits and Compliance.
----------------------
(a) The Company is in possession of all Permits necessary for it to own,
lease and operate its properties or to carry on its business as it is now being
conducted (the "Company Permits"), except where the failure to have any of the
---------------
Company Permits would not, individually or in the aggregate, have a Material
Adverse Effect on the Company, and, as of the date of this Agreement, no
suspension or cancellation of any of the Company Permits is pending or, to the
Knowledge of the Company (as hereinafter defined), threatened, except where the
suspension or cancellation of any of the Company Permits would not, individually
or in the aggregate, have a Material Adverse Effect on the Company; provided
--------
that no representation is being made by the Company in this sentence with
- ----
respect to any IND or NDA of the Company filed with the FDA (which are the
subject of Section 3.13 hereof). The Company is not in violation of (A) the
Company Charter or the Company By-Laws, (B) any applicable law, ordinance,
administrative or governmental rule or regulation or (C) any order, decree or
judgment of any Governmental Entity having jurisdiction over the Company,
except, in the case of clauses (B) and (C), for any violations that,
individually or in the aggregate, would not have a Material Adverse Effect on
the Company.
(b) Except as disclosed in the Company SEC Documents filed prior to the
date of this Agreement or in Schedule 3.8(a) of the Company Disclosure Schedule,
as of the date of this Agreement, there is no contract or agreement that is
material to the business, financial condition or results of operations of the
Company. Except as set forth in the Company SEC Documents filed prior to the
date of this Agreement or in Schedule 3.8(b) of the Company Disclosure Schedule,
the execution and delivery of the Transaction Agreements do not, and the
consummation of the transactions contemplated hereby and thereby and compliance
with the provisions hereof and thereof will not, conflict with, result in any
violation of, or breach or default (with or without due notice or lapse of time,
or both) under, or give to others a right of termination, cancellation or
acceleration of any obligation or the loss of any benefit
37
<PAGE>
under, or result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company under, any
indenture, mortgage, loan agreement, note or other agreement or instrument for
borrowed money, any guarantee of any agreement or instrument for borrowed money
or any lease, contractual license or other contract, agreement or instrument to
which the Company is a party or by which the Company is bound or to which any of
the properties, assets or operations of the Company is subject, other than such
conflicts, violations, breaches, defaults, rights or liens as would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
As used in this Agreement "Knowledge of the Company" means the actual knowledge
------------------------
of any of the Chief Executive Officer, the Chief Financial Officer, the General
Counsel of the Company or Executive Vice President, Research and Development.
Section 3.9 Tax Matters.
-----------
Except as set forth in Schedule 3.9 of the Company Disclosure Schedule:
(a) All federal, state, local and foreign Tax Returns required to be filed
(taking into account extensions) by or on behalf of the Company (i) have been
timely filed, except for such Tax Returns that the failure by the Company to
timely file would not, individually or in the aggregate, have a Material Adverse
Effect on the Company, and (ii) are true, complete and correct in all material
respects.
(b) All Taxes payable by or with respect to the Company have been timely
paid, or adequately reserved for (in accordance with GAAP) in the most recent
financial statements contained in the Company SEC Documents, except for Taxes
that the failure of which to pay would not, individually or in the aggregate,
have a Material Adverse Effect on the Company.
(c) No deficiencies for any Taxes have been proposed, asserted or assessed
either orally or in writing against the Company that are not adequately reserved
for (in accordance with GAAP) in the most recent financial statements contained
in the Company SEC Documents, except for such deficiencies as would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
All assessments for Taxes due and owing by or with respect to the Company with
respect to completed and settled examinations or concluded Litigation have been
paid.
(d) No examinations have been completed or are presently being conducted
with respect to the Company's federal or material state income Tax Returns.
38
<PAGE>
(e) The Company has complied with all rules and Treasury regulations
relating to the payment and withholding of Taxes (including, without limitation,
withholding of Taxes pursuant to Sections 1441 and 1442 of the Code or similar
provisions under any foreign Laws) and have, within the time and in the manner
required by law, withheld from employee wages and paid over to the proper Govern
mental Entities all amounts required to be so withheld and paid over under all
Applicable Laws, except where the failure to be in such compliance or to
withhold and pay over such amounts would not, individually or in the aggregate,
have a Material Adverse Effect on the Company.
(f) The Company (i) has not waived any statutory period of limitations in
respect of its or their Taxes or Tax Returns or (ii) is not a party to, not
bound by, or has no obligation under any agreement, contract or arrangement for
the sharing, allocation, or indemnification of Taxes (other than indemnification
agreements where Taxes incidental to the primary obligation so indemnified are
also indemnified).
(g) The net operating losses ("NOLs") of the Company are not, as of the
----
date hereof, subject to Section 382 or 269 of the Code, Treasury regulation
Section 1.1502-21T(c), or any similar provisions or Treasury regulations
otherwise limiting the use of the NOLs of the Company.
(h) No property of the Company is "tax-exempt use property" (as such term
is defined in Section 168 of the Code).
(i) The Company has not filed a consent pursuant to Section 341(f) of the
Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of
a "Subsection (f) asset" (as such term is defined in Section 341(f)(4) of the
Code) owned by the Company.
(j) The Company is not, and has not been for the five years preceding the
Closing, a "United States real property holding company" (as such term is
defined in Section 897(c)(2) of the Code).
(k) The Company has no reason to believe that any condition exists nor has
the Company taken any action or failed to take any action that could reasonably
be expected to prevent the Merger from qualifying as a reorganization within the
meaning of Section 368(a) of the Code.
39
<PAGE>
Section 3.10 Actions and Proceedings. Except as set forth in the Company
-----------------------
SEC Documents filed prior to the date of this Agreement or in Schedule 3.10 of
the Company Disclosure Schedule, there are no outstanding orders, judgments,
injunctions, awards or decrees of any Governmental Entity against or involving
the Company, against or involving any of the present directors or officers of
the Company, as such, or involving any of its or their properties, assets or
business that, individually or in the aggregate, would have a Material Adverse
Effect on the Company. Except as set forth in the Company SEC Documents filed
prior to the date of this Agreement or in Schedule 3.10 of the Company
Disclosure Schedule, as of the date of this Agreement, there are no actions,
suits or claims or legal, administrative or arbitrative proceedings or
investigations pending or, to the Knowledge of the Company, threatened against
or involving the Company against or involving any of the present directors or
officers of the Company as such, or involving any of its or their properties,
assets or business before any court or arbitration tribunal or before any
Governmental Entity that, individually or in the aggregate, would have a
Material Adverse Effect on the Company. As of the date of this Agreement,
there are no actions, suits, labor disputes or other litigation, legal or
administrative proceedings or governmental investigations pending, or, to the
Knowledge of the Company, threatened against or affecting the Company or any of
its present directors or officers, as such, or any of its or their properties,
assets or business before any court or arbitration tribunal or before any
Governmental Entity relating to the transactions contemplated by the
Transaction Agreements.
Section 3.11 Certain Agreements. Schedule 3.11 of the Company Disclosure
------------------
Schedule sets forth each material oral or written stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan to which
the Company is a party. Except as set forth in Schedule 3.11 of the Company
Disclosure Schedule, as of the date of this Agreement, the Company is not a
party to any oral or written agreement or plan, including any stock option plan,
stock appreciation rights plan, restricted stock plan or stock purchase plan,
any of the benefits of which will be increased, or the vesting of the benefits
of which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement. No holder of any option to purchase shares of Company Common Stock,
or shares of Company Common Stock granted in connection with the performance
of services for the Company, is or will be entitled to receive cash from the
Company in lieu of or in exchange for such option or shares as a result of the
transactions contemplated by this Agreement (other than in lieu of fractional
shares). The Company is not a party to any termination benefits agreement or
severance agreement or employment agreement which would be triggered by the
40
<PAGE>
consummation of the transactions contemplated by this Agreement, except as set
forth in Schedule 3.11 of the Company Disclosure Schedule.
Section 3.12 ERISA.
-----
(a) Schedule 3.12(a) of the Company Disclosure Schedule lists each
Company Plan (as hereinafter defined). With respect to each material Company
Plan, the Company has made (or as soon as practicable will make) available to
Parent a true and correct copy of (i) the three most recent annual reports (Form
5500) filed with the IRS, (ii) such Company Plan and any amendments thereto,
(iii) each trust agreement, insurance contract or administration agreement
relating to such Company Plan and the latest financial statements thereof, (iv)
the most recent summary plan description of each Company Plan for which a
summary plan description is required, (v) the most recent actuarial report or
valuation relating to a Company Plan subject to Title IV of ERISA, (vi) the most
recent determination letter, if any, issued by the IRS with respect to any
Company Plan intended to be qualified under Section 401(a) of the Code and (vii)
any written description that exists as of the date of this Agreement of any
unwritten Company Plan. Except as would not, individually or in the aggregate,
have a Material Adverse Effect on the Company, (i) each Company Plan complies
with all applicable statutes and governmental rules and regulations, including
but not limited to ERISA, the Code and COBRA, (ii) no "reportable event" (within
the meaning of Section 4043 of ERISA) has occurred with respect to any Company
Plan for which the 30-day notice requirement has not been waived, (iii) the
Company is not or has not been obligated to contribute or otherwise may not have
any liability with respect to any Company Multiemployer Plan (as hereinafter
defined), (iv) no action has been taken, or is currently being considered, to
terminate any Company Plan subject to Title IV of ERISA, (v) the Company has
complied with the continued medical coverage requirements of COBRA, (vi) no
Company Plan has engaged in a "prohibited transaction" (as defined in Section
4975 of the Code and Section 406 of ERISA) and (vii) no liability under Title IV
or Section 302 of ERISA or Section 412 of the Code has been incurred by the
Company that has not been satisfied in full, and no condition exists that
presents a risk to the Company of incurring any such liability. Except as would
not, individually or in the aggregate, have a Material Adverse Effect on the
Company, no Company Plan subject to Title IV of ERISA, nor any trust created
thereunder, has incurred any "accumulated funding deficiency" (as defined in
Section 302 of ERISA), whether or not waived.
(b) Except as disclosed in Schedule 3.12(b) of the Company Disclosure
Schedule, with respect to any Company Plan which is subject to Title IV of
ERISA, the present value of accrued benefit obligations, as determined in
accordance with FAS 87 in accordance with the actuarial assumptions used to
prepare the most recent
41
<PAGE>
reports of such Company Plan, did not exceed the fair market value of the Plan
assets as of the most recent valuation date for which an actuarial report has
been prepared, and to the Knowledge of the Company, there has not been any
material adverse change to such status. All contributions required to be made
with respect to any Company Plan on or prior to the Closing Date have been made
or are reflected on the most recent balance sheet of the Company.
(c) With respect to the Company Plans, no event has occurred in connection
with which the Company would be subject to any liability under the terms of such
Company Plans, ERISA, the Code or any other applicable law which would have,
individually or in the aggregate, a Material Adverse Effect on the Company.
Except as disclosed in the Company SEC Documents or set forth in Schedule
3.12(c) of the Company Disclosure Schedule, with respect to any current or
former employee, director, officer, consultant or contractor of the Company,
consummation of the transactions contemplated by this Agreement shall not result
in the payment or provision of additional compensation or benefits or accelerate
the vesting, payment or funding of any compensation or benefits. Except as
disclosed in the Company SEC Documents or set forth in Schedule 3.12(c) of the
Company Disclosure Schedule, no amounts payable by reason of this transaction
under the Company Plans will fail to be deductible for federal income tax
purposes by virtue of either Section 280G or Section 162(m) of the Code. Except
as set forth in Schedule 3.12(c) of the Company Disclosure Schedule, Company
Plans that are intended to be qualified under Section 401(a) of the Code have
been determined by the IRS to be so qualified, or a timely application for such
determination is now pending, and to the Knowledge of the Company, there is no
reason why any Company Plan is not so qualified in operation. Except as
disclosed in the Company SEC Documents filed prior to the date of this Agreement
or set forth in Schedule 3.12(c) of the Company Disclosure Schedule or as
required by ERISA, the Company does not have any liability or obligation under
any welfare plan to provide benefits after termination of employment to any
employee or dependent. There are no pending, or to the Knowledge of the
Company, threatened, claims, suits, audits or investigations related to any
Company Plan other than claims for benefits in the ordinary course and other
than claims, suits, audits or investigations that would not, individually or in
the aggregate, have a Material Adverse Effect on the Company. As used herein,
(i) "Company Plan" means each deferred compensation and each bonus or other
------------
incentive compensation, stock purchase, stock option and other equity
compensation or ownership plan, program, agreement or arrangement, each
severance or termination pay, medical, surgical, hospitalization, life insurance
and other "welfare" plan, fund or program (within the meaning of Section 3(1) of
the ERISA); each profit-sharing, stock bonus or other "pension" plan, fund or
program (within the meaning of Section 3(2) of ERISA); each employment,
retention, consulting,
42
<PAGE>
termination or severance agreement; and each other employee benefit plan, fund,
program, agreement or arrangement, in each case, that is sponsored, maintained
or contributed to or required to be contributed to by the Company, including any
plan subject to Title IV of ERISA maintained within the past five (5) years by
the Company and (ii) "Company Multiemployer Plan" means a "multiemployer plan"
--------------------------
(as defined in Section 4001(a)(3) of ERISA) to which the Company is or has been
obligated to contribute or otherwise may have any liability.
Section 3.13 Compliance with Certain Laws.
----------------------------
(a) Except as disclosed in Schedule 3.13(a) of the Company Disclosure
Schedule, the properties, assets and operations of the Company are in compliance
with all Applicable Laws, except for any violations that individually or in the
aggregate would not have a Material Adverse Effect on the Company. Except as
disclosed in Schedule 3.13(a) of the Company Disclosure Schedule, with respect
to such properties, assets and operations, including any previously owned,
leased or operated properties, assets or operations, there are no past, present
or reasonably anticipated future events, conditions, circumstances, activities,
practices, incidents, actions or plans of the Company that may interfere with or
prevent compliance or continued compliance with all Applicable Laws, other than
interference or prevention that would not individually or in the aggregate with
any other such interference or prevention have a Material Adverse Effect on the
Company. The Company will make available to Parent such certificates and
environmental studies with respect to such properties as the Company has
available on the date of this Agreement.
(b) The Company's manufacturing, distribution, development and marketing
practices are in compliance with all applicable federal and state laws, rules,
regulations, orders, licenses, judgments, writs, injunctions, decrees or
demands, including, without limitation, laws and regulations administered by the
FDA and the DEA, except where the failure to be in such compliance would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
(c) The Company has filed an NDA for MorphiDex(R) with the FDA (the
"MorphiDex(R) Application"), and on August 2, 1999, the Company received
------------------------
notification from the FDA that such application was not approvable. The
MorphiDex(R) Application is the only NDA of the Company on file with the FDA.
Schedule 3.13(c) of the Company Disclosure Schedule sets forth all INDs and
license agreements of the Company.
43
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(d) The Company has not used the services of any person debarred under
the provisions of the Generic Drug Enforcement Act of 1992, 21 U.S.C. (S)
335(a)(b). Neither the Company nor any of its officers, employees, agents or
affiliates, has been convicted of any crime or engaged in any conduct for which
debarment is mandated by 21 U.S.C. (S) 335a(a) or authorized by 21 U.S.C. (S)
335a(b).
(e) The Company is in compliance with all (i) federal and state laws
applicable to the development, manufacture, processing, packing, testing and
sale of pharmaceutical products to the extent such laws are applicable to it,
(ii) rules and regulations of the FDA and the DEA to the extent such rules and
regulations are applicable to it, and (iii) product applications (including
INDs) in which the Company has sold any product on or after November 1, 1999,
except in each case where the failure to be in such compliance would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
All manufacturing operations conducted by or for the benefit of the Company have
been and are being conducted in substantial compliance with the current Good
Manufacturing Practice regulations set forth in 21 C.F.R. Parts 210 and 211.
(f) As to each drug of the Company for which a product application has
been approved by, or any IND has been filed with, the FDA, which drugs are
described in Schedule 3.13(f) of the Company Disclosure Schedule, the applicant
and all Persons performing operations covered by the application are in
compliance with the requirements of the FDCA and the implementing regulations of
the FDA, respectively, and all terms and conditions of the application, except
where the failure to be in such compliance would not, individually or in the
aggregate, have a Material Adverse Effect on the Company.
(g) The Company is in material compliance with all applicable
registration and listing requirements set forth in 21 U.S.C. (S) 360 and 21
C.F.R. Part 207. To the extent required, the Company has obtained registrations
from the DEA and is in material compliance with all such registrations and all
applicable regulations promulgated by the DEA.
(h) None of the Company or any of its officers, employees, or agents has
made an untrue statement of material fact or fraudulent statement to the FDA or
the DEA, failed to disclose a material fact required to be disclosed to the FDA
or the DEA, or committed an act, made a statement, or failed to make a statement
that could reasonably be expected to provide a basis for the FDA to invoke its
policy respecting "Fraud, Untrue Statements of Material Facts, Bribery, and
Illegal Gratuities," set forth in 56 Fed. Reg 46191 (September 10, 1991).
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(i) The Company has made available to Parent copies of any and all
notices of inspectional observations (FD 483's), establishment inspection
reports, warning letters and any other documents received from or issued by the
FDA or the DEA within the last three years that indicate or suggest lack of
compliance with the FDA or the DEA regulatory requirements by the Company or
Persons covered by product applications or otherwise performing services for the
benefit of the Company with respect to services or products provided to the
Company.
(j) The Company has not received any written notice that the FDA or the
DEA has commenced or threatened to initiate (i) any action to withdraw its
approval or request the recall of any product of the Company, or (ii) any action
to enjoin (A) production at any facility (including any clinical facility where
testing and/or trials occur) owned or used by the Company or any Person on
behalf of the Company or (B) any facility (including any clinical facility where
testing and/or trials occur) owned or used by the Company or any Person on
behalf of the Company, (iii) the withdrawal of approval of any product
application (including any IND), other than such withdrawals of approval that
would not, individually or in the aggregate, have a Material Adverse Effect on
the Company, or (iv) any material civil penalty, injunction, seizure or criminal
action.
(k) To the Knowledge of the Company, as to each article of drug or
consumer product currently manufactured and/or distributed by the Company, which
products are described in Schedule 3.13(k) of the Company Disclosure Schedule,
or by any Person on behalf of the Company, such article is not adulterated or
misbranded within the meaning of the FDCA, 21 U.S.C. (S)(S) 301 et seq. and not
in violation of 21 U.S.C. (S) 355.
(l) As to each drug referred to in subsection (c) above, the Company and
its officers, employees, agents and affiliates have included or caused to be
included in the application for such drug, where required, the certification
described in 21 U.S.C. (S) 335a(k)(1) and the list described in 21 U.S.C. (S)
335a(k)(2), and such certification and such list was in each case true and
accurate when made and remained true and accurate thereafter.
(m) Except as set forth in Schedule 3.13(m) of the Company Disclosure
Schedule, all pre-clinical trials and clinical trials the Company has conducted
or has had conducted for it by third parties, to the Knowledge of the Company,
complies in all material respects with the requirements of Good Clinical
Practice, Informed Consent, and all requirements relating to protection of human
subjects, found in 21 C.F.R. (S)(S) 50, 54 and 56 and that all nonclinical
laboratory testing complies with the requirements of 21 C.F.R. (S) 58.
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(n) Except as set forth in Schedule 3.13(n) of the Company Disclosure
Schedule, as to each product application submitted to, but not approved by, the
FDA, and not withdrawn by the Company or applicants acting on its behalf as of
the date of this Agreement, the Company has complied in all material respects
with the requirements of the FDCA and implementing FDA regulations and has
provided, or will provide, all additional information and taken, or will take,
all additional action either that has been deemed appropriate by both the
Company and Parent in connection with the application.
(o) The Company exports no FDA regulated products.
Section 3.14 Liabilities. Except as fully reflected or reserved against in
-----------
the balance sheet of the Company as of December 31, 1998 (included in the
Company SEC Documents) or as reflected in the Company SEC Documents filed prior
to the date of this Agreement, or set forth in Schedule 3.14 of the Company
Disclosure Schedule, the Company has no liabilities (including, without
limitation, tax liabilities) absolute or contingent, that would be required to
be reflected on a balance sheet or in notes thereto prepared in accordance with
GAAP, other than liabilities incurred in the ordinary course of business or
that, individually or in the aggregate, would not have a Material Adverse Effect
on the Company.
Section 3.15 Labor Matters. Except as set forth in Schedule 3.15 of the
-------------
Company Disclosure Schedule or in the Company SEC Documents filed prior to the
date of this Agreement, the Company is not a party to any collective bargaining
agreement or labor contract. The Company has not engaged in any unfair labor
practice with respect to any Persons employed by or otherwise performing
services primarily for the Company (the "Company Business Personnel"), and there
--------------------------
is no unfair labor practice complaint or grievance against the Company by the
National Labor Relations Board or any comparable state agency pending or
threatened in writing with respect to the Company Business Personnel, except
where such unfair labor practices, complaints or grievances would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
There is no labor strike, dispute, slowdown or stoppage pending or, to the
Knowledge of the Company, threatened against or affecting the Company which may
interfere with the business activities of the Company, except where such
disputes, strikes or work stoppages would not, individually or in the aggregate,
have a Material Adverse Effect on the Company. The Company is in compliance with
all labor, employment and wage payment-related laws, regulations and rules,
except where the failure to be in such compliance would not, individually or in
the aggregate, have a Material Adverse Effect on Parent.
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Section 3.16 Intellectual Property.
---------------------
(a) Except as set forth in Schedule 3.16(a) of the Company Disclosure
Schedule or as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company, the Company is the owner of or has the valid and
enforceable right to make, use, sell, offer to sell and import all Company
Intellectual Property to the extent used in or necessary for the conduct of the
Company's business, free and clear of all liens, security interests, charges or
encumbrances of any kind and, except for the Company License Agreements set
forth in Schedule 3.16(b) of the Company Disclosure Schedule, free and clear of
all licenses to third parties granting any right to use or practice any rights
under any Company Intellectual Property. As used in this Agreement, the term
"Company Intellectual Property" shall mean: (i) the Company's registered and
-----------------------------
material unregistered trademarks, service marks (including registrations,
recordings and applications in the United States Patent and Trademark Office,
any state of the United States or any other Governmental Entity worldwide),
slogans, trade names, logos and trade dress (collectively, together with the
good will symbolized thereby or associated with each, "Company Trademarks");
------------------
(ii) all of the Company's national (including, but not limited to, the United
States) and multinational statutory invention registrations, patents, patent
registrations and patent applications (including, but not limited to, all
reissues, divisions, continuations, continuations-in-part, extensions and
reexaminations, and all rights therein provided by law, multinational treaties
or conventions) (collectively, "Company Patents"); (iii) all of the Company's
---------------
national and multinational registered and material unregistered copy rights,
including, but not limited to, copyrights in software programs and databases
(collectively, "Company Copyrights"); (iv) the Company's software programs
------------------
documentation and manuals used in connection therewith and databases (together,
"Company Software"); (v) all of the Company's (A) inventions, whether patentable
----------------
or not patentable, whether or not reduced to practice, and not yet made the
subject of a pending patent application or applications, (B) ideas and
conceptions of potentially patentable subject matter, including, without
limitation, any patent disclosures, whether or not reduced to practice and not
yet made the subject of a patent application, (C) trade secrets and
confidential, technical information (including ideas, formulas, compositions,
inventions and conceptions of inventions whether patentable or not patentable
and whether or not reduced to practice), (D) technology (including, without
limitation, know-how and show-how), manufacturing and production processes and
techniques, service and repair manuals, research and development information,
drawings, specifications, designs, plans, proposals, technical data and
copyrightable works, whether secret or confidential or not, and all proprietary
or confidential business information, (E) all rights to obtain and rights to
apply for patents, and to register trademarks and copyrights and (F) all records
(including, but
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not limited to, laboratory, research and testing notebooks) in any accessible
format (including, but not limited to, paper records, photographs, audio and
visual tape recordings and computer storage media and other information storage
media) pertaining to patentable or potentially patentable subject matter and all
technical manuals and documentation made or used in connection with any of the
foregoing (collectively, "Company Technology"); and (vi) agreements pursuant to
------------------
which the Company has obtained or granted the right to use any of the foregoing
(collectively, and together with other agreements to which the Company is a
party relating to the development, acquisition, use, sale, offer for sale or
importation of Company Intellectual Property, "Company License Agreements").
--------------------------
(b) Schedule 3.16(b) of the Company Disclosure Schedule sets forth a true,
complete and accurate list of the following Company Intellectual Property items
owned by or under obligation of assignment to the Company: (i) all
registrations of and applications to register Company Trademarks material to the
Company; (ii) all unregistered Company Trademarks which are material to the
Company; (iii) all Company Patents; (iv) all registrations of and applications
to register any Company Copyrights; (v) all Company Software; and (vi) all
Company License Agreements, other than off-the-shelf Company Software licenses.
(c) Except as set forth in Schedule 3.16(b) of the Company Disclosure
Schedule, the Company is the sole and exclusive owner of the Company
Intellectual Property items set forth in Schedule 3.16(b) of the Company
Disclosure Schedule and the Company is listed in the records of the Governmental
Entities set forth in Schedule 3.16(b) of the Company Disclosure Schedule as the
sole owner of record. Except as set forth in Schedule 3.16(c) of the Company
Disclosure Schedule, there is no lien, security interest, charge or encumbrance
of any kind on the right of the Company to transfer to the Surviving Corporation
any of the Company Intellectual Property, as contemplated by this Agreement.
Except as otherwise indicated in Schedule 3.16(b) of the Company Disclosure
Schedule, (i) all issued patents set forth thereon are valid and enforceable and
(ii) (A) as of the date of this Agreement, no such trademark registrations,
trademark applications, issued patents or patent applications set forth in
Schedule 3.16(b) of the Company Disclosure Schedule are subject to any pending
proceedings, including opposition, cancellation, interference or similar
adversarial proceeding by or before any Governmental Entity and no such
proceedings are threatened and (B) at the Effective Time, no such trademark
registrations, trademark applications, issued patents or patent applications
set forth in Schedule 3.16(b) of the Company Disclosure Schedule are subject to
any pending proceedings, including opposition, cancellation, interference or
similar adversarial proceeding by or before any Governmental Entity and no such
proceedings are
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threatened, other than such proceedings that would not, individually or in the
aggregate, have a Material Adverse Effect on the Company.
(d) There are no royalties, honoraria, fees or other payments payable by
the Company in respect of the use or the right to use any of the Company
Intellectual Property to any Person or Governmental Entity (excluding Taxes,
governmental or attorneys' fees required in the normal course of obtaining
patent, trademark or copyright rights and excluding governmental maintenance
fees), except as set forth in the Company License Agreements listed in Schedule
3.16(b) of the Company Disclosure Schedule and pursuant to off-the-shelf Company
Software licenses. The Company License Agreements set forth in Schedule 3.16(b)
of the Company Disclosure Schedule are valid and binding obligations of the
parties thereto, enforceable in accordance with their terms, except as the
enforceability thereof may be limited by (a) applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws in effect that affect the enforcement
of creditors rights generally or (b) general principals of equity, whether
considered in a proceeding at law or in equity, and there exists no event or
condition which will result in a violation or breach of, or constitute (with or
without due notice or lapse of time or both) a default by the Company (or, to
the Knowledge of the Company, any other party thereto) under any Company License
Agreement, except where such violations, breaches or defaults would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
Except as set forth in Schedule 3.16(d) of the Company Disclosure Schedule, no
consent is required to be obtained in connection with the right of the Company
to transfer any Company License Agreement to Parent or Sub pursuant to the
Merger.
(e) Except as disclosed in Schedule 3.16(e) of the Company Disclosure
Schedule or as would not, individually or in the aggregate, have a Material
Adverse Effect on the Company, (i) none of the use by the Company of any Company
Intellectual Property, the exercise of rights relating to Company Patents,
Company Trademarks and Company Copyrights contained within the Company
Intellectual Property or the conduct of the business of the Company infringes or
otherwise violates any intellectual property rights (either directly or
indirectly, such as through contributory infringement or inducement to infringe)
of any third party and (ii) no such claims have been asserted or, to the
Knowledge of the Company, threatened against the Company which have not been
resolved. Except as disclosed in Schedule 3.16(e) of the Company Disclosure
Schedule, (A) as of the date of this Agreement, (i) to the Knowledge of the
Company, no third party is infringing or otherwise violating any Company
Intellectual Property rights of the Company and (ii) no such claims are pending
or threatened by the Company against any third party and (B) at the Effective
Time, (i) to the Knowledge of the Company, no third party is infringing or
otherwise violating any Company Intellectual Property rights of the Company that
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are material to the business of the Company as conducted or proposed to be
conducted on the date of this Agreement and (ii) no such claims are pending or
threatened by the Company against any third party, which involve any Company
Intellectual Property that is material to the business of the Company as
conducted or proposed to be conducted on the date of this Agreement.
(f) Except as disclosed in Schedule 3.16(f) of the Company Disclosure
Schedule, (i) as of the date of this Agreement, there are no suits or any other
proceedings pending or, to the Knowledge of the Company, threatened before any
Governmental Entity to which the Company is a party challenging (A) the
Company's rights to own or use any Company Intellectual Property or (B) the
validity, enforceability or scope of the Company Intellectual Property and (ii)
at the Effective Time, there are no such suits to which the Company is a party
challenging (A) the Company's rights to own or use any Company Intellectual
Property that is material to the business of the Company as conducted or
proposed to be conducted on the date of this Agreement or (B) the validity,
enforceability or scope of the Company Intellectual Property that is material to
the business of the Company as conducted or proposed to be conducted on the date
of this Agreement. There are no settlement agreements, consents, judgments,
orders, forebearances to sue or similar obligations which materially restrict
any rights of the Company to (i) make, use, sell, offer for sale, import or
license under any Company Intellectual Property or (ii) conduct its business in
order to accommodate a third party's intellectual property rights.
(g) The Company employs reasonable measures to protect the confidentiality
of the Company Technology. The Company requires employees with access to the
Company Technology to execute a nondisclosure agreement substantially in
accordance with the form(s) previously provided by the Company to Parent. Except
as set forth in Schedule 3.16(g) of the Company Disclosure Schedule, none of the
current or former employees, officers or directors of the Company (i) is
suspected to be in violation of any such agreement or (ii) is suspected of
having disclosed any Company Technology to any third party except subject to an
appropriate confidentiality agreement or as required by a Governmental Entity.
(h) Except as set forth in Schedule 3.16(h) of the Company Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
will not result in the loss or impairment of any rights of the Company to own,
use or license any Company Intellectual Property, except where such losses or
impairments would not, individually or in the aggregate, have a Material Adverse
Effect on the Company.
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(i) Except as set forth in Schedule 3.16(i) of the Company Disclosure
Schedule, since September 25, 1996, the Company has not disposed of or permitted
to lapse any rights to the use of any Company Intellectual Property, or disposed
of or disclosed to any Person other than representatives of Parent any Company
trade secret, formula, process or know-how not theretofore a matter of public
knowledge other than in the ordinary course of business or pursuant to secrecy
agreement.
Section 3.17 Opinion of Financial Advisor. The Company has received the
----------------------------
written opinion of Credit Suisse First Boston dated the date hereof, to the
effect that, as of the date hereof, the Merger Consideration is fair to the
Company's stockholders from a financial point of view, a copy of which opinion
will be made available to Parent promptly after the date of this Agreement.
Section 3.18 Required Vote of Company Stockholders. Under applicable
-------------------------------------
Delaware law and the Company Charter and Company By-laws, the affirmative vote
of the holders of not less than a majority of the outstanding shares of Company
Common Stock is required to approve the Merger. No other vote of the
stockholders of the Company is required by law, the Company Charter or Company
By-Laws or otherwise for the Company to consummate the Merger and the
transactions contemplated hereby.
Section 3.19 Ownership of Shares. The Company does not own any Shares of
-------------------
Parent Common Stock.
Section 3.20 Brokers. No broker, investment banker or other Person, other
-------
than Credit Suisse First Boston, the fees and expenses of which will be paid by
the Company (and are reflected in agreements between Credit Suisse First Boston
and the Company, copies of which have been furnished to Parent), is entitled to
any broker's, finder's or other similar fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of the Company.
Section 3.21 State Takeover Statutes. Assuming the accuracy of Parent's
-----------------------
representations and warranties contained in Section 2.17 hereof (Ownership of
Shares), the Board of Directors of the Company has taken all action so that,
prior to the execution hereof, the Board of Directors has approved both pursuant
to Section 203 of the DGCL and Article VIII of the Company Charter (a) the
Merger, this Agreement and each Stockholder Voting Agreement and the
transactions contemplated hereby and thereby prior to the execution hereof and
thereof, (b) a fee (in an amount previously disclosed to the Company) paid to
Kelso & Co. (or an Affiliate thereof) in connection with the transactions
contemplated by this
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Agreement and (c) the possible purchase by an Affiliate of Parent (other than
Parent and so long as such purchase would not be treated for U.S. federal income
tax purposes as a purchase, in whole or in part, by a Person who is related to
Parent within the meaning of Treasury Regulation Section 1.368-1(e)(3)) of
shares of Company Common Stock from John W. Lyle and Frank S. Caruso pursuant to
that certain side letter dated of even date herewith between each of such
executives and Parent. Prior to the execution of this Agreement, the Company has
delivered to Parent a true and accurate copy of the resolutions of the Board of
Directors of the Company approving such transactions. As of the date of this
Agreement, no other state takeover statutes, including without limitation, any
business combination act or supermajority Company Charter provisions are
applicable to the Merger or the Transaction Agreements.
Section 3.22 Year 2000. With respect to year 2000, the Company
---------
represents and warrants that the statement contained in Exhibit D-2 hereto is
true and accurate.
Section 3.23 Interests in Other Entities. Except as set forth in
---------------------------
Schedule 3.23 of the Company Disclosure Schedule, the Company does not, directly
or indirectly, own or have the right to acquire any equity interest in any other
corporation, partnership, joint venture or other business organization (other
than any such equity interest that is 1% or less of the equity interest such
public corporation). The Company has not made any investment in or advance of
cash or other extension of credit to any Person, or has any commitment or
obligation to do so.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 4.1 Conduct of Business Pending the Merger.
--------------------------------------
(a) Actions by Parent. Notwithstanding anything herein to the contrary,
-----------------
(1) prior to the Effective Time, the Parent Recapitalization shall occur and (2)
contemporaneously with the Closing, Parent shall duly adopt and declare
advisable the Charter Amendment. During the period from the date of this
Agreement through the Effective Time, Parent shall, and shall cause each of its
Subsidiaries to, in all material respects carry on its business in the ordinary
course as currently conducted and, to the extent consistent therewith, use
reasonable best efforts to preserve intact its current business organizations,
keep available the services of its current officers and employees and preserve
its relationships with customers, suppliers and others
52
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having business dealings with it. Without limiting the generality of the
foregoing, and except as otherwise contemplated by this Agreement (including the
Parent Recapitalization as consummated in accordance with the terms set forth on
Exhibit A-2 hereto), from the date of this Agreement to the Effective Time,
Parent, shall not, and shall not permit any of its Subsidiaries to, without the
prior written consent of the Company:
(i) (w) declare, set aside or pay any dividends on, or make any
other actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to its stockholders in their
capacity as such (other than dividends and other distributions by Subsidiaries),
(x) other than in the case of any Subsidiary, split, combine or reclassify any
of its capital stock or issue or authorize the issuance of any other securities
in respect of, in lieu of or in substitution for shares of its capital stock,
(y) other than pursuant to any existing stockholders agreement (copies of which
have been previously provided to the Company), purchase, redeem or otherwise
acquire any shares of capital stock of Parent or any other securities thereof or
the capital stock of any Subsidiary or any other securities thereof or any
rights, warrants or options to acquire any such shares or other securities or
(z) institute or amend any share repurchase program;
(ii) issue, deliver, sell, pledge, dispose of, grant, transfer or
otherwise encumber any shares of its capital stock, any other voting securities
or equity equivalent or any securities convertible or exchangeable into, or
exercisable for, or any rights, warrants or options to acquire any such shares,
voting securities, equity equivalent or convertible securities, other than (A)
subject to Section 4.3 hereof, the issuance of stock options and shares of
Parent Common Stock to employees of Parent or any of its Subsidiaries under the
Parent Incentive Plans and in the ordinary course of business consistent with
past practice between the date hereof and the Effective Date, (B) the issuance
by any wholly-owned Subsidiary of Parent of its capital stock to Parent or
another wholly-owned Subsidiary of Parent and (C) as set forth in Schedule
4.1(a)(ii) of the Parent Disclosure Schedule;
(iii) amend its charter or by-laws;
(iv) except for inventory, merchandise, finished goods and accounts
receivable acquired in the ordinary course of business, acquire or agree to
acquire by merging or consolidating with, or by purchasing a portion of the
assets of or equity in, or by making an investment in or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof or otherwise acquire or agree to acquire any
assets, other than acquisitions of
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assets in the ordinary course of business consistent with past practice in an
amount not to exceed $20 million;
(v) sell, lease or otherwise dispose of, or agree to sell, lease
or otherwise dispose of, any of its rights or other assets, other than (A) sales
of inventory, merchandise and finished goods in the ordinary course of business
and (B) transactions that are in the ordinary course of business consistent with
past practice and that, individually or in the aggregate, are not material to
Parent and its Subsidiaries taken as a whole;
(vi) incur any indebtedness for borrowed money, guarantee any such
indebtedness or make any loans, advances or capital contributions to, or other
investments in, any other Person, other than (A) indebtedness incurred in the
ordinary course of business consistent with past practice in an amount not to
exceed $20 million, (B) indebtedness, loans, advances, capital contributions and
investments between Parent and any of its wholly-owned Subsidiaries or between
any of such wholly-owned Subsidiaries, (C) such indebtedness as may be necessary
to fund actions allowed under Section 4.1(a)(iv) hereof and (D) in connection
with a refinancing of the Credit Agreement, dated as of August 26, 1997 (the
"Credit Agreement"), among Endo Pharmaceuticals Inc., the lenders party thereto
----------------
and The Chase Manhattan Bank (provided that such indebtedness incurred in
-------- ----
connection with such a refinancing does not exceed indebtedness allowed under
the Credit Agreement);
(vii) knowingly violate or knowingly fail to perform any material
obligation or duty imposed upon it or any Subsidiary by any applicable federal,
state or local law, rule, regulation, guideline or ordinance;
(viii) take any action, other than reasonable and usual actions in
the ordinary course of business consistent with past practice, with respect to
accounting policies or procedures and other than actions required to be taken by
GAAP; or
(ix) enter into any contract, agreement, commitment or arrangement
to take any action prohibited by this Section 4.1(a).
(b) Actions by the Company. During the period from the date of this
----------------------
Agreement through the Effective Time, the Company shall, in all material
respects, carry on its business in the ordinary course as currently conducted
and, to the extent consistent therewith, use reasonable best efforts to preserve
intact its current business organizations, keep available the services of its
current officers and employees and preserve its relationships with customers,
suppliers and others having business
54
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dealings with it. Without limiting the generality of the foregoing, and except
as otherwise expressly contemplated by this Agreement, from the date of this
Agreement to the Effective Time, the Company shall not, without the prior
written consent of Parent:
(i) (w) declare, set aside or pay any dividends on, or make any
other actual, constructive or deemed distributions in respect of, any of its
capital stock, or otherwise make any payments to its stockholders in their
capacity as such, (x) split, combine or reclassify any of its capital stock or
issue or authorize the issuance of any other securities in respect of, in lieu
of or in substitution for shares of its capital stock, (y) purchase, redeem or
otherwise acquire any shares of capital stock of the Company or any other
securities thereof or any rights, warrants or options to acquire any such shares
or other securities or (z) institute or amend any share repurchase program;
(ii) issue, deliver, sell, pledge, dispose of, grant, transfer or
otherwise encumber any shares of its capital stock, any other voting securities
or equity equivalent or any securities convertible or exchangeable into, or
exercisable for, or any rights, warrants or options to acquire any such shares,
voting securities, equity equivalent or convertible securities, other than the
issuance of shares of Company Common Stock upon the exercise of Company Stock
Options outstanding on the date of this Agreement in accordance with their
current terms;
(iii) amend the Company Charter or Company By-Laws;
(iv) except for inventory, merchandise, finished goods and accounts
receivable acquired in the ordinary course of business, acquire or agree to
acquire by merging or consolidating with, or by purchasing a portion of the
assets of or equity in, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof or
otherwise acquire or agree to acquire any assets other than acquisitions of
assets in the ordinary course of business consistent with past practice, the
value of which do not exceed $500,000 in the aggregate;
(v) sell, lease or otherwise dispose of, or agree to sell, lease or
otherwise dispose of, any of its rights or other assets other than (A) sales of
inventory, merchandise and finished goods in the ordinary course of business and
(B) transactions that are in the ordinary course of business consistent with
past practice, not material to the Company and in an aggregate amount greater
than $250,000;
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(vi) incur any indebtedness for borrowed money, guarantee any such
indebtedness or make any loans, advances or capital contributions to, or other
investments in (other than investments in accordance with clause (iv) above),
any other Person, other than indebtedness incurred in the ordinary course of
business consistent with past practice in an amount not to exceed $50,000 in the
aggregate;
(vii) alter (through merger, liquidation, reorganization,
restructuring or in any other fashion) the corporate structure or ownership of
the Company other than as a result of the trading of the Company Common Stock on
the NASDAQ;
(viii) enter into or adopt, or amend any existing, severance plan,
agreement or arrangement or enter into or amend any Company Plan or employment
or consulting agreement, other than (A) as required by applicable law, (B) as
expressly contemplated by this Agreement or (C) stay bonuses as reasonably
approved by Parent;
(ix) increase the compensation payable or to become payable to its
officers, employees or directors except for increases in the ordinary course of
business consistent with past practice in salaries or wages of employees of the
Company who are not officers of the Company, or grant any additional rights to
severance or termination pay to, or enter into any employment or severance
agreement with, any director or officer of the Company, or establish, adopt,
enter into, or, except as set forth in Schedule 4.1(b)(ix) of the Company
Disclosure Schedule or as may be required to comply with applicable law, amend
or take action in any such case in a manner so as to enhance or accelerate any
rights or benefits under, any labor, collective bargaining, bonus, profit
sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of any
director, officer or employee;
(x) knowingly violate or knowingly fail to perform any material
obligation or duty imposed upon it by any applicable federal, state or local
law, rule, regulation, guideline or ordinance;
(xi) take any action, other than reasonable and usual actions in
the ordinary course of business consistent with past practice, with respect to
accounting policies or procedures (other than actions required to be taken by
GAAP);
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(xii) make any Tax election, change its method of accounting, or
settle or compromise any material federal, state, local or foreign income Tax
liability or refund;
(xiii) except as set forth in Schedule 4.1(b)(xiii) of the Company
Disclosure Schedule, enter into any contract that cannot be canceled on 30 days'
notice pursuant to which it is obligated in an amount in excess of $500,000;
(xiv) make any capital expenditure in the aggregate in excess of
$100,000, other than expenditures (and contracts for such expenditures) set
forth in the Company's current capital budget included as Schedule 4.1(b)(xiv)
of the Company Disclosure Schedule;
(xv) enter into any agreement, arrangement or contract that
provides for the allocation, sharing or indemnification for Taxes; or
(xvi) enter into any contract, agreement, commitment or arrangement
to take any action prohibited by this Section 4.1(b).
(c) Other Actions. The Company and Parent shall not, and Parent shall not
-------------
permit any of its Subsidiaries to, take any action that would, or that could
reasonably be expected to, result in (i) any of the representations and
warranties of such party set forth in this Agreement that is qualified as to
materiality becoming untrue, (ii) any of such representations and warranties
that is not so qualified becoming untrue in any material respect or (iii) except
as otherwise permitted by Section 4.2 hereof with regard to the Company, any
condition to the Merger set forth in Article VI hereof not being satisfied.
Section 4.2 No Solicitation.
---------------
(a) The Company shall not, and it will use its best efforts to cause its
officers, directors, employees, investment bankers, consultants, attorneys,
accountants, agents, advisors or representatives not to, directly or indirectly,
(i) take any action to solicit, initiate, encourage or facilitate any Company
Takeover Proposal (as hereinafter defined) or any inquiry with respect thereto,
(ii) enter into or approve any agreement or agreement-in-principle providing for
or with respect to any Company Takeover Proposal or (iii) participate or engage
in any discussions or negotiations regarding, or furnish to any Person any
information with respect to or take any other action to facilitate any inquiries
or the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Company Takeover Proposal, including affording access to the
Company's properties, books or records;
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provided, however, that prior to the approval of this Agreement by the
- -------- -------
stockholders of the Company, to the extent required by the fiduciary obligations
of the Board of Directors of the Company, as determined in good faith by it
after consultation with outside counsel, the Company may, in response to a
Company Takeover Proposal that was not solicited by the Company and that did not
otherwise result from a breach or a deemed breach of this Section 4.2(a), and
subject to compliance with the provisions of this Agreement, (x) furnish
information with respect to the Company to any Person pursuant to a customary
confidentiality agreement and (y) if the Company is in compliance with Section
4.2(b) hereof, participate or engage in discussions or negotiations with such
Person regarding any Company Takeover Proposal. Without limiting the foregoing,
it is agreed that any violation of the restrictions set forth in the preceding
sentence by any executive officer of the Company or any director or investment
banker, attorney or other advisor or representative of the Company, whether or
not such Person is purporting to act on behalf of the Company or otherwise,
shall be deemed to be a breach of this Section 4.2(a) by the Company. For
purposes of this Agreement, "Company Takeover Proposal" means any proposal for a
------------------------
merger or other business combination involving the Company or the acquisition or
purchase of more than 25% of any class of equity securities of the Company, or
any tender offer (including self-tenders) or exchange offer that, if
consummated, would result in any Person beneficially owning more than 25% of any
class of equity securities of the Company, or a majority of the assets of the
Company, other than the transactions contemplated by this Agreement. Nothing
contained in this Section 4.2 shall prohibit the Company or the Company's Board
of Directors from (i) taking and disclosing to the Company's stockholders a
position with respect to a tender or exchange offer by a third party pursuant to
Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or (ii) making any
disclosure required by applicable law.
(b) The Company promptly shall advise Parent orally and in writing of its
receipt of any public or private Company Takeover Proposal or any inquiry with
respect to or that could reasonably be expected to lead to any Company Takeover
Proposal, the identity of the Person making any such Company Takeover Proposal
or inquiry and the material terms of any such Company Takeover Proposal. The
Company shall (i) keep Parent fully informed of the status, including any change
to the terms and conditions of, any such Company Takeover Proposal or inquiry
and (ii) provide to Parent as soon as practicable after receipt or delivery
thereof with copies of all correspondence and other written material sent or
provided to the Company from any third party in connection with any Company
Takeover Proposal or sent or provided by the Company to any third party in
connection with any Company Takeover Proposal.
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Section 4.3 Tax Representation Letters. For purposes of the tax
--------------------------
opinions described in Sections 6.2(b) and 6.3(c) hereof, Parent and the Company
shall provide representation letters reasonably customary in scope and
substance, substantially in the respective forms of Exhibits E-1 and E-2
attached hereto (the "Tax Representation Letters"), dated as of the date that is
--------------------------
two business days prior to the date the Proxy Statement is mailed to
stockholders of the Company and reissued as of the date of Closing.
ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1 Stockholder Meeting. The Company shall call a meeting of its
-------------------
stockholders to be held as promptly as practicable after the date on which the
Registration Statement becomes effective for the purpose of considering the
approval of this Agreement (such meeting and any adjournments or postponements
thereto, the "Stockholder Meeting"). Neither the Board of Directors of the
-------------------
Company nor any committee thereof shall withdraw or modify, or propose to
withdraw or modify, in a manner adverse to Parent or Sub, the approval or
recommendation by the Board of Directors of the Company or any such committee
thereof of this Agreement or the Merger, or approve or recommend, or propose to
approve or recommend, any Company Takeover Proposal (each, a "Change in the
-------------
Company Recommendation"), unless such proposal is a Superior Company Proposal.
- ----------------------
For purposes of this Agreement, a "Superior Company Proposal" means any proposal
-------------------------
made by a third party to acquire a majority of the equity securities or assets
of the Company, pursuant to a tender or exchange offer, a merger, a sale of all
or substantially all its assets or otherwise, on terms which the Company Board
of Directors determines in its good faith judgment to be superior from a
financial point of view to the holders of Company Common Stock (based on the
written opinion, with only customary qualifications, of the Company's
independent financial advisor), taking into account all the terms and conditions
of such proposal and this Agreement. Notwithstanding any Change in the Company
Recommendation, a proposal to approve the Merger and adopt this Agreement shall
be submitted to the stockholders of the Company at the Stockholder Meeting in
order to give the Company's stockholders the opportunity to vote on the Merger
and this Agreement in order to obtain the requisite approval of the Company's
stockholders and nothing contained in this Agreement shall be deemed to relieve
the Company of such obligation.
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Section 5.2 Preparation of the Registration Statement and the Proxy
-------------------------------------------------------
Statement. The Company and Parent shall promptly prepare the Proxy Statement
- ---------
and the Registration Statement in which the Proxy Statement will be included,
and thereafter the Company shall promptly file with the SEC the Proxy Statement
and Parent shall promptly file with the SEC such Registration Statement. The
Company and Parent shall cooperate with each other in connection with the
preparation of the foregoing documents (including, without limitation, providing
each other any information that is necessary to be included in such documents).
Each of Parent and the Company shall use its reasonable best efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing. As promptly as practicable after the
Registration Statement shall have become effective, the Company shall mail the
Proxy Statement to its stockholders. Parent shall also take any action (other
than qualifying to do business in any jurisdiction in which it is now not so
qualified) required to be taken under any applicable state securities laws in
connection with the issuance of Parent Common Stock and Algos Warrants in the
Merger and the issuance of Parent Common Stock upon the exercise of the Algos
Warrants, and the Company shall furnish all information concerning the Company
and the holders of Company Common Stock as may be reasonably requested in
connection with any such action. No amendment or supplement to the Proxy
Statement or the Registration Statement will be made by Parent or the Company
without the prior approval of the other party. Parent and the Company each will
advise the other, promptly after it receives notice thereof, of the time when
the Registration Statement has become effective or any supplement or amendment
has been filed, of the issuance of any stop order, of the suspension of the
qualification of the Parent Common Stock or Algos Warrants issuable in
connection with the Merger or the Parent Common Stock issuable upon the exercise
of the Algos Warrants for offering or sale in any jurisdiction, or of any
request by the SEC for amendment of the Proxy Statement or the Registration
Statement or comments thereon and responses thereto or requests by the SEC for
additional information.
Section 5.3 Access to Information; Regulatory Communications.
------------------------------------------------
(a) Subject to currently existing contractual and legal restrictions
applicable to the Company or Parent or any of Parent's Subsidiaries, each of
Parent and the Company shall, and Parent shall cause each of its Subsidiaries
to, afford to the accountants, counsel, financial advisors and other
representatives of the other party hereto reasonable access to, and permit them
to make such inspections as they may reasonably require of, during normal
business hours during the period from the date of this Agreement through the
Effective Time, all their respective properties, books, contracts, commitments
and records (including, without limitation, the work papers of independent
accountants, if available and subject to the consent of such
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independent accountants) and, during such period, Parent and the Company shall,
and Parent shall cause each of its Subsidiaries to, furnish promptly to the
other (i) a copy of each report, schedule, registration statement and other
document filed by it during such period pursuant to the requirements of federal
or state securities laws and (ii) all other information concerning its business,
properties and personnel as the other may reasonably request. No investigation
pursuant to this Section 5.3(a) shall affect any representation or warranty in
this Agreement of any party hereto or any condition to the obligations of the
parties hereto.
(b) The Company (i) shall keep Parent promptly informed of (A) any
communication (written or oral) with or from the FDA or the DEA and (B) any
communications (written or oral) received from any Person relating to the
Company Intellectual Property and (ii) shall not make any submissions to, or
have discussions with, the FDA or the DEA without either the prior consultation
or the inclusion of Parent; provided, however, that in the event the Company (i)
-------- -------
is verbally contacted by the FDA and (ii) has made a good faith effort to
include representatives of Parent in such discussion without success, then the
Company shall be allowed to participate in such discussions without Parent and
shall promptly inform Parent of the content of such discussions. Parent shall
keep the Company promptly informed of any communications from the FDA or DEA
relating to any of the drugs set forth in Schedule 5.3(b) of the Parent
Disclosure Schedule,
Section 5.4 Compliance with the Securities Act. Prior to mailing the
----------------------------------
Proxy Statement, the Company shall deliver to Parent a list of names and
addresses of those Persons who, in the opinion of the Company, may, at the time
of the Stockholder Meeting, be deemed to be "affiliates" of the Company within
the meaning of Rule 145 under the Securities Act ("Affiliates"). The Company
----------
shall provide to Parent such information and documents as each shall reasonably
request for purposes of reviewing such lists. There shall be added to such lists
the names and addresses of any other Person that the Company reasonably
identifies (by written notice to the other party within ten business days after
receipt of such list) as being a Person who may be deemed to be an Affiliate of
the Company. Except as set forth in Schedule 5.4 of the Company Disclosure
Schedule, the Company shall exercise all reasonable efforts to deliver or cause
to be delivered to Parent, not later than 30 days prior to the Effective Time,
from each of such Affiliates of the Company identified on the foregoing list, an
affiliate letter in the form attached hereto as Exhibit F.
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Section 5.5 Designation of Directors. At the Effective Time, Parent
-------------------------
shall take all actions necessary to cause (a) three (3) designees of the Company
(each of whom shall be satisfactory to Parent) to be appointed to its Board of
Directors (such person and any subsequent designees thereof, the "Company
-------
Designees"), to serve until their terms expire or until their successors have
- ---------
been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the Parent Charter or Parent By-laws
and (b) John W. Lyle to be appointed a Non-Executive Chairman of Parent's Board
of Directors. During the three-year period from and including the Effective
Date, (A) Parent shall use its reasonable best efforts to cause at least three
(3) Company Designees to be on the Board of Directors of Parent at all times,
(B) at any meeting of stockholders for the purpose of electing the members of
Parent's Board of Directors, Parent shall cause to be nominated for election the
Company Designees, (C) the Parent LLC (as defined in Section 5.21) shall vote
the shares of Parent Common Stock owned by it in favor of the Company Designees,
(D) the Parent Charter or the Parent By-Laws shall provide that any vacancies
created by any Company Designee upon such Company Designee's death, resignation
or removal that are not filled pursuant to a Parent stockholder vote shall be
filled by a nominee of the remaining Company Designees and (E) one Company
Designee shall be appointed as a member of any compensation committee of
Parent's Board of Directors or any other committee of such Board having the
responsibility or power with respect to the granting of employee stock options.
Section 5.6 NASDAQ Listing. Parent shall use its reasonable best efforts
--------------
to have authorized for listing on the NASDAQ, subject to official notice of
issuance,the shares of Parent Common Stock, the Algos Warrants to be issued in
connection with the Merger and the Endo Warrants (as defined in Section 5.20
hereof).
Section 5.7 Fees and Expenses.
-----------------
(a) Except as provided in this Section 5.7, whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby, including, without limitation, the
fees and disbursements of counsel, financial advisors and accountants, shall be
paid by the party incurring such costs and expenses; provided that all filing
-------- ----
fees and printing expenses for the Proxy Statement and Registration Statement
shall be shared equally by the Company and Parent.
(b) The Company shall reimburse Parent and Sub for all their out-of-pocket
expenses actually incurred in connection with this Agreement and the other
Transaction Agreements, the Merger and any other transactions contemplated
hereby and thereby if this Agreement is terminated pursuant to Section 7.1(e)
hereof, or
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terminated pursuant to Section 7.1(b) or (c) hereof based on a breach of the
Company. Such reimbursement shall be paid upon demand following such
termination.
(c) Parent and Sub shall reimburse the Company for all of its out-of-
pocket expenses actually incurred in connection with this Agreement and the
other Transaction Agreements, the Merger and any other transactions contemplated
hereby and thereby if this Agreement is terminated pursuant to Section 7.1(b) or
(c) hereby based on a breach of Parent or Sub. Such reimbursement shall be paid
upon demand following such termination.
Section 5.8 Company Stock Options. The Company shall cause each
---------------------
unexpired and unexercised Company Stock Option under the Company Stock Plans to
become fully vested and exercisable for the thirty (30)-day period immediately
prior to the Effective Time. To the extent any Company Stock Option is unexpired
and unexercised at the end of such period, the Company shall cause such Company
Stock Option to terminate as of the Effective Time.
Section 5.9 Parent Options. Parent shall take all action necessary, and
--------------
shall use its reasonable best efforts to obtain as soon as practicable the
consent of option holders to provide that each Parent Stock Option (to purchase
shares of Parent Common Stock under the Parent Incentive Plans) which is
outstanding at the Effective Time (whether or not such Parent Stock Option is
then vested and exercisable) shall, subject to the following sentence, be
following the Effective Time exercisable solely into shares of Parent Common
Stock that are beneficially owned by certain holders of Parent Common Stock
immediately following the Parent Recapitalization and prior to the Effective
Time (the "Current Endo Options"). The parties hereto also agree and
--------------------
acknowledge that following the date of this Agreement, current holders of Parent
Common Stock and current holders of Parent Stock Options will enter into
amendments to their current stockholders agreements, Parent Incentive Plans and
Parent Stock Options, as the case may be, in order to accomplish the foregoing.
Section 5.10 Reasonable Efforts.
------------------
(a) Upon the terms and subject to the conditions set forth in this
Agreement, including, with regard to the Company, Section 4.2 hereof, each of
the parties agrees to use reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, and to assist and cooperate with the
other parties in doing, all things necessary, proper or advisable to consummate
and make effective, in the most expeditious manner practicable, the Merger and
the other transactions
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contemplated by this Agreement, including, but not limited to: (i) the obtaining
of all necessary actions or nonactions, waivers, consents and approvals from all
Governmental Entities and the making of all necessary registrations and filings
(including filings with Governmental Entities) and the taking of all reasonable
steps as may be necessary to obtain an approval or waiver from, or to avoid an
action or proceeding by, any Governmental Entity (including those in connection
with the HSR Act and State Takeover Approvals), (ii) the obtaining of all
necessary consents, approvals or waivers from third parties, (iii) the defending
of any lawsuits or other legal proceedings, whether judicial or administrative,
challenging this Agreement or the consummation of the transactions contemplated
hereby, including seeking to have any stay or temporary restraining order
entered by any court or other Governmental Entity vacated or reversed and (iv)
the execution and delivery of any additional instruments necessary to consummate
the transactions contemplated by this Agreement. Parent and the Company shall
cooperate with each other in connection with the making of such filings,
including providing copies of all such documents to the non-filing party and its
advisors prior to filing and, if requested, accepting all reasonable suggestions
in connection therewith.
(b) The parties hereto will consult and cooperate with one another, and
consider in good faith the views of one another, in connection with any
analyses, appearances, presentations, memoranda, briefs, arguments, opinions and
proposals made or submitted by or on behalf of any party hereto in connection
with proceedings under or relating to the HSR Act or any other federal, state or
foreign antitrust or fair trade law. Each party shall promptly notify the other
party of any communication to that party from any Governmental Entity in
connection with any required filing with, or approval or review by, such
Governmental Entity in connection with the Merger and permit the other party to
review in advance any such proposed communication to any Governmental Entity.
Neither party shall agree to participate in any meeting with any Governmental
Entity in respect of any such filings, investigation or other inquiry unless it
consults with the other party in advance and, to the extent permitted by such
Governmental Entity, gives the other party the opportunity to attend and
participate thereat.
(c) Each party shall use all reasonable efforts to not take any action, or
enter into any transaction, which would cause any of its representations or
warranties contained in this Agreement to be untrue or result in a breach of any
covenant made by it in this Agreement.
Section 5.11 Public Announcements. The initial press release shall be a
--------------------
joint press release and thereafter the Company and Parent each shall obtain the
prior consent of the other prior to issuing any press releases or otherwise
making public
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announcements with respect to the Merger and the other transactions contemplated
by this Agreement and prior to making any filings with any third party and/or
any Governmental Entity (including any national securities exchange or
interdealer quotation service) with respect thereto, except as may be required
by law or by obligations pursuant to any listing agreement with or rules of the
NASDAQ.
Section 5.12 State Takeover Laws. If any "fair price," "business
-------------------
combination" or "control share acquisition" statute or other similar statute or
regulation shall become applicable to the transactions contemplated hereby,
Parent and the Company and their respective Boards of Directors shall use their
reasonable best efforts to grant such approvals and take such actions as are
necessary so that the transactions contemplated hereby may be consummated as
promptly as practicable on the terms contemplated hereby and otherwise act to
minimize the effects of any such statute or regulation on the transactions
contemplated hereby.
Section 5.13 Indemnification; Directors and Officers Insurance. For not
-------------------------------------------------
than six (6) years from and after the Effective Time, Parent agrees to, and to
cause the Surviving Corporation to, indemnify and hold harmless all past and
present directors, officers and employees of the Company to the same extent such
Persons are indemnified as of the date of this Agreement by the Company pursuant
to the Company Charter and Company By-Laws and indemnification agreements, if
any, in existence on the date of this Agreement with any directors, officers and
employees of the Company for acts or omissions occurring at or prior to the
Effective Time; provided, however, that Parent agrees to, and to cause the
-------- -------
Surviving Corporation to, indemnify and hold harmless such Persons to the
fullest extent permitted by law for acts or omissions occurring in connection
with the approval of this Agreement and the consummation of the transactions
contemplated hereby. Parent shall cause the Surviving Corporation to provide,
for an aggregate period of not less than six (6) years from the Effective Time,
the Company's current directors and officers an insurance and indemnification
policy that provides coverage for events occurring prior to the Effective Time
(the "D&O Insurance") that is no less favorable than the Company's existing
-------------
policy or, if substantially equivalent insurance coverage is unavailable, the
best available coverage; provided, however, that the Surviving Corporation shall
-------- -------
not be required to pay an annual premium for the D&O Insurance in excess of 200
percent of the last annual premium paid prior to the date of this Agreement,
which premium the Company represents and warrants to be approximately $195,740.
Section 5.14 Notification of Certain Matters. Parent shall use its
-------------------------------
reasonable best efforts to give prompt notice to the Company, and the Company
shall use its reasonable best efforts to give prompt notice to Parent, of: (i)
the
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occurrence, or non-occurrence, of any event the occurrence, or non-occurrence,
of which it is aware and which would be reasonably likely to cause (x) any
representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect or (y) any covenant, condition or agreement
contained in this Agreement not to be complied with or satisfied in all material
respects, (ii) any failure of Parent or the Company, as the case may be, to
comply in a timely manner with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder, (iii) any material litigation,
any material governmental complaints, investigations or hearings (or
communications indicating that the same may be contemplated) or (iv) any change
or event which would be reasonably likely to have a Material Adverse Effect on
Parent or the Company, as the case may be; provided, however, that the delivery
-------- -------
of any notice pursuant to this Section 5.14 shall not limit or otherwise affect
the remedies available hereunder to the party receiving such notice.
Section 5.15 Employee Matters. Except to the extent necessary to avoid
----------------
duplication of benefits, Parent will, or will cause the Surviving Corporation
to, give Continuing Employees full credit for purposes of eligibility and
vesting under any employee benefit plans or arrangements maintained by Parent,
the Surviving Corporation or any Subsidiary of Parent in which such Continuing
Employee is eligible to participate for such Continuing Employees' service with
the Company to the same extent recognized by the Company immediately prior to
the Effective Time. Parent will, or will cause the Surviving Corporation to, (i)
waive all limitations as to preexisting conditions exclusions and waiting
periods with respect to participation and coverage requirements applicable to
the Continuing Employees under any welfare plan that such employees may be
eligible to participate in after the Effective Time, other than limitations or
waiting periods that are already in effect with respect to such employees and
that have not been satisfied as of the Effective Time under any welfare plan
maintained for the Continuing Employees immediately prior to the Effective Time,
and (ii) provide each Continuing Employee with credit for any co-payments and
deductibles paid prior to the Effective Time in satisfying any applicable
deductible or out-of-pocket requirements under any welfare plans that such
employees are eligible to participate in after the Effective Time.
Section 5.16 Tax Treatment. Parent and the Company will each use
-------------
reasonable efforts before and after the Closing to cause the Merger to qualify
as a reorganization within the meaning of Section 368(a) of the Code, and will
not take or fail to take, and will use reasonable efforts to prevent any
Affiliate of such party from taking or failing to take, any actions which would
jeopardize the qualification of the Merger as such a reorganization, and will
take such action as is available and may be reasonably required to negate the
impact of any past actions or failures by
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such party or its respective Affiliates which would reasonably be expected to
adversely impact the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
Section 5.17 Conveyance Taxes. Parent and the Company shall cooperate
----------------
in the preparation, execution and filing of all returns, questionnaires,
applications, or other documents regarding (i) any real property transfer gains,
sales, use, transfer, value-added, stock transfer (subject to Section 1.9(b)
hereof), and stamp Taxes, (ii) any recording, registration and other fees and
(iii) any similar Taxes or fees that become payable in connection with the
transactions contemplated hereby. The Taxes described in clause (i) above shall
be paid by the Company, without deduction or withholding from any amounts
payable to the holders of Company Common Stock.
Section 5.18 Ownership of Shares. None of Parent, any Person deemed
-------------------
acting in concert with Parent or any of its Subsidiaries or any of Parent's
Subsidiaries has acquired the beneficial ownership of any shares of Company
Common Stock other than in compliance with Section 3.21 hereof and any other
Applicable Law.
Section 5.19 Additional Agreements. At or before Closing, (a) each of
---------------------
Parent and the Parent LLC shall enter into a tax sharing agreement in
substantially the form attached hereto as Exhibit G (the "Tax Sharing
-----------
Agreement") and (b) each of Parent and John W. Lyle shall enter into an
- ----------
agreement in substantially the form attached hereto as Exhibit H (the "Lyle
-----
Agreement").
- ----------
Section 5.20 Issuance of Warrants to Parent. Immediately prior to
------------------------------
Closing, Parent shall issue one warrant (collectively, the "Endo Warrants")
-------------
with respect to each share of Parent Common Stock then outstanding, which
warrant shall be subject to the terms and conditions of a warrant agreement
"Endo Warrant Agreement") substantially in the form attached hereto as
----------------------
Exhibit I.
Section 5.21 Formation of Parent LLC.
-----------------------
(a) Immediately prior to the Effective Time, a limited liability company
(the "Parent LLC") shall be formed to which Parent shall use its reasonable best
----------
efforts to cause each of the then current holders of Parent Common Stock to
contribute all of the shares of Parent Common Stock beneficially owned by it in
exchange for membership interests in such Parent LLC; provided that this
-------- ----
covenant shall be deemed to have occurred if holders of at least 85% of the
Parent Common Stock so contribute their shares of Parent Common Stock to the
Parent LLC.
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(b) On March 31, 2001, Parent will determine the Cash Gross Profit of
Parent (as defined below) and the Adjustment Event (as defined below) shall be
deemed to have occurred or not occurred (as appropriate) on such date. Among
other things, the limited liability company agreement for the Parent LLC (the
"Parent LLC Agreement") will provide that (i) in the event (A) the Cash Gross
--------------------
Profit of Parent (as defined below) for the fiscal year ended December 31, 2000
does not equal or exceed $147.4 million and (B) the Exercisability Date (as
defined in the Algos Warrant) has occurred prior to March 31, 2001, then
----
13,769,573 shares of Parent Common Stock that are then owned by the Parent LLC
shall be transferred for no consideration to Parent (which shall deposit the
same in its treasury) and (ii) in the event (A) the Cash Gross Profit of Parent
for the fiscal year ended December 31, 2000 does not equal or exceed $147.4
million and (B) the Exercisability Date has not occurred prior to March 31,
2001, then 17,900,445 shares of Parent Common Stock that are then owned by the
----
Parent LLC shall be transferred for no consideration to Parent (which shall
deposit the same in its treasury) (the actions contemplated by clause (i) or
clause (ii) shall be adjustments to the Merger Consideration and shall be
referred to as an "Adjustment Event").
----------------
(c) The number of shares that are required to be transferred in the event
of an Adjustment Event shall be appropriately adjusted (i) such that, at the
Effective Time, the numbers in clauses (b)(i)(B) and (b)(ii)(B) of this Section
5.21 shall represent that number of shares of Parent Common Stock such that if
such shares were no longer outstanding at the Effective Time, the shares
issuable under the Algos Warrants in the aggregate (if such Algos Warrants were
then immediately exercisable), together with shares of Parent Common Stock
issued to the Company stockholders in the Merger would represent 40% of the
outstanding Parent Common Stock on a fully diluted basis (excluding the Endo
Warrants) and (ii) without duplicating clause (i) above, if Parent pays a
dividend or makes a distribution on the Parent Common Stock in shares of Parent
Common Stock or other capital stock of Parent or subdivides, splits, combines or
reclassifies its outstanding shares of Parent Common Stock into a different
number of securities of the same class, then the number of shares of Parent
Common Stock required to be transferred under this Section 5.21 shall be
appropriately adjusted to give the effect specified in clause (i) of this
sentence as if such events occurred immediately prior to the Effective Time.
(d) For such purposes, "Cash Gross Profit of Parent" shall mean the
---------------------------
difference between Net Sales (as defined below) and Cash Cost of Sales (as
defined below) for the fiscal year ended December 31, 2000. "Net Sales" shall
---------
mean the gross invoice price of Endo Products (as defined below) sold to any
third party (excluding Affiliates of Parent) less (i) cash, trade, promotional,
or quantity discounts and/or rebates, and chargebacks, (ii) retroactive price
reductions, (iii) sales,
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use or other excise taxes and (iv) returns and allowances, all as reflected on
the audited statement of operations of Parent attributable to the Endo Products
determined in accordance with GAAP consistently applied for the fiscal year
ended December 31, 2000. "Cash Cost of Sales" shall mean the Cost of Sales
------------------
(determined in accordance with GAAP and consistent with the past practices used
by Parent in 1998 as previously disclosed to the Company) as reflected on the
audited statement of operations of Parent for the fiscal year ended December 31,
2000 attributable to the Endo Products less all non-recurring charges and non-
cash charges included in Cost of Sales (including, but not limited to,
depreciation, amortization and other non-cash manufacturing charges). "Endo
----
Products" shall include current and future internally developed products sold or
- --------
marketed by Parent or its Subsidiaries (other than products developed or being
developed by the Company) to any third party (including products from which
Parent has revenues on account of royalties and license fees). The Parent LLC
Agreement shall further provide that the definition of the Cash Gross Profit of
Parent shall be based solely on the audited financial statements of Parent for
the fiscal year ended December 31, 2000. Any determinations regarding the
satisfaction of such obligation or any amendments, modifications or waivers of
such provisions by Parent shall be effective only if approved by a majority of
the members of the Board of Directors of Parent who do not then (by themselves
or through an Affiliate) have a financial interest in the Parent LLC. Any
dispute relating to the calculation of the Cash Gross Profit of Parent shall be
resolved by the Independent Accounting Firm (as defined below) acting as
arbitrator, and such determination shall be final and binding on the parties.
The Parent LLC and Parent (by a majority of the members of the Board of
Directors of Parent who do not then (by themselves or through an Affiliate) have
a financial interest in the Parent LLC) shall mutually select a nationally
recognized firm of certified public accountants then having no significant
ongoing relationship with either Parent or the Parent LLC or their respective
Affiliates, but if the Parent LLC and Parent cannot mutually agree on the
identity of such firm, then the Parent LLC and Parent shall each submit to the
other party's independent auditor the name of a national accounting firm other
than any firm that has in the prior two years provided services to the Parent
LLC, Parent or any of their respective Affiliates, and a firm shall be selected
by lot from these two firms by the independent auditors of the two parties. The
accounting firm selected pursuant to the foregoing procedures shall be referred
to as the "Independent Accounting Firm." (If no national accounting firm shall
---------------------------
be willing to serve as the Independent Accounting Firm, then an arbitrator
qualified under the rules of the American Arbitration Association shall be
selected to serve as such, such selection to be according to the above
procedures.) Within five (5) days of the submission of the dispute to the
Independent Accounting Firm, each of the Parent LLC and Parent (by a majority of
the members of the Board of Directors of Parent who do not then (by themselves
or through an Affiliate) have a
69
<PAGE>
financial interest in the Parent LLC) shall submit a written position paper (the
"Position Paper") to the Independent Accounting Firm outlining such party's
--------------
calculations and/or objections that are the subject of dispute. The Independent
Accounting Firm shall be instructed to use every reasonable effort to perform
its services within thirty (30) days of submission of the Position Papers to it
and, in any case, as promptly as practicable after such submission. The
determination of the Independent Accounting Firm shall be final and binding on
the parties without further right of appeal.
Section 5.22 Effect of Parent Recapitalization. Parent covenants that the
---------------------------------
Parent Recapitalization shall have the effect of adjusting the outstanding
Parent Common Stock such that those Persons who had been holders of Company
Common Stock immediately prior to the Effective Time shall, following the Parent
Recapitalization and at the Effective Time, hold, in the aggregate, 20% of the
outstanding Parent Common Stock (on a fully diluted basis, excluding the effect
of the Algos Warrants and the Endo Warrants) and those Persons who had been
holders of Parent Common Stock immediately prior to the Effective Time shall,
following the Parent Recapitalization and at the Effective Time, hold, in the
aggregate, 80% of the outstanding Parent Common Stock (on a fully diluted basis,
excluding the effect of the Algos Warrants and the Endo Warrants). For purposes
of calculating this 20/80 split, (a) any repurchases by Parent between the date
of this Agreement and the Effective Time of any Parent Common Stock or Parent
Stock Options from current holders thereof pursuant to any current stockholders
or options agreements or plans and any issuances of Parent Common Stock or
Parent Stock Options between the date of this Agreement and the Effective Time
to any Parent employee shall be taken into account in determining the 80% to be
owned by holders of Parent Common Stock and the 20% to be owned by holders of
Company Common Stock and (b) the shares of Parent Common Stock underlying any
Parent Stock Options, the holders of which do not consent to amend such Parent
Stock Options pursuant to Section 5.9 hereof, shall not be counted as part of
the 80% to be owned by holders of Parent Common Stock nor as part of the 20% to
be owned by holders of Company Common Stock and shall be treated as if such
Parent Stock Options did not exist for purposes of this calculation and in
calculating the number of fully diluted shares; provided, however, that such
-------- ------- ----
treatment will not apply to the shares underlying the Parent Stock Options held
by the six executives listed in Schedule 5.22 of the Parent Disclosure Schedule,
which Parent Stock Options shall be taken into account in determining the 80% to
be owned by the current holders of Parent Common Stock if such Parent Stock
Options are not amended pursuant to Section 5.9 hereof. If any of such
executives fails to abide by the terms of that certain side letter agreement
between each of them and the Company, mutually agreed upon arrangements will be
made so that the Parent Stock Options held by such Persons will only affect the
80% held at
70
<PAGE>
Effective Time by the current Parent stockholders. Each of the Algos Warrants
and the Endo Warrants shall be exercisable into a number of shares of Parent
Common Stock that is necessary to achieve the effect specified in the form of
each such Warrant in Section 7 of the Warrant Agreement and Section 7 of the
Endo Warrant Agreement, respectively.
ARTICLE VI
CONDITIONS PRECEDENT TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger.
----------------------------------------------------------
The respective obligation of each party to effect the Merger shall be subject to
the fulfillment or, to the extent permitted by applicable law, waiver at or
prior to the Effective Time of the following conditions:
(a) Stockholder Approval. This Agreement shall have been duly approved by
--------------------
the requisite vote of stockholders of the Company in accordance with applicable
law and the Company Charter and Company By-Laws.
(b) Listing on the NASDAQ. The Parent Common Stock issuable in the Merger
---------------------
shall have been authorized for listing on the NASDAQ, subject to official notice
of issuance.
(c) HSR. The waiting period (and any extensions thereof) applicable to
---
the consummation of the Merger under the HSR Act shall have expired or been
terminated.
(d) Registration Statement. The Registration Statement shall have become
----------------------
effective in accordance with the provisions of the Securities Act. No stop
order suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and no proceedings for that purpose shall have been initiated
or, to the Knowledge of Parent or the Knowledge of the Company, threatened by
the SEC. All necessary state securities or "blue sky" authorizations (including
State Takeover Approvals) shall have been received.
(e) No Governmental Action/Order. There shall not be pending any action,
----------------------------
suit or proceeding brought by any Governmental Entity which challenges or seeks
to enjoin the Merger or the other transactions contemplated hereby. No court or
other Governmental Entity having jurisdiction over the Company or Parent, or any
of Parent's Subsidiaries, shall have enacted, issued, promulgated, enforced or
entered
71
<PAGE>
any law, rule, regulation, executive order, decree, injunction or other
order (whether temporary, preliminary or permanent) which is then in effect and
has the effect of making the Merger or any of the transactions contemplated
hereby illegal.
Section 6.2 Conditions to Obligation of the Company to Effect the Merger.
------------------------------------------------------------
The obligation of the Company to effect the Merger shall be subject to the
fulfillment or, to the extent permitted by applicable law, waiver at or prior to
the Effective Time of the following additional conditions:
(a) Performance of Obligations; Representations and Warranties. Each of
----------------------------------------------------------
Parent and Sub shall have performed in all material respects each of its
covenants and agreements contained in this Agreement required to be performed on
or prior to the Effective Time, each of the representations and warranties of
Parent and Sub contained in this Agreement that is qualified by materiality
shall be true and correct on and as of the Effective Time as if made on and as
of such date (other than representations and warranties that address matters
only as of a certain date which shall be true and correct as of such certain
date) and each of the representations and warranties that is not so qualified
shall be true and correct in all material respects on and as of the Effective
Time as if made on and as of such date (other than representations and
warranties that address matters only as of a certain date which shall be true
and correct in all material respects as of such certain date), in each case
except as contemplated or permitted by this Agreement, and the Company shall
have received a certificate signed on behalf of each of Parent and Sub by its
Chief Executive Officer or its Chief Financial Officer to such effect.
(b) Tax Opinion. The Company shall have received an opinion of Latham &
-----------
Watkins in form and substance reasonably satisfactory to the Company, dated the
Effective Time, substantially to the effect that on the basis of facts,
representations and assumptions set forth in such opinion (including as provided
in the Tax Representation Letters) which are consistent with the state of facts
existing as of the Effective Time, for U.S. federal income tax purposes:
(i) the Merger will constitute a "reorganization" within the
meaning of Section 368(a) of the Code, and the Company, Sub and Parent will each
be a party to that reorganization within the meaning of Section 368(b) of the
Code; and
(ii) no gain or loss will be recognized by Parent or the Company as
a result of the Merger.
72
<PAGE>
The issuance of such opinion shall be conditioned on the receipt by Latham &
Watkins of the Tax Representation Letters, upon which Latham & Watkins will rely
in rendering its opinion, from each of Parent, Sub and the Company, in each
case, in form and substance reasonably satisfactory to such tax counsel. The
specific provisions of each such representation letter shall be in form and
substance reasonably satisfactory to such tax counsel rendering such opinion,
and each such representation letter shall be dated on or before the date of such
opinion and shall not have been withdrawn or modified in any material respect.
(c) Formation of Parent LLC. The formation of the Parent LLC in
------------------------
accordance with Section 5.21 hereof shall have occurred.
Section 6.3 Conditions to Obligations of Parent and Sub to Effect the
---------------------------------------------------------
Merger. The obligations of Parent and Sub to effect the Merger shall be subject
- ------
to the fulfillment or, to the extent permitted by applicable law, waiver at or
prior to the Effective Time of the following additional condition:
(a) Performance of Obligations; Representations and Warranties. The
----------------------------------------------------------
Company shall have performed in all material respects each of its agreements
contained in this Agreement required to be performed on or prior to the
Effective Time, each of the representations and warranties of the Company
contained in this Agreement that is qualified by materiality shall be true and
correct on and as of the Effective Time as if made on and as of such date (other
than representations and warranties that address matters only as of a certain
date which shall be true and correct as of such certain date) and each of the
representations and warranties that is not so qualified shall be true and
correct in all material respects on and as of the Effective Time as if made on
and as of such date (other than representations and warranties that address
matters only as of a certain date which shall be true and correct in all
material respects as of such certain date), in each case except as contemplated
or permitted by this Agreement, and Parent shall have received a certificate
signed on behalf of the Company by its Chief Executive Officer or its Chief
Financial Officer to such effect.
(b) Affiliate Letters. The letters from Affiliates required by Section
-----------------
5.4 hereof shall have been executed and delivered.
(c) Tax Opinion. Parent shall have received an opinion of Skadden, Arps,
-----------
Slate, Meagher & Flom LLP in form and substance reasonably satisfactory to
Parent, dated the Effective Time substantially to the effect that on the basis
of facts, representations and assumptions set forth in such opinion (including
as provided in
73
<PAGE>
the Tax Representation Letters) which are consistent with the state of facts
existing as of the Effective Time, for U.S. federal income tax purposes:
(i) the Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code, and that the Company, Sub and Parent will each be
a party to that reorganization within the meaning of Section 368(b) of the Code;
and
(ii) no gain or loss will be recognized by Parent or the Company as
a result of the Merger.
The issuance of such opinion shall be conditioned on the receipt by Skadden,
Arps, Slate, Meagher & Flom LLP of the Tax Representation Letters, upon which
Skadden, Arps, Slate, Meagher & Flom LLP will rely in rendering its opinion,
from each of Parent, Sub, and the Company, in each case, in form and substance
reasonably satisfactory to such tax counsel. The specific provisions of each
such representation letter shall be in form and substance reasonably
satisfactory to such tax counsel rendering such opinion, and each such
representation letter shall be dated on or before the date of such opinion and
shall not have been withdrawn or modified in any material respect.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1 Termination. This Agreement may be terminated at any time
-----------
prior to the Effective Time, whether before or after any approval of the matters
presented in connection with the Merger by the stockholders of the Company:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company (provided such party is not then in
material breach) if the other party shall have failed to comply in any material
respect with any of its covenants or agreements contained in this Agreement
required to be complied with prior to the date of such termination, which
failure to comply has not been cured within ten business days following receipt
by such other party of written notice of such failure to comply; provided,
--------
however, that if any such breach is curable by the breaching party through the
- -------
exercise of the breaching party's best efforts and for so long as the breaching
party shall be so using its best efforts to cure such breach, the non-breaching
party may not terminate this Agreement pursuant to this paragraph;
74
<PAGE>
(c) by either Parent or the Company (provided such party is not then in
material breach) if there has been (i) a breach by the other party (in the case
of Parent, including any breach by Sub) of any representation or warranty that
is not qualified as to materiality which has the effect of making such
representation or warranty not true and correct in all material respects or (ii)
a breach by the other party (in the case of Parent, including any breach by Sub)
of any representation or warranty that is qualified as to materiality, in each
case which breach has not been cured within ten business days following receipt
by the breaching party of written notice of the breach; provided, however, that
-------- -------
if any such breach is curable by the breaching party through the exercise of the
breaching party's best efforts and for so long as the breaching party shall be
so using its best efforts to cure such breach, the non-breaching party may not
terminate this Agreement pursuant to this paragraph;
(d) by Parent or the Company:
(i) if any Governmental Entity issues an order, decree or ruling or
takes any other action permanently enjoining, restraining or otherwise
prohibiting the Merger and such order, decree or ruling shall have become final
and nonappealable;
(ii) if any condition to the obligation of such party to consummate
the Merger set forth in Article VI hereof becomes incapable of satisfaction
prior to the Termination Date (as hereinafter defined) (provided that the
-------------
terminating party is not then in material breach of any representation, warranty
or covenant contained in this Agreement); or
(iii) if the Merger has not been effected on or prior to the close of
business on June 30, 2000 (the "Termination Date"); provided, however, that the
---------------- -------- -------
right to terminate this Agreement pursuant to this Section 7.1(d)(iii) shall not
be available to any party whose failure to fulfill any of its obligations
contained in this Agreement has been the cause of, or resulted in, the failure
of the Merger to have occurred on or prior to the aforesaid date; and
(e) by Parent or the Company if the stockholders of the Company do not
approve this Agreement at the Stockholder Meeting or any adjournment or
postponement thereof (so long as Parent and its Affiliates have voted the
proxies that they are entitled to vote in favor of this Agreement).
The right of any party hereto to terminate this Agreement pursuant to this
Section 7.1 shall remain operative and in full force and effect regardless of
any
75
<PAGE>
investigation made by or on behalf of any party hereto, any Person controlling
any such party or any of their respective officers or directors, whether prior
to or after the execution of this Agreement.
Section 7.2 Effect of Termination. In the event of termination of this
---------------------
Agreement by either Parent or the Company as provided in Section 7.1 hereof,
this Agreement shall forthwith terminate and there shall be no liability
hereunder on the part of the Company, Parent, Sub or their respective officers
or directors (except for Section 5.7 and Article VIII hereof which shall survive
the termination); provided, however, that nothing contained in this Section 7.2
-------- -------
shall relieve any party hereto from any liability for any willful breach of a
representation or warranty contained in this Agreement or the breach of any
covenant contained in this Agreement.
Section 7.3 Amendment. This Agreement may be amended by the parties
---------
hereto at any time before or after approval of the matters presented in
connection with the Merger by the stockholders of the Company; provided,
--------
however, after any such
- -------
approval, no amendment shall be made which by law requires further approval by
such stockholders without such further approval. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 7.4 Waiver. At any time prior to the Effective Time, the parties
------
hereto may (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (iii) subject to the proviso of Section 7.3 hereof, waive
compliance with any of the agreements or conditions contained herein which may
legally be waived. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in an instrument in writing
signed on behalf of such party.
Section 7.5 Procedure for Termination, Amendment, Extension or Waiver. A
---------------------------------------------------------
termination of this Agreement pursuant to Section 7.1 hereof, an amendment of
this Agreement pursuant to Section 7.3 hereof or an extension or waiver pursuant
to Section 7.4 hereof shall, to be effective, require in the case of Parent, Sub
or the Company, action by its Board of Directors or the duly authorized designee
of its Board of Directors.
76
<PAGE>
ARTICLE VIII
GENERAL PROVISIONS
Section 8.1 Non-Survival of Representations and Warranties. The
----------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall terminate at the Effective Time or, subject to
Section 7.2 hereof, upon the termination of this Agreement pursuant to Section
7.1 hereof.
Section 8.2 Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed given when delivered personally, one day after
being delivered to an overnight courier or when telecopied (with a confirmatory
copy sent by overnight courier) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
Endo Pharmaceuticals Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, PA 19317
Attn.: Carol A. Ammon
Fax No.: (610) 558-9683
with copies to:
Kelso & Company
320 Park Avenue, 24/th/ Floor
New York, New York 10022
Attn.: James J. Connors, II
Fax No.: (212) 223-2379
and
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attn.: Eileen Nugent Simon
Fax No.: (212) 735-2000
77
<PAGE>
(b) if to the Company, to:
Algos Pharmaceuticals Corporation
1333 Campus Parkway
Neptune, NJ 07753-6815
Attn.: General Counsel
Fax No.: (732) 938-2825
with copies to:
Latham & Watkins
885 Third Avenue
Suite 1000
New York, NY 10022
Attn.: Raymond Y. Lin
Fax No.: (212) 751-4864
Section 8.3 Interpretation. When a reference is made in this Agreement to
--------------
a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
Section 8.4 Counterparts. This Agreement may be executed in counterparts,
------------
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties.
Section 8.5 Entire Agreement; No Third-Party Beneficiaries. Except for
----------------------------------------------
the Mutual Confidentiality and Non-Disclosure Agreement between the parties
dated October 21, 1998, this Agreement (together with the Company Disclosure
Schedule, the Parent Disclosure Schedule, the Stockholder Voting Agreements and
the exhibits and annexes attached hereto and thereto) constitute the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof and
thereof. In the event of any conflict between this Agreement and any of the
Company Disclosure Schedule, the Parent Disclosure Schedule, the Stockholder
Voting Agreements and the exhibits and annexes attached hereto and thereto, this
Agreement shall control. Other than Sections 5.5, 5.8, 5.9, 5.13, 5.15 and
5.21(c) hereof and the obligation of the Parent
78
<PAGE>
LLC to transfer shares of Parent Common Stock pursuant to Section 5.21(b) hereof
(taking into account Section 5.21(d) hereof), this Agreement is not intended to
confer upon any Person other than the parties hereto any rights or remedies
hereunder.
Section 8.6 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY, OR SUB IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.
Section 8.7 Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties.
Section 8.8 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions contemplated by this Agreement may be consummated as
originally contemplated to the fullest extent possible.
Section 8.9 Enforcement of this Agreement.
-----------------------------
(a) The parties acknowledge and agree that any payment made pursuant to
Section 5.7 hereof does not relieve either party from any liability it otherwise
may have for breach of this Agreement.
(b) The parties hereto agree that irreparable damage would occur in the
event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this
79
<PAGE>
Agreement and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, such remedy being
in addition to any other remedy to which any party is entitled at law or in
equity. Each party hereto hereby irrevocably and unconditionally consents to
submit to the exclusive jurisdiction of the United States District Court located
in the State of Delaware (unless such courts assert no jurisdiction, in which
case the parties hereto consent to the exclusive jurisdiction of the courts of
the State of Delaware) for any actions, suits or proceedings arising out of or
relating to this Agreement and the transactions contemplated hereby (and each
party hereto agrees not to commence any action, suit or proceeding relating
thereto except in such courts), and further agrees that service of any process,
summons, notice or document by U.S. registered mail to the addresses set forth
herein shall be effective service of process for any such action, suit or
proceeding brought against each party in such court. Each party hereto hereby
irrevocably and unconditionally waives any objection to the laying of venue of
any action, suit or proceeding arising out of this Agreement or the transactions
contemplated hereby, in the United States District Courts located in the State
of Delaware (unless such courts assert no jurisdiction, in which case each party
consents to the exclusive jurisdiction of the courts of the State of Delaware).
Each party hereby further irrevocably and unconditionally waives and agrees not
to plead or to claim in any such court that any such action, suit or proceeding
brought in any such court has been brought in an inconvenient forum. Each of the
parties hereto also agrees that any final and unappealable judgment against a
party hereto in connection with any action, suit or other proceeding shall be
conclusive and binding on such party and that such award or judgment may be
enforced in any court of competent jurisdiction, either within or outside of the
United States. A certified or exemplified copy of such award or judgment shall
be conclusive evidence of the fact and amount of such award or judgment.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective officers thereunto duly authorized all as of the
date first written above.
ENDO PHARMACEUTICALS HOLDINGS INC.
By: /s/ Carol A. Ammon
-------------------------------------------------------
Name: Carol A. Ammon
Title: President & Chief Executive Officer
ENDO INC.
By: /s/ Carol A. Ammon
-------------------------------------------------------
Name: Carol A. Ammon
Title: President & Chief Executive Officer
ALGOS PHARMACEUTICAL CORPORATION
By: /s/ John W. Lyle
-------------------------------------------------------
Name: John W. Lyle
Title: President
<PAGE>
Annex I
Company Stockholders Entering into a Stockholder Voting Agreement
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
===================================================================
Registered Holder Number of Shares
Subject to
Stockholder
Voting Agreements
- -------------------------------------------------------------------
<S> <C>
Karen B. Lyle 1,344,416
- -------------------------------------------------------------------
Michael Hyatt (N.B. does not include 829,551
shares owned by the Kimmel Trusts listed
below)
- -------------------------------------------------------------------
Trust Under the Will of Inez Kimmel 657,193
- -------------------------------------------------------------------
Todd Kimmel Trust 171,530
- -------------------------------------------------------------------
Melissa Kimmel Trust 155,000
- -------------------------------------------------------------------
Anita Hyatt Family Trust 20,750
- -------------------------------------------------------------------
Frank S. Caruso 370,200
- -------------------------------------------------------------------
John W. Lyle 224,100
- -------------------------------------------------------------------
Hyatt Family Trust 221,332
- -------------------------------------------------------------------
Roger H. Kimmel (N.B. does not include
shares owned by the Hyatt Trusts listed above) 30,000
- -------------------------------------------------------------------
Frank S. Caruso Irrevocable Trust 24,900
- -------------------------------------------------------------------
James R. Ledley 109,450
- -------------------------------------------------------------------
Donald G. Drapkin 8,300
- -------------------------------------------------------------------
Donald Drapkin 8,300
- -------------------------------------------------------------------
Patricia Caruso 1,000
===================================================================
Total 4,176,022
===================================================================
</TABLE>
82
<PAGE>
Exhibit A-1 to the
Agreement and Plan of Merger
FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ENDO PHARMACEUTICALS HOLDINGS INC.
FIRST: The name of the Corporation is Endo Pharmaceuticals Holdings
-----
Inc. (hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in
------
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at that address is the
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
-----
or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code (the "GCL").
FOURTH: The total number of shares of capital stock which the
------
Corporation shall have authority to issue is 175,078,160 shares, consisting of
(i) 142,656,279 shares of Common Stock, par value $.01 per share (the "Common
Stock") and (ii) 32,421,882 shares of Preferred Stock, par value $.01 per share
(the "Preferred Stock").
A. Common Stock. Except as otherwise pro vided in this Article
------------
FOURTH or as otherwise required by law, shares of Common Stock shall be
identical and shall entitle the holders thereof to the same rights and
privileges, subject to the same qualifications, limitations and restrictions.
<PAGE>
1. Voting Rights. Except as otherwise required by applicable
-------------
law, the holders of Common Stock will be entitled to one vote per share on all
matters to be voted on by the Corporation's Common Stockholders.
2. Dividends. When and as dividends are declared thereon,
---------
whether payable in cash, property or securities of the Corporation, the holders
of Common Stock will be entitled to share equally, share for share, in such
dividends.
B. Preferred Stock. The Board of Directors is expressly authorized
---------------
to provide for the issuance of all or any shares of the Preferred Stock in one
or more classes or series, and to fix for each such class or series such voting
powers, full or limited, or no voting powers, and such distinctive designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the GCL, including, without limitation, the authority to provide that any such
class or series may be (i) subject to such mandatory or optional redemption at
such time or times and at such price or prices, or, if appropriate, not subject
to such mandatory or optional redemption, (ii) entitled to receive dividends
(which may be cumulative or non-cumulative) at such rates, on such conditions,
and at such times, and payable in preference to, or in such relation to, the
dividends payable on any other class or classes or any other series, (iii)
entitled to such rights upon the dissolution of, or upon any distribution of the
assets of, the Corporation, or (iv) convertible into, or exchangeable for,
shares of any other class or classes of stock, or of any other series of the
same or any other class or classes of stock, of the Corporation at such price or
prices or at such rates of exchange and with such adjustments, all as may be
stated in such resolution or resolutions .
FIFTH: The following provisions are inserted for the management of
-----
the business and the conduct of
2
<PAGE>
the affairs of the Corporation, and for further definition, limitation and
regulation of the powers of the Corporation and of its directors and
stockholders:
(1) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stockholders
to make, alter, amend, change, add to or repeal the By-Laws of the
Corporation, as amended and restated from time to time (the "By-Laws").
(3) The number of directors of the Corporation shall not be less than
seven (7) nor more than eleven (11), the exact number of directors to be
fixed from time to time by, or in the manner provided in, the By-Laws of
the Corporation. The number of directors constituting the Board of
Directors shall be fixed at nine (9) as of the date hereof. Election of
directors need not be by written ballot unless the By-Laws so provide.
(4) No director shall be personally liable to the Corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the GCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Any repeal or modification of this Article FIFTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions
3
<PAGE>
occurring prior to such repeal or modification.
(5) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Certificate of Incorporation, and any By-Laws
adopted by the stockholders; provided, however, that no By-Laws hereafter
adopted by the stockholders shall invalidate any prior act of the directors
which would have been valid if such By-Laws had not been adopted.
SIXTH: The name and mailing address of the Sole Incorporator is as
-----
follows:
Name Address
---- -------
Deborah M. Reusch P.O. Box 636
Wilmington, DE 19899
SEVENTH: The Corporation shall indemnify its directors and officers
-------
to the fullest extent authorized or permitted by law, as now or hereafter in
effect, and such right to indemnification shall continue as to a person who has
ceased to be a director or officer of the Corporation and shall inure to the
benefit of his or her heirs, executors and personal and legal representatives;
provided, however, that, except for proceedings to enforce rights to
- -------- -------
indemnification, the Corporation shall not be obligated to indemnify any
director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated by
such person unless such proceeding (or part thereof) was authorized or consented
to by the Board of Directors. The right to indemnification conferred by this
Article SEVENTH shall include the right to be paid by the Corporation the
expenses incurred in defending or otherwise participating in any proceeding in
advance of its final disposition.
4
<PAGE>
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article SEVENTH to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses conferred
in this Article SEVENTH shall not be exclusive of any other right which any
person may have or hereafter acquire under this Certificate of Incorporation,
the By-Laws, any statute, agreement, vote of stockholders or disinterested
directors or otherwise.
Any repeal or modification of this Article SEVENTH by the stockholders
of the Corporation shall not adversely affect any rights to indemnification and
to the advancement of expenses of a director or officer of the Corporation
existing at the time of such repeal or modification with respect to any acts or
omissions occurring prior to such repeal or modification.
EIGHTH: Meetings of stockholders may be held within or without the
------
State of Delaware, as the By-Laws may provide. The books of the Corporation may
be kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws.
NINTH: The Corporation hereby elects not to be governed by Section
-----
203 of the GCL pursuant to Section 203(b)(3) therein.
TENTH: The Corporation reserves the right to amend, alter, change or
-----
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
5
<PAGE>
I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the GCL, do make this
Certificate, hereby declaring and certifying that this is my act and deed and
the facts herein stated are true, and accordingly have hereunto set my hand this
__ day of _________, ____.
______________________
Deborah M. Reusch
Sole Incorporator
6
<PAGE>
Exhibit A-2 - Summary of Parent Recapitalization
Endo Pharmaceuticals Holdings Inc.
Share Recapitalization Schedule
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Authorized Issued Treasury Outstanding
- ------------ ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Shares 2,000,000 929,950 - 929,950
Exchange Class A to Common Stock 200,000 174,560 (290) 174,270
----------- ---------- ----------- -------------
Adjusted Shares 2,200,000 1,104,510 (290) 1,104,220
Recapitalization Ratio 64.844x 64.844x 64.844x 64.844x
----------- ---------- ----------- -------------
Total Post-Recapitalization Shares 142,656,279 71,620,585 (18,805) 71,601,780
=========== ========== =========== =============
Class A Common Stock
- --------------------
Shares 200,000 174,560 (290) 174,270
Exchange Class A to Common Stock (200,000) (174,560) 290 (174,270)
----------- ----------- ---------- -------------
Adjusted Shares - - - -
Recapitalization Ratio 64.844x 64.844x 64.844x 64.844x
----------- ----------- ---------- -------------
Total Post-Recapitalization Shares - - - -
=========== =========== ========== =============
Preferred Stock
- ---------------
Shares 500,000 - - -
Exchange Preferred to Common Stock - - - -
----------- ----------- ---------- -------------
Adjusted Shares 500,000 - - -
Recapitalization Ratio 64.844x 64.844x 64.844x 64.844x
----------- ----------- ---------- -------------
Total Post-Recapitalization Shares 32,421,882 - - -
=========== =========== ========== =============
Totals
- ------
Total Pre-Recapitalization Shares 2,700,000 1,104,510 (290) 1,104,220
Recapitalization Ratio 64.844x 64.844x 64.844x 64.844x
----------- ----------- ---------- -------------
Total Post-Recapitalization Shares 175,078,160 71,620,585 (18,805) 71,601,780
=========== =========== ========== =============
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The numbers set forth in this exhibit A-2 assume Algos has 17,900,445
fully diluted shares outstanding and are subject to adjustment after the date of
the Merger Agreement to the extent necessary to give effect to the requirements
set forth in Section 5.22 of the Merger Agreement.
<PAGE>
Exhibit B-Form of Company Voting Agreement
VOTING AGREEMENT
VOTING AGREEMENT (this "Agreement"), dated as of November __, 1999, by
---------
and among ENDO PHARMACEUTICALS HOLDINGS INC., a Delaware corporation ("Parent"),
------
ENDO INC., a Delaware corporation and a newly-formed wholly-owned subsidiary of
Parent ("Sub"), and the stockholder party hereto (the "Stockholder").
--- -----------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, concurrently with the execution and delivery of this
Agreement, an Agreement and Plan of Merger (as such agreement may be amended
from time to time, the "Merger Agreement") is being entered into by and among
----------------
Parent, Sub and ALGOS PHARMACEUTICAL CORPORATION, a Delaware corporation (the
"Company"), pursuant to which Company has agreed to merge with and into Sub,
-------
with Sub continuing as the surviving corporation (the "Merger"); and
------
WHEREAS, as a condition to, and in consideration for, Parent's and
Sub's willingness to enter into the Merger Agreement and to consummate the
transactions contemplated thereby, Parent and Sub have required that the
Stockholder enter into this Agreement and certain other stockholders to enter
into similar agreements.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements contained herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
1. Definitions. For purposes of this Agreement:
-----------
"Company Securities" shall mean the Company's common stock, par value
------------------
$.01 per share.
"Stockholder Shares" shall mean (i) the Existing Securities (as
------------------
defined in Section 5(a)(i) hereof) set forth on Schedule I hereto, (ii) any
shares of Company Securities distributed prior to the termination of this
Agreement in respect of the Stockholder Shares by reason of a stock dividend,
split-up, recapitalization, reclassification, combination, merger, exchange of
shares or otherwise and (iii) any other shares of the Company Securities of
which the Stockholder acquires ownership,
<PAGE>
either directly or indirectly, after the date of this Agreement and prior to the
Effective Time.
"Person" shall mean an individual, corporation, partnership, limited
------
liability company, joint venture, association, trust, unincorporated
organization or other entity.
Capitalized terms used but not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement.
2. Agreement to Vote Shares. The Stockholder shall, at any meeting
------------------------
of the holders of any class or classes of Company Securities, however such
meeting is called and regardless of whether such meeting is a special or annual
meeting of the stockholders of the Company, or in connection with any written
consent of the stockholders of the Company, vote (or cause to be voted) the
Stockholder Shares, (i) in favor of the Merger, the execution and delivery by
the Company of the Merger Agreement and the approval of the terms thereof and
each of the other actions contemplated by the Merger Agreement and this
Agreement and any actions required in furtherance thereof and hereof and (ii)
against the following actions (other than the Merger and the transactions
contemplated by the Merger Agreement): (1) any extraordinary corporate
transaction, such as a merger, consolidation or other business combination
involving the Company; (2) a sale, lease or transfer of a material amount of
assets of the Company or a reorganization, recapitalization, dissolution or
liquidation of the Company; (3) (a) any change in the majority of the board of
directors of the Company; (b) any material change in the present capitalization
of the Company or any amendment of the certificate of incorporation or similar
governing document of the Company; (c) any other material change in the
corporate structure or business of the Company; or (d) any other action, which,
in the case of each of the matters referred to in clauses (a), (b) and (c)
above, is intended, or could reasonably be expected, to impede, interfere with,
delay, postpone, discourage or materially adversely affect the contemplated
economic benefits to Parent or Sub of the Merger or the transactions
contemplated by the Merger Agreement or this Agreement.
2
<PAGE>
3. Grant of Irrevocable Proxy; Appointment of Proxy.
------------------------------------------------
(a) The Stockholder hereby irrevocably grants to, and appoints,
Carol Ammon, Jeffrey Black and Osagie Imasogie, or any one of them, in their
respective capacities as officers of Parent, and any individual who shall
hereafter succeed to any such office of Parent, and each of them individually,
the Stockholder's proxy and attorney-in-fact (with full power of substitution),
for and in the name, place and stead of the Stockholder, to vote the Stockholder
Shares held at the time of the relevant stockholder vote as set forth in Section
2 hereof. The Stock holder will cause any record holder of Stockholder Shares to
grant substantially similar proxies as requested in accordance with Section
8(e) hereof.
(b) The Stockholder represents that any proxies heretofore given
in respect of the Stockholder Shares are not irrevocable, and that any such
proxies are hereby revoked.
(c) The Stockholder understands and acknowledges that Parent and
Sub are entering into the Merger Agreement in reliance upon the Stockholder's
execution and delivery of this Agreement. The Stockholder hereby affirms that
the irrevocable proxy set forth in this Section 3 is given in connection with
the execution of the Merger Agreement, and that such irrevocable proxy is given
to secure the performance of the duties of the Stockholder under this Agreement.
The Stockholder hereby further affirms that the irrevocable proxy is coupled
with an interest and may under no circumstances be revoked. Such irrevocable
proxy is executed and intended to be irrevocable in accordance with the
provisions of Section 212(e) of the Delaware General Corporation Law.
4. Covenants of the Stockholders. The Stockholder hereby agrees
-----------------------------
and covenants that:
(a) Restriction on Transfers. Except as may otherwise be agreed
------------------------
by Parent and as contemplated by those agreements or understandings set forth
on Schedule II hereto, the Stockholder shall not (i) transfer (which term shall
include, without limitation, any sale, gift, pledge or other disposition), or
consent to any transfer of, any or all of the Stockholder Shares, or any
interest therein if such transfer would result in the Stockholder no longer
having the power to vote or cause to be voted the Stockholder Shares or (ii)
enter into any contract, option or other agreement or understanding with respect
to any such transfer of any or all of the Stockholder Shares, or any interest
therein.
3
<PAGE>
(b) Restrictions on Proxies and Voting Arrangements. Except as
-----------------------------------------------
otherwise provided herein, the Stockholder shall not (i) grant any proxy, power-
of-attorney or other authorization in or with respect to the Stockholder Shares
or (ii) deposit the Stockholder Shares into a voting trust or enter into a
voting agreement or arrangement with respect to the Stockholder Shares.
(c) Stop Transfer. The Stockholder shall not request that the
-------------
Company register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of the Stockholder's Existing
Securities (as defined in Section 6(a)(i) hereof), unless such transfer is made
in compliance with this Agreement. In the event of any dividend or
distribution, or any change in the capital structure of the Company by reason of
any non-cash dividend, split-up, recapitalization, combination, exchange of
securities or the like, the term "Existing Securities" shall refer to and
include the Existing Securities as well as all such dividends and distributions
of securities and any securities into which or for which any or all of the
Existing Securities may be changed, exchanged or converted.
(d) Waiver of Appraisal Rights. The Stockholder hereby waives
--------------------------
any rights of appraisal or rights to dissent from the Merger that the
Stockholder may have.
(e) No Inconsistent Arrangements. The Stockholder shall not
----------------------------
take any other action that would in any way restrict, limit or interfere with
the performance of the Stockholder's obligations hereunder or the transactions
contemplated hereby or by the Merger Agreement.
5. Representations and Warranties.
------------------------------
(a) The Stockholder hereby represents and warrants to Parent and
Sub as follows:
(i) Ownership of Securities. On the date hereof, the
-----------------------
Stockholder owns, directly or indirectly, or has the power to direct
the voting of, the Company Securities set forth next to the
Stockholder's name on Schedule I hereto (the "Existing Securities"),
-------------------
and the Existing Securities are owned of record by the Stockholder or
certain of the Stockholder's subsidiaries or nominees (together, the
"Record Holders"). On the date hereof, the Existing Securities
---------------
constitute all of the shares of voting capital stock of the Company
owned of record or otherwise by such Stockholder or as to which such
Stockholder has the power to direct the voting of the shares. Each
Record has
4
<PAGE>
sole voting power and sole power to issue instructions with respect to
the matters set forth in Section 2 hereof, sole power of disposition,
sole power of conversion, sole power (if any) to demand appraisal
rights and sole power to agree to all of the matters set forth in this
Agreement, in each case with respect to all of such Record Holder's
Existing Securities with no limitations, qualifications or
restrictions on such rights, subject to applicable securities laws and
the terms of this Agreement.
(ii) Power; Binding Agreement. The Stockholder has the power
------------------------
(or, if applicable, corporate power) and authority to enter into and
perform all of the Stockholder's obligations under this Agreement. The
execution, delivery and performance of this Agreement by the
Stockholder will not violate any other agreement to which the
Stockholder is a party including, without limitation, any voting
agreement, proxy arrangement, pledge agreement, shareholders
agreement, voting trust or trust agreement. This Agreement has been
duly and validly executed and delivered by the Stockholder and
constitutes a valid and binding agreement of the Stockholder,
enforceable against the Stockholder in accordance with its terms,
except as the enforceability thereof may be limited by (a) applicable
bankruptcy, insolvency, moratorium, reorganization or similar laws in
effect that affect the enforcement of creditors rights generally or
(b) general principles of equity, whether considered in a proceeding
at law or in equity. There is no beneficiary or holder of a voting
trust certificate or other interest of any trust of which the
Stockholder is a trustee whose consent is required for the execution
and delivery of this Agreement or the compliance by the Stockholder
with the terms hereof.
(iii) No Conflicts. No filing with, and no permit,
------------
authorization, consent or approval of, any Governmental Entity is
required for the execution of this Agreement by the Stockholder and
the consummation by the Stockholder of the transactions contemplated
hereby, except in connection, or in compliance, with the provisions of
(i) Section 16 and Section 13D or 13G of the Exchange Act and (ii) the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), none of the execution and delivery of this Agreement by
-------
the Stockholder, the consummation by the Stockholder of the
transactions contemplated hereby or compliance by the Stockholder with
any of the provisions hereof shall (A) conflict with, or result in any
breach of, any organizational documents applicable to
5
<PAGE>
the Stockholder, (B) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or
give rise to any third party right of termination, cancellation,
material modification or acceleration) under any of the terms,
conditions or provisions of any note, loan agreement, bond, mortgage,
indenture, license, contract, commitment, arrangement, understanding,
agreement or other instrument or obligation of any kind to which the
Stockholder is a party or by which the Stockholder or any of the
Stockholder's properties or assets may be bound, or (C) violate any
order, writ, injunction, decree, judgment, order, statute, arbitration
award, rule or regulation applicable to the Stockholder or any of the
Stockholder's properties or assets.
(iv) No Liens. Except as established hereby, the Existing
--------
Securities are now and, at all times during the term hereof, will be
held by the Stockholder, or by a nominee or custodian for the benefit
of the Stockholder, free and clear of all liens, claims, security
interests, proxies, voting trusts or agreements, understandings or
arrangements or any other encumbrances whatsoever.
(v) No Solicitation. The Stockholder hereby agrees, in the
---------------
Stockholder's capacity as stockholder of the Company, that neither the
Stockholder nor any of the Stockholder's subsidiaries, if applicable,
shall (and the Stockholder shall use best efforts to cause the
Stockholder's officers, directors, employees, investment bankers,
consultants, attorneys, accountants, agents, advisors or
representatives not to), directly or indirectly, take any action to
solicit, initiate, encourage, facilitate, participate in or initiate
discussions or negotiations with, or provide any information to, any
Person (other than Parent, Sub or any of their Affiliates or
representatives) concerning any Company Take over Proposal; provided
--------
that nothing contained in this Section 5(a)(v) shall restrict any
----
officer, director or employee of the Stockholder or the Stockholder's
subsidiaries, if applicable, from taking any action in his or her
capacity as a director, officer or employee of the Company which is
permitted to be taken pursuant to Section 4.2 of the Merger Agreement.
6
<PAGE>
(b) Parent and Sub jointly and severally hereby represent and
warrant to the Stockholder as follows:
(i) Power; Binding Agreement. Each of Parent and Sub has the
------------------------
corporate power and authority to enter into and perform all of its
obligations under this Agreement. The execution, delivery and
performance of this Agreement by each of Parent and Sub will not
violate any material agreement to which Parent or Sub, as the case may
be, is a party. This Agreement has been duly and validly executed
and delivered by each of Parent and Sub and constitutes a valid and
binding agreement of each of Parent and Sub, enforceable against each
of them in accordance with its terms, except as the enforceability
thereof may be limited by (a) applicable bankruptcy, insolvency,
moratorium, reorganization or similar laws in effect that affect the
enforcement of creditors rights generally or (b) general principles of
equity, whether considered in a proceeding at law or in equity.
(ii) No Conflicts. No filing with, and no permit,
------------
authorization, consent or approval of, any Governmental Entity is
required for the execution of this Agreement by each of Parent and Sub
and the consummation by each of them of the transactions contemplated
hereby, except in connection, or in compliance, with the provisions of
(i) Section 16 and Section 13D or 13G of the Exchange Act and (ii) the
HSR Act, and none of the execution and delivery of this Agreement by
each of Parent and Sub, the consummation by each of them of the
transactions contemplated hereby or compliance by each of them with
any of the provisions hereof shall (A) conflict with or result in any
breach of any organizational documents applicable to Parent or Sub,
respectively, (B) result in a violation or breach of, or constitute
(with or without due notice or lapse of time or both) a default (or
give rise to any third party right of termination, cancellation,
material modification or acceleration) under any of the terms,
conditions or provisions of any material note, loan agreement, bond,
mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind
to which Parent or Sub is a party or by which Parent or Sub or any of
their respective properties or assets may be bound, or (C) violate any
order, writ, injunction, decree, judgment, order, statute, arbitration
award, rule or regulation applicable to Parent or Sub or any of their
respective properties or assets.
7
<PAGE>
6. Best Efforts. Subject to the terms and conditions of this
------------
Agreement, each of the parties hereto agrees to use its best efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
and the Merger Agreement; provided that nothing contained in this Section 6
-------- ----
shall restrict any officer, director or employee of the Stockholder or the
Stockholder's Subsidiaries from taking any action in his or her capacity as a
director, officer or employee of the Company which is permitted to be taken
pursuant to Section 4.2 of the Merger Agreement.
7. Termination. Other than Section 8 hereof (which shall survive
-----------
in any event), this Agreement and the covenants, representations and warranties,
agreements and irrevocable proxy or proxies contained herein or granted pursuant
hereto shall terminate upon the earlier to occur of (i) the termination of the
Merger Agreement in accordance with Article VII thereof and (ii) the
consummation of the transactions contemplated by the Merger Agreement. Upon any
termination of this Agreement, this Agreement shall thereupon become void and of
no further force and effect, and there shall be no liability in respect of this
Agreement or of any transactions contemplated hereby or by the Merger Agreement
on the part of any party hereto or any of its directors, officers, partners,
stockholders, employees, agents, advisors, representatives or Affiliates;
provided, however, that nothing herein shall relieve any party from any
- -------- -------
liability for such party's willful breach of this Agreement; and provided,
--------
further, that nothing herein shall limit, restrict, impair, amend or otherwise
- -------
modify the rights, remedies, obligations or liabilities of any person under any
other contract or agreement, including, without limitation, the Merger
Agreement.
8. Miscellaneous.
-------------
(a) Specific Performance. Each party hereto recognizes and
--------------------
agrees that if for any reason any of the provisions of this Agreement are not
performed by the other parties in accordance with their specific terms or are
otherwise breached, immediate and irreparable harm or injury would be caused to
the non-breaching parties for which money damages would not be an adequate
remedy. Accordingly, the parties agree that, in addition to any other available
remedies, the non-breaching parties shall be entitled to an injunction
restraining any violation or threatened violation of the provisions of this
Agreement without the necessity of the non-breaching parties posting a bond or
other form of security. In the event that any action should be brought in equity
to enforce the provisions of this Agreement, the breaching party will not
allege, and the breaching party hereby waives the defense, that there is an
adequate remedy at law.
8
<PAGE>
(b) Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. Without limiting the
foregoing, with respect to any provision of this Agreement, if it is determined
by a court of competent jurisdiction to be excessive as to duration or scope,
it is the parties' intention that such provision nevertheless be enforced to the
fullest extent which it may be enforced.
(c) Attorneys' Fees. If any action at law or equity, including
---------------
an action for declaratory relief, is brought by a party to this Agreement to
enforce or interpret any provision of this Agreement, the prevailing party shall
be entitled to recover reasonable attorneys' fees and expenses from the other
party, which fees and expenses shall be in addition to any other relief which
may be awarded.
(d) Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF PARENT, THE COMPANY, OR SUB IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.
(e) Further Assurances. From time to time, at the request of
------------------
Parent or Sub, the Stockholder shall execute and deliver to Parent and Sub or
cause other Record Holders to execute and deliver to Parent and Sub such
additional instruments containing grants of proxy with respect to the
Stockholder Shares (which grants of proxy will be in substantially the form of
Section 3(a) hereof) as Parent or Sub may reasonably request in connection with
the Stockholder's obligations under this Agreement.
(f) Entire Agreement. This Agreement constitutes the entire
----------------
agreement among the parties hereto with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and oral,
among the parties or any of them with respect to the subject matter hereof.
9
<PAGE>
(g) Consent to Jurisdiction, Etc. Each party hereto hereby
-----------------------------
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the United States District Court located in the State of Delaware (unless
such courts assert no jurisdiction, in which case the parties hereto consent to
the exclusive jurisdiction of the courts of the State of Delaware) for any
actions, suits or proceedings arising out of or relating to this Agreement and
the transactions contemplated hereby (and each party hereto agrees not to
commence any action, suit or proceeding relating thereto except in such courts),
and further agrees that service of any process, summons, notice or document by
U.S. registered mail to the addresses set forth herein shall be effective
service of process for any such action, suit or proceeding brought against each
party in such court. Each party hereto hereby irrevocably and unconditionally
waives any objection to the laying of venue of any action, suit or proceeding
arising out of this Agreement or the transactions contemplated hereby, in the
United States District Courts located in the State of Delaware (unless such
courts assert no jurisdiction, in which case each party consents to the
exclusive jurisdiction of the courts of the State of Delaware). Each party
hereby further irrevocably and unconditionally waives and agrees not to plead or
to claim in any such court that any such action, suit or proceeding brought in
any such court has been brought in an inconvenient forum. Each of the parties
hereto also agrees that any final and unappealable judgment against a party
hereto in connection with any action, suit or other proceeding shall be
conclusive and binding on such party and that such award or judgment may be
enforced in any court of competent jurisdiction, either within or outside of the
United States. A certified or exemplified copy of such award or judgment shall
be conclusive evidence of the fact and amount of such award or judgment.
(h) Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by overnight
courier, by facsimile (which is confirmed), or by registered or certified mail
(postage prepaid, return receipt requested) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to the Stockholder, to the addresses set forth next to the
Stockholder's name on Schedule II hereto and
(b) if to Parent or Sub, to:
Endo Pharmaceuticals Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, PA 19317
10
<PAGE>
Attn.: Carol A. Ammon
Fax No.: (610) 558-9683
with copies to:
Kelso & Company
320 Park Avenue, 24/th/ Floor
New York, NY 10022
Attn.: James J. Connors, II
Fax No.: (212) 223-2379
and
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attn.: Eileen Nugent Simon, Esq.
Fax No.: (212) 735-2000
and
(c) if to the Company, to:
Algos Pharmaceuticals Corporation
1333 Campus Parkway
Neptune, NJ 07753-6815
Attn.: General Counsel
Fax No.: (732) 938-2825
with copies to:
Latham & Watkins
885 Third Avenue
New York, New York 10022
Attn.: Raymond Y. Lin, Esq.
Fax No.: (212) 751-4864
(i) Descriptive Headings; Interpretation. The descriptive headings
------------------------------------
herein are inserted for convenience of reference only and are not intended to be
part of or to affect the meaning or interpretation of this Agreement.
11
<PAGE>
(j) Assignment; Binding Agreement. Neither this Agreement nor any of
-----------------------------
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto without the prior written consent of the other party hereto;
provided, however, that Parent and Sub shall be permitted to assign, in whole or
- -------- -------
in part, this Agreement or any of the rights, interests or obligations hereunder
to any of their Subsidiaries or Affiliates.
(k) Amendment, Modification and Waiver. This Agreement may not be
----------------------------------
amended, modified or waived except by an instrument or instruments in writing
signed and delivered on behalf of the party hereto against whom such amendment,
modification or waiver is sought to be entered.
(l) Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
12
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Stockholder have caused this
Agreement to be duly executed as of the day and year first above written.
ENDO PHARMACEUTICAL HOLDINGS INC.
By:_____________________________
Name:
Title:
ENDO INC.
By:_____________________________
Name:
Title:
[STOCKHOLDER]
By:_____________________________
Name:
Title:
<PAGE>
Schedule I
----------
List of Existing Securities
Stockholders' Holdings of Company Common Stock
- ----------------------------------------------------------------------
Registered Holder Number of Shares Held
- ----------------------------------------------------------------------
Karen B. Lyle 1,344,416
- ----------------------------------------------------------------------
Michael Hyatt (N.B. does not include 829,551
shares owned by the Kimmel Trusts
listed below)
- ----------------------------------------------------------------------
Trust Under the Will of Inez Kimmel 657,193
- ----------------------------------------------------------------------
Todd Kimmel Trust 171,530
- ----------------------------------------------------------------------
Melissa Kimmel Trust 155,000
- ----------------------------------------------------------------------
Anita Hyatt Family Trust 20,750
- ----------------------------------------------------------------------
Frank S. Caruso 370,200
- ----------------------------------------------------------------------
John W. Lyle 224,100
- ----------------------------------------------------------------------
Hyatt Family Trust 221,332
- ----------------------------------------------------------------------
Roger H. Kimmel (N.B. does not include 30,000
shares owned by the Hyatt Trusts listed
above)
- ----------------------------------------------------------------------
Frank S. Caruso Irrevocable Trust 24,900
- ----------------------------------------------------------------------
James R. Ledley 109,450
- ----------------------------------------------------------------------
Donald G. Drapkin 8,300
- ----------------------------------------------------------------------
Donald Drapkin 8,300
- ----------------------------------------------------------------------
Patricia Caruso 1,000
- ----------------------------------------------------------------------
Total 4,176,022
- ----------------------------------------------------------------------
14
<PAGE>
Schedule II
-----------
Notices
- --------------------------------------------------------------------------------
Stockholder Party Notice To: With A Copy To:
- --------------------------------------------------------------------------------
Michael Hyatt Michael Hyatt Michael Hyatt
Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
245 Park Avenue 245 Park Avenue
New York, NY 10167 New York, NY 10167
- --------------------------------------------------------------------------------
Michael Hyatt as Michael Hyatt Michael Hyatt
Trustee for the Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
Trust Under the Will 245 Park Avenue 245 Park Avenue
of Inez L. Kimmel New York, NY 10167 New York, NY 10167
- --------------------------------------------------------------------------------
Michael Hyatt as Michael Hyatt Michael Hyatt
Trustee for The Todd Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
Kimmel Trust 245 Park Avenue 245 Park Avenue
New York, NY 10167 New York, NY 10167
- --------------------------------------------------------------------------------
Michael Hyatt as Michael Hyatt Michael Hyatt
Trustee for the Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
Melissa Kimmel Trust 245 Park Avenue 245 Park Avenue
New York, NY 10167 New York, NY 10167
- --------------------------------------------------------------------------------
Michael Hyatt as Michael Hyatt Michael Hyatt
Trustee for the Bear Stearns & Co. Inc. Bear Stearns & Co. Inc.
Anita Hyatt Family 245 Park Avenue 245 Park Avenue
Trust New York, NY 10167 New York, NY 10167
- --------------------------------------------------------------------------------
Roger H. Kimmel Roger H. Kimmel Roger H. Kimmel
Latham & Watkins Latham & Watkins
885 Third Avenue, Suite 1000 885 Third Avenue, Suite 1000
New York, NY 10022 New York, NY 10022
- --------------------------------------------------------------------------------
1
<PAGE>
- --------------------------------------------------------------------------------
Roger H. Kimmel as Roger H. Kimmel Roger H. Kimmel
Trustee for the Hyatt Latham & Watkins Latham & Watkins
Family Trust 885 Third Avenue, Suite 1000 885 Third Avenue, Suite 1000
New York, NY 10022 New York, NY 10022
- --------------------------------------------------------------------------------
James R. Ledley James R. Ledley James R. Ledley
26 Hardscrabble Hill 26 Hardscrabble Hill
Chappaqua, NY 10514 Chappaqua, NY 10514
- --------------------------------------------------------------------------------
Donald Drapkin Donald Drapkin Donald Drapkin
35 East 62/nd/ 35 East 62/nd/
New York, NY 10021 New York, NY 10021
- --------------------------------------------------------------------------------
Donald G. Drapkin Donald Drapkin Donald Drapkin
35 East 62/nd/ 35 East 62/nd/
New York, NY 10021 New York, NY 10021
- --------------------------------------------------------------------------------
John W. Lyle John Lyle John Lyle
28 Inlet Terrace 28 Inlet Terrace
Belmar, NJ 07719 Belmar, NJ 07719
- --------------------------------------------------------------------------------
Karen B. Lyle Karen Lyle Karen Lyle
4 Dayna Lane 4 Dayna Lane
Lawrenceville, NJ 08648 Lawrenceville, NJ 08648
- --------------------------------------------------------------------------------
Frank S. Caruso Frank S. Caruso, Ph. D. Frank S. Caruso, Ph. D.
2 Bowling Green 2 Bowling Green
Colts Neck, NJ 07722 Colts Neck, NJ 07722
- --------------------------------------------------------------------------------
2
<PAGE>
- --------------------------------------------------------------------------------
Frank S. Caruso, Jr. as Trustee Frank S. Caruso, Jr. Frank S. Caruso, Ph. D.
for the Frank S. Caruso USA Datanet 2 Bowling Green
Irrevocable Trust 318 South Clinton St. Colts Neck, NJ 07722
Suite 300
Syracuse, NY 13202
- --------------------------------------------------------------------------------
Patricia Caruso Patricia Caruso Patricia Caruso
2 Bowling Green 2 Bowling Green
Colts Neck, NJ 07722 Colts Neck, NJ 07722
- --------------------------------------------------------------------------------
3
<PAGE>
Exhibit C - Form of Algos Warrant
________________________________________________________________________________
WARRANT AGREEMENT
by and between
ENDO PHARMACEUTICALS HOLDINGS INC.
and
[WARRANT AGENT],
as
Warrant Agent
_____________________
Dated as of _____________, ____
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Appointment of Warrant Agent......................................
Section 2. Warrant Certificates..............................................
Section 3. Execution of Warrant Certificates.................................
Section 4. Registration and Countersignature.................................
Section 5. Transfer and Exchange of Warrants.................................
Section 6. Registration of Transfers and Exchanges...........................
Section 7. Terms of Warrants; Exercise of Warrants...........................
Section 8. Payment of Taxes..................................................
Section 9. Mutilated or Missing Warrant Certificates.........................
Section 10. Reservation of Warrant Shares.....................................
Section 11. Obtaining Stock Exchange Listings.................................
Section 12. Adjustment of Exercise Price and Number of
Warrant Shares Issuable...........................................
Section 13. Fractional Interests..............................................
Section 14. Notices to Warrant Holders; Reservation
of Dividends......................................................
Section 15. Notices to the Company and Warrant Agent..........................
Section 16. Supplements and Amendments; Actions...............................
Section 17. Concerning the Warrant Agent......................................
Section 18. Change of Warrant Agent...........................................
Section 19. Successors........................................................
Section 20. Termination.......................................................
Section 21. GOVERNING LAW.....................................................
Section 22. Benefits of This Agreement........................................
Section 23. Counterparts......................................................
Section 24. Headings..........................................................
Exhibit A. Form of Warrant Certificate....................................................
Exhibit B. Certificate to be Delivered Upon Transfer......................................
</TABLE>
i
<PAGE>
WARRANT AGREEMENT (the "Agreement"), dated as of _______ __, ____, by
---------
and between Endo Pharmaceuticals Holdings Inc., a Delaware corporation
(together with any successors and assigns, the "Company"), and [WARRANT AGENT],
-------
as Warrant Agent (the "Warrant Agent").
-------------
WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated
as of November __, 1999 (the "Merger Agreement"), by and among the Company, Endo
----------------
Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Sub"),
---
and [TARGET] Pharmaceutical Corporation, a Delaware corporation Algos, the
-----
Company proposes to issue warrants (each a "Warrant," and collectively, the
-------
"Warrants") for the purchase of an aggregate of up to 20,654,360/1/ shares of
--------
common stock, par value $.01 per share, of the Company (the "Common Stock," and
------------
the shares of Common Stock issuable upon exercise of the Warrants being referred
to herein as the "Warrant Shares");
--------------
WHEREAS, there shall be two classes of Warrants, Class A which shall
be transferable ("Class A Transferable Warrants") and Class B which shall not be
-----------------------------
transferable ("Class B Non-Transferable Warrants") and each holder of shares of
---------------------------------
common stock of Target at the time of the stockholder vote relating to the
Merger Agreement may elect to receive all or a portion of such holder's Warrants
to be Class A Transferable Warrants or all or a portion of such holder's
Warrants to be Class B Non-Transferable Warrants and in the event any such
holder of shares of common stock of Target does not make such an election, then
such holder shall be issued Class A Transferable Warrants. Such election, once
made, will be irrevocable;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company and the Warrant Agent is willing to act in connection with the issuance,
transfer, exchange and exercise of Warrants as provided herein; and
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein, the Company and the Warrant Agent hereby agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints
----------------------------
the Warrant Agent to act as agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
___________________
/1/ These numbers may be adjusted in the final Endo Warrant. See footnotes 2-5
below.
<PAGE>
Section 2. Warrant Certificates. The Class A Transferable Warrants
--------------------
will initially be issued in global form (the "Global Warrants"), substantially
---------------
in the form of Exhibit A hereto. Any certificates evidencing the Global
Warrants to be delivered pursuant to this Agreement (the "Class A Warrant
---------------
Certificates") shall be substantially in the form set forth in Exhibit A hereto.
- ------------
Such Global Warrants shall represent such of the outstanding Class A
Transferable Warrants as shall be specified therein and each shall provide that
it shall represent the aggregate amount of outstanding Class A Transferable
Warrants from time to time endorsed thereon and that the aggregate amount of
outstanding Class A Transferable Warrants represented thereby may from time to
time be reduced or increased, as appropriate. Any endorsement of a Global
Warrant to reflect the amount of any increase or decrease in the amount of
outstanding Class A Transferable Warrants represented thereby shall be made by
the Warrant Agent and the Depositary (as defined below) in accordance with
instructions given by the holder thereof. [The Depository Trust Company] shall
act as the Depositary with respect to the Global Warrants until a successor
shall be appointed by the Company. Upon written request, a Warrant holder who
holds Class A Transferable Warrants may receive from the Depositary and Warrant
Agent Class A Transferable Warrants in registered form as definitive Warrant
Certificates (the "Definitive Warrants") as set forth in Section 6 below. Class
-------------------
B Non-Transferable Warrants will be issued in certificated form in the form of
Exhibit B hereto, in the name of and in the denomination as set forth in the
applicable letter of transmittal accompanying the shares of common stock of
Target surrendered by the holder thereof in connection with the merger of Target
with and into Sub pursuant to the Merger Agreement.
Section 3. Execution of Warrant Certificates. Warrant Certificates
---------------------------------
shall be signed on behalf of the Company by its Chairman of the Board, its
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer or Treasurer or a Vice President and by its Secretary or an Assistant
Secretary. Each such signature upon the Warrant Certificates may be in the form
of a facsimile signature of the present or any future Chairman of the Board,
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, Vice President, Secretary or Assistant Secretary and may be
imprinted or otherwise reproduced on the Warrant Certificates and for that
purpose the Company may adopt and use the facsimile signature of any person who
shall have been Chairman of the Board, President, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, Treasurer, a Vice President,
Secretary or an Assistant Secretary, notwithstanding the fact that at the time
the Warrant Certificates shall be countersigned and delivered or disposed of
such person shall have ceased to hold such office.
2
<PAGE>
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been countersigned by the Warrant Agent, or
disposed of by the Company, such Warrant Certificates nevertheless may be
countersigned and delivered or disposed of as though such person had not ceased
to be such officer of the Company; and any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Warrant
Agreement any such person was not such officer.
Warrant Certificates shall be dated the date of countersignature by
the Warrant Agent.
Section 4. Registration and Countersignature. The Warrants shall be
---------------------------------
numbered and shall be registered on the books of the Company maintained at the
principal office of the Warrant Agent in [LOCATION OF WARRANT AGENT'S OFFICES]
(the "Warrant Register") as they are issued.
----------------
Warrant Certificates shall be manually countersigned by the Warrant
Agent and shall not be valid for any purpose unless so countersigned. The
Warrant Agent shall, upon written instructions of the Chairman of the Board, the
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, a Vice President, the Secretary or an Assistant Secretary of
the Company, initially countersign and deliver Warrants entitling the holders
thereof to purchase not more than the number of Warrant Shares referred to above
in the first recital hereof and shall thereafter countersign and deliver
Warrants as otherwise provided in this Agreement.
The Company and the Warrant Agent may deem and treat the registered
holders (the "Holders") of the Warrant Certificates as the absolute owners
-------
thereof (notwithstanding any notation of ownership or other writing thereon made
by anyone) for all purposes, and neither the Company nor the Warrant Agent shall
be affected by any notice to the contrary.
Section 5. Transfer and Exchange of Warrants. The Warrant Agent shall
---------------------------------
from time to time, subject to the limitations of Section 6 hereof, register the
transfer of any outstanding Warrants upon the records to be maintained by it for
3
<PAGE>
that purpose, upon surrender thereof duly endorsed or accompanied (if so
required by it) by a written instrument or instruments of transfer in form
satisfactory to the Warrant Agent, duly executed by the registered Holder or
Holders thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney; provided that Class B Non-Transferable Warrants may
-------- ----
only be transferred (i) as the result or assignment by operation of law (such as
death or merger or otherwise) or (ii) as required by law or any court of
competent jurisdiction (such as in connection with divorce, bankruptcy or
liquidation). A request for a transfer of a Class B Non-Transferable Warrant
shall be accompanied by such documentation establishing satisfaction of the
conditions set forth in clause (i) or (ii) above, as applicable, as may be
reasonably requested by the Company (including opinions of counsel, if
appropriate). Upon receipt of documentation reasonably satisfactory to the
Company, the Company shall authorize the Warrant Agent to permit the transfer of
a Class B Non-Transferable Warrant. The Warrant Agent shall not permit the
transfer of a Class B Non-Transferable Warrant until it is so authorized by the
Company. Unless otherwise authorized by the Company, Class B Non-Transferable
Warrant Certificate may only be transferred for another Class B Non-Transferable
Warrant Certificate. Subject to the terms of this Agreement, each Warrant
Certificate may be exchanged for another certificate or certificates entitling
the Holder thereof to purchase a like aggregate number of Warrant Shares as the
certificate or certificates surrendered then entitle each Holder to purchase.
Any Holder desiring to exchange a Warrant Certificate or Certificates shall make
such request in writing delivered to the Warrant Agent, and shall surrender,
duly endorsed or accompanied (if so required by the Warrant Agent) by a written
instrument or instruments of transfer in form satisfactory to the Warrant Agent,
the Warrant Certificate or Certificates to be so exchanged.
Upon registration of transfer, the Warrant Agent shall countersign and
deliver by certified or first class mail a new Warrant Certificate or
Certificates to the persons entitled thereto. The Warrant Certificates may be
exchanged at the option of the Holder thereof, when surrendered at the office or
agency of the Company maintained for such purpose, which initially will be the
corporate trust office of the Warrant Agent in [LOCATION OF WARRANT AGENT'S
CORPORATE TRUST OFFICE], for another Warrant Certificate, or other Warrant
Certificates of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Warrant Shares.
No service charge shall be made for any exchange or registration of
transfer of Warrant Certificates, but the Company may require payment of a sum
4
<PAGE>
sufficient to cover any stamp or other tax or other governmental charge that is
imposed in connection with any such exchange or registration of transfer.
Section 6. Registration of Transfers and Exchanges.
---------------------------------------
(a) Transfer and Exchange of Definitive Warrants. When Definitive
--------------------------------------------
Warrants are presented to the Warrant Agent with a request:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of Definitive
Warrants of other authorized denominations,
the Warrant Agent shall register the transfer or make the exchange as requested
if its requirements under this Agreement are met; provided, however, that the
-------- -------
Definitive Warrants presented or surrendered for registration of transfer or
exchange shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Warrant Agent, duly executed by the Holder
thereof or by such Holder's attorney, duly authorized in writing; provided that
-------- ----
a transfer of Definitive Warrants that are Class B Non-Transferable Warrants
shall be subject to the requirements of Section 5 hereof.
(b) Restrictions on Transfer of a Definitive Warrant for a Beneficial
-----------------------------------------------------------------
Interest in a Global Warrant. The Warrant Agent may exchange a Definitive
- ----------------------------
Warrant for a beneficial interest in a Global Warrant only if the Warrant Agent
has received such Definitive Warrant, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the Warrant Agent,
together with written instructions directing the Warrant Agent to make, or to
direct the Depositary to make, an endorsement on the Global Warrant to reflect
an increase in the aggregate amount of the Warrants represented by the Global
Warrant. If such conditions have been satisfied, the Warrant Agent shall cancel
such Definitive Warrant and cause, or direct the Depositary to cause, in
accordance with the standing instructions and procedures existing between the
Depositary and the Warrant Agent, the number of Warrant Shares represented by
the Global Warrant to be increased accordingly. If no Global Warrant is then
outstanding, the Company shall issue and the Warrant Agent shall countersign a
new Global Warrant in the appropriate amount.
(c) Transfer and Exchange of Global Warrants. The transfer and
----------------------------------------
exchange of Global Warrants or beneficial interests therein shall be effected
through
5
<PAGE>
the Depositary, in accordance with this Warrant Agreement (including the
restrictions on transfer set forth herein) and the procedures of the Depositary
therefor.
(d) Transfer of a Beneficial Interest in a Global Warrant for a
-----------------------------------------------------------
Definitive Warrant.
- ------------------
(i) Any person having a beneficial interest in a Global Warrant may upon
his, her or its request exchange such beneficial interest for a
Definitive Warrant. Upon receipt by the Warrant Agent of written
instructions (or such other form of instructions as is customary for
the Depositary) from the Depositary or its nominee on behalf of any
person having a beneficial interest in a Global Warrant and upon
receipt by the Warrant Agent of a written order or such other form of
instructions as is customary for the Depositary or the person
designated by the Depositary as having such a beneficial interest
containing registration instructions, then the Warrant Agent will
cause, in accordance with the standing instructions and procedures
existing between the Depositary and the Warrant Agent, the aggregate
amount of the Global Warrant to be reduced and, following such
reduction, the Company will execute and, upon receipt of a
countersignature, the Warrant Agent will countersign and deliver to
the transferee a Definitive Warrant. All such Warrants shall be Class
A Transferable Warrants.
(ii) Definitive Warrants issued in exchange for a beneficial interest in a
Global Warrant pursuant to this Section 6(d) shall be registered in
such names and in such authorized denominations as the Depositary,
pursuant to instructions from its direct or indirect participants or
otherwise, shall instruct the Warrant Agent in writing, provided such
designation is in accordance with this Section 6(d). The Warrant Agent
shall deliver such Definitive Warrants to the persons in whose names
such Definitive Warrants are registered.
(e) Restrictions on Transfer and Exchange of Global Warrants.
--------------------------------------------------------
Notwithstanding any other provisions of this Warrant Agreement (other than the
provisions set forth in subsection (f) of this Section 6), a Global Warrant may
not be transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary
6
<PAGE>
or by the Depositary or any such nominee to a successor Depositary or a nominee
of such successor Depositary.
(f) Authentication of Definitive Warrants in Absence of Depositary.
---------------------------------------------------------------
If at any time:
(i) the Depositary for the Global Warrants notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the
Global Warrant and a successor Depositary for the Global Warrant is
not appointed by the Company within 90 days after delivery of such
notice; or
(ii) the Company, at its sole discretion, notifies the Warrant Agent in
writing that it elects to cause the issuance of Definitive Warrants
under this Warrant Agreement,
then the Company will execute, and the Warrant Agent, upon receipt of an
officers' certificate, signed by the President, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer or a Vice President of the Company,
requesting the counter-signature and delivery of Definitive Warrants, will
countersign and deliver Definitive Warrants, in an aggregate number equal to the
aggregate number of Warrants represented by the Global Warrant, in exchange for
such Global Warrant.
(g) Cancellation and/or Adjustment of a Global Warrant. At such time
--------------------------------------------------
as all beneficial interests in a Global Warrant have either been exchanged for
Definitive Warrants, redeemed, repurchased or cancelled, such Global Warrant
shall be returned to or retained and cancelled by the Warrant Agent. At any time
prior to such cancellation, if any beneficial interest in a Global Warrant is
exchanged for Definitive Warrants, redeemed, repurchased or cancelled, the
number of Warrants represented by such Global Warrant shall be reduced and an
endorsement shall be made on such Global Warrant, by the Warrant Agent to
reflect such reduction.
(h) Obligations with Respect to Transfers and Exchanges of Definitive
-----------------------------------------------------------------
Warrants.
- --------
(i) To permit registrations of transfers and exchanges in accordance with
the terms of this Agreement, the Company shall execute, and the
Warrant Agent shall countersign Definitive Warrants and Global
Warrants.
7
<PAGE>
(ii) All Definitive Warrants and Global Warrants issued upon any
registration, transfer or exchange of Definitive Warrants or Global
Warrants shall be the valid obligations of the Company, entitled to
the same benefits under this Warrant Agreement as the Definitive
Warrants or Global Warrants surrendered upon the registration of
transfer or exchange.
(iii) Prior to due presentment for registration of transfer of any
Warrant, the Warrant Agent and the Company may deem and treat the
person in whose name any Warrant is registered as the absolute owner
of such Warrant, and neither the Warrant Agent nor the Company shall
be affected by notice to the contrary.
Section 7. Terms of Warrants; Exercise of Warrants. Subject to the
---------------------------------------
terms of this Agreement, each Warrant Holder shall have the right, which may be
exercised commencing on or after the Exercisability Date (as defined below) and
until 5:00 p.m., New York City time, on the six-month anniversary of the
Exercisability Date (the "Expiration Date"), to receive from the Company the
---------------
number of fully paid and nonassessable Warrant Shares which the Holder may at
the time be entitled to receive on exercise of such Warrants and payment of the
Exercise Price (as defined below) then in effect for such Warrant Shares
together, if applicable, with cash payable as provided in Section 13 hereof and
any dividends or distributions payable as provided in Section 14 hereof. If the
Exercisability Date is on or prior to December 31, 2001, the Holders shall then
be entitled to receive from the Company (on exercise of such Warrants and
payment of the Exercise Price then in effect for such Warrant Shares) (together,
if applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
20,654,360 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 1.153846 Warrant Shares)/2/ in the event the Adjustment Event
(as defined in the Merger Agreement) has not occurred prior to the
Exercisability Date or (b) 17,900,445 Warrant Shares (in the aggregate) (with
each Warrant being
__________________
/2/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Stock in the Merger, shall equal 35% of the shares of Parent
Common Stock on a fully diluted basis (excluding the effect of the Algos
Warrants as if no Adjustment Event had occurred).
8
<PAGE>
exercisable for 1.000000 Warrant Shares)/3/ in the event the Adjustment Event
has occurred prior to the Exercisability Date. If the Exercisability Date is
after December 31, 2001 and on or prior to June 30, 2002, the Holder shall then
be entitled to receive from the Company (on exercise of such Warrants and
payment of the Exercise Price then in effect for such Warrant Shares) (together,
if applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
12,786,032 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 0.714286 Warrant Shares)/4/ in the event the Adjustment Event
has not occurred prior to the Exercisability Date or (b) 11,015,658 Warrant
Shares (in the aggregate) (with each Warrant being exercisable for 0.615385
Warrant Shares)/5/ in the event the Adjustment Event has occurred prior to the
Exercisability Date. If the Exercisability Date is after June 30, 2002 and on or
prior to December 31, 2002 (the "Ultimate Expiration Date"), the Holders shall
------------------------
then be entitled to receive from the Company (on exercise of such Warrants and
payment of the Exercise Price then in effect for such Warrant Shares) (together,
if applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
5,966,815 Warrant Shares (in the aggregate) (with each Warrant being exercisable
for 0.333333 Warrant Shares)/6/ in the event the Adjustment Event has not
occurred prior to the
_____________________
/3/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 40% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of
the Algos Warrants and after giving effect to the Adjustment Event as if
it had occurred).
/4/ These number shall be adjusted in the final Agreement and Warrants in order
at the Effective Time such aggregate number, when taken together with the
shares of Parent Common Stock issuable to holders of Company Stock in the
Merger, shall equal 30% of the shares of Parent Common Stock on a fully
diluted basis (excluding the effect of the Algos Warrants as if no
Adjustment Event had occurred).
/5/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 35% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants as if no Adjustment Event had occurred).
/6/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent
(continued...)
9
<PAGE>
Exercisability Date or (b) 5,114,413 Warrant Shares (in the aggregate) (with
each Warrant being exercisable for 0.285714 Warrant Shares)/7/ in the event
the Adjustment Event has occurred prior to the Exercisability Date. Each
Warrant not exercised prior to the Expiration Date shall become void and all
rights thereunder and all rights in respect thereof under this Agreement
shall cease as of the Expiration Date. Without limiting the foregoing, in the
event the Ultimate Expiration Date occurs before the Exercisability Date, each
Warrant shall become void and all rights thereunder and all rights in respect
thereof under this Agreement shall cease as of the Ultimate Expiration Date.
If applicable, dividends and other distributions will be made upon exercise of
the Warrants as set forth in Section 14 hereof.
"Exercisability Date" shall mean the fifth (5/th/) Business Day (as
-------------------
defined below) following the date on which the Company (or any of its
subsidiaries) receives approval from the U.S. Food and Drug Administration (the
"FDA") with respect to its New Drug Application for MorphiDex(R) for the
---
treatment of one or more pain indications. In addition to the notices
required by Section 14 hereof, the Company shall give prompt written notice to
the Warrant Agent that the Exercisability Date has occurred and shall cause the
Warrant Agent, on behalf of and at the expense of the Company, within 5 Business
Days after such notification is received by the Warrant Agent, to mail by first
class mail, postage prepaid, to each Holder a notice specifying that the
Exercisability Date has occurred and that the Warrant has become exercisable
pursuant to its terms and that the Warrant will expire at 5:00 p.m., New York
City time, on the Expiration Date. In addition, the Company shall post
appropriate notices of the Exercisability Date on its web pages
- ----------------------
/6/ (...continued)
Common Stock issuable to holders of Company Common Stock in the Merger,
shall equal 25% of the shares of Common Stock on a fully diluted basis
(excluding the effect of Algos Warrants as if no Adjustment Event had
occurred).
/7/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
Company Common Stock in the Merger, shall equal 30% of the shares of Parent
Common Stock on a fully diluted basis (excluding the effect of the Algos
Warrants and after giving effect to the Adjustment Event as if it had
occurred).
10
<PAGE>
and issue press releases to wire services. A "Business Day" is a day that is not
------------
a Legal Holiday. A "Legal Holiday" is a Saturday a Sunday, a federally
-------------
recognized holiday or a day on which banking institutions are not required to be
open in the State of New York.
From and after the Effective Time, Parent agrees to use its reasonable
efforts to continue to process the FDA application for MorphiDex(R) in a timely
fashion. The parties acknowledge that there are many variables in the process of
obtaining FDA approval in such a situation and many different approaches which
may be used by an applicant in order to obtain such approval; as a result, the
parties hereto agree that all determinations relating to such process and all
actions taken in connection with seeking such approval shall be in the sole
discretion of Parent and shall be binding upon the parties for all purposes. The
parties further acknowledge that (i) on August 2, 1999, the Company received
notification from the FDA that such application was not approvable, (ii) the
failure to obtain such approval, either at all or on or before a certain date,
shall not be deemed a breach by Parent of the provisions hereof and (iii) in any
event Parent shall have no responsibility in connection with the provisions of
this paragraph, except for its willful breach hereof.
The initial price per share at which Warrant Shares shall be
purchasable upon exercise of Warrants (the "Exercise Price") shall equal $0.01.
--------------
A Warrant may be exercised upon surrender at the office or agency of the Company
maintained for such purpose, which initially will be the corporate trust office
of the Warrant Agent or its agents in [LOCATION OF WARRANT AGENT'S OFFICE], of
the Warrant Certificate(s) evidencing the Warrants to be exercised with the form
of election to purchase on the reverse thereof duly filled in and signed, which
signature shall be guaranteed by a participant in a recognized Signature
Guarantee Medallion Program, and upon payment to the Warrant Agent for the
account of the Company of the Exercise Price, as adjusted as herein provided,
for the number of Warrant Shares together, if applicable, with cash payable as
provided in Section 13 hereof and any dividends or distributions as provided in
Section 14 hereof in respect of which such Warrants are then exercised. Payment
of the Exercise Price may be made (a) in the form of cash or by certified or
official bank check payable to the order of the Company in New York Clearing
House Funds, (b) by delivering to the Company a written notice accompanying the
surrender of a Warrant to, at the time of
11
<PAGE>
exercise, apply to the payment of Exercise Price such number of Warrant Shares
as shall be specified in such notice, in which case an amount equal to the
excess of the Current Market Value (as defined in Section 12(d) hereof) of such
Warrant Shares on the date of exercise over the Exercise Price required for such
exercise shall be deemed to have been paid to the Company and the number of
Warrant Shares issuable upon such exercise shall be reduced by such specified
number (a "Cashless Exercise") or (c) any combination of (a) and (b) above.
-----------------
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
Holder and in such name or names as the Warrant Holder may designate a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 13
hereof. Such certificate or certificates shall be deemed to have been issued and
any person so named therein shall be deemed to have become a holder of record of
such Warrant Shares as of the date of the surrender of such Warrants and payment
of the Exercise Price.
On or after the Exercisability Date, the Warrants shall be
exercisable, at the election of the Holders thereof, either in full or from time
to time in part and, in the event that a certificate evidencing Warrants is
exercised in respect of fewer than all of the Warrant Shares issuable on such
exercise at any time prior to the Expiration Date, a new certificate evidencing
the remaining Warrant or Warrants will be issued, and the Warrant Agent is
hereby irrevocably authorized to countersign and to deliver the required new
Warrant Certificate or Certificates pursuant to the provisions of this Section 7
and of Section 3 hereof, and the Company, whenever required by the Warrant
Agent, will promptly supply the Warrant Agent with Warrant Certificates duly
executed on behalf of the Company for such purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall
be cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall
then be either delivered to the Company or disposed of by the Warrant Agent in a
manner consistent with the Warrant Agent's customary procedure for such disposal
and in a manner reasonably satisfactory to the Company. The Warrant Agent shall
account promptly to the Company with respect to Warrants exercised and
concurrently pay to
12
<PAGE>
the Company all monies received by the Warrant Agent for the purchase of the
Warrant Shares through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by the Holders during normal business hours at its office. The
Company shall supply the Warrant Agent from time to time with such numbers of
copies of this Agreement as the Warrant Agent may request.
Section 8. Payment of Taxes. The Company will pay all documentary
----------------
stamp taxes attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Company shall not be required
-------- -------
to pay any tax or taxes which may be payable in respect of any transfer involved
in the issue of any Warrant Certificates or any certificates for Warrant Shares
in a name other than that of the registered Holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
Section 9. Mutilated or Missing Warrant Certificates. In case any of
-----------------------------------------
the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue and the Warrant Agent may countersign, in
exchange and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificate and indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
Section 10. Reservation of Warrant Shares. The Company will at all
-----------------------------
times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to
13
<PAGE>
issue Warrant Shares upon exercise of Warrants, the maximum number of shares of
Common Stock which may then be deliverable upon the exercise of all outstanding
Warrants.
The Company will keep a copy of this Agreement on file with the
transfer agent for the Common Stock (the "Transfer Agent") and with every
--------------
subsequent transfer agent for any shares of the Company's capital stock issuable
upon the exercise of the rights of purchase represented by the Warrants. The
Warrant Agent is hereby irrevocably authorized to requisition from time to time
from such Transfer Agent the stock certificates required to honor outstanding
warrants upon exercise thereof in accordance with the terms of this Agreement.
The Company will supply such Transfer Agent with duly executed certificates for
such purposes and will provide or otherwise make available any cash which may be
payable as provided in Section 13 hereof. The Company will furnish such Transfer
Agent a copy of all notices of adjustments and certificates related thereto
transmitted to each Holder pursuant to Section 14 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon payment of the Exercise Price therefor and
issue, be validly authorized and issued, fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issuance thereof. The Company will use its reasonable best
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Agreement.
Section 11. Obtaining Stock Exchange Listings. The Company will from
---------------------------------
time to time take all action which may be necessary so that the Warrants and,
immediately upon their issuance upon exercise of the Warrants, the Warrant
Shares will be listed on the principal securities exchanges and markets within
the United States of America, if any, on which other shares of Common Stock are
then listed.
14
<PAGE>
Section 12. Adjustment of Exercise Price and Number of Warrant Shares
---------------------------------------------------------
Issuable.
- --------
(a) If the Company:
(i) pays a dividend or makes a distribution on its Common Stock in shares
of its Common Stock or other capital stock of the Company; or
(ii) subdivides, splits, combines or reclassifies its outstanding shares of
Common Stock into a different number of securities of the same class,
then the number of shares of Common Stock issuable upon the exercise of each
Warrant (the "Exercise Rate") in effect immediately prior to such action shall
-------------
be proportionately adjusted so that the Holder of any Warrant thereafter
exercised may receive the aggregate number and kind of shares of capital stock
of the Company which such Holder would have owned immediately following such
action if such Warrant had been exercised immediately prior to such action and
the Exercise Price in effect immediately prior to such action shall be adjusted
to a price determined by multiplying the Exercise Price in effect immediately
prior to such action by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding before giving effect to such action and
the denominator of which shall be the number of shares of Common Stock and/or
such other capital stock outstanding referred to in the foregoing clause (a)(1)
after giving effect to such action.
An adjustment pursuant to this Section 12(a) shall become effective
immediately after the record date in the case of a dividend or distribution and
immediately after the effective date in the case of a subdivision, combination
or reclassification.
If, after an adjustment pursuant to this Section 12(a), a Holder of a
Warrant upon exercise of it may receive shares of two or more classes of capital
stock of the Company, the board of directors of the Company shall determine the
allocation of the adjusted Exercise Price between the classes of capital stock.
After such allocation, the exercise privilege and the Exercise Price of each
class of capital stock shall thereafter be subject to adjustment on terms
comparable to those applicable to Common Stock in this Section 12.
15
<PAGE>
Such adjustment shall be made successively whenever any event listed
above shall occur.
(b) Adjustment for Certain Issuances of Common Stock. If the Company
------------------------------------------------
issues or sells to any Affiliate (as defined in Section 12(d) hereof) of the
Company shares of its Common Stock or distributes to any Affiliate of the
Company any rights, options or warrants entitling them to purchase shares of
Common Stock, or securities convertible into or exchangeable for Common Stock,
in each case, at a price per share less than the Current Market Value on the
record date for determining entitlements of such Affiliates to participate in
such issuance, sale or distribution (the "Time of Determination") and prior to
--------------------- ---
such issuance, sale or distribution the Company did not first offer to issue,
sell or distribute such shares of its Common Stock or such rights, options or
warrants or such securities convertible into or exchangeable for Common Stock to
all holders of Common Stock on the same economic terms and on a pro rata basis
with the issuance, sale or distribution to the Affiliates of the Company, then
----
the Exercise Rate shall be adjusted in accordance with the formula:
E' = E x O + N
---------------
O + N x P
-----
M
and the Exercise Price shall be adjusted in accordance with the following
formula:
EP'= EP x E
---
E'
where:
E' = the adjusted Exercise Rate.
E = the Exercise Rate immediately prior to the Time of Determination
for any such issuance, sale or distribution.
EP' = the Adjusted Exercise Price.
16
<PAGE>
EP = the Exercise Price immediately prior to the Time of
Determination for any such issuance, sale or distribution.
O = the number of Fully Diluted Shares (as defined below)
outstanding immediately prior to the Time of Determination for
any such issuance, sale or distribution.
N = the number of additional shares of Common Stock issued, sold or
issuable upon exercise of such rights, options or warrants.
P = the per share price received and receivable by the Company in
the case of any issuance or sale of Common Stock or rights,
options or warrants as to which such adjustment is being made,
inclusive of the exercise price per share of Common Stock
payable upon exercise of such rights, options or warrants.
M = the Current Market Value per share of Common Stock on the Time
of Determination for any such issuance, sale or distribution.
For purposes of this Section 12(b), the term "Fully Diluted Shares"
--------------------
shall mean (i) the shares of Common Stock outstanding as of a specified date,
and (ii) the shares of Common Stock into or for which rights, options, warrants
or other securities of the Company outstanding as of such date are exercisable
or convertible (other than the Warrants).
Any adjustments shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after the
relevant Time of Determination. Notwithstanding the foregoing, the Exercise
Rate and the Exercise Price shall not be subject to adjustment in connection
with (i) the issuance of any shares of Common Stock upon exercise of any such
rights, options or warrants which have previously been the subject of an
adjustment under this Agreement for which the required adjustment has been made
and (ii) any exercise of the Warrants. If at the end of the period during which
any such rights,
17
<PAGE>
options or warrants are exercisable, not all rights, options or warrants shall
have been exercised, the Warrant shall be immediately readjusted to what it
would have been if "N" in each of the above formulas had been the number of
shares actually issued.
(c) When De Minimis Adjustment May Be Deferred. No adjustment in the
------------------------------------------
Exercise Rate need be made unless the adjustment would require an increase or
decrease of at least 1% in the Exercise Rate. Notwithstanding the foregoing, any
adjustments that are not made shall be carried forward and taken into account in
any subsequent adjustment, provided that no such adjustment shall be deferred
-------- ----
beyond the date on which a Warrant is exercised.
All calculations under this Section 12 shall be made to the nearest
cent or to the nearest 1/100/th/ of a share, as the case may be.
(d) Certain Definitions. "Current Market Value" per share of Common
------------------- --------------------
Stock or of any other security (herein collectively referred to as a "Security")
--------
at any date shall be:
(1) if the Security is not registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), (i) the value of the Security
------------
determined in good faith by the board of directors of the Company and
certified in a board resolution, based on the most recently completed
arm's-length transaction between the Company and a person other than an
Affiliate of the Company and the closing of which occurs on such date or
shall have occurred within the six months preceding such date or (ii) if no
such transaction shall have occurred on such date or within such six-month
period, the value of the Security determined as of a date within 30 days
preceding such date by an Independent Financial Expert (as defined below),
or
(2) if the Security is registered under the Exchange Act, the average
of the daily closing bid prices of such Security for 30 consecutive
Business Days selected by the Company from the period of 45 Business Days
preceding such date, but only if such Security shall have been listed on a
national securities exchange or the Nasdaq National Market or traded
through an automated quotation system during such entire 45-Business Day
period.
18
<PAGE>
The "closing bid price" for any Security on each Business Day means
-----------------
the closing price, regular way, on such day on the principal exchange on which
such Security is traded, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day.
"Independent Financial Expert" shall mean any nationally recognized
----------------------------
investment banking firm that is not an Affiliate of the Company. Any such
person may receive customary compensation and indemnification by the Company for
opinions or services it provides as an Independent Financial Expert.
"Affiliate" of any specified person means any other person which
---------
directly or indirectly through one or more intermediaries controls or is
controlled by, or is under common control with, such specified person. For the
purposes of this definition, "control" (including with correlative meanings, the
terms "controlling," "controlled by" and "under common control with") as used
with respect to any person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
person, whether through the ownership of voting securities, by agreement or
otherwise.
"Ordinary Cash Distribution" means any quarterly cash dividend on the
--------------------------
Common Stock to the extent that the aggregate cash dividend per share of Common
Stock in any calendar quarter does not exceed the greater of (x) the amount per
share of Common Stock of the next preceding quarterly cash dividend on the
Common Stock (as adjusted to reflect subdivisions or combinations of the Common
Stock) and (y) 3.0% of the average of the last reported sales prices of the
Common Stock during the ten trading days immediately prior to the date of
declaration of such dividend.
(e) When No Adjustment Required. If an adjustment is made upon the
---------------------------
establishment of a record date for an issuance, sale or distribution subject to
subsection (a) or (b) hereof and such issuance, sale or distribution is
subsequently cancelled or is not otherwise made, the Exercise Rate and Exercise
Price then in effect shall be readjusted, effective as of the date when the
board of directors of the Company determines to cancel such issuance, sale or
distribution or when it is otherwise evident that such issuance, sale or
distribution will not be so made, to that
19
<PAGE>
which would have been in effect if such record date had not been fixed. If an
adjustment would be required under both subsections (a) and (b) above, such
adjustments will be determined without duplication.
To the extent the Warrants become convertible into cash, no adjustment
need be made thereafter as to the amount of cash into which such Warrants are
exercisable. Interest will not accrue on the cash.
(f) Notice of Adjustment. Whenever the Exercise Rate or Exercise
--------------------
Price is adjusted, the Company shall provide the notices required by Section 14
hereof.
(g) Voluntary Reduction. The Company from time to time may increase
-------------------
the Exercise Rate or reduce the Exercise Price by any amount for any period of
time (including, without limitation, permanently) if the period is at least 20
Business Days after the Company has given notice of such increase or reduction
in accordance with Section 14 hereof.
An increase of the Exercise Rate or reduction in the Exercise Price
under this subsection (g) (other than a permanent increase) does not change or
adjust the Exercise Rate otherwise in effect for purposes of subsection (a) and
(b) of this Section 12.
(h) When Issuance or Payment May Be Deferred. In any case in which
----------------------------------------
this Section 12 shall require that an adjustment in the Exercise Rate or
Exercise Price be made effective as of a record date for a specified event, the
Company may elect to defer until the occurrence of such event (i) issuing to the
Holder of any Warrant exercised after such record date the Warrant Shares and
other capital stock of the Company, if any, issuable upon such exercise over and
above the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise on the basis of the Exercise Rate prior to such
adjustment, and (ii) paying to such Holder any amount in cash in lieu of a
fractional share pursuant to Section 13 hereof; provided, however, that the
-------- -------
Company shall deliver to the Warrant Agent and shall cause the Warrant Agent, on
behalf of and at the expense of the Company, to deliver to such Holder a due
bill or other appropriate instrument evidencing such
20
<PAGE>
Holder's right to receive such additional Warrant Shares, other capital stock
and cash upon the occurrence of the event requiring such adjustment.
(i) Reorganizations. In case of (i) any capital reorganization,
---------------
other than in the cases referred to in Section 12(a) and (b) hereof and other
than any capital reorganization that does not result in any reclassification of
the outstanding shares of Common Stock into shares of other stock or other
securities or property, or (ii) the consolidation or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock into shares of other
stock or other securities or property), or (iii) the sale of all or
substantially all of the assets of the Company (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
---------------
deliverable upon exercise of any Warrant in accordance with the terms hereof (in
lieu of the number of shares of Common Stock theretofore deliverable) the number
of shares of stock or other securities or property to which a holder of the
number of shares of Common Stock that would otherwise have been deliverable upon
the exercise of such Warrant would have been entitled upon such Reorganization
if the Exercisability Date had occurred and such Warrant had been exercised in
full immediately prior to such Reorganization. In case of any Reorganization,
appropriate adjustment, as determined in good faith by the board of directors
of the Company, whose determination shall be described in a duly adopted
resolution certified by the Company's Secretary or Assistant Secretary, shall be
made in the application of the provisions herein set forth with respect to the
rights and interests of Holders so that the provisions set forth herein shall
thereafter be applicable, as nearly as possible, in relation to any such shares
or other securities or property thereafter deliverable upon exercise of
Warrants.
The Company shall not effect any such Reorganization unless prior to
or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such Reorganization or the corporation or
other entity purchasing such assets shall expressly assume, by a supplemental
warrant agreement or other acknowledgment executed and delivered to the Warrant
Agent, the obligation to deliver to the Warrant Agent and to cause the Warrant
Agent to deliver to each such Holder such shares of stock, securities or assets
as, in
21
<PAGE>
accordance with the foregoing provisions, such Holder may be entitled to
purchase in accordance with the terms hereof upon the occurrence of the
Exercisability Date, and the due and punctual performance and observance of each
and every covenant, condition, obligation and liability under this Agreement to
be performed and observed by the Company in the manner prescribed herein.
The foregoing provisions of this Section 12(i) shall apply to
successive Reorganization transactions.
(j) Form of Warrants. Irrespective of any adjustments in the number
----------------
or kind of shares purchasable upon the exercise of the Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Agreement.
(k) Warrant Agent's Disclaimer. The Warrant Agent has no duty to
--------------------------
determine when an adjustment under this Section 12 should be made, how it should
be made or what it should be. The Warrant Agent has no duty to determine
whether any provisions of a supplemental warrant agreement under subsection (i)
of this Section 12 are correct. The Warrant Agent makes no representation as to
the validity or value of any securities or assets issued upon exercise of
Warrants. The Warrant Agent shall not be responsible for the Company's failure
to comply with this Section 12.
(l) Miscellaneous. For purpose of this Section 12 the term "shares of
------------- ---------
Common Stock" shall mean (i) shares of the class of stock designated as the
- ------------
Common Stock, par value $.01 per share, of the Company as of the date of this
Agreement, and (ii) shares of any other class of stock resulting from successive
changes or reclassification of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that at any time, as a result of an adjustment made pursuant to this
Section 12, the Holders of Warrants shall become entitled to purchase any
securities of the Company other than, or in addition to, shares of Common Stock,
thereafter the number or amount of such other securities so purchasable upon
exercise of each Warrant shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Warrant Shares contained in subsections (a) through (l) of this
Section 12, inclusive, and the
22
<PAGE>
provisions of Sections 7, 8, 10 and 13 with respect to the Warrant Shares or the
Common Stock shall apply on like terms to any such other securities.
Section 13. Fractional Interests. The Company shall not be required
--------------------
to issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
Holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 13,
be issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the excess of the Current Market
Value of a Warrant Share over the Exercise Price on the day immediately
preceding the date the Warrant is presented for exercise, multiplied by such
fraction.
Section 14. Notices to Warrant Holders; Reservation of Dividends. No
----------------------------------------------------
later than April 6, 2001, the Company shall give written notice of the
occurrence or non-occurrence of the Adjustment Event to the Warrant Agent and
shall cause the Warrant Agent, on behalf of and at the expense of the Company,
within 10 days after such notification is received by the Warrant Agent, to mail
by first class mail, postage prepaid, to each Holder a notice of such occurrence
or non-occurrence of the Adjustment Event. Upon any adjustment pursuant to
Section 12 hereof, the Company shall give prompt written notice of such
adjustment to the Warrant Agent and shall cause the Warrant Agent, on behalf of
and at the expense of the Company, within 10 days after notification is received
by the Warrant Agent of such adjustment, to mail by first class mail, postage
prepaid, to each Holder a notice of such adjustment(s) and shall deliver to the
Warrant Agent a certificate of the Chief Financial Officer of the Company,
setting forth in reasonable detail (i) the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant after
such adjustment(s), (ii) a brief statement of the facts requiring such
adjustment(s) and (iii) the computation by which such adjustment(s) was made.
Where appropriate, such notice may be given in advance and included as a part of
the notice required under the other provisions of this Section 14.
23
<PAGE>
In case the Exercisability Date has occurred and:
(a) the Company shall authorize the issuance to all holders of shares
of Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets or cash; or
(c) of any consolidation or merger to which the Company is a party
and for which approval of any stockholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any reclassification or change of Common Stock issuable
upon exercise of the Warrants (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or a tender offer or exchange offer for shares of
Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company proposes to take any action that would require an
adjustment to the Exercise Rate pursuant to Section 12 hereof;
then the Company shall give prompt written notice to the Warrant Agent and shall
cause the Warrant Agent, on behalf of and at the expense of the Company to give
to each of the registered holders of the Warrant Certificates at his, her or its
address appearing on the Warrant Register, at least 30 days (or 20 days in any
case specified in clauses (a) or (b) above) prior to the applicable record date
hereinafter specified, or the date of the event in the case of events for which
there is no record date, by first-class mail, postage prepaid, a written notice
stating (i) the date as of which the holders of record of shares of Common Stock
to be entitled to receive any such rights, options, warrants or distribution are
to be determined, or (ii) the initial expiration date set forth in any tender
offer or exchange offer for shares of Common Stock, or (iii) the date on which
any such consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding up is expected to become effective or consummated, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange such shares for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger,
24
<PAGE>
conveyance, transfer, dissolution, liquidation or winding up. The failure by the
Company or the Warrant Agent to give such notice or any defect therein shall not
affect the legality or validity of any distribution, right, option, warrant,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up, or the vote upon any action.
The Company shall give prompt written notice to the Warrant Agent and
shall cause the Warrant Agent, on behalf of and at the expense of the Company to
give to each Holder written notice of any determination to make a distribution
or dividend to the holders of its Common Stock of any assets (including cash
(other than any Ordinary Cash Distribution)), debt securities, preferred stock,
or any rights or warrants to purchase debt securities, preferred stock, assets
or other securities (other than Common Stock, or rights, options, or warrants to
purchase Common Stock) of the Company, which notice shall state the nature and
amount of such planned dividend or distribution and the record date therefor,
and shall be given by the Company at least 20 days prior to such record date
therefor.
At any time prior to the date that is 30 Business Days after the
Exercisability Date, with respect to any distribution or dividend made by the
Company to all of the holders of its Common Stock for which notice to the
Holders of the Warrants under this Section 14 would be required had such
dividend or distribution occurred after the Exercisability Date and except for
such distributions or dividends as are provided for in Section 12 hereof, the
Company shall hold in reserve the amount of any such dividend or distribution
that would have been payable to the Holders in respect of their Warrant Shares
had the Holders exercised their Warrants immediately prior to such dividend or
distribution. The Company shall release to each Holder of Warrants his, her or
its pro rata share of such reserved dividends or distributions upon the exercise
of such Holder's Warrants pursuant to Section 7 hereof. Any notice delivered to
the Holders by the Company pursuant to this Section 14 shall state the nature
and amount of such dividend or distribution that shall be held in reserve.
Nothing contained in this Agreement or in any Warrant Certificate
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as stockholders in respect of the meetings of
stockholders or the election of directors of the Company or any other matter, or
any rights whatsoever as stockholders of the Company.
25
<PAGE>
Section 15. Notices to the Company and Warrant Agent. Any notice or
----------------------------------------
demand authorized by this Agreement to be given or made by the Warrant Agent or
by any Holder to or on the Company shall be sufficiently given or made when
received at the office of the Company expressly designated by the Company as its
office for purposes of this Agreement (until the Warrant Agent is otherwise
notified in accordance with this Section 15 by the Company), as follows:
Endo Pharmaceuticals Holdings Inc.
c/o Kelso & Company
320 Park Avenue
24/th/ Floor
New York, New York 10022
Attention: Managing Director
with copy to General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-3897
Attention: Eileen Nugent Simon, Esq.
Any notice pursuant to this Agreement to be given by the Company or by
any Holder(s) to the Warrant Agent shall be sufficiently given when received by
the Warrant Agent at the address appearing below (until the Company is otherwise
notified in accordance with this Section by the Warrant Agent).
[WARRANT AGENT]
[ADDRESS]
Attention: [CONTACT]
Section 16. Supplements and Amendments; Actions. The Company and the
-----------------------------------
Warrant Agent may from time to time supplement or amend this Agreement without
the approval of any holders of Warrants in order to cure any ambiguity or to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not in any
26
<PAGE>
way adversely affect the rights of any holder of Warrants hereunder. Any
amendment or supplement to this Agreement that has a material adverse effect on
the rights of holders hereunder shall require the written consent of registered
holders of a majority of the then outstanding Warrants, which consent shall then
be effective against all the Holders of Warrants hereunder. The consent of each
holder of a Warrant affected shall be required for any amendment pursuant to
which the Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (not including
adjustments contemplated hereunder). The Warrant Agent shall be entitled to
receive and shall be fully protected in relying upon an officers' certificate
and opinion of counsel as conclusive evidence that any such amendment or
supplement is authorized or permitted hereunder, that it is not inconsistent
herewith, and that it will be valid and binding upon the Company in accordance
with its terms.
Any actions seeking enforcement of the rights of Holders hereunder
(including paragraph 3 of Section 7 hereof) may be brought either by the Warrant
Agent or the Holders of more than 50% of the Warrants issued hereunder and then
outstanding.
Section 17. Concerning the Warrant Agent. The Warrant Agent
----------------------------
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the Holders, by
their acceptance of Warrants, shall be bound:
(a) The statements contained herein and in the Warrant Certificate
shall be taken as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as describe
the Warrant Agent or any action taken by it. The Warrant Agent assumes no
responsibility with respect to the distribution of the Warrants except as
herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with the covenants contained in this Agreement or in the
Warrants to be complied with by the Company.
(c) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself (through
its employees) or by or through its attorneys or agents (which shall not include
its
27
<PAGE>
employees) and shall not be responsible for the misconduct of any agent
appointed with due care.
(d) The Warrant Agent may consult at any time with legal counsel
satisfactory to it (who may be counsel for the Company), and the Warrant Agent
shall incur no liability or responsibility to the Company or to any Holder in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in accordance with the opinion or the advice of such counsel.
(e) Whenever in the performance of its duties under this Agreement
the Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless such evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the President,
Chief Financial Officer, one of the Vice Presidents, the Treasurer or the
Secretary of the Company and delivered to the Warrant Agent; and such
certificate shall be full authorization to the Warrant Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(f) The Company agrees to pay the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the performance
of its duties under this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent (including reasonable fees and expenses of
the Warrant Agent's counsel and agents) in the performance of its duties under
this Agreement, and to indemnify the Warrant Agent and save it harmless against
any and all liabilities, including judgments, costs and counsel fees, for
anything done or omitted by the Warrant Agent in the performance of its duties
under this Agreement, except as a result of the Warrant Agent's negligence or
bad faith.
(g) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to involve
expense unless the Company or one or more Holders shall furnish the Warrant
Agent with reasonable security and indemnity satisfactory to the Warrant Agent
for any costs and expenses which may be incurred, but this provision shall not
affect the power of the Warrant Agent to take such action as the Warrant Agent
may consider proper, whether with or without any such security or indemnity.
28
<PAGE>
All rights of action under this Agreement or under any of the Warrants may be
enforced by the Warrant Agent without the possession of any of the Warrants or
the production thereof at any trial or other proceeding relative thereto, and
any such action, suit or proceeding instituted by the Warrant Agent shall be
brought in its name as Warrant Agent, and any recovery of judgment shall be for
the ratable benefit of the Holders, as their respective rights or interests may
appear.
(h) The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transactions in which the Company may be interested, or contract with or lend
money to the Com pany or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement or such director, officer or employee.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity including, without
limitation, acting as Transfer Agent or as a lender to the Company or an
Affiliate thereof.
(i) The Warrant Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The Warrant Agent
shall not be liable for anything which it may do or refrain from doing in
connection with this Agreement except for its own negligence or bad faith.
(j) The Warrant Agent will not incur any liability or responsibility
to the Company or to any Holder for any action taken in reliance on any notice,
resolution, waiver, consent, order, certificate, or other paper, document or
instrument reasonably believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(k) The Warrant Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant (except its countersignature thereof); nor
shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any Warrant
Shares (or other stock) to be issued pursuant to this Agreement or any Warrant,
or as to whether any Warrant Shares (or other stock) will, when issued, be
validly issued, fully paid and nonassessable, or as to the Exercise Price or the
number or amount of Warrant Shares or other securities or other property
issuable upon exercise of any Warrant.
29
<PAGE>
(l) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chair man of the Board, the President, any Vice President or the Secretary of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and shall not be liable for any action taken or
suffered to be taken by it in good faith and without negligence in accordance
with instructions of any such officer or officers.
Section 18. Change of Warrant Agent. The Warrant Agent may resign at
-----------------------
any time and be discharged from its duties under this Agreement by giving to the
Company 30-days' notice in writing. The Warrant Agent may be removed by like
notice to the Warrant Agent from the Company. If the Warrant Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Warrant Agent. If the Company shall fail to make such
appointment within a period of 30 days after such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Warrant Agent or by any Holder (who shall with such notice submit
his, her or its Warrant for inspection by the Company), then any Holder may
apply to any court of competent jurisdiction for the appointment of a successor
to the Warrant Agent. Pending appointment of a successor warrant agent, either
by the Company or by such court, the duties of the Warrant Agent shall be
carried out by the Company. Any successor warrant agent, whether appointed by
the Company or such a court, shall be a bank or trust company in good standing,
incorporated under the laws of the United States of America or any State thereof
or the District of Columbia and having at the time of its appointment as warrant
agent a combined capital and surplus of at least $10,000,000. After appointment,
the successor warrant agent shall be vested with the same powers, rights, duties
and responsibilities as if it had been originally named as Warrant Agent without
further act or deed; but the former Warrant Agent shall deliver and transfer to
the successor warrant agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
such purpose. Failure to file any notice provided for in this Section 18,
however, or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
warrant agent, as the case may be. In the event of such resignation or removal,
the Company or the successor warrant agent shall mail by first class mail,
postage prepaid, to each Holder, written notice of such removal or resignation
and the name and address of such successor warrant agent.
30
<PAGE>
Section 19. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company, the Warrant Agent or any holder
of Warrants shall bind and inure to the benefit of their respective successors
and assigns hereunder.
Section 20. Termination. This Agreement shall terminate at 5:00 p.m.,
-----------
New York City time, on the Expiration Date. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date if all Warrants have been exercised
pursuant to this Agreement.
Section 21. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT
-------------
CERTIFICATE ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE
LAWS OF THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF SAID STATE, WITHOUT REGARD TO THE CONFLICT OF LAW
RULES THEREOF.
Section 22. Benefits of This Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any person or corporation other than the Company,
the Warrant Agent and the registered Holders of the Warrant Certificates any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent and the registered Holders of the Warrant Certificates.
Section 23. Counterparts. This Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 24. Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
ENDO PHARMACEUTICALS HOLDINGS INC.
By: ________________________________
Name:
Title:
[WARRANT AGENT],
as Warrant Agent
By: ________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[Form of Warrant Certificate]
[Face]
THIS SECURITY IS A GLOBAL CERTIFICATE AND IS REGISTERED IN THE NAME
OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON
OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE WARRANT AGREEMENT, DATED AS OF ____________, ____, BY AND
BETWEEN THE COMPANY AND THE WARRANT AGENT (THE "WARRANT AGREEMENT"), AND NO
TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY
THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY
TO THE DEPOSITORY OR AN OTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS
THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (A NEW YORK CORPORATION) ("DTC") TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH
OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
A-1
<PAGE>
EXERCISABLE ON OR AFTER THE EXERCISABILITY DATE
AND ON OR BEFORE THE EXPIRATION DATE
No. __________ __________ Class A Transferable Warrants
Class A Transferable Warrant Certificate
ENDO PHARMACEUTICALS HOLDINGS INC.
This Warrant Certificate certifies that _______, or registered
assigns, is the registered holder of Class A Transferable Warrants expiring on
or before the Expiration Date (the "Warrants") to purchase shares of Common
Stock, par value $.01 per share (the "Common Stock"), of Endo Pharmaceuticals
Holdings Inc., a Delaware corporation (the "Company"). Each Warrant entitles
the holder upon exercise to receive from the Company on or after the
Exercisability Date and on or before 5:00 p.m. New York City Time on the six-
month anniversary of the Exercisability Date (the "Expiration Date") a number of
fully paid and nonassessable shares of Common Stock (each such share, a "Warrant
Share") as determined in the following paragraph at the initial exercise price
(the "Exercise Price") equal to $0.01 payable upon surrender of this Warrant
Certificate and payment of the Exercise Price in the manner set forth in the
Warrant Agreement, subject only to the conditions set forth herein and in the
Warrant Agreement referred to on the reverse hereof.
If the Exercisability Date is on or prior to December 31, 2001, the
Holder shall then be entitled to receive from the Company (on exercise of such
Warrants and payment of the Exercise Price then in effect for such Warrant
Shares) (together, if applicable, with cash payable as provided in Section 13
hereof and any dividends or distributions payable as provided in Section 14
hereof) (a) 1.153846/8/ Warrant Shares in the event the Adjustment Event (as
defined in that certain Agreement and Plan of Merger, dated as of November __,
1999, by and among the Company, Endo Inc., a Delaware corporation and wholly
owned subsidiary of the
_________________
/8/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 35% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
A-2
<PAGE>
Company, and [TARGET] Pharmaceutical Corporation, a Delaware corporation) has
not occurred prior to the Exercisability Date or (b) 1.000000/9/ Warrant Shares
in the event the Adjustment Event has occurred prior to the Exercisability Date.
If the Exercisability Date is after December 31, 2001 and on or prior to June
30, 2002, the Holder shall then be entitled to receive from the Company (on
exercise of such Warrants and payment of the Exercise Price then in effect for
such Warrant Shares) (together, if applicable, with cash payable as provided in
Section 13 hereof and any dividends or distributions payable as provided in
Section 14 hereof) (a) 0.714286/10/ Warrant Shares in the event the Adjustment
Event has not occurred prior to the Exercisability Date or (b) 0.615385/11/
Warrant Shares in the event the Adjustment Event has occurred prior to the
Exercisability Date. If the Exercisability Date is after June 30, 2002 and on or
prior to December 31, 2002, the Holders shall then be entitled to receive from
the Company (on exercise of such Warrants and payment of the Exercise Price then
in effect for such Warrant Shares) (together, if applicable, with cash payable
as provided in Section 13 hereof and any dividends or distributions payable as
provided in Section 14 hereof) (a) 0.333333/12/ Warrant Shares in the event the
Adjustment Event has not occurred prior to the Exercisability Date or (b)
_________________
/9/ This number shall be adjusted in the final Agreements and Warrant in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 40% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
/10/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 30% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
/11/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 35% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
/12/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 25% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
A-3
<PAGE>
0.285714/13/ Warrant Shares in the event the Adjustment Event has occurred prior
to the Exercisability Date.
The Exercise Price and number of Warrant Shares issuable upon exercise of
the Warrants are subject to adjustment upon the occurrence of certain events as
set forth in the Warrant Agreement.
No Warrant may be exercised before the Exercisability Date or after
5:00 p.m., New York City Time, on the Expiration Date and to the extent not
exercised by such time such Warrants shall become void.
This Warrant Certificate shall not be valid unless countersigned by
the Warrant Agent, as such term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
_________________
/13/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 30% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
A-4
<PAGE>
IN WITNESS WHEREOF, Endo Pharmaceuticals Holdings Inc. has caused this
Warrant Certificate to be signed by its [OFFICER] and by its Secretary, each by
a facsimile of his or her signature, and has caused a facsimile of its corporate
seal to be affixed hereunto or imprinted hereon.
Dated: , ____
ENDO PHARMACEUTICALS HOLDINGS INC.
By: ___________________________
Name:
Title:
By: ___________________________
Name:
Title: Secretary
Countersigned:
[WARRANT AGENT],
as Warrant Agent
By: ___________________________
Name:
Title:
A-5
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring on the "Expiration Date," entitling the
holder on exercise to receive shares of Common Stock, par value $.01 per share,
of the Company (the "Common Stock"), and are issued or to be issued pursuant to
a Warrant Agreement dated as of ________ __, ____ (the "Warrant Agreement"),
duly executed and delivered by the Company to [WARRANT AGENT], as warrant agent
(the "Warrant Agent"), which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Company and the holders (the
words "holders" or "holder" meaning the registered holders or registered holder)
of the Warrants. A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
Warrants may be exercised at any time on or after the "Exercisability
Date" and on or before the "Expiration Date." The holder of Warrants evidenced
by this Warrant Certificate may exercise them by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with payment in the manner provided for in the
Warrant Agreement at the office of the Warrant Agent. In the event that upon any
exercise of Warrants evidenced hereby, the number of Warrants exercised shall be
less than the total number of Warrants evidenced hereby, there shall be issued
to the holder hereof or his, her or its assignee a new Warrant Certificate
evidencing the number of Warrants not exercised.
The Warrant Agreement provides that upon the occurrence of certain
events the number of Warrants set forth on the face hereof and the Exercise
Price may, subject to certain conditions, be adjusted. No fractions of a share
of Common Stock will be issued upon the exercise of any Warrant, but the Company
will pay the cash value thereof determined as provided in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Warrant
Agent by the registered holder thereof in person or by legal representative or
attorney duly authorized in writing, may be exchanged, in the manner and subject
to the limitations provided in the Warrant Agreement, but without payment of any
service
A-6
<PAGE>
charge, for another Warrant Certificate or Warrant Certificates of like tenor
evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder(s) thereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
A-7
<PAGE>
[Form of Election to Purchase]
(To Be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive _____shares of Common Stock
and herewith tenders payment for such shares to the order of Endo
Pharmaceuticals Holdings Inc. in the amount of $______ payable in (select one or
more: (i) cash and/or (ii) pursuant to a Cashless Exercise) in accordance with
the terms hereof and of the Warrant Agreement. The undersigned requests that a
certificate for such shares be registered in the name of _________, whose
address is ________ and that such shares be delivered to ________ whose address
is ________. If said number of shares is less than all of the shares of Common
Stock purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the remaining balance of such shares be registered in
the name of ________, whose address is ________, and that such Warrant
Certificate be delivered to ________, whose address is ________.
Signature:
Date:
Signature Guaranteed:
A-8
<PAGE>
SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS
The following exchanges of a part of this Global Warrant for certificated
Warrants have been made:
<TABLE>
<CAPTION>
Number of
Warrants of
Amount of Amount of this Global
decrease in increase in Warrant Signature of
Number of Number of following authorized
Date of Warrants of this Warrants of this such decrease officer of
Exchange Global Warrant Global Warrant (or increase) Warrant Agent
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
A-9
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF
CLASS A TRANSFERABLE WARRANTS
Re: Class A Transferable Warrants to Purchase Common Stock (the "Warrants") of
Endo Pharmaceuticals Holdings Inc.
This Certificate relates to Warrants held in* ___book-entry or * ____
certificated form by ____________ (the "Transferor").
The Transferor:*
[_] has requested the Warrant Agent by written order to deliver in
exchange for its beneficial interest in the Global Warrant held by the
depository a Warrant or Warrants in definitive, registered form equal to its
beneficial interest in Warrants represented by such Global Warrant (or the
portion thereof indicated above); or
[_] has requested the Warrant Agent by written order to exchange or
register the transfer of a Warrant or Warrants.
________________________________
[INSERT NAME OF TRANSFEROR]
By: __________________________
Date: _____________________
*Check applicable box.
<PAGE>
INDEX OF DEFINED TERMS
----------------------
<TABLE>
<CAPTION>
<S> <C>
Affiliate....................................................................
Agreement....................................................................
Business Day.................................................................
Cashless Exercise............................................................
closing bid price............................................................
Common Stock.................................................................
Company......................................................................
Current Market Value.........................................................
Definitive Warrants..........................................................
Exchange Act.................................................................
Exercisability Date..........................................................
Exercise Price...............................................................
Exercise Rate................................................................
Expiration Date..............................................................
FDA..........................................................................
Fully Diluted Shares.........................................................
Global Warrants..............................................................
Holders......................................................................
Independent Financial Expert.................................................
Legal Holiday................................................................
Merger Agreement.............................................................
Ordinary Cash Distribution...................................................
Reorganizations..............................................................
Security.....................................................................
shares of Common Stock.......................................................
Sub..........................................................................
Target.......................................................................
Time of Determination........................................................
Transfer Agent...............................................................
Ultimate Expiration Date.....................................................
Warrant......................................................................
Warrant Agent................................................................
Warrant Certificates.........................................................
Warrant Register.............................................................
Warrant Shares...............................................................
Warrants.....................................................................
</TABLE>
<PAGE>
Exhibit D-1 - Parent's Year 2000 Representation
Year 2000
- ---------
Parent has evaluated the impact of the Year 2000 Issue and completed
upgrading or modifying critical applications and systems to accommodate Year
2000 dating. This includes all computer systems, office machines, phone and
security systems, off-the-shelf systems and applications, custom software
applications, and accounting systems. Parent believes that the financial and
operational systems of Parent, as currently used, will function adequately with
respect to the Year 2000 Issue.
Parent has limited information concerning the compliance status of its
third-party contractors. Parent's current third party contractors generally
test Parent products and provide Parent with the results of those tests and
manufacture drug supplies. Parent has initiated formal communications with all
of its significant suppliers and vendors to determine the extent to which Parent
may be vulnerable if those third parties fail to remediate their own Year 2000
issues. Parent is continually receiving and evaluating written assurances from
all significant suppliers and vendors that they have completed, or are working
on Year 2000 projects with deadlines well in advance of December 1999. To date,
approximately all suppliers and vendors contacted, have reported that they will
be fully operational on January 1, 2000.
Parent is not significantly reliant on computer software applications
and systems during its developmental stage.
As part of the commercialization of products, Parent has third parties
manufacture and distribute its products. Parent places significant dependence
on such third parties' computer systems for purchasing, production, customer
order entry and invoicing and other related activities. A disruption in these
systems could result in lost revenue from inventory shortages, improper
execution of customer orders and/or delays in the resolution and collection of
outstanding invoices. Parent may make significant additions to and changes in
its existing computer software applications and systems and/or the use of such
systems. If Parent makes any such additions or changes, it would affect
Parent's exposure to the Year 2000 Issue since Parent would become more reliant
on its computer software applications and systems.
<PAGE>
At this time, Parent does not expect that the cost of its Year 2000
Issue compliance program will be material to its business, financial condition
or results of operations and does not currently anticipate any material
disruption in its operations.
2
<PAGE>
Exhibit D-2 - Company's Year 2000 Representation
Year 2000
- ---------
The Company has evaluated the impact of the Year 2000 Issue and completed
upgrading or modifying critical applications and systems to accommodate Year
2000 dating. This includes all computer systems, office machines, phone and
security systems, off-the-shelf systems and applications, custom software
applications, and accounting systems. The Company believes that the financial
and operational systems of the Company, as currently used, will function
adequately with respect to the Year 2000 Issue.
The Company has limited information concerning the compliance status of its
third-party contractors. The Company's current third party contractors generally
test the Company products and provide the Company with the results of those
tests and manufacture drug supplies. The Company has initiated formal
communications with all of its significant suppliers and vendors to determine
the extent to which the Company may be vulnerable if those third parties fail to
remediate their own Year 2000 issues. The Company is continually receiving and
evaluating written assurances from all significant suppliers and vendors that
they have completed, or are working on Year 2000 projects with deadlines well in
advance of December 1999. To date, approximately all suppliers and vendors
contacted, have reported that they will be fully operational on January 1, 2000.
The Company is not significantly reliant on computer software applications
and systems during its developmental stage.
As part of the possible future commercialization of products, the Company
intends to have third parties manufacture and distribute its products. The
Company will place significant dependence on such third parties' computer
systems for purchasing, production, customer order entry and invoicing and other
related activities. A disruption in these systems could result in lost revenue
from inventory shortages, improper execution of customer orders and/or delays in
the resolution and collection of outstanding invoices. In preparation for the
possible future commercialization of products, the Company may make significant
additions to and changes in its existing computer software applications and
systems and/or the use of such systems. If the Company makes any such additions
or changes, it would affect the Company's exposure to the Year 2000 Issue since
the Company would become more reliant on its computer software applications and
systems.
<PAGE>
At this time, the Company does not expect that the cost of its Year 2000
Issue compliance program will be material to its business, financial condition
or results of operations and does not currently anticipate any material
disruption in its operations.
2
<PAGE>
Exhibit E - 1 Form of Representation Letter
CERTIFICATE OF ENDO PHARMACEUTICALS HOLDINGS, INC.
________ __, 1999
Skadden, Arps. Slate, Meagher, & Flom LLP
919 Third Avenue
New York, NY 10022-3897
Latham & Watkins
53rd at Third, Suite 1000
885 Third Avenue
New York, NY 10022-4802
Re: Merger pursuant to the Agreement and Plan of Merger dated as of
________ __, 1999 (the "Merger Agreement") by and among Endo
Pharmaceuticals Holdings, Inc., a Delaware corporation
("Parent"), Algos Pharmaceutical Corporation, a Delaware
corporation (the "Company") and [Endo Newco], a Delaware
corporation ("Sub").
This certificate is supplied to you in connection with your rendering
of opinions regarding certain federal income tax consequences of the merger (the
"Merger") of the Company with and into Sub pursuant to the Merger Agreement.
Unless otherwise indicated, capitalized terms not defined herein have the
meanings set forth in the Merger Agreement.
A. Representations. After consulting with its counsel and auditors
---------------
regarding the meaning of and factual support for the following representations,
the undersigned hereby certifies and represents the following facts will be true
at the Effective Time:
1. Pursuant to the Merger Agreement, the Company will merge with and
into Sub, and Sub will acquire all of the assets and liabilities of the Company;
2. Parent is participating in the Merger for good and valid business
reasons and not for tax purposes;
<PAGE>
3. Except for cash paid in lieu of fractional shares of Parent Common
Stock, all shares of Company Common Stock will be exchanged solely for Parent
Common Stock and Parent Warrants. In addition, no shares of Sub will be issued
to any shareholder of the Company in the Merger, and Parent will issue the
Parent Common Stock and Parent Warrants that are to be received by each Company
Common shareholder in the Merger;
4. The sum of the cash paid in lieu of fractional shares of Parent
Common Stock, the fair market value of the Parent Warrants, and the fair market
value of Parent Common Stock to be received by each shareholder of the Company
pursuant to Section 1.7(c) of the Merger Agreement will be approximately equal
to the fair market value of Company Common Stock surrendered in exchange
therefor. In connection with the Merger no holder of Company Common Stock will
receive in exchange for Company Common Stock, directly or indirectly, any
consideration from Parent other than Parent Common Stock, Parent Warrants, and
cash in lieu of a fractional share of Parent Common Stock;
5. Neither Parent nor any person related to Parent, as defined in
Treas. Reg. (S) 1.368-1(e)(3), (i) has acquired any stock of the Company or (ii)
has a plan or intention to redeem or otherwise reacquire any Parent Common Stock
issued in the Merger to the shareholders of the Company;
6. Prior to the Merger, Parent will be in control of Sub within the
meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended (the
"Code");
7. At the time of the Merger, Sub will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire common stock in Sub that, if exercised or
converted, would affect Parent's retention of control of Sub within the meaning
of Section 368(c) of the Code;
8. Following the Merger, Sub will not issue additional shares of its
stock that would result in Parent losing control of Sub within the meaning of
Section 368(c) of the Code;
9. As of the Effective Time, neither Parent nor any corporation
affiliated with Parent: (i) will be under any obligation, or will have entered
into any agreement to redeem or repurchase any shares of Parent Common Stock
issued in the Merger or to make any extraordinary distributions in respect of
Parent Common Stock; or (ii) will have any plan or intention to reacquire shares
of Parent Common Stock issued in the Merger. After the Merger, no dividends or
distributions will be made to the former Company stockholders by Parent other
than regular, normal dividends or distributions made to all holders of Parent
Common Stock;
10. Except for dispositions made in the ordinary course of business
and transfers described in Section 368(a)(2)(C) of the Code and Treas.
Reg. (S) 1.368-2(k)(1), Parent
2
<PAGE>
has no plan or intention to cause Sub to sell or otherwise dispose of the assets
acquired from the Company in the Merger;
11. Following the Merger, Sub will continue the "historic business"
of the Company or use a "significant portion" of the Company's "historic
business assets" in a business, as each such term is used in Treas. Reg. (S)
1.368-1(d);
12. Parent, Sub, the Company and the shareholders of the Company will
each pay their respective expenses incurred in connection with the Merger,
provided that all filing fees and printing expenses for the Proxy Statement and
Registration Statement shall be shared equally by the Company and the Parent.
Neither Parent nor Sub has agreed to assume, nor will it directly or indirectly
assume, any expense or other liability, whether fixed or contingent, of any
holder of Company Common Stock;
13. Parent has no plan or intention: (i) to liquidate Sub, (ii) to
merge Sub with and into another corporation or (iii) to sell or otherwise
dispose of the stock of Sub;
14. There is no intercorporate indebtedness existing between the
Company and Parent that was issued, acquired, or will be settled at a discount
as a result of the Merger, and Parent will assume no liability of any
shareholder of the Company in connection with the Merger;
15. None of the compensation received by any shareholder-employee of
the Company will be separate consideration for, or allocable to, any of their
shares of Company Common Stock; none of the Parent Common Stock or the Parent
Warrants to be received by any shareholder-employee of the Company will be
separate consideration for, or allocable to, any employment agreement; and the
compensation to be paid to any such shareholder-employee will be for services
actually rendered and will be commensurate with amounts paid to third parties
bargaining at arm's-length for similar services;
16. As of the Effective Time, neither Parent nor any corporation
affiliated with Parent will own, directly or indirectly, nor has Parent or any
such affiliated corporation owned during the past five years, directly or
indirectly, any shares of stock of the Company or securities, options, warrants
or instruments giving the holder thereof the right to acquire Company stock or
other securities issued by the Company;
17. Neither Parent nor Sub are investment companies as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code;
18. Parent is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code;
3
<PAGE>
19. The fair market value of the assets of the Company to be
transferred to Sub in the Merger will equal or exceed the sum of the liabilities
assumed by Sub plus the amount of liabilities to which the transferred assets
are subject;
20. Parent will not assume any of the Company's liabilities in the
Merger;
21. The payment of cash in lieu of fractional shares of Parent Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Parent of issuing fractional shares and does not represent separately bargained
for consideration. The total consideration that will be paid in the Merger to
the shareholders of the Company in lieu of fractional shares of Parent Common
Stock will not exceed one percent (1%) of the total consideration that will be
issued in the Merger to shareholders of the Company in exchange for their
Company Common Stock. The fractional share interests of each shareholder of the
Company will be aggregated and no shareholder will receive cash in an amount
greater than the value of one full share of Parent Common Stock;
22. The Merger Agreement and the transactions contemplated therein
represent the full and complete agreement among Parent, Sub and the Company
regarding the Merger, [and excluding the Stock Exchange Agreement], there are no
other written or oral agreements regarding the Merger other than those expressly
referred to or contemplated in the Merger Agreement;
23. The terms of the Merger Agreement and all other agreements
entered into in connection therewith are the product of arm's-length
negotiations;
24. The facts relating to the Merger, as such facts are described in
the Form S-4 are, insofar as such pertain to Parent, true, complete and accurate
in all material respects and each of the representations made by Parent in the
Merger Agreement and other documents associated therewith is true and accurate;
and
25. Parent is authorized to make all of the representations set forth
herein.
B. Reliance by Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom
---------------------------------------------------------------------
LLP in Rendering Opinion: Limitation on the Opinion.
---------------------------------------------------
1. The undersigned recognizes and agrees that (i) the opinion of
Latham & Watkins and the opinion of Skadden, Arps, Slate, Meagher & Flom LLP
(the "Opinions") will be based on the representations set forth herein and on
the statements contained in the Merger Agreement and the documents related
thereto, (ii) the Opinions will be subject to certain limitations and
qualifications including that they may not be relied upon if any such
representations are not accurate in all material respects, and (iii)
notwithstanding any provisions
4
<PAGE>
of the Merger Agreement to the contrary, the representations set forth in this
letter shall survive without limitation.
2. The undersigned recognizes and agrees that the Opinions will not
address any tax consequences of the Merger or any action taken in connection
therewith except as expressly set forth in such opinion.
3. The undersigned hereby undertakes to inform Latham & Watkins,
Skadden, Arps, Slate, Meagher & Flom LLP, and the Company immediately should any
of the statements or representations set forth in this letter become untrue,
incorrect or incomplete in any respect on or prior to the Effective Time.
5
<PAGE>
In witness whereof, Endo Pharmaceuticals Holdings, Inc. executed this
certificate as of the date and year first above-written.
ENDO PHARMACEUTICALS HOLDINGS INC.,
a Delaware corporation
By: _______________________
Name: _______________________
Title:_______________________
6
<PAGE>
Exhibit E - 2 Form of Representation Letter
CERTIFICATE OF ALGOS PHARMACEUTICAL CORPORATION
________ ___, 1999
Skadden, Arps. Slate, Meagher, & Flom LLP
919 Third Avenue
New York, NY 10022-3897
Latham & Watkins
53rd at Third, Suite 1000
885 Third Avenue
New York, NY 10022-4802
Re: Merger pursuant to the Agreement and Plan of Merger dated as of
_______ __, 1999 (the "Merger Agreement") by and among Endo
Pharmaceuticals Holdings, Inc., a Delaware corporation
("Parent"), Algos Pharmaceutical Corporation, a Delaware
corporation (the "Company") and [Endo Newco], a Delaware
corporation ("Sub").
This certificate is supplied to you in connection with your rendering
of opinions regarding certain federal income tax consequences of the merger (the
"Merger") of the Company with and into Sub pursuant to the Merger Agreement.
Unless otherwise indicated, capitalized terms not defined herein have the
meanings set forth in the Merger Agreement.
A. Representations. After consulting with its counsel and auditors
---------------
regarding the meaning of and factual support for the following representations,
the undersigned hereby certifies and represents the following facts will be true
at the Effective Time:
1. Pursuant to the Merger Agreement, the Company will merge with and
into Sub, and Sub will acquire all of the assets and liabilities of the Company;
2. The Company is participating in the Merger for good and valid
business reasons and not for tax purposes;
<PAGE>
3. Except for cash paid in lieu of fractional shares of Parent
Common Stock, all shares of Company Common Stock will be exchanged solely for
Parent Common Stock and Parent Warrants. In addition, no shares of Sub will be
issued to any shareholder of the Company in the Merger;
4. The sum of the cash paid in lieu of fractional shares of Parent
Common Stock, the fair market value of the Parent Warrants, and the fair market
value of Parent Common Stock to be received by each shareholder of the Company
pursuant to Section 1.7(c) of the Merger Agreement will be approximately equal
to the fair market value of Company Common Stock surrendered in exchange
therefor. In connection with the Merger no holder of Company Common Stock will
receive in exchange for Company Common Stock, directly or indirectly, any
consideration from Parent other than Parent Common Stock, Parent Warrants, and
cash in lieu of a fractional share of Parent Common Stock;
5. Neither the Company nor any person related to the Company, as
defined in Treas. Reg. (S) 1.368-1(e)(3), determined without regard to Treas.
Reg. (S) 1.368-1(e)(3)(i)(A), has (i) redeemed or otherwise acquired any stock
of the Company with consideration other than stock of the Company prior to the
Merger or (ii) made any extraordinary distribution (within the meaning of Treas.
Reg. (S) 1.368-1T(e)(1)(ii)(A)) with respect to any stock of the Company;
6. The Company has made no transfer of its assets (including any
distribution of assets with respect to, or in redemption of, stock) in
contemplation of the Merger or during the period beginning with the commencement
of negotiations (whether formal or informal) with Parent or Sub regarding the
Merger and ending at the Effective Time other than (i) in the ordinary course of
business and (ii) payments made in connection with the Merger;
7. Parent, Sub, the Company and the shareholders of the Company will
each pay their respective expenses incurred in connection with the Merger,
provided that all filing fees and printing expenses for the Proxy Statement and
Registration Statement shall be shared equally by the Company and the Parent.
Neither Parent nor Sub has agreed to assume, nor will it directly or indirectly
assume, any expense or other liability, whether fixed or contingent, of any
holder of Company Common Stock;
8. There is no intercorporate indebtedness existing between the
Company and Parent or between the Company and Sub that was issued, acquired, or
will be settled at a discount as a result of the Merger, and Parent and Sub will
assume no liability of any shareholder of the Company in connection with the
Merger;
9. None of the compensation received by any shareholder-employee of
the Company will be separate consideration for, or allocable to, any of their
shares of Company Common Stock; none of the Parent Common Stock or the Parent
Warrants to be received by any
2
<PAGE>
shareholder-employee of the Company will be separate consideration for, or
allocable to, any employment agreement; and the compensation to be paid to any
such shareholder-employee will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length for
similar services;
10. The business currently carried on by the Company is its "historic
business" within the meaning of Treas. Reg. (S) 1.368-1(d) and no assets of the
Company have been sold, transferred or otherwise disposed of which would prevent
Sub from continuing the "historic business" of the Company or from using a
"significant portion" of the Company's "historic business" assets in a business
following the Merger, as such terms are used in Treas. Reg. (S) 1.368-1(d);
11. The Company is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv) of the Internal Revenue Code of 1986, as amended (the
"Code");
12. The Company is not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code;
13. The fair market value of the assets of the Company to be
transferred to Sub in the Merger will equal or exceed the sum of the liabilities
assumed by Sub plus the amount of liabilities to which the transferred assets
are subject. In addition, the liabilities of the Company assumed by Sub and the
liabilities to which the transferred assets of the Company are subject were
incurred by the Company in the ordinary course of its business;
14. Parent will not assume any of the Company's liabilities in the
Merger;
15. At least 90 percent of the fair market value of the net assets
and at least 70 percent of the fair market value of the gross assets held by the
Company immediately prior to the Merger will be acquired by Sub in the Merger.
For purposes of determining the percentage of the Company's net and gross assets
to be acquired by Sub pursuant to the Merger, the following assets will be
treated as held by the Company immediately prior, but not acquired by Sub
pursuant to the Merger: (i) assets disposed of by the Company prior to the
Merger and in contemplation thereof (including, without limitation, any asset
disposed of by the Company, other than in the ordinary course of business,
pursuant to a plan or intention existing during the period ending on the
Effective Date and beginning with the earlier of the commencement of
negotiations (whether formal or informal) with Parent or Sub regarding the
Merger), (ii) assets used by the Company to pay shareholders, if any, who
perfect dissenters' rights, (iii) assets used by the Company to pay
reorganization expenses or other liabilities incurred in connection with the
Merger, and (iv) assets used to make distributions, redemptions or other
payments in respect of the Company's stock (including payments treated as such
for tax purposes) that are made prior to the Merger and are part of the plan of
the Merger;
3
<PAGE>
16. The payment of cash in lieu of fractional shares of Parent Common
Stock is solely for the purpose of avoiding the expense and inconvenience to
Parent of issuing fractional shares and does not represent separately bargained
for consideration. The total consideration that will be paid in the Merger to
the shareholders of the Company in lieu of fractional shares of Parent Common
Stock will not exceed one percent (1%) of the total consideration that will be
issued in the Merger to shareholders of the Company in exchange for their
Company Common Stock. The fractional share interests of each shareholder of the
Company will be aggregated and no shareholder will receive cash in an amount
greater than the value of one full share of Parent Common Stock;
17. The Merger Agreement and the transactions contemplated therein
represent the full and complete agreement among Parent, Sub and the Company
regarding the Merger, and excluding the Stock Exchange Agreement, there are no
other written or oral agreements regarding the Merger and which the Company is
party to other than those expressly referred to or contemplated in the Merger
Agreement;
18. The terms of the Merger Agreement and all other agreements
entered into in connection therewith are the product of arm's-length
negotiations;
19. The facts relating to the Merger, as such facts are described in
the Form S-4 are, insofar as such pertain to the Company, true, complete and
accurate in all material respects and each of the representations made by the
Company in the Merger Agreement and other documents associated therewith is true
and accurate;
20. The Company is not currently, and during the five years preceding
the Effective Time will not have been, a "United States real property holding
corporation" within the meaning of Section 897(c)(2)of the Code; and
21. The Company is authorized to make all of the representations set
forth herein.
B. Reliance by Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom
---------------------------------------------------------------------
LLP in Rendering Opinion: Limitation on the Opinion.
---------------------------------------------------
1. The undersigned recognizes and agrees that (i) the opinion of
Latham & Watkins and the opinion of Skadden, Arps, Slate, Meagher & Flom LLP
(the "Opinions") will be based on the representations set forth herein and on
the statements contained in the Merger Agreement and the documents related
thereto, (ii) the Opinions will be subject to certain limitations and
qualifications including that they may not be relied upon if any such
representations are not accurate in all material respects, and (iii)
notwithstanding any provisions
4
<PAGE>
of the Merger Agreement to the contrary, the representations set forth in this
letter shall survive without limitation.
2. The undersigned recognizes and agrees that the Opinions will not
address any tax consequences of the Merger or any action taken in connection
therewith except as expressly set forth in such opinion.
3. The undersigned hereby undertakes to inform Latham & Watkins,
Skadden, Arps, Slate, Meagher & Flom LLP, and Parent immediately should any of
the statements or representations set forth in this letter become untrue,
incorrect or incomplete in any respect on or prior to the Effective Time.
5
<PAGE>
In witness whereof, Algos Pharmaceutical Corporation executed this
certificate as of the date and year first above-written.
ALGOS PHARMACEUTICAL CORPORATION,
a Delaware corporation
By: ____________________________
Name: __________________________
Title: _________________________
6
<PAGE>
EXHIBIT F
to the Agreement and Plan of Merger
FORM OF AFFILIATE LETTER
________________ ______, ______
___________________________
___________________________
___________________________
Attention:_________________
Ladies and Gentlemen:
I have been advised that as of the date of this letter I may be deemed
to be an "affiliate" of Algos Pharmaceutical Corporation, a Delaware corporation
(the "Company"), as the term "affiliate" is defined for purposes of paragraphs
-------
(c) and (d) of Rule 145 of the rules and regulations (the "Rules and
---------
Regulations") of the Securities and Exchange Commission (the "Commission") under
- ----------- ----------
the Securities Act of 1933, as amended (the "Act"). Pursuant to the terms of
---
the Agreement and Plan of Merger, dated as of November ____, 1999 (the
"Agreement"), by and among Endo Pharmaceuticals Holdings Inc., a Delaware
---------
corporation ("Parent"), Endo Inc., a Delaware corporation and a newly-formed,
------
wholly-owned subsidiary of Parent ("Sub"), and the Company, pursuant to which
---
the Company has agreed to merge with and into Sub, with Sub continuing as the
surviving corporation (the "Merger").
------
As a result of the Merger, I may receive shares of common stock, par
value $.01 per share, of Parent ("Parent Common Stock"). I would receive the
Parent Common Stock in exchange for shares (or options for shares) owned by me
of common stock, par value $.01 per share, of the Company (the "Company Common
--------------
Stock").
- -----
I represent, warrant and covenant to the Parent that in the event I
receive Parent Common Stock as a result of the Merger:
A. I shall not make any sale, transfer or other disposition of the
Parent Common Stock in violation of the Act or the Rules and Regulations.
F-1
<PAGE>
B. I have carefully read this letter and the Agreement and discussed
the requirements of such documents and other applicable limitations upon my
ability to sell, transfer or otherwise dispose of Parent Common Stock to the
extent I felt necessary, with my counsel or counsel for the Company.
C. I have been advised that the issuance of Parent Common Stock to
me pursuant to the Merger has been registered with the Commission under the Act
on a Registration Statement on Form S-4. However, I have also been advised that,
because at the time the Merger is submitted for a vote of the stockholders of
the Company, (a) I may be deemed to be an affiliate of the Company and (b) the
distribution by me of the Company Common Stock has not been registered under the
Act, I may not sell, transfer or otherwise dispose of Parent Common Stock issued
to me in the Merger unless (i) such sale, transfer or other disposition is made
in conformity with the volume and other limitations of Rule 145 promulgated by
the Commission under the Act, (ii) such sale, transfer or other disposition has
been registered under the Act or (iii) in the opinion of counsel reasonably
acceptable to Parent, such sale, transfer or other disposition is otherwise
exempt from registration under the Act.
D. I understand that Parent is under no obligation to register the
sale, transfer or other disposition of the Parent Common Stock by me or on my
behalf under the Act or to take any other action necessary in order to make
compliance with an exemption from such registration available solely as a result
of the Merger.
E. I also understand that there will be placed on the certificates
for the Parent Common Stock issued to me, or any substitutions therefor, a
legend stating in substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION
TO WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY ONLY BE TRANSFERRED IN A
REGISTERED PUBLIC OFFERING OR IN ACCORDANCE WITH THE RESALE PROVISIONS
OF RULE 145 PROMULGATED UNDER THE SECURITIES ACT."
F. I also understand that unless a sale or transfer is made in
conformity with the provisions of Rule 145, or pursuant to a registration
statement, Parent reserves the right to put the following legend on the
certificates issued to any transferee:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 AND WERE
F-2
<PAGE>
ACQUIRED FROM A PERSON WHO RECEIVED SUCH SHARES IN A TRANSACTION TO WHICH
RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933 APPLIES. THE
SHARES HAVE BEEN ACQUIRED BY THE HOLDER NOT WITH A VIEW TO, OR FOR RESALE
IN CONNECTION WITH, ANY DISTRIBUTION THEREOF WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT IN ACCORDANCE WITH AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT OF 1933."
It is understood and agreed that the legends set forth in paragraphs E
and F above shall be removed by delivery of substitute certificates without such
legend after one year unless the provisions of Rule 145(d)(2) have been amended
to require a longer period than one year.
Execution of this letter should not be considered an admission on my
part that I am an "affiliate" of the Company as described in the first paragraph
of this letter, as or a waiver of any rights I may have to object to any claim
that I am such an affiliate or on after the date of this letter.
Very truly yours,
By:___________________________
Name:
Title:
Accepted this _______ day of ___________ _______:
By:___________________________
Name:
Title:
F-3
<PAGE>
Exhibit G - Form of Tax Sharing Agreement
TAX SHARING AGREEMENT
---------------------
This TAX SHARING AGREEMENT (the "Agreement") by and among Endo
---------
Pharmaceuticals Holdings Inc., a Delaware corporation ("Endo"), Endo Inc., a
----
Delaware corporation and wholly owned subsidiary of Endo, and [Newco], LLC, a
Delaware limited liability company ("[Newco] LLC"), is effective as of this __
-----------
day of ______, ____.
WHEREAS the members of [Newco] LLC have agreed to exchange the shares
of common stock, par value $.01 per share, of Endo ("Endo Common Stock")
-----------------
currently beneficially owned by them for membership interests of [Newco] LLC;/1/
WHEREAS under the Parent Plan certain officers and employees of Endo
have been granted stock options exercisable against Endo to purchase newly
issued shares of Endo Common Stock in certain circumstances;
WHEREAS Endo and Sub entered into an Agreement and Plan of Merger with
[Target] Pharmaceutical Corporation, a Delaware corporation, on November ___,
1999 (the "Merger Agreement");
----------------
WHEREAS, in connection with the Merger, employee stock options granted
or to be granted under the Parent Plan will be amended as provided in Section
5.9 of the Merger Agreement in order to provide that such options will be
exercisable solely into shares of Parent Common Stock that are beneficially
owned by certain holders of Parent Common Stock immediately following the Parent
_____________________
/1/ Consider whether all Endo Common Stock owned by the members will be
contributed or whether contribution will be limited to the maximum number of
shares of Endo Common Stock issuable pursuant to the Options. In the case of an
exercise of Options prior to a sale of a significant number of Endo shares by
[Newco] LLC (or significant dilution of [Newco] LLC through new stock issuances
by Endo) there may be a tax advantage to limiting the number of shares placed in
the LLC. For business reasons the members may also prefer to hold their Endo
shares individually rather than through [Newco] LLC.
<PAGE>
Recapitalization and prior to the Effective Time (such amended options, the
"[Newco] LLC Options");
-------------------
WHEREAS the shares of Endo Common Stock to be delivered upon exercise
of the [Newco] LLC Options will be provided entirely by [Newco] LLC and not
directly or indirectly by Endo or any other Endo stockholder; and
WHEREAS under the Internal Revenue Code of 1986, as amended (the
"Code") and the Treasury Regulations, rulings and other interpretations
----
thereunder, deductible compensation expense resulting from the exercise of a
[Newco] LLC Option by an Endo officer or employee is treated for income tax
purposes as a deduction of Endo;
NOW, THEREFORE, in consideration of the premises, representations,
warranties and agreements herein contained, the parties agree as follows:
ARTICLE I
PAYMENTS
Section 1.1 Payments to [Newco] LLC.
-----------------------
(a) Upon the occurrence of a Liquidity Event, Endo (or any successor
entity) shall pay to [Newco] LLC or its designees by wire transfer in
immediately available funds in U.S. dollars the Tax Benefit Amount to the extent
such Tax Benefit Amount has not previously resulted in a payment under this
Section 1.1.
(b) For purposes of this Agreement, "Liquidity Event" shall mean any
---------------
transaction or series of transactions resulting in (A) a sale of greater than
20% on a fully diluted basis of the common equity of Endo through (i) a primary
offering by Endo, (ii) a secondary sale of Endo Common Stock by [Newco] LLC or
other holders of Endo Common Stock pursuant to a registration rights agreement
or (iii) a combination of primary and secondary offerings described in clauses
(i) and (ii) of this subsection, (B) a Change of Control or (C) a sale of all or
substantially all of the assets of Endo.
2
<PAGE>
(c) For purposes of this Agreement, "Change of Control" shall mean
-----------------
(i) any merger, consolidation or other business combination that requires the
approval of holder of Endo Common Stock, (ii) any transaction or series of
transactions resulting in an acquisition by any Person (or Persons acting in
concert) unrelated to [Newco] LLC or its Affiliates of greater than 50% of the
equity of Endo measured by vote or value on a fully diluted basis or (iii) the
consummation by Endo of a plan of complete liquidation or a dissolution of Endo.
(d) For purposes of this Agreement, "Tax Benefit Amount" means the
------------------
cumulative excess (if any) of (A) the Taxes that would have been payable by Endo
and its Subsidiaries for all taxable periods or portions thereof after the
Effective Date if none of the [Newco] LLC Options had been exercised over (B)
the actual Taxes payable by Endo and its Subsidiaries for such periods. For the
avoidance of doubt and for purposes of this Section 1(d), in order to determine
the Tax Benefit Amount for any taxable period of Endo and its Subsidiaries in
which a net operating loss carryforward deduction ("NOL") is utilized, the
---
portion of the NOL attributable to deductions resulting from the exercise of
[Newco] LLC Options shall be treated as utilized last. By way of example, and
solely for the avoidance of doubt, if Endo has a loss for tax purposes in Year 1
of $100, consisting of $65 of deductions attributable to the exercise of
[Newco] LLC Options and $35 of deductions attributable to interest expense, and
in Year 2 Endo has $40 of taxable income prior to application of the NOL, $35 of
the $40 NOL applied against Year 2 income will be deemed to be attributable to
the interest expense and $5 of the NOL will be deemed attributable to the
exercise of the [Newco] LLC Options. Therefore, the Tax Benefit Amount would be
the Taxes that would have been payable by Endo if its NOL in Year 2 had been
only $35. The NOL carryforward to Year 3 of $60 would then be treated as
consisting entirely of deductions resulting from the exercise of the [Newco] LLC
Options.
(e) The parties hereby agree that no payments shall be made and no
rights to any payment shall accrue to [Newco] LLC under this Agreement until the
occurrence of a Liquidity Event, if any, and that Endo and its Subsidiaries
shall not credit to an account of [Newco] LLC or any other Person, set aside any
funds or assets, or otherwise make available to or subject to a claim of [Newco]
LLC or any other Person any amounts hereunder until such amounts become payable
to [Newco] LLC pursuant to Section 1.1(a) hereof.
3
<PAGE>
(f) The parties hereby agree that, notwithstanding anything herein to
the contrary, (i) any payments made pursuant to this Section 1.1 shall be
treated as payments described in Section 302 of the Code and shall take no
position inconsistent with this treatment for any tax purpose and (ii) no amount
shall be payable hereunder, and [Newco] LLC shall not be entitled to any payment
hereunder, to the extent any such payment is not permitted under Endo's Senior
Credit Facility, unless or until such time as such payment is either permitted
under the Senior Credit Facility or the Senior Credit Facility is terminated.
For purposes hereof, "Senior Credit Facility" shall mean the Credit Agreement
dated as of _____, 1999 [the Effective Time], among Endo, the lenders party
thereto, and The Chase Manhattan Bank, as amended, restated, modified, renewed,
refunded, replaced, or refinanced, in whole or in part, from time to time.
ARTICLE II
GENERAL PROVISIONS
Section 2.1 Survival This Agreement shall survive until the later of
--------
(a) the close of the last taxable period of Endo or any successor to Endo in
which a deduction may be allowable to Endo or its Subsidiaries or their
successors as a result of or attributable to the exercise of an Option or (b)
the payment by Endo of all amounts payable under Section 1.1 hereof.
Section 2.2 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given when delivered personally, one day
after being delivered to an overnight courier or when telecopied (with a
confirmatory copy sent by overnight courier) to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Endo or Sub, to:
Endo Pharmaceuticals Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, PA 19317
Attn.: Carol A. Ammon
Fax No.: (610) 558-9683
4
<PAGE>
(b) if to [Newco] LLC or Kelso & Company:
Kelso & Company
320 Park Avenue, 24/th/ Floor
New York, New York 10022
Attn.: James J. Connors, II
Fax No.: (212) 223-2379
and with copies to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
Attn.: Eileen Nugent Simon and David Rievman
Fax No.: (212) 735-2000
Section 2.3 Interpretation. When a reference is made in this Agreement
--------------
to a Section, such reference shall be to a Section of this Agreement unless
otherwise indicated. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. Whenever the words "include," "includes" or "including" are used
in this Agreement, they shall be deemed to be followed by the words "without
limitation."
Section 2.4 Counterparts. This Agreement may be executed in counter
------------
parts, all of which shall be considered one and the same agreement, and shall
become effective when one or more counterparts have been signed by each of the
parties and delivered to the other parties.
Section 2.5 Entire Agreement; No Third-Party Beneficiaries. Except for
----------------------------------------------
the Merger Agreement and the Mutual Confidentiality and Non-Disclosure
Agreement between the parties dated October 21, 1998, this Agreement is the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter hereof.
This Agreement is not intended to confer upon any Person other than the parties
hereto any rights or remedies hereunder.
5
<PAGE>
Section 2.6 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the laws of the State of Delaware, regardless of
the laws that might otherwise govern under applicable principles of conflicts of
laws thereof. EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL
BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO
THIS AGREEMENT OR THE ACTIONS OF ENDO, [NEWCO] LLC, OR SUB IN THE NEGOTIATION,
ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF.
Section 2.7 Assignment. Neither this Agreement nor any of the rights,
----------
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
Section 2.8 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law,
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic and legal
substance of the transactions contemplated hereby are not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in a mutually acceptable manner in
order that the transactions contemplated by this Agreement may be consummated as
originally contemplated to the fullest extent possible.
Section 2.9 Modifications, Supplements and Amendment. This Agreement
----------------------------------------
may be modified, supplemented or amended from time to time by the parties
hereto; provided that any such modification, supplement or amendment must be
-------- ----
approved by a majority of the members of the Board of Directors of Endo who do
not then (by themselves or through an Affiliate) have a financial interest in
the Parent LLC or otherwise have a financial interest in any payments that may
be made by Parent or any successor to Parent hereunder).
Section 2.10 Definitions. Terms not otherwise defined herein have the
-----------
meaning given such terms in the Merger Agreement.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be signed by their respective officers thereunto duly authorized all as of the
date first written above.
ENDO PHARMACEUTICALS HOLDINGS INC.
By:_____________________________________
Name:
Title:
ENDO INC.
By:_____________________________________
Name:
Title:
[NEWCO], LLC
By:_____________________________________
Name:
Title:
<PAGE>
Exhibit H--Form of Lyle Agreement
FORM OF EMPLOYMENT AGREEMENT
Parties
-------
This Employment Agreement (the "Agreement") made as of ___________,
2000 is entered into by and between Endo Pharmaceuticals Holdings Inc., with its
principal business address at 223 Wilmington-West Chester Pike, Chadds Ford,
Pennsylvania 19317 (the "Company"), and John W. Lyle, residing at 28 Inlet
Terrace, Belmar, New Jersey 07719 ("Executive").
Recitals
--------
A. The Company has entered into an Agreement and Plan of Merger (the
"Merger Agreement"), dated as of November ___, 1999, among the Company, Endo
Inc., a Delaware corporation and a newly formed wholly owned subsidiary of the
Company ("Sub"), and [Target] Pharmaceutical Corporation, a Delaware Corporation
(the "Target"), pursuant to which, among other things, the Target will merge
with and into Sub.
B. The Company desires to retain Executive to provide the services
hereinafter set forth.
C. Executive is willing to continue to provide such services to the
Company on the terms and conditions hereinafter set forth.
Terms of Agreement
------------------
The parties agree as follows:
1. Employment.
----------
1.1 The Company hereby retains Executive's employment (subject
to the provisions of Section 6) in a senior executive capacity with the Company.
The Executive shall perform such duties and services, consistent with his
positions, as may be assigned to him from time to time by the Board of Directors
of the Company or its designee. In furtherance of the foregoing, the Executive
hereby agrees to perform well and faithfully the aforesaid duties and
responsibilities and the other reasonable senior executive duties and
responsibilities assigned to him from time to time by the Board of Directors of
the Company or its designee. During the Employment Period, the Company shall
provide the Executive with an office, secretarial and other support services
comparable to those provided to other senior executive officers of the Company
at its headquarters and at the Company's facility at 1333 Campus Parkway,
Neptune, New Jersey 07753 for so long as the Company maintains such facility and
afterward at another facility of the Company convenient to the Executive to be
chosen at Executive's discretion.
1.2 Executive hereby accepts this employment on and subject to
the terms and conditions set forth in this Agreement, and shall use his
reasonable best efforts to promote the Company's interests.
<PAGE>
2. Compensations Benefits.
----------------------
2.1 Salary. During the Employment Period, as compensation for
------
Executive's performance of Executive's duties under this Agreement, the Company
shall pay Executive a Base Salary ("Base Salary") at the annual rate of $325,000
from the date of this Agreement through December 31, 2000. Thereafter, the Base
Salary shall be subject to increase at the option and in the sole discretion of
the Board of Directors of the Company annually. The Base Salary shall be payable
in installments pursuant to the Company's executive payroll policies in force at
the time of payment (but not less frequently than monthly) for the month or
shorter pay period then ended, subject to applicable withholding for FICA,
income taxes and other required payroll deductions.
2.1.1 The Executive's Base Salary will be supplemented
by payment of performance bonuses at the option and in the sole discretion of
the Board of Directors of the Company annually.
2.2 Expenses. During the Employment Period, to the extent such
--------
expenditures meet the requirements and the policies of the Company for senior
executives, the Company shall reimburse Executive promptly for all reasonable
travel, entertainment, parking, business meeting and similar expenditures in
pursuance and furtherance of the Company's business, upon presentation of proper
vouchers or receipts therefor and in accordance with the Company's customary
procedures. During the Employment Period, the Company shall provide Executive
with a mobile phone, facsimile machine and photocopying machine for his home
office, and the Company shall reimburse Executive for expenses incurred in the
use thereof by Executive in pursuance and furtherance of the Company's business,
upon presentation of proper vouchers or receipts therefor and in accordance with
the Company's customary procedures.
2.3 Other Benefits. Executive shall be entitled to participate,
--------------
at Executive's option and as eligible, in any Company plans for the benefit of
officers and key employees as from time to time established, including, without
limitation, profit sharing, pension plan, stock option plans, performance bonus
plans, disability, medical and group life insurance. If the Company shall not
provide coverage for comprehensive family major medical, family dental,
disability and life insurance to Executive, he shall be reimbursed for the cost
of such coverage acquired by him elsewhere.
3. Employment Period; Termination.
------------------------------
3.1 Employment Period. Executive's employment term ("Employment
-----------------
Period") shall terminate on the fifth anniversary of the date of this Agreement
unless earlier terminated pursuant to Section 3.2.
3.2 Termination.
-----------
3.2.1 Termination for Cause. The Company may, upon the
---------------------
approval of a majority of the members of the Board of Directors of the Company,
discharge Executive and terminate the Employment Period for cause. Discharge for
cause shall be effective ten (10) days after Executive's receipt of written
notice of discharge or at such later date as may be specified in that notice,
provided such notice contains the specific reasons and the
2
<PAGE>
specific events upon which discharge is predicated. If Executive is discharged
for cause, Executive shall only be entitled to Base Salary through the effective
date of the discharge or termination. As used in this paragraph, "cause" shall
mean any or all of the following:
(i) Willful and grossly negligent action taken
by Executive which materially harms, or can reasonably be expected to harm, the
Company;
(ii) Commission of a fraud, misappropriation,
embezzlement, or criminal misconduct that would constitute a felony or adversely
affect the reputation of the Company or any of its affiliates (for purposes of
this Employment Agreement the term "affiliates" shall be deemed to include, but
not necessarily be limited to the corporation to which the Company assigns its
rights to the name, "Endo Pharmaceuticals" or any variation thereof); or
(iii) If Executive shall be in breach of, or in
default under, any material provision, term or covenant of Article 4 of this
Agreement (other than a breach or default described in clauses (i) and (ii)) and
shall fail to cure such breach or default within a reasonable time after written
notice describing such breach or default in particular by the Company; provided,
--------
however, that the Company need not give such notice of, and Executive shall not
- -------
have such opportunity to cure, any material breach or default of any provision,
term or covenant of Article 4 of this Agreement if Executive had previously
committed such material breach or default and received notice thereof pursuant
to this clause (iii). The Employment Agreement shall only be terminable by the
Company with cause;
provided, however, that "cause" shall in no event include failure by Executive
- -------- -------
to perform services under this Agreement because the Company and Executive have
failed to agree on the nature, amount, scope or timing of his services.
3.2.2 Termination for other than Cause. During the
--------------------------------
Employment Period, the Company may terminate Executive's employment at any time
for other than cause on 30 days' written notice to Executive. Such termination
shall be deemed effective 30 days after Executive's receipt of the written
notice of termination or at such later date as may be specified in such notice.
3.2.3 Involuntary Termination. If, during the Employment
-----------------------
Period, Executive becomes ill, disabled or otherwise incapacitated so as to be
unable regularly to perform his usual duties for a period in excess of 120
consecutive days, or more than 150 days in any consecutive twelve-month period
(such condition being hereinafter referred to as "Disability"), the Company
shall have the right, with the approval of a majority of the members of the
Board of Directors, to terminate Executive's employment on 30 days' written
notice to Executive (such termination, or Executive's death, being herein
referred to as "Involuntary Termination"). If the Executive dies during the
Employment Period, his employment hereunder shall be deemed to have ceased as of
the date of his death.
3.2.4 Voluntary Termination. Any termination of the
---------------------
employment of the Executive hereunder effectuated by the Executive shall be
deemed to be a
3
<PAGE>
"Voluntary Termination." A Voluntary Termination shall be deemed to be effective
immediately upon such termination.
3.3 Effect of Termination of Employment.
-----------------------------------
3.3.1 Upon the termination of the Executive's employment
hereunder pursuant to a Voluntary Termination or a Termination for Cause,
neither the Executive nor his beneficiary or estate shall have any further
rights or claims against the Company under this Agreement except to receive:
(i) the unpaid portion of the Base Salary provided
for in Section 2.1, computed on a pro rata basis to the date of termination; and
(ii) reimbursement for any expenses for which the
Executive shall not have theretofore been reimbursed as provided in Section 2.2.
3.3.2 Upon the termination of the Executive's employment
hereunder pursuant to an Involuntary Termination or a Termination for other than
Cause, neither the Executive nor his beneficiary or estate shall have any
further rights or claims against the Company under this Agreement except to
receive:
(i) the unpaid portion of the Base Salary provided
for in Section 2.1, to the fifth anniversary of the date of this Agreement;
(ii) reimbursement for any expenses for which the
Executive shall not have theretofore been reimbursed as provided in Section 2.2;
and
(iii) the continuation of the benefits afforded
pursuant to Section 2.3(i) through the fifth anniversary of the date of this
Agreement.
4. Executive's Covenants.
---------------------
4.1 Executive agrees that he will not from and after the date
hereof through the fifth anniversary of the termination of the Employment Period
(for whatever reason), directly or indirectly, through any other person, firm or
corporation, solicit, raid, entice, induce or encourage any employee, sales
representative, agent or consultant of or for the Company or its affiliates, to
(i) cease his or her association with or leave the employ of the Company or its
affiliates, (ii) solicit customers or suppliers of the Company or its affiliates
for Executive's or any other person's or entity's benefit or (iii) otherwise act
in violation of that person's obligations to the Company or its affiliates, and
Executive shall not authorize or knowingly approve the taking of such actions by
any other person.
4.2 Executive acknowledges that, by reason of his employment
with the Company, he will obtain confidential or non-public proprietary
knowledge or information pertaining to the business and policies of the Company
and its affiliates. Executive agrees that during and after the term of this
Agreement, he shall not disclose, without the prior written consent of the Board
of Directors of the Company or the Chairman of the Board, any confidential or
non-public proprietary knowledge or information pertaining to the Company and
4
<PAGE>
its affiliates ("Confidential Information"), including, but not limited to (1)
trade secrets concerning the business and affairs of the Company and its
affiliates, product specifications, data, know-how, formulae, compositions,
processes, designs, sketches, photographs, graphs, drawings, samples, inventions
and ideas, past, current and planned research and development, current and
planned manufacturing or distribution methods and processes, customer lists,
information regarding customers of the Company (including such customers'
requirements), price lists, market studies, business plans, computer software
and programs (including object code and source code), computer software and
database technologies, systems, structures, and architectures (and related
formulae, compositions, processes, improvements, devices, know-how, inventions,
discoveries, designs, methods and information); (2) information concerning the
business and affairs of the Company and its affiliates (which includes
historical financial statements, financial projections and budgets, historical
and projected sales, capital spending budgets and plans, the names and
backgrounds of key personnel, personnel training and techniques and material)
however documented; and (3) notes, analyses, compilations, studies, summaries
and other materials prepared by or for the Company and its affiliates containing
or based, in whole or in part, on any information included in the foregoing.
Confidential Information shall not include information that: (a) was known to
Executive prior to his first employment with the Company or its affiliates, or
(b) is public knowledge, or becomes public knowledge other than by action (or
omission) of (i) Executive or persons obtaining access to such information
directly or indirectly from Executive or (ii) other persons disclosing such
information in breach of obligations to the Company.
4.3 Executive acknowledges and agrees that all memoranda, notes,
reports, records and other documents made or compiled by Executive, or made
available to Executive prior to or during the term of this Agreement concerning
the Company's and its affiliates, business, shall be the Company's or its
affiliates' property and shall be delivered to the Company on the termination of
this Agreement or at any other time on request by the Board of Directors or
Chairman of the Board of the Company.
4.4 Executive agrees that he will not, from and after the date
hereof through the fifth anniversary of the termination of the Employment Period
(for whatever reason), (i) directly or indirectly engage in, represent in any
way, or be connected with, any business or activity (such business or activity
being hereinafter called a "Competing Business"), which engages in pain
management, generic pharmaceuticals or such other activities that (during
Executive's Employment Period) the Company engages in or intends to engage in
and is set forth in a detailed written business plan that has been submitted to
the Company's Board of Directors prior to the termination of the Executive's
Employment Period, within any state in which the Company or its affiliates
transact business, whether such engagement shall be as an officer, director,
owner, employee, partner, affiliate or other participant in any Competing
Business; or (ii) assist others in engaging in any Competing Business in the
manner described in the foregoing clause (i); provided, however, that it shall
-------- -------
not be a violation of this Section 4.4 for Executive (a) to be the registered or
beneficial owner of up to twelve percent (12%) of any class of capital stock of
U.S. Dermatalogics, Inc., and the amount and percentage ownership of shares
beneficially owned by Executive, as of the date of this Agreement is set forth
on Schedule 4.4 hereto, (b) to be the registered or beneficial owner of shares
of any class of capital stock of a Competing Business that Executive owns as of
the date of this Agreement, the amounts and percentage ownership of which is set
forth on Schedule 4.4 hereto or (c) to become the registered
5
<PAGE>
or beneficial owner of up to five percent (5%) of any class of the capital stock
of a Competing Business, provided that in the case of each of clauses (a), (b)
--------
and (c) Executive does not actively participate in the business of such
Competing Business until such time as this covenant expires. The Executive
acknowledges and understands that the foregoing restrictions may limit his
ability to earn a livelihood in a business similar to the business of the
Company, but he nevertheless believes that he has received and will receive
sufficient consideration and other benefits in connection with the Company's
issuance of certain stock to the Executive, as an employee of the Company and as
otherwise provided hereunder to clearly justify such restrictions which, in any
event (given his education, skills and ability), the Executive does not believe
would prevent him from earning a living; provided, however, that the Executive
-------- -------
may actively engage in a Competing Business during the term of the covenant set
forth in this Section 4.4 if the Executive provides written notice to the
Company prior to engaging in any such Competing Business and the Executive
thereafter receives the written consent of the Board of Directors of the Company
to engage in such Competing Business. Notwithstanding the foregoing, during the
period from and after the date of this Agreement through the fifth anniversary
of the termination of the Employment Period, the Executive shall keep the Board
of Directors apprised of his business activities.
4.5 The Executive shall promptly disclose, grant and assign to
the Company for its sole use and benefit any and all inventions, improvements,
technical information and suggestions relating in any way to the business of the
Company, which he may develop or acquire during the Employment Period (whether
or not during usual working hours), together with all patent applications,
letters patent, copyrights and reissues thereof that may at any time be granted
for or upon any such invention, improvement or technical information. In
connection therewith:
(i) The Executive shall without charge, but at the expense
of the Company, promptly at all times hereafter execute and deliver such
applications, assignments, descriptions and other instruments as may be
reasonably necessary or proper in the reasonable opinion of the Company to vest
title to any such inventions, improvements, technical information, patent
applications, patents, copyrights or reissues thereof in the Company and to
enable it to obtain and maintain the entire right and title thereto throughout
the world; and
(ii) The Executive shall render to the Company at its
expense (including a reasonable payment for the time involved in case he is not
then in its employ) all such assistance as it may reasonably require in the
prosecution of applications for said patents, copyrights or reissues thereof, in
the prosecution or defense of interferences which may be declared involving any
said applications, patents or copyrights and in any litigation in which the
Company may be involved relating to any such patents, inventions, improvements
or technical information.
4.6 The provisions of this paragraph 4 shall survive the
termination or expiration of this Agreement irrespective of the reason therefor.
4.7 Executive acknowledges that the services to be rendered by
him are of a special, unique and extraordinary character and, in connection with
such services, he will have access to Confidential Information vital to the
Company's business. By reason of this,
6
<PAGE>
Executive consents and agrees that if he violates any of the provisions of this
Agreement with respect to the diversion of the Company's or its affiliates'
employees or confidentiality, the Company or its affiliates would sustain
irreparable harm and, therefore, in addition to any other remedies which the
Company may have under this Agreement or otherwise, the Company shall be
entitled to apply to any court of competent jurisdiction for an injunction
restraining Executive from committing or continuing any such violation of this
Agreement, and Executive shall not object to any such application.
5. Indemnification. The Company agrees to indemnify and hold
---------------
harmless Executive on the terms set forth in the Company's Bylaws and
Certificate of Incorporation as they exist on the date of this Agreement and in
any event to the same extent that the Company provides indemnification for its
other executive employees.
6. Conflicting Duties. The Company acknowledges that during his
------------------
tenure pursuant to this Employment Agreement, Executive shall not be required to
work "full-time" for the Company and shall work on an as-needed basis, the dates
and times of which to be mutually agreed upon by the Company and Executive. In
addition, the Company acknowledges that during the Employment Period Executive
shall retain the right to pursue and/or fulfill other business opportunities,
commitments and obligations so long as such opportunities, commitments and
obligations would not constitute a breach by Executive of his obligations under
Section 4 of this Employment Agreement.
7. Miscellaneous.
-------------
7.1 Notices. Any notice or communication given by either
-------
party hereto to the other party shall be in writing and shall be deemed duly
given (i) when personally delivered, or (ii) when five days have elapsed after
its transmittal, by registered or certified mail, return receipt requested,
postage prepaid, or (iii) if transmitted by telecopy, when sent, or (iv) if
transmitted by telex (or equivalent service), when the sender's receiving
apparatus has printed the answerback of the addressee on a copy of the telex
message. Notices shall be addressed as follows:
If to the Company:
Endo Pharmaceutical Holdings Inc.
223 Wilmington-West Chester Pike
Chadds Ford, Pennsylvania 19317
Telecopier No.: 610-558-9683
Attention: Chief Executive Officer
If to Executive:
Mr. John W. Lyle
28 Inlet Terrace
Belmar, New Jersey 07719
With copies in each case to:
7
<PAGE>
Kleinberg, Kaplan, Wolff & Cohen, P.C.
551 Fifth Avenue
New York, New York 10176
Telecopier No.: 212-986-8866
Attention: James R. Ledley, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022
Telecopier No.: 212-735-2000
Attention: Eileen Nugent Simon, Esq.
Any person entitled to receive notice (or a copy thereof) may designate in
writing, by notice to the others, such other address to which notices to such
person shall thereafter be sent.
7.2 Entire Agreement; Amendment; Waiver. This Agreement
-----------------------------------
contains the entire understanding of the parties covering its subject matter and
supersedes all prior agreements between the parties. This Agreement may be
amended or waived only by a writing signed by both parties. The waiver by either
party of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any other breach of that provision nor as a waiver of
any breach of another provision.
7.3 Headings. The headings of the paragraphs of this Agreement
--------
are inserted for convenience only and shall not be considered a part of or be
referred to in interpreting this Agreement.
7.4 Governing Law; Interpretation; Service of Process. This
-------------------------------------------------
Agreement shall be construed in accordance with and governed for all purposes by
the laws and public policies of the State of New Jersey applicable to contracts
executed and to be wholly performed in that State. Service of process in any
dispute shall be effective: (a) upon the Company, if service is made on any
officer of the Company; and (b) upon Executive, if service is made to
Executive's residence last known to the Company with an information copy to
Executive at any other residence, or care of a subsequent employer, of which the
Company may be aware.
7.5 Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which shall constitute an original, but all of which
together shall constitute one and the same instrument.
7.6 Assignment. Assignment of the rights and obligations of
----------
this Agreement shall bind and enure to the benefit of any successor of the
Company by reorganization, merger or consolidation, or any assignee of all or
substantially all of the Company's business and properties, provided that the
successor shall assume the obligations of the Company under this Agreement.
Executive's rights or obligations under this Agreement may not be assigned by
Executive.
7.7 Further Assurances. Each of the parties agrees to execute,
------------------
acknowledge, deliver and perform, and/or cause to be executed, acknowledged,
delivered and
8
<PAGE>
performed, at any time and/or from time to time, as the case may be, all such
further acts, deeds, assignments, transfers, conveyances, powers-of-attorney
and/or assurances as may be necessary and/or proper to carry out the provisions
and/or intent of this Agreement.
7.8 Severability. If any one or more of the terms, provisions,
------------
covenants or restrictions of this Agreement shall be determined by a court of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions, covenants and restrictions of this Agreement shall remain
in full force and effect and shall in no way be affected, impaired or
invalidated, unless the parties hereto would not have entered into this
Agreement without said invalid, void or unenforceable term, provision, covenant
or restriction. If, moreover, any one or more of the provisions contained in
this Agreement shall for any reason be determined by a court of competent
jurisdiction to be excessively broad as to duration, geographical scope,
activity or subject, it shall be construed by limiting or reducing it, so as to
be enforceable to the extent compatible with then applicable law.
9
<PAGE>
Execution
---------
The parties have duly executed this Agreement as of the date first
above written whereupon this Agreement enters into full force and effect in
accordance with its terms.
ENDO PHARMACEUTICALS HOLDINGS
ATTEST: INC.
a Delaware Corporation
By:________________________________ By:________________________________
Name: Name:
Title: Title
___________________________________
John W. Lyle
<PAGE>
Schedule 4.4
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Competing Business Shares Beneficially Owned Percentage Ownership
- --------------------------------------------------------------------------------
<S> <C> <C>
U.S. Dermatalogics, Inc. 970,250 shares of common 7.9%, fully diluted for
stock the exercise of the
options and issuance
23,944 shares of common the issuance of the
issuable under a 23,944 shares issuable
convertible note shares issuable upon
conversion of the note
Options to purchase 25,000
shares of common stock
- --------------------------------------------------------------------------------
Warner Lambert Less than 500 shares Less than 1.0%
- --------------------------------------------------------------------------------
American Home Products Less than 500 shares Less than 1.0%
- --------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
Exhibit I - Form of Endo Warrant
____________________________________________________________________
WARRANT AGREEMENT
by and between
ENDO PHARMACEUTICALS HOLDINGS INC.
and
[WARRANT AGENT],
as
Warrant Agent
_____________________
Dated as of _____________, ____
____________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Appointment of Warrant Agent.................
Section 2. Warrant Certificates.........................
Section 3. Execution of Warrant Certificates............
Section 4. Registration and Countersignature............
Section 5. Transfer and Exchange of Warrants............
Section 6. Registration of Transfers and Exchanges......
Section 7. Terms of Warrants; Exercise of Warrants......
Section 8. Payment of Taxes.............................
Section 9. Mutilated or Missing Warrant Certificates....
Section 10. Reservation of Warrant Shares................
Section 11. Obtaining Stock Exchange Listings............
Section 12. Adjustment of Exercise Price and Number
of Warrant Shares Issuable...................
Section 13. Fractional Interests.........................
Section 14. Notices to Warrant Holders; Reservation
of Dividends.................................
Section 15. Notices to the Company and Warrant Agent.....
Section 16. Supplements and Amendments...................
Section 17. Concerning the Warrant Agent.................
Section 18. Change of Warrant Agent......................
Section 19. Successors...................................
Section 20. Termination..................................
Section 21. GOVERNING LAW................................
Section 22. Benefits of This Agreement...................
Section 23. Counterparts.................................
Section 24. Headings.....................................
Exhibit A. Form of Warrant Certificate...............................
Exhibit B. Certificate to be Delivered Upon Transfer.................
</TABLE>
i
<PAGE>
WARRANT AGREEMENT (the "Agreement"), dated as of _______ __, ____, by
---------
and between Endo Pharmaceuticals Holdings Inc., a Delaware corporation
(together with any successors and assigns, the "Company"), and [WARRANT AGENT],
-------
as Warrant Agent (the "Warrant Agent").
-------------
WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated
as of November __, 1999 (the "Merger Agreement"), by and among the Company, Endo
----------------
Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Sub"),
---
and [TARGET] Pharmaceutical Corporation, a Delaware corporation ("Target"), the
------
Company proposes to issue warrants (each a "Warrant," and collectively, the
-------
"Warrants") for the purchase of an aggregate of 29,834,075/1/ shares of common
--------
stock, par value $.01 per share, of the Company (the "Common Stock," and the
------------
shares of Common Stock issuable upon exercise of the Warrants being referred to
herein as the "Warrant Shares");
--------------
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company and the Warrant Agent is willing to act in connection with the issuance,
transfer, exchange and exercise of Warrants as provided herein; and
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein, the Company and the Warrant Agent hereby agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby
----------------------------
appoints the Warrant Agent to act as agent for the Company in accordance with
the instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
Section 2. Warrant Certificates. The Warrants will initially be
--------------------
issued in global form (the "Global Warrants"), substantially in the form of
---------------
Exhibit A hereto. Any certificates evidencing the Global Warrants to be
delivered pursuant to this Agreement (the "Warrant Certificates") shall be
--------------------
substantially in the form set forth in Exhibit A hereto. Such Global Warrants
shall represent such of the outstanding Warrants as shall be specified therein
and each shall provide that it shall represent the aggregate amount of
outstanding Warrants from time to time endorsed thereon and that the aggregate
amount of outstanding Warrants represented thereby may from time to time be
reduced or increased, as appropriate. Any endorsement of a Global Warrant to
reflect the amount of any increase or decrease in the amount of
__________________
/1/ These numbers shall be adjusted in the final Endo Warrant. See
footnotes 2-5 below.
<PAGE>
outstanding Warrants represented thereby shall be made by the Warrant Agent and
the Depositary (as defined below) in accordance with instructions given by the
holder thereof. [The Depository Trust Company] shall act as the Depositary with
respect to the Global Warrants until a successor shall be appointed by the
Company. Upon written request, a Warrant holder who holds Warrants may receive
from the Depositary and Warrant Agent Warrants in registered form as definitive
Warrant Certificates (the "Definitive Warrants") as set forth in Section 6
-------------------
below.
Section 3. Execution of Warrant Certificates. Warrant Certificates
---------------------------------
shall be signed on behalf of the Company by its Chairman of the Board, its
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer or Treasurer or a Vice President and by its Secretary or an Assistant
Secretary. Each such signature upon the Warrant Certificates may be in the form
of a facsimile signature of the present or any future Chairman of the Board,
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, Vice President, Secretary or Assistant Secretary and may be
imprinted or otherwise reproduced on the Warrant Certificates and for that
purpose the Company may adopt and use the facsimile signature of any person who
shall have been Chairman of the Board, President, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, Treasurer, a Vice President,
Secretary or an Assistant Secretary, notwithstanding the fact that at the time
the Warrant Certificates shall be countersigned and delivered or disposed of
such person shall have ceased to hold such office.
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been countersigned by the Warrant Agent, or
disposed of by the Company, such Warrant Certificates nevertheless may be
countersigned and delivered or disposed of as though such person had not ceased
to be such officer of the Company; and any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Warrant
Agreement any such person was not such officer.
Warrant Certificates shall be dated the date of countersignature by
the Warrant Agent.
Section 4. Registration and Countersignature. The Warrants shall
---------------------------------
be numbered and shall be registered on the books of the Company maintained at
the
2
<PAGE>
principal office of the Warrant Agent in [LOCATION OF WARRANT AGENT'S OFFICES]
(the "Warrant Register") as they are issued.
----------------
Warrant Certificates shall be manually countersigned by the Warrant
Agent and shall not be valid for any purpose unless so countersigned. The
Warrant Agent shall, upon written instructions of the Chairman of the Board, the
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, a Vice President, the Secretary or an Assistant Secretary of
the Company, initially countersign and deliver Warrants entitling the holders
thereof to purchase not more than the number of Warrant Shares referred to above
in the first recital hereof and shall thereafter countersign and deliver
Warrants as otherwise provided in this Agreement.
The Company and the Warrant Agent may deem and treat the registered
holders (the "Holders") of the Warrant Certificates as the absolute owners
-------
thereof (notwithstanding any notation of ownership or other writing thereon made
by anyone) for all purposes, and neither the Company nor the Warrant Agent shall
be affected by any notice to the contrary.
Section 5. Transfer and Exchange of Warrants. The Warrant Agent
---------------------------------
shall from time to time, subject to the limitations of Section 6 hereof,
register the transfer of any outstanding Warrants upon the records to be
maintained by it for that purpose, upon surrender thereof duly endorsed or
accompanied (if so required by it) by a written instrument or instruments of
transfer in form satisfactory to the Warrant Agent, duly executed by the
registered Holder or Holders thereof or by the duly appointed legal
representative thereof or by a duly authorized attorney. Subject to the terms of
this Agreement, each Warrant Certificate may be exchanged for another
certificate or certificates entitling the Holder thereof to purchase a like
aggregate number of Warrant Shares as the certificate or certificates
surrendered then entitle each Holder to purchase. Any Holder desiring to
exchange a Warrant Certificate or Certificates shall make such request in
writing delivered to the Warrant Agent, and shall surrender, duly endorsed or
accompanied (if so required by the Warrant Agent) by a written instrument or
instruments of transfer in form satisfactory to the Warrant Agent, the Warrant
Certificate or Certificates to be so exchanged.
Upon registration of transfer, the Warrant Agent shall countersign and
deliver by certified or first class mail a new Warrant Certificate or
Certificates to the persons entitled thereto. The Warrant Certificates may be
exchanged at the option of the Holder thereof, when surrendered at the office or
agency of the Company
3
<PAGE>
maintained for such purpose, which initially will be the corporate trust office
of the Warrant Agent in [LOCATION OF WARRANT AGENT'S CORPORATE TRUST OFFICE],
for another Warrant Certificate, or other Warrant Certificates of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Warrant Shares.
No service charge shall be made for any exchange or registration of
transfer of Warrant Certificates, but the Company may require payment of a sum
sufficient to cover any stamp or other tax or other governmental charge that is
imposed in connection with any such exchange or registration of transfer.
Section 6. Registration of Transfers and Exchanges.
---------------------------------------
(a) Transfer and Exchange of Definitive Warrants. When Definitive
--------------------------------------------
Warrants are presented to the Warrant Agent with a request:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of Definitive
Warrants of other authorized denominations,
the Warrant Agent shall register the transfer or make the exchange as requested
if its requirements under this Agreement are met; provided, however, that the
-------- -------
Definitive Warrants presented or surrendered for registration of transfer or
exchange shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Warrant Agent, duly executed by the Holder
thereof or by such Holder's attorney, duly authorized in writing.
(b) Restrictions on Transfer of a Definitive Warrant for a Beneficial
-----------------------------------------------------------------
Interest in a Global Warrant. The Warrant Agent may exchange a Definitive
- ----------------------------
Warrant for a beneficial interest in a Global Warrant only if the Warrant Agent
has received such Definitive Warrant, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the Warrant Agent,
together with written instructions directing the Warrant Agent to make, or to
direct the Depositary to make, an endorsement on the Global Warrant to reflect
an increase in the aggregate amount of the Warrants represented by the Global
Warrant. If such conditions have been satisfied, the Warrant Agent shall cancel
such Definitive Warrant and cause, or direct the Depositary to cause, in
accordance with the standing instructions and procedures existing between the
Depositary and the Warrant Agent, the number
4
<PAGE>
of Warrant Shares represented by the Global Warrant to be increased accordingly.
If no Global Warrant is then outstanding, the Company shall issue and the
Warrant Agent shall countersign a new Global Warrant in the appropriate amount.
(c) Transfer and Exchange of Global Warrants. The transfer and
----------------------------------------
exchange of Global Warrants or beneficial interests therein shall be effected
through the Depositary, in accordance with this Warrant Agreement (including the
restrictions on transfer set forth herein) and the procedures of the Depositary
therefor.
(d) Transfer of a Beneficial Interest in a Global Warrant for a
-----------------------------------------------------------
Definitive Warrant.
- ------------------
(i) Any person having a beneficial interest in a Global Warrant may upon
his, her or its request exchange such beneficial interest for a
Definitive Warrant. Upon receipt by the Warrant Agent of written
instructions (or such other form of instructions as is customary for
the Depositary) from the Depositary or its nominee on behalf of any
person having a beneficial interest in a Global Warrant and upon
receipt by the Warrant Agent of a written order or such other form of
instructions as is customary for the Depositary or the person
designated by the Depositary as having such a beneficial interest
containing registration instructions, then the Warrant Agent will
cause, in accordance with the standing instructions and procedures
existing between the Depositary and the Warrant Agent, the aggregate
amount of the Global Warrant to be reduced and, following such
reduction, the Company will execute and, upon receipt of a
countersignature, the Warrant Agent will countersign and deliver to
the transferee a Definitive Warrant.
(ii) Definitive Warrants issued in exchange for a beneficial interest in a
Global Warrant pursuant to this Section 6(d) shall be registered in
such names and in such authorized denominations as the Depositary,
pursuant to instructions from its direct or indirect participants or
otherwise, shall instruct the Warrant Agent in writing, provided such
designation is in accordance with this Section 6(d). The Warrant Agent
shall deliver such Definitive Warrants to the persons in whose names
such Definitive Warrants are registered.
5
<PAGE>
(e) Restrictions on Transfer and Exchange of Global Warrants.
--------------------------------------------------------
Notwithstanding any other provisions of this Warrant Agreement (other than the
provisions set forth in subsection (f) of this Section 6), a Global Warrant may
not be transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) Authentication of Definitive Warrants in Absence of Depositary.
--------------------------------------------------------------
If at any time:
(i) the Depositary for the Global Warrants notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the
Global Warrant and a successor Depositary for the Global Warrant is
not appointed by the Company within 90 days after delivery of such
notice; or
(ii) the Company, at its sole discretion, notifies the Warrant Agent in
writing that it elects to cause the issuance of Definitive Warrants
under this Warrant Agreement,
then the Company will execute, and the Warrant Agent, upon receipt of an
officers' certificate, signed by the President, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer or a Vice President of the Company,
requesting the counter-signature and delivery of Definitive Warrants, will
countersign and deliver Definitive Warrants, in an aggregate number equal to the
aggregate number of Warrants represented by the Global Warrant, in exchange for
such Global Warrant.
(g) Cancellation and/or Adjustment of a Global Warrant. At such time
--------------------------------------------------
as all beneficial interests in a Global Warrant have either been exchanged for
Definitive Warrants, redeemed, repurchased or cancelled, such Global Warrant
shall be returned to or retained and cancelled by the Warrant Agent. At any
time prior to such cancellation, if any beneficial interest in a Global Warrant
is exchanged for Definitive Warrants, redeemed, repurchased or cancelled, the
number of Warrants represented by such Global Warrant shall be reduced and an
endorsement shall be made on such Global Warrant, by the Warrant Agent to
reflect such reduction.
6
<PAGE>
(h) Obligations with Respect to Transfers and Exchanges of Definitive
-----------------------------------------------------------------
Warrants.
- --------
(i) To permit registrations of transfers and exchanges in accordance with
the terms of this Agreement, the Company shall execute, and the
Warrant Agent shall countersign Definitive Warrants and Global
Warrants.
(ii) All Definitive Warrants and Global Warrants issued upon any
registration, transfer or exchange of Definitive Warrants or Global
Warrants shall be the valid obligations of the Company, entitled to
the same benefits under this Warrant Agreement as the Definitive
Warrants or Global Warrants surrendered upon the registration of
transfer or exchange.
(iii) Prior to due presentment for registration of transfer of any Warrant,
the Warrant Agent and the Company may deem and treat the person in
whose name any Warrant is registered as the absolute owner of such
Warrant, and neither the Warrant Agent nor the Company shall be
affected by notice to the contrary.
Section 7. Terms of Warrants; Exercise of Warrants. Subject to the
---------------------------------------
terms of this Agreement, the Warrant Holders shall have the right, which may be
exercised commencing on or after the Exercisability Date (as defined below) and
until 5:00 p.m., New York City time, on July 7, 2003 (the six-month anniversary
of the Exercisability Date) (the "Expiration Date"), to receive from the Company
---------------
(on exercise of such Warrants and payment of the Exercise Price then in effect
for such Warrant Shares) (together, if applicable, with cash payable as provided
in Section 13 hereof and any dividends or distributions payable as provided in
Section 14 hereof) (a) 29,834,075 Warrant Shares (in the aggregate) (with each
Warrant being exercisable for 0.416667 Warrant Shares)/2/ in the event the
Adjustment Event has not occurred prior to such time or (b) 17,900,445 Warrant
Shares (in the aggregate) (with
____________________
/2/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when taken
together with the shares of Parent Common Stock held by Persons who had been
holders of Parent Common Stock immediately prior to the Effective Time, shall
equal 80% of the shares of Parent Common Stock on a fully diluted basis
(excluding the effect of the Algos Warrants and after giving effect to the
Adjustment Event as if it had occurred).
7
<PAGE>
each Warrant being exercisable for 0.250000 Warrant Shares)/3/ in the event the
Adjustment Event has occurred prior to such time. Each Warrant not exercised
prior to the Expiration Date shall become void and all rights thereunder and all
rights in respect thereof under this Agreement shall cease as of the Expiration
Date. If applicable, dividends and other distributions will be made upon
exercise of the Warrants as set forth in Section 14 hereof.
"Exercisability Date" shall mean the fifth (5/th/) Business Day (as
-------------------
defined below) following December 31, 2002 if the Company (or any of its
subsidiaries) has not received approval from the U.S. Food and Drug
Administration (the "FDA") with respect to its New Drug Application for
---
MorphiDex(R) for the treatment of any pain prior to December 31, 2002.
In addition to the notices required by Section 14 hereof, the Company
shall give prompt written notice to the Warrant Agent that the Exercisability
Date has occurred and shall cause the Warrant Agent, on behalf of and at the
expense of the Company, within 5 Business Days after such notification is
received by the Warrant Agent, to mail by first class mail, postage prepaid, to
each Holder a notice specifying that the Exercisability Date has occurred and
that the Warrant has become exercisable pursuant to its terms and that the
Warrant will expire at 5:00 p.m., New York City time, on the Expiration Date.
In addition, the Company shall post appropriate notices of the Exercisability
Date on its web pages and issue press releases to wire services. A "Business
--------
Day" is a day that is not a Legal Holiday. A "Legal Holiday" is a Saturday, a
- --- -------------
Sunday, a federally recognized holiday or a day on which banking institutions
are not required to be open in the State of New York.
The initial price per share at which Warrant Shares shall be
purchasable upon exercise of Warrants (the "Exercise Price") shall equal $0.01.
--------------
A Warrant may be exercised upon surrender at the office or agency of the Company
maintained for such purpose, which initially will be the corporate trust office
of the Warrant Agent or its agents in [LOCATION OF WARRANT AGENT'S OFFICE], of
the Warrant Certificate(s) evidencing the Warrants to be exercised with the form
of
______________________
/3/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when taken
together with the shares of Parent Common Stock held by Persons who had been
holders of Parent Common Stock immediately prior to the Effective Time, shall
equal 85% of the shares of Parent Common Stock on a fully diluted basis
(excluding the effect of the Algos Warrants as if no Adjustment Event had
occurred).
8
<PAGE>
election to purchase on the reverse thereof duly filled in and signed, which
signature shall be guaranteed by a participant in a recognized Signature
Guarantee Medallion Program, and upon payment to the Warrant Agent for the
account of the Company of the Exercise Price, as adjusted as herein provided,
for the number of Warrant Shares together, if applicable, with cash payable as
provided in Section 13 hereof and any dividends or distributions as provided in
Section 14 hereof in respect of which such Warrants are then exercised. Payment
of the Exercise Price may be made (a) in the form of cash or by certified or
official bank check payable to the order of the Company in New York Clearing
House Funds, (b) by delivering to the Company a written notice accompanying the
surrender of a Warrant to, at the time of exercise, apply to the payment of the
Exercise Price such number of Warrant Shares as shall be specified in such
notice, in which case an amount equal to the excess of the Current Market Value
(as defined in Section 12(d) hereof) of such Warrant Shares on the date of
exercise over the Exercise Price required for such exercise shall be deemed to
have been paid to the Company and the number of Warrant Shares issuable upon
such exercise shall be reduced by such specified number (a "Cashless Exercise")
-----------------
or (c) any combination of (a) and (b) above.
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
Holder and in such name or names as the Warrant Holder may designate a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 13
hereof. Such certificate or certificates shall be deemed to have been issued
and any person so named therein shall be deemed to have become a holder of
record of such Warrant Shares as of the date of the surrender of such Warrants
and payment of the Exercise Price.
On or after the Exercisability Date, the Warrants shall be
exercisable, at the election of the Holders thereof, either in full or from time
to time in part and, in the event that a certificate evidencing Warrants is
exercised in respect of fewer than all of the Warrant Shares issuable on such
exercise at any time prior to the Expiration Date, a new certificate evidencing
the remaining Warrant or Warrants will be issued, and the Warrant Agent is
hereby irrevocably authorized to countersign and to deliver the required new
Warrant Certificate or Certificates pursuant to the provisions of this Section 7
and of Section 3 hereof, and the Company, whenever required by the Warrant
Agent, will promptly supply the Warrant Agent with Warrant Certificates duly
executed on behalf of the Company for such purpose.
9
<PAGE>
All Warrant Certificates surrendered upon exercise of Warrants shall
be cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall
then be either delivered to the Company or disposed of by the Warrant Agent in a
manner consistent with the Warrant Agent's customary procedure for such disposal
and in a manner reasonably satisfactory to the Company. The Warrant Agent shall
account promptly to the Company with respect to Warrants exercised and
concurrently pay to the Company all monies received by the Warrant Agent for the
purchase of the Warrant Shares through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by the Holders during normal business hours at its office. The
Company shall supply the Warrant Agent from time to time with such numbers of
copies of this Agreement as the Warrant Agent may request.
Section 8. Payment of Taxes. The Company will pay all documentary
----------------
stamp taxes attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Company shall not be required
-------- -------
to pay any tax or taxes which may be payable in respect of any transfer involved
in the issue of any Warrant Certificates or any certificates for Warrant Shares
in a name other than that of the registered Holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
Section 9. Mutilated or Missing Warrant Certificates. In case any
-----------------------------------------
of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue and the Warrant Agent may countersign, in
exchange and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificate and indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
Section 10. Reservation of Warrant Shares. The Company will at all
-----------------------------
times reserve and keep available, free from preemptive rights, out of the
aggregate
10
<PAGE>
of its authorized but unissued Common Stock or its authorized and issued Common
Stock held in its treasury, for the purpose of enabling it to satisfy any
obligation to issue Warrant Shares upon exercise of Warrants, the maximum number
of shares of Common Stock which may then be deliverable upon the exercise of all
outstanding Warrants.
The Company will keep a copy of this Agreement on file with the
transfer agent for the Common Stock (the "Transfer Agent") and with every
--------------
subsequent transfer agent for any shares of the Company's capital stock issuable
upon the exercise of the rights of purchase represented by the Warrants. The
Warrant Agent is hereby irrevocably authorized to requisition from time to time
from such Transfer Agent the stock certificates required to honor outstanding
warrants upon exercise thereof in accordance with the terms of this Agreement.
The Company will supply such Transfer Agent with duly executed certificates for
such purposes and will provide or otherwise make available any cash which may be
payable as provided in Section 13 hereof. The Company will furnish such
Transfer Agent a copy of all notices of adjustments and certificates related
thereto transmitted to each Holder pursuant to Section 14 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon payment of the Exercise Price therefor and
issue, be validly authorized and issued, fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issuance thereof. The Company will use its reasonable best
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Agreement.
Section 11. Obtaining Stock Exchange Listings. The Company will
---------------------------------
from time to time take all action which may be necessary so that the Warrants
and, immediately upon their issuance upon exercise of the Warrants, the Warrant
Shares will be listed on the principal securities exchanges and markets within
the United States of America, if any, on which other shares of Common Stock are
then listed.
11
<PAGE>
Section 12. Adjustment of Exercise Price and Number of Warrant
--------------------------------------------------
Shares Issuable.
- ---------------
(a) If the Company:
(i) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock or other capital stock of the Company;
or
(ii) subdivides, splits, combines or reclassifies its outstanding
shares of Common Stock into a different number of securities of
the same class,
then the number of shares of Common Stock issuable upon the exercise of each
Warrant (the "Exercise Rate") in effect immediately prior to such action shall
-------------
be proportionately adjusted so that the Holder of any Warrant thereafter
exercised may receive the aggregate number and kind of shares of capital stock
of the Company which such Holder would have owned immediately following such
action if such Warrant had been exercised immediately prior to such action and
the Exercise Price in effect immediately prior to such action shall be adjusted
to a price determined by multiplying the Exercise Price in effect immediately
prior to such action by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding before giving effect to such action and
the denominator of which shall be the number of shares of Common Stock and/or
such other capital stock outstanding referred to in the foregoing clause (a)(1)
after giving effect to such action.
An adjustment pursuant to this Section 12(a) shall become effective
immediately after the record date in the case of a dividend or distribution and
immediately after the effective date in the case of a subdivision, combination
or reclassification.
If, after an adjustment pursuant to this Section 12(a), a Holder of
a Warrant upon exercise of it may receive shares of two or more classes of
capital stock of the Company, the board of directors of the Company shall
determine the allocation of the adjusted Exercise Price between the classes of
capital stock. After such allocation, the exercise privilege and the Exercise
Price of each class of capital stock shall thereafter be subject to adjustment
on terms comparable to those applicable to Common Stock in this Section 12.
Such adjustment shall be made successively whenever any event listed
above shall occur.
12
<PAGE>
(b) Adjustment for Certain Issuances of Common Stock. If the
------------------------------------------------
Company issues or sells to any Affiliate (as defined in Section 12(d) hereof) of
the Company (other than KIA V, L.P. and KEP V, L.P.) shares of its Common Stock
or distributes to any Affiliate of the Company (other than KIA V, L.P. and KEP
V, L.P.) any rights, options or warrants entitling them to purchase shares of
Common Stock, or securities convertible into or exchangeable for Common Stock,
in each case, at a price per share less than the Current Market Value on the
record date for determining entitlements of such Affiliates to participate in
such issuance, sale or distribution (the "Time of Determination") and prior to
--------------------- ---
such issuance, sale or distribution the Com pany did not first offer to issue,
sell or distribute such shares of its Common Stock or such rights, options or
warrants or such securities convertible into or exchangeable for Common Stock to
all holders of Common Stock on the same economic terms and on a pro rata basis
with the issuance, sale or distribution to such Affiliates of the Company, then
----
the Exercise Rate shall be adjusted in accordance with the formula:
E' = E x O + N
---------------
O + N x P
-----
M
and the Exercise Price shall be adjusted in accordance with the following
formula:
EP' = EP x E
---
E'
where:
E' = the adjusted Exercise Rate.
E = the Exercise Rate immediately prior to the Time of
Determination for any such issuance, sale or distribution.
EP' = the Adjusted Exercise Price.
EP = the Exercise Price immediately prior to the Time of
Determination for any such issuance, sale or distribution.
13
<PAGE>
O = the number of Fully Diluted Shares (as defined below)
outstanding immediately prior to the Time of Determination for
any such issuance, sale or distribution.
N = the number of additional shares of Common Stock issued, sold or
issuable upon exercise of such rights, options or warrants.
P = the per share price received and receivable by the Company in
the case of any issuance or sale of Common Stock or rights,
options or warrants as to which such adjustment is being made,
inclusive of the exercise price per share of Common Stock
payable upon exercise of such rights, options or warrants.
M = the Current Market Value per share of Common Stock on the Time
of Determination for any such issuance, sale or distribution.
For purposes of this Section 12(b), the term "Fully Diluted Shares"
--------------------
shall mean (i) the shares of Common Stock outstanding as of a specified date,
and (ii) the shares of Common Stock into or for which rights, options, warrants
or other securities of the Company outstanding as of such date are exercisable
or convertible (other than the Warrants).
Any adjustments shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after the
relevant Time of Determination. Notwithstanding the foregoing, the Exercise
Rate and the Exercise Price shall not be subject to adjustment in connection
with (i) the issuance of any shares of Common Stock upon exercise of any such
rights, options or warrants which have previously been the subject of an
adjustment under this Agreement for which the required adjustment has been made
and (ii) any exercise of the Warrants. If at the end of the period during which
any such rights, options or warrants are exercisable, not all rights, options or
warrants shall have been exercised, the Warrant shall be immediately readjusted
to what it would have been if "N" in each of the above formulas had been the
number of shares actually issued.
14
<PAGE>
(c) When De Minimis Adjustment May Be Deferred. No adjustment
------------------------------------------
in the Exercise Rate need be made unless the adjustment would require an
increase or decrease of at least 1% in the Exercise Rate. Notwithstanding the
foregoing, any adjustments that are not made shall be carried forward and taken
into account in any subsequent adjustment, provided that no such adjustment
-------- ----
shall be deferred beyond the date on which a Warrant is exercised.
All calculations under this Section 12 shall be made to the nearest
cent or to the nearest 1/100/th/ of a share, as the case may be.
(d) Certain Definitions. "Current Market Value" per share of
------------------- --------------------
Common Stock or of any other security (herein collectively referred to as a
"Security") at any date shall be:
--------
(1) if the Security is not registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), (i) the value of the Security
------------
determined in good faith by the board of directors of the Company and
certified in a board resolution, based on the most recently completed
arm's-length transaction between the Company and a person other than an
Affiliate of the Company and the closing of which occurs on such date or
shall have occurred within the six months preceding such date or (ii) if no
such transaction shall have occurred on such date or within such
six-month period, the value of the Security determined as of a date within
30 days preceding such date by an Independent Financial Expert (as defined
below), or
(2) if the Security is registered under the Exchange Act, the average
of the daily closing bid prices of such Security for 30 consecutive
Business Days selected by the Company from the period of 45 Business Days
preceding such date, but only if such Security shall have been listed on a
national securities exchange or the Nasdaq National Market or traded
through an automated quotation system during such entire 45-Business Day
period.
The "closing bid price" for any Security on each Business Day means
-----------------
the closing price, regular way, on such day on the principal exchange on which
such Security is traded, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day.
15
<PAGE>
"Independent Financial Expert" shall mean any nationally recognized
----------------------------
investment banking firm that is not an Affiliate of the Company. Any such
person may receive customary compensation and indemnification by the Company for
opinions or services it provides as an Independent Financial Expert.
"Affiliate" of any specified person means any other person which
---------
directly or indirectly through one or more intermediaries controls or is
controlled by, or is under common control with, such specified person. For the
purposes of this definition, "control" (including with correlative meanings, the
terms "controlling," "controlled by" and "under common control with") as used
with respect to any person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
person, whether through the ownership of voting securities, by agreement or
otherwise.
"Ordinary Cash Distribution" means any quarterly cash dividend on the
--------------------------
Common Stock to the extent that the aggregate cash dividend per share of Common
Stock in any calendar quarter does not exceed the greater of (x) the amount per
share of Common Stock of the next preceding quarterly cash dividend on the
Common Stock (as adjusted to reflect subdivisions or combinations of the Common
Stock) and (y) 3.0% of the average of the last reported sales prices of the
Common Stock during the ten trading days immediately prior to the date of
declaration of such dividend.
(e) When No Adjustment Required. If an adjustment is made upon the
---------------------------
establishment of a record date for an issuance, sale or distribution subject to
subsection (a) or (b) hereof and such issuance, sale or distribution is
subsequently cancelled or is not otherwise made, the Exercise Rate and Exercise
Price then in effect shall be readjusted, effective as of the date when the
board of directors of the Company determines to cancel such issuance, sale or
distribution or when it is otherwise evident that such issuance, sale or
distribution will not be so made, to that which would have been in effect if
such record date had not been fixed. If an adjustment would be required under
both subsections (a) and (b) above, such adjustments will be determined without
duplication.
To the extent the Warrants become convertible into cash, no adjust
ment need be made thereafter as to the amount of cash into which such Warrants
are exercisable. Interest will not accrue on the cash.
16
<PAGE>
(f) Notice of Adjustment. Whenever the Exercise Rate or Exercise
--------------------
Price is adjusted, the Company shall provide the notices required by Section 14
hereof.
(g) Voluntary Reduction. The Company from time to time may increase
-------------------
the Exercise Rate or reduce the Exercise Price by any amount for any period of
time (including, without limitation, permanently) if the period is at least 20
Business Days and the Company has given notice of such increase or reduction in
accordance with Section 14 hereof.
An increase of the Exercise Rate or reduction in the Exercise Price
under this subsection (g) (other than a permanent increase) does not change or
adjust the Exercise Rate otherwise in effect for purposes of subsection (a) and
(b) of this Section 12.
(h) When Issuance or Payment May Be Deferred. In any case in which
----------------------------------------
Section 12 shall require that an adjustment in the Exercise Rate or Exercise
Price be made effective as of a record date for a specified event, the Company
may elect to defer until the occurrence of such event (i) issuing to the Holder
of any Warrant exercised after such record date the Warrant Shares and other
capital stock of the Company, if any, issuable upon such exercise over and above
the Warrant Shares and other capital stock of the Company, if any, issuable upon
such exercise on the basis of the Exercise Rate prior to such adjustment, and
(ii) paying to such Holder any amount in cash in lieu of a fractional share
pursuant to Section 13 hereof; provided, however, that the Company shall deliver
-------- -------
to the Warrant Agent and shall cause the Warrant Agent, on behalf of and at the
expense of the Company, to deliver to such Holder a due bill or other
appropriate instrument evidencing such Holder's right to receive such additional
Warrant Shares, other capital stock and cash upon the occurrence of the event
requiring such adjustment.
(i) Reorganizations. In case of (i) any capital reorganization, other
---------------
than in the cases referred to in Section 12(a) and (b) hereof and other than any
capital reorganization that does not result in any reclassification of the
outstanding shares of Common Stock into shares of other stock or other
securities or property, or (ii) the consolidation or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock into shares of other
stock or other securities or property), or
17
<PAGE>
(iii) the sale of all or substantially all of the assets of the Company
(collectively such actions being hereinafter referred to as "Reorganizations"),
---------------
there shall thereafter be deliverable upon exercise of any Warrant
in accordance with the terms hereof (in lieu of the number of shares of Common
Stock theretofore deliverable) the number of shares of stock or other securities
or property to which a holder of the number of shares of Common Stock that would
otherwise have been deliverable upon the exercise of such Warrant would have
been entitled upon such Reorganization if the Exercisability Date had occurred
and such Warrant had been exercised in full immediately prior to such
Reorganization. In case of any Reorganization, appropriate adjustment, as
determined in good faith by the board of directors of the Company, whose
determination shall be described in a duly adopted resolution certified by the
Company's Secretary or Assistant Secretary, shall be made in the application of
the provisions herein set forth with respect to the rights and interests of
Holders so that the provisions set forth herein shall thereafter be applicable,
as nearly as possible, in relation to any such shares or other securities or
property thereafter deliverable upon exercise of Warrants.
The Company shall not effect any such Reorganization unless prior to
or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such Reorganization or the corporation or
other entity purchasing such assets shall expressly assume, by a supplemental
warrant agreement or other acknowledgment executed and delivered to the Warrant
Agent, the obligation to deliver to the Warrant Agent and to cause the Warrant
Agent to deliver to each such Holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such Holder may be entitled to
purchase in accordance with the terms hereof upon the occurrence of the
Exercisability Date, and the due and punctual performance and observance of each
and every covenant, condition, obligation and liability under this Agreement to
be performed and observed by the Company in the manner prescribed herein.
The foregoing provisions of this Section 12(i) shall apply to
successive Reorganization transactions.
(j) Form of Warrants. Irrespective of any adjustments in the number
----------------
or kind of shares purchasable upon the exercise of the Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Agreement.
18
<PAGE>
(k) Warrant Agent's Disclaimer. The Warrant Agent has no duty to
--------------------------
determine when an adjustment under this Section 12 should be made, how it should
be made or what it should be. The Warrant Agent has no duty to determine
whether any provisions of a supplemental warrant agreement under subsection (i)
of this Section 12 are correct. The Warrant Agent makes no representation as to
the validity or value of any securities or assets issued upon exercise of
Warrants. The Warrant Agent shall not be responsible for the Company's failure
to comply with this Section 12.
(l) Miscellaneous. For purpose of this Section 12 the term "shares
------------- ------
of Common Stock" shall mean (i) shares of the class of stock designated as the
- ---------------
Common Stock, par value $.01 per share, of the Company as of the date of this
Agreement, and (ii) shares of any other class of stock resulting from successive
changes or reclassification of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that at any time, as a result of an adjustment made pursuant to this
Section 12, the Holders of Warrants shall become entitled to purchase any
securities of the Company other than, or in addition to, shares of Common Stock,
thereafter the number or amount of such other securities so purchasable upon
exercise of each Warrant shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Warrant Shares contained in subsec subsections (a) through (l) of
this Section 12, inclusive, and the provisions of Sections 7, 8, 10 and 13 with
respect to the Warrant Shares or the Common Stock shall apply on like terms to
any such other securities.
Section 13. Fractional Interests. The Company shall not be require
--------------------
to issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
Holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 13,
be issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the excess of the Current Market
Value of a Warrant Share over the Exercise Price on the day immediately
preceding the date the Warrant is presented for exercise, multiplied by such
fraction.
19
<PAGE>
Section 14. Notices to Warrant Holders; Reservation of Dividends.
----------------------------------------------------
Upon any adjustment pursuant to Section 12 hereof, the Company shall give prompt
written notice of such adjustment to the Warrant Agent and shall cause the
Warrant Agent, on behalf of and at the expense of the Company, within 10 days
after notification is received by the Warrant Agent of such adjustment, to mail
by first class mail, postage prepaid, to each Holder a notice of such
adjustment(s) and shall deliver to the Warrant Agent a certificate of the Chief
Financial Officer of the Company, setting forth in reasonable detail (i) the
number of Warrant Shares purchasable upon the exercise of each Warrant and the
Exercise Price of such Warrant after such adjustment(s), (ii) a brief statement
of the facts requiring such adjustment(s) and (iii) the computation by which
such adjustment(s) was made. Where appropriate, such notice may be given in
advance and included as a part of the notice required under the other provisions
of this Section 14.
In case the Exercisability Date has occurred and:
(a) the Company shall authorize the issuance to all holders of shares
of Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets or cash; or
(c) of any consolidation or merger to which the Company is a party and
for which approval of any stockholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any reclassification or change of Common Stock issuable
upon exercise of the Warrants (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or a tender offer or exchange offer for shares of
Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company proposes to take any action that would require an
adjustment to the Exercise Rate pursuant to Section 12 hereof;
20
<PAGE>
then the Company shall give prompt written notice to the Warrant Agent and shall
cause the Warrant Agent, on behalf of and at the expense of the Company to give
to each of the registered holders of the Warrant Certificates at his, her or its
address appearing on the Warrant Register, at least 30 days (or 20 days in any
case specified in clauses (a) or (b) above) prior to the applicable record date
hereinafter specified, or the date of the event in the case of events for which
there is no record date, by first-class mail, postage prepaid, a written notice
stating (i) the date as of which the holders of record of shares of Common Stock
to be entitled to receive any such rights, options, warrants or distribution are
to be determined, or (ii) the initial expiration date set forth in any tender
offer or exchange offer for shares of Common Stock, or (iii) the date on which
any such consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding up is expected to become effective or consummated, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange such shares for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger, conveyance,
transfer, dissolution, liquidation or winding up. The failure by the Company or
the Warrant Agent to give such notice or any defect therein shall not affect the
legality or validity of any distribution, right, option, warrant, consolidation,
merger, conveyance, transfer, dissolution, liquidation or winding up, or the
vote upon any action.
The Company shall give prompt written notice to the Warrant Agent and
shall cause the Warrant Agent, on behalf of and at the expense of the Company
to give to each Holder written notice of any determination to make a
distribution or dividend to the holders of its Common Stock of any assets
(including cash (other than any Ordinary Cash Distribution)), debt securities,
preferred stock, or any rights or warrants to purchase debt securities,
preferred stock, assets or other securities (other than Common Stock, or rights,
options, or warrants to purchase Common Stock) of the Company, which notice
shall state the nature and amount of such planned dividend or distribution and
the record date therefor, and shall be given by the Company at least 20 days
prior to such record date therefor.
At any time prior to the date that is 30 Business Days after the
Exercisability Date, with respect to any distribution or dividend made by the
Company to all of the holders of its Common Stock for which notice to the
Holders of the Warrants under this Section 14 would be required had such
dividend or distribution occurred after the Exercisability Date and except for
such distributions or dividends as are provided for in Section 12 hereof, the
Company shall hold in reserve the
21
<PAGE>
amount of any such dividend or distribution that would have been payable to the
Holders in respect of their Warrant Shares had the Holders exercised their
Warrants immediately prior to such dividend or distribution. The Company shall
release to each Holder of Warrants his, her or its pro rata share of such
reserved dividends or distributions upon the exercise of such Holder's Warrants
pursuant to Section 7 hereof. Any notice delivered to the Holders by the Company
pursuant to this Section 14 shall state the nature and amount of such dividend
or distribution that shall be held in reserve.
Nothing contained in this Agreement or in any Warrant Certificate
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as stockholders in respect of the meetings of
stockholders or the election of directors of the Company or any other matter, or
any rights whatsoever as stockholders of the Company.
Section 15. Notices to the Company and Warrant Agent. Any notice or
----------------------------------------
demand authorized by this Agreement to be given or made by the Warrant Agent or
by any Holder to or on the Company shall be sufficiently given or made when
received at the office of the Company expressly designated by the Company as its
office for purposes of this Agreement (until the Warrant Agent is otherwise
notified in accordance with this Section 15 by the Company), as follows:
Endo Pharmaceuticals Holdings Inc.
c/o Kelso & Company
320 Park Avenue
24/th/ Floor
New York, New York 10022
Attention: Managing Director
with copy to General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-3897
Attention: Eileen Nugent Simon, Esq.
22
<PAGE>
Any notice pursuant to this Agreement to be given by the Company or by
any Holder(s) to the Warrant Agent shall be sufficiently given when received by
the Warrant Agent at the address appearing below (until the Company is otherwise
notified in accordance with this Section by the Warrant Agent).
[WARRANT AGENT]
[ADDRESS]
Attention: [CONTACT]
Section 16. Supplements and Amendments. The Company and the Warrant
--------------------------
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Warrants in order to cure any ambiguity or to correct
or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not in any way
adversely affect the rights of any holder of Warrants hereunder. Any amendment
or supplement to this Agreement that has a material adverse effect on the rights
of holders hereunder shall require the written consent of registered holders of
a majority of the then outstanding Warrants, which consent shall then be
effective against all the Holders of Warrants hereunder. The consent of each
holder of a Warrant affected shall be required for any amendment pursuant to
which the Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (not including
adjustments contemplated hereunder). The Warrant Agent shall be entitled to
receive and shall be fully protected in relying upon an officers' certificate
and opinion of counsel as conclusive evidence that any such amendment or
supplement is authorized or permitted hereunder, that it is not inconsistent
herewith, and that it will be valid and binding upon the Company in
accordance with its terms.
Section 17. Concerning the Warrant Agent. The Warrant Agent
----------------------------
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the Holders, by
their acceptance of Warrants, shall be bound:
(a) The statements contained herein and in the Warrant Certificate
shall be taken as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as describe
the Warrant Agent or any action taken by it. The Warrant Agent assumes no
responsibil-
23
<PAGE>
ity with respect to the distribution of the Warrants except as herein otherwise
provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with the covenants contained in this Agreement or in the
Warrants to be complied with by the Company.
(c) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself (through
its employees) or by or through its attorneys or agents (which shall not include
its employees) and shall not be responsible for the misconduct of any agent
appointed with due care.
(d) The Warrant Agent may consult at any time with legal counsel
satisfactory to it (who may be counsel for the Company), and the Warrant Agent
shall incur no liability or responsibility to the Company or to any Holder in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in accordance with the opinion or the advice of such counsel.
(e) Whenever in the performance of its duties under this Agreement
the Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless such evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the President,
Chief Financial Officer, one of the Vice Presidents, the Treasurer or the
Secretary of the Company and delivered to the Warrant Agent; and such
certificate shall be full authorization to the Warrant Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(f) The Company agrees to pay the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the performance
of its duties under this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent (including reasonable fees and expenses of
the Warrant Agent's counsel and agents) in the performance of its duties under
this Agreement, and to indemnify the Warrant Agent and save it harmless against
any and all liabilities, including judgments, costs and counsel fees, for
anything done or omitted by the
24
<PAGE>
Warrant Agent in the performance of its duties under this Agreement, except as a
result of the Warrant Agent's negligence or bad faith.
(g) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to involve
expense unless the Company or one or more Holders shall furnish the Warrant
Agent with reasonable security and indemnity satisfactory to the Warrant Agent
for any costs and expenses which may be incurred, but this provision shall not
affect the power of the Warrant Agent to take such action as the Warrant Agent
may consider proper, whether with or without any such security or indemnity.
All rights of action under this Agreement or under any of the Warrants may be
enforced by the Warrant Agent without the possession of any of the Warrants or
the production thereof at any trial or other proceeding relative thereto, and
any such action, suit or proceeding instituted by the Warrant Agent shall be
brought in its name as Warrant Agent, and any recovery of judgment shall be for
the ratable benefit of the Holders, as their respective rights or interests may
appear.
(h) The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transactions in which the Company may be interested, or contract with or lend
money to the Com pany or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement or such director, officer or employee.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity including, without
limitation, acting as Transfer Agent or as a lender to the Company or an
Affiliate thereof.
(i) The Warrant Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The Warrant Agent
shall not be liable for anything which it may do or refrain from doing in
connection with this Agreement except for its own negligence or bad faith.
(j) The Warrant Agent will not incur any liability or responsibility
to the Company or to any Holder for any action taken in reliance on any notice,
resolution, waiver, consent, order, certificate, or other paper, document or
instrument reasonably believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
25
<PAGE>
(k) The Warrant Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Warrant Agent) or in respect of the validity or
execution of any Warrant (except its countersignature thereof); nor shall the
Warrant Agent by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any Warrant Shares (or other
stock) to be issued pursuant to this Agreement or any Warrant, or as to whether
any Warrant Shares (or other stock) will, when issued, be validly issued, fully
paid and nonassessable, or as to the Exercise Price or the number or amount of
Warrant Shares or other securities or other property issuable upon exercise of
any Warrant.
(l) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President, any Vice President or the Secretary of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and shall not be liable for any action taken or
suffered to be taken by it in good faith and without negligence in accordance
with instructions of any such officer or officers.
Section 18. Change of Warrant Agent. The Warrant Agent may resign at
-----------------------
any time and be discharged from its duties under this Agreement by giving to the
Company 30-days' notice in writing. The Warrant Agent may be removed by like
notice to the Warrant Agent from the Company. If the Warrant Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Warrant Agent. If the Company shall fail to make
such appointment within a period of 30 days after such removal or after it has
been notified in writing of such resignation or incapacity by the resigning or
incapacitated Warrant Agent or by any Holder (who shall with such notice submit
his, her or its Warrant for inspection by the Company), then any Holder may
apply to any court of competent jurisdiction for the appointment of a successor
to the Warrant Agent. Pending appointment of a successor warrant agent, either
by the Company or by such court, the duties of the Warrant Agent shall be
carried out by the Company. Any successor warrant agent, whether appointed by
the Company or such a court, shall be a bank or trust company in good standing,
incorporated under the laws of the United States of America or any State thereof
or the District of Columbia and having at the time of its appointment as warrant
agent a combined capital and surplus of at least $10,000,000. After
appointment, the successor warrant agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named
26
<PAGE>
as Warrant Agent without further act or deed; but the former Warrant Agent shall
deliver and transfer to the successor warrant agent any property at the time
held by it hereunder, and execute and deliver any further assurance, conveyance,
act or deed necessary for such purpose. Failure to file any notice provided for
in this Section 18, however, or any defect therein, shall not affect the
legality or validity of the resignation or removal of the Warrant Agent or the
appointment of the successor warrant agent, as the case may be. In the event of
such resignation or removal, the Company or the successor warrant agent shall
mail by first class mail, postage prepaid, to each Holder, written notice of
such removal or resignation and the name and address of such successor warrant
agent.
Section 19. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company, the Warrant Agent or any holder
of Warrants shall bind and inure to the benefit of their respective successors
and assigns hereunder.
Section 20. Termination. This Agreement shall terminate at 5:00
-----------
p.m.,New York City time, on the Expiration Date. Notwithstanding the foregoing,
this Agreement will terminate on any earlier date if all Warrants have been
exercised pursuant to this Agreement.
Section 21. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT CERTIFICATE
-------------
ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE
STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF SAID STATE, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF.
Section 22. Benefits of This Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any person or corporation other than the Company,
the Warrant Agent and the registered Holders of the Warrant Certificates any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent and the registered Holders of the Warrant Certificates.
Section 23. Counterparts. This Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes be
27
<PAGE>
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 24. Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
ENDO PHARMACEUTICALS HOLDINGS INC.
By: ________________________________
Name:
Title:
[WARRANT AGENT],
as Warrant Agent
By: ________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[Form of Warrant Certificate]
[Face]
THIS SECURITY IS A GLOBAL CERTIFICATE AND IS REGISTERED IN THE NAME
OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON
OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE WARRANT AGREEMENT, DATED AS OF ____________, ____, BY AND
BETWEEN THE COMPANY AND THE WARRANT AGENT (THE "WARRANT AGREEMENT"), AND NO
TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY
THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY
TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS
THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (A NEW YORK CORPORATION) ("DTC") TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH
OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
A-1
<PAGE>
EXERCISABLE ON OR AFTER THE EXERCISABILITY DATE
AND ON OR BEFORE JULY 7, 2003
No. __________ __________ Warrants
Warrant Certificate
ENDO PHARMACEUTICALS HOLDINGS INC.
This Warrant Certificate certifies that _______, or registered
assigns, is the registered holder of Warrants expiring on or before July 7, 2003
(the "Warrants") to purchase shares of Common Stock, par value $.01 per share
(the "Common Stock"), of Endo Pharmaceuticals Holdings Inc., a Delaware
corporation (the "Company"). Each Warrant entitles the holder upon exercise to
receive from the Company on or after the Exercisability Date and on or before
5:00 p.m. New York City Time on July 7, 2003 (the six-month anniversary of the
Exercisability Date), (a) 0.416667/4/ fully paid and nonassessable shares of
Common Stock (each such share, a "Warrant Share") in the event the Adjustment
Event (as defined in that certain Agreement and Plan of Merger, dated as of
November __, 1999, by and among the Company, Endo Inc., a Delaware corporation
and wholly owned subsidiary of the Company, and [TARGET] Pharmaceutical
Corporation, a Delaware corporation) has not occurred prior to such time or (b)
0.250000/5/ Warrant Shares in the event the Adjustment Event has occurred prior
to such time, in either case, at the initial exercise price (the "Exercise
Price") equal to $0.01 payable upon surrender of this Warrant Certificate and
payment of the Exercise Price in the manner set forth in the Warrant Agreement,
subject only to the conditions set forth herein and in the Warrant Agreement
referred to on the reverse hereof. The Exercise Price and number of Warrant
Shares issuable
______________________
/4/ This number shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock held by
Persons who had been holders of Parent Common Stock immediately prior to the
Effective Time, shall equal 85% of the shares of Parent Common Stock on a fully
diluted basis (excluding the effect of the Algos Warrants as if no Adjustment
Event had occurred).
/5/ This number shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock held by
Persons who had been holders of Parent Common Stock immediately prior to the
Effective Time, shall equal 80% of the shares of Parent Common Stock on a fully
diluted basis (excluding the effect of the Algos Warrants and after giving
effect to the Adjustment Event as if it had occurred).
A-2
<PAGE>
upon exercise of the Warrants are subject to adjustment upon the occurrence of
certain events as set forth in the Warrant Agreement.
No Warrant may be exercised before the Exercisability Date or after
5:00 p.m., New York City Time, on July 7, 2003 and to the extent not exercised
by such time such Warrants shall become void.
This Warrant Certificate shall not be valid unless countersigned by
the Warrant Agent, as such term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
A-3
<PAGE>
IN WITNESS WHEREOF, Endo Pharmaceuticals Holdings Inc. has caused this
Warrant Certificate to be signed by its [OFFICER] and by its Secretary, each by
a facsimile of his or her signature, and has caused a facsimile of its corporate
seal to be affixed hereunto or imprinted hereon.
Dated: , ____
ENDO PHARMACEUTICALS HOLDINGS INC.
By: __________________________
Name:
Title:
By: __________________________
Name:
Title: Secretary
Countersigned:
[WARRANT AGENT],
as Warrant Agent
By: ____________________________
Name:
Title:
A-4
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring July 7, 2003, entitling the holder on
exercise to receive shares of Common Stock, par value $.01 per share, of the
Company (the "Common Stock"), and are issued or to be issued pursuant to a
Warrant Agreement dated as of ________ __, ____ (the "Warrant Agreement"), duly
executed and delivered by the Company to [WARRANT AGENT], as warrant agent (the
"Warrant Agent"), which Warrant Agreement is hereby incorporated by reference in
and made a part of this instrument and is hereby referred to for a description
of the rights, limitation of rights, obligations, duties and immunities
thereunder of the Warrant Agent, the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants. A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
Warrants may be exercised at any time on or after the "Exercisability
Date" and on or before July 7, 2003. The holder of Warrants evidenced by this
Warrant Certificate may exercise them by surrendering this Warrant Certificate,
with the form of election to purchase set forth hereon properly completed and
executed, together with payment in the manner provided for in the Warrant
Agreement at the office of the Warrant Agent. In the event that upon any
exercise of Warrants evidenced hereby, the number of Warrants exercised shall
be less than the total number of Warrants evidenced hereby, there shall be
issued to the holder hereof or his, her or its assignee a new Warrant
Certificate evidencing the number of Warrants not exercised.
The Warrant Agreement provides that upon the occurrence of certain
events the number of Warrants set forth on the face hereof and the Exercise
Price may, subject to certain conditions, be adjusted. No fractions of a share
of Common Stock will be issued upon the exercise of any Warrant, but the Company
will pay the cash value thereof determined as provided in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Warrant
Agent by the registered holder thereof in person or by legal representative or
attorney duly authorized in writing, may be exchanged, in the manner and subject
to the
A-5
<PAGE>
limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder(s) thereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
A-6
<PAGE>
[Form of Election to Purchase]
(To Be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive _____shares of Common Stock
and herewith tenders payment for such shares to the order of Endo
Pharmaceuticals Holdings Inc. in the amount of $______ payable in (select one or
more: (i) cash and/or (ii) pursuant to a Cashless Exercise) in accordance with
the terms hereof and of the Warrant Agreement. The undersigned requests that a
certificate for such shares be registered in the name of _________, whose
address is ________ and that such shares be delivered to ________ whose address
is ________. If said number of shares is less than all of the shares of Common
Stock purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the remaining balance of such shares be registered in
the name of ________, whose address is ________, and that such Warrant
Certificate be delivered to ________, whose address is ________.
Signature:
Date:
Signature Guaranteed:
A-7
<PAGE>
SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS
The following exchanges of a part of this Global Warrant for certificated
Warrants have been made:
Number of
Warrants of
Amount of Amount of this Global
decrease in increase in Warrant Signature of
Number of Number of following authorized
Date of Warrants of this Warrants of this such decrease officer of
Exchange Global Warrant Global Warrant (or increase) Warrant Agent
- --------------------------------------------------------------------------------
A-8
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF WARRANTS
Re: Warrants to Purchase Common Stock (the "Warrants") of Endo Pharmaceuticals
Holdings Inc.
This Certificate relates to Warrants held in* ___book-entry or* ____
certificated form by ____________ (the "Transferor").
The Transferor:*
[ ] has requested the Warrant Agent by written order to deliver in
exchange for its beneficial interest in the Global Warrant held by the
depository a Warrant or Warrants in definitive, registered form equal to its
beneficial interest in Warrants represented by such Global Warrant (or the
portion thereof indicated above); or
[ ] has requested the Warrant Agent by written order to exchange or
register the transfer of a Warrant or Warrants.
________________________________
[INSERT NAME OF TRANSFEROR]
By: ____________________________
Date: _____________________
*Check applicable box.
<PAGE>
INDEX OF DEFINED TERMS
----------------------
<TABLE>
<S> <C>
Affiliate................................................................
Agreement................................................................
Business Day.............................................................
Cashless Exercise........................................................
closing bid price........................................................
Common Stock.............................................................
Company..................................................................
Current Market Value.....................................................
Definitive Warrants......................................................
Exchange Act.............................................................
Exercisability Date......................................................
Exercise Price...........................................................
Exercise Rate............................................................
Expiration Date..........................................................
FDA......................................................................
Fully Diluted Shares.....................................................
Global Warrants..........................................................
Holders..................................................................
Independent Financial Expert.............................................
Legal Holiday............................................................
Merger Agreement.........................................................
Ordinary Cash Distribution...............................................
Reorganizations..........................................................
Security.................................................................
shares of Common Stock...................................................
Sub......................................................................
Target...................................................................
Time of Determination....................................................
Transfer Agent...........................................................
Warrant..................................................................
Warrant Agent............................................................
Warrant Certificates.....................................................
Warrant Register.........................................................
Warrant Shares...........................................................
Warrants.................................................................
</TABLE>
<PAGE>
APPENDIX B
November 26, 1999
Board of Directors
Algos Pharmaceutical Corporation
13333 Campus Parkway
Neptune, NJ 07753
Ladies and Gentlemen:
You have asked us to advise you with respect to the fairness to the stockholders
of Algos Pharmaceutical Corporation (the "Company") from a financial point of
view of the consideration to be received by such stockholders pursuant to the
terms of the Agreement and Plan of Merger, dated as of November 26, 1999 (the
"Merger Agreement"), among the Company, Endo Pharmaceuticals Holdings Inc. (the
"Acquiror") and Endo Inc. (the "Sub"). The Merger Agreement provides for the
merger (the "Merger") of the Company with and into the Sub and each outstanding
share of common stock, par value $0.01 per share, of the Company will be
converted into (i) one share of common stock, par value $0.01 per share, of the
Acquiror and (ii) 1.00 warrant (together, the "Merger Consideration"). Each
warrant will be exercisable for $0.01 to purchase a number of shares of common
stock of the Acquiror which will vary from zero to 1.15 depending on whether the
Company receives approval from the U.S. Food and Drug Administration with
respect to its New Drug Application for MorphiDex(TM) (the "Approval") and if
so, the timing of such Approval, all according to the terms set forth in the
Warrant Agreement by and between the Acquiror and the party thereto.
In arriving at our opinion, we have reviewed certain publicly available business
information relating to the Acquiror and certain publicly available business and
financial information relating to the Company, as well as the Merger Agreement
and the Warrant Agreement. We understand and have assumed that the Acquiror
common stock to be received by the stockholders of the Company will be issued
pursuant to an effective Registration Statement on Form S-4, and that such
shares will be authorized for quotation on the Nasdaq National Market. We have
also reviewed certain other information, including financial forecasts, provided
to us by the Company and the Acquiror, and have met with the Company's and the
Acquiror's management to discuss the business and prospects of the Company and
the Acquiror.
We have also considered certain financial and stock market data of the Company
and certain financial data of the Acquiror, and we have compared those data with
similar data for other publicly held companies in businesses similar to the
Company and the Acquiror, and we have considered the financial terms of certain
other business combinations and other transactions which have recently been
effected. We also considered such other information, financial studies,
analyses and investigations and financial, economic and market criteria which we
deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have assumed that they have been reasonably prepared on
bases reflecting the best currently available estimates and
<PAGE>
2
judgments of the Company's and the Acquiror's management as to the future
financial performance of the Company and the Acquiror. You also have informed
us, and we have assumed, that the Merger will be treated as a tax-free
reorganization for federal income tax purposes. In addition, we have not been
requested to make, and have not made, an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of the Company or the
Acquiror, nor have we been furnished with any such evaluations or appraisals.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist and can be evaluated on the date hereof. We are not
expressing any opinion as to the actual value of the common stock and/or
warrants when issued to the Company's stockholders pursuant to the Merger,
whether any active trading market will develop for such common stock or
warrants, or the prices at which such common stock and warrants will trade
subsequent to the Merger. We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to effect the Merger. We were not requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the Company.
We have acted as financial advisor to the Company in connection with the Merger
and will receive a fee for our services, a portion of which is contingent upon
the consummation of the Merger. We will also receive a fee for rendering this
opinion.
In the ordinary course of our business, we and our affiliates may actively trade
the equity securities of the Company for our and such affiliates' own accounts
and for the accounts of customers and, accordingly, may at any time hold a long
or short position in such securities.
It is understood that this letter is for the information of Board of Directors
in connection with its consideration of the Merger, does not constitute a
recommendation to any stockholder as to how such stockholder should vote on the
proposed Merger and is not to be quoted or referred to, in whole or in part, in
any registration statement, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of securities, nor shall
this letter be used for any other purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Merger Consideration is fair to the stockholders of the Company from
a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
/s/ Steven L. Fisch, M.D.
By: Steven L. Fisch, M.D.
Director
<PAGE>
Appendix C
________________________________________________________________________________
FORM OF WARRANT AGREEMENT
by and between
ENDO PHARMACEUTICALS HOLDINGS INC.
and
[WARRANT AGENT],
as
Warrant Agent
_____________________
Dated as of _____________, ____
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Appointment of Warrant Agent......................................
Section 2. Warrant Certificates..............................................
Section 3. Execution of Warrant Certificates.................................
Section 4. Registration and Countersignature.................................
Section 5. Transfer and Exchange of Warrants.................................
Section 6. Registration of Transfers and Exchanges...........................
Section 7. Terms of Warrants; Exercise of Warrants...........................
Section 8. Payment of Taxes..................................................
Section 9. Mutilated or Missing Warrant Certificates.........................
Section 10. Reservation of Warrant Shares.....................................
Section 11. Obtaining Stock Exchange Listings.................................
Section 12. Adjustment of Exercise Price and Number of
Warrant Shares Issuable...........................................
Section 13. Fractional Interests..............................................
Section 14. Notices to Warrant Holders; Reservation
of Dividends......................................................
Section 15. Notices to the Company and Warrant Agent..........................
Section 16. Supplements and Amendments; Actions...............................
Section 17. Concerning the Warrant Agent......................................
Section 18. Change of Warrant Agent...........................................
Section 19. Successors........................................................
Section 20. Termination.......................................................
Section 21. GOVERNING LAW.....................................................
Section 22. Benefits of This Agreement........................................
Section 23. Counterparts......................................................
Section 24. Headings..........................................................
Exhibit A. Form of Warrant Certificate....................................................
Exhibit B. Certificate to be Delivered Upon Transfer......................................
</TABLE>
i
<PAGE>
WARRANT AGREEMENT (the "Agreement"), dated as of _______ __, ____, by
---------
and between Endo Pharmaceuticals Holdings Inc., a Delaware corporation
(together with any successors and assigns, the "Company"), and [WARRANT AGENT],
-------
as Warrant Agent (the "Warrant Agent").
-------------
WHEREAS, pursuant to that certain Agreement and Plan of Merger, dated
as of November __, 1999 (the "Merger Agreement"), by and among the Company, Endo
----------------
Inc., a Delaware corporation and wholly owned subsidiary of the Company ("Sub"),
---
and [TARGET] Pharmaceutical Corporation, a Delaware corporation Algos, the
-----
Company proposes to issue warrants (each a "Warrant," and collectively, the
-------
"Warrants") for the purchase of an aggregate of up to 20,654,360/1/ shares of
--------
common stock, par value $.01 per share, of the Company (the "Common Stock," and
------------
the shares of Common Stock issuable upon exercise of the Warrants being referred
to herein as the "Warrant Shares");
--------------
WHEREAS, there shall be two classes of Warrants, Class A which shall
be transferable ("Class A Transferable Warrants") and Class B which shall not be
-----------------------------
transferable ("Class B Non-Transferable Warrants") and each holder of shares of
---------------------------------
common stock of Target at the time of the stockholder vote relating to the
Merger Agreement may elect to receive all or a portion of such holder's Warrants
to be Class A Transferable Warrants or all or a portion of such holder's
Warrants to be Class B Non-Transferable Warrants and in the event any such
holder of shares of common stock of Target does not make such an election, then
such holder shall be issued Class A Transferable Warrants. Such election, once
made, will be irrevocable;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company and the Warrant Agent is willing to act in connection with the issuance,
transfer, exchange and exercise of Warrants as provided herein; and
NOW, THEREFORE, in consideration of the premises and mutual agreements
herein, the Company and the Warrant Agent hereby agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints
----------------------------
the Warrant Agent to act as agent for the Company in accordance with the
instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
___________________
/1/ These numbers may be adjusted in the final Endo Warrant. See footnotes 2-5
below.
<PAGE>
Section 2. Warrant Certificates. The Class A Transferable Warrants
--------------------
will initially be issued in global form (the "Global Warrants"), substantially
---------------
in the form of Exhibit A hereto. Any certificates evidencing the Global
Warrants to be delivered pursuant to this Agreement (the "Class A Warrant
---------------
Certificates") shall be substantially in the form set forth in Exhibit A hereto.
- ------------
Such Global Warrants shall represent such of the outstanding Class A
Transferable Warrants as shall be specified therein and each shall provide that
it shall represent the aggregate amount of outstanding Class A Transferable
Warrants from time to time endorsed thereon and that the aggregate amount of
outstanding Class A Transferable Warrants represented thereby may from time to
time be reduced or increased, as appropriate. Any endorsement of a Global
Warrant to reflect the amount of any increase or decrease in the amount of
outstanding Class A Transferable Warrants represented thereby shall be made by
the Warrant Agent and the Depositary (as defined below) in accordance with
instructions given by the holder thereof. [The Depository Trust Company] shall
act as the Depositary with respect to the Global Warrants until a successor
shall be appointed by the Company. Upon written request, a Warrant holder who
holds Class A Transferable Warrants may receive from the Depositary and Warrant
Agent Class A Transferable Warrants in registered form as definitive Warrant
Certificates (the "Definitive Warrants") as set forth in Section 6 below. Class
-------------------
B Non-Transferable Warrants will be issued in certificated form in the form of
Exhibit B hereto, in the name of and in the denomination as set forth in the
applicable letter of transmittal accompanying the shares of common stock of
Target surrendered by the holder thereof in connection with the merger of Target
with and into Sub pursuant to the Merger Agreement.
Section 3. Execution of Warrant Certificates. Warrant Certificates
---------------------------------
shall be signed on behalf of the Company by its Chairman of the Board, its
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer or Treasurer or a Vice President and by its Secretary or an Assistant
Secretary. Each such signature upon the Warrant Certificates may be in the form
of a facsimile signature of the present or any future Chairman of the Board,
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, Vice President, Secretary or Assistant Secretary and may be
imprinted or otherwise reproduced on the Warrant Certificates and for that
purpose the Company may adopt and use the facsimile signature of any person who
shall have been Chairman of the Board, President, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer, Treasurer, a Vice President,
Secretary or an Assistant Secretary, notwithstanding the fact that at the time
the Warrant Certificates shall be countersigned and delivered or disposed of
such person shall have ceased to hold such office.
2
<PAGE>
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been countersigned by the Warrant Agent, or
disposed of by the Company, such Warrant Certificates nevertheless may be
countersigned and delivered or disposed of as though such person had not ceased
to be such officer of the Company; and any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Warrant
Agreement any such person was not such officer.
Warrant Certificates shall be dated the date of countersignature by
the Warrant Agent.
Section 4. Registration and Countersignature. The Warrants shall be
---------------------------------
numbered and shall be registered on the books of the Company maintained at the
principal office of the Warrant Agent in [LOCATION OF WARRANT AGENT'S OFFICES]
(the "Warrant Register") as they are issued.
----------------
Warrant Certificates shall be manually countersigned by the Warrant
Agent and shall not be valid for any purpose unless so countersigned. The
Warrant Agent shall, upon written instructions of the Chairman of the Board, the
President, Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, Treasurer, a Vice President, the Secretary or an Assistant Secretary of
the Company, initially countersign and deliver Warrants entitling the holders
thereof to purchase not more than the number of Warrant Shares referred to above
in the first recital hereof and shall thereafter countersign and deliver
Warrants as otherwise provided in this Agreement.
The Company and the Warrant Agent may deem and treat the registered
holders (the "Holders") of the Warrant Certificates as the absolute owners
-------
thereof (notwithstanding any notation of ownership or other writing thereon made
by anyone) for all purposes, and neither the Company nor the Warrant Agent shall
be affected by any notice to the contrary.
Section 5. Transfer and Exchange of Warrants. The Warrant Agent shall
---------------------------------
from time to time, subject to the limitations of Section 6 hereof, register the
transfer of any outstanding Warrants upon the records to be maintained by it for
3
<PAGE>
that purpose, upon surrender thereof duly endorsed or accompanied (if so
required by it) by a written instrument or instruments of transfer in form
satisfactory to the Warrant Agent, duly executed by the registered Holder or
Holders thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney; provided that Class B Non-Transferable Warrants may
-------- ----
only be transferred (i) as the result or assignment by operation of law (such as
death or merger or otherwise) or (ii) as required by law or any court of
competent jurisdiction (such as in connection with divorce, bankruptcy or
liquidation). A request for a transfer of a Class B Non-Transferable Warrant
shall be accompanied by such documentation establishing satisfaction of the
conditions set forth in clause (i) or (ii) above, as applicable, as may be
reasonably requested by the Company (including opinions of counsel, if
appropriate). Upon receipt of documentation reasonably satisfactory to the
Company, the Company shall authorize the Warrant Agent to permit the transfer of
a Class B Non-Transferable Warrant. The Warrant Agent shall not permit the
transfer of a Class B Non-Transferable Warrant until it is so authorized by the
Company. Unless otherwise authorized by the Company, Class B Non-Transferable
Warrant Certificate may only be transferred for another Class B Non-Transferable
Warrant Certificate. Subject to the terms of this Agreement, each Warrant
Certificate may be exchanged for another certificate or certificates entitling
the Holder thereof to purchase a like aggregate number of Warrant Shares as the
certificate or certificates surrendered then entitle each Holder to purchase.
Any Holder desiring to exchange a Warrant Certificate or Certificates shall make
such request in writing delivered to the Warrant Agent, and shall surrender,
duly endorsed or accompanied (if so required by the Warrant Agent) by a written
instrument or instruments of transfer in form satisfactory to the Warrant Agent,
the Warrant Certificate or Certificates to be so exchanged.
Upon registration of transfer, the Warrant Agent shall countersign and
deliver by certified or first class mail a new Warrant Certificate or
Certificates to the persons entitled thereto. The Warrant Certificates may be
exchanged at the option of the Holder thereof, when surrendered at the office or
agency of the Company maintained for such purpose, which initially will be the
corporate trust office of the Warrant Agent in [LOCATION OF WARRANT AGENT'S
CORPORATE TRUST OFFICE], for another Warrant Certificate, or other Warrant
Certificates of different denominations, of like tenor and representing in the
aggregate the right to purchase a like number of Warrant Shares.
No service charge shall be made for any exchange or registration of
transfer of Warrant Certificates, but the Company may require payment of a sum
4
<PAGE>
sufficient to cover any stamp or other tax or other governmental charge that is
imposed in connection with any such exchange or registration of transfer.
Section 6. Registration of Transfers and Exchanges.
---------------------------------------
(a) Transfer and Exchange of Definitive Warrants. When Definitive
--------------------------------------------
Warrants are presented to the Warrant Agent with a request:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of Definitive
Warrants of other authorized denominations,
the Warrant Agent shall register the transfer or make the exchange as requested
if its requirements under this Agreement are met; provided, however, that the
-------- -------
Definitive Warrants presented or surrendered for registration of transfer or
exchange shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Warrant Agent, duly executed by the Holder
thereof or by such Holder's attorney, duly authorized in writing; provided that
-------- ----
a transfer of Definitive Warrants that are Class B Non-Transferable Warrants
shall be subject to the requirements of Section 5 hereof.
(b) Restrictions on Transfer of a Definitive Warrant for a Beneficial
-----------------------------------------------------------------
Interest in a Global Warrant. The Warrant Agent may exchange a Definitive
- ----------------------------
Warrant for a beneficial interest in a Global Warrant only if the Warrant Agent
has received such Definitive Warrant, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the Warrant Agent,
together with written instructions directing the Warrant Agent to make, or to
direct the Depositary to make, an endorsement on the Global Warrant to reflect
an increase in the aggregate amount of the Warrants represented by the Global
Warrant. If such conditions have been satisfied, the Warrant Agent shall cancel
such Definitive Warrant and cause, or direct the Depositary to cause, in
accordance with the standing instructions and procedures existing between the
Depositary and the Warrant Agent, the number of Warrant Shares represented by
the Global Warrant to be increased accordingly. If no Global Warrant is then
outstanding, the Company shall issue and the Warrant Agent shall countersign a
new Global Warrant in the appropriate amount.
(c) Transfer and Exchange of Global Warrants. The transfer and
----------------------------------------
exchange of Global Warrants or beneficial interests therein shall be effected
through
5
<PAGE>
the Depositary, in accordance with this Warrant Agreement (including the
restrictions on transfer set forth herein) and the procedures of the Depositary
therefor.
(d) Transfer of a Beneficial Interest in a Global Warrant for a
-----------------------------------------------------------
Definitive Warrant.
- ------------------
(i) Any person having a beneficial interest in a Global Warrant may upon
his, her or its request exchange such beneficial interest for a
Definitive Warrant. Upon receipt by the Warrant Agent of written
instructions (or such other form of instructions as is customary for
the Depositary) from the Depositary or its nominee on behalf of any
person having a beneficial interest in a Global Warrant and upon
receipt by the Warrant Agent of a written order or such other form of
instructions as is customary for the Depositary or the person
designated by the Depositary as having such a beneficial interest
containing registration instructions, then the Warrant Agent will
cause, in accordance with the standing instructions and procedures
existing between the Depositary and the Warrant Agent, the aggregate
amount of the Global Warrant to be reduced and, following such
reduction, the Company will execute and, upon receipt of a
countersignature, the Warrant Agent will countersign and deliver to
the transferee a Definitive Warrant. All such Warrants shall be Class
A Transferable Warrants.
(ii) Definitive Warrants issued in exchange for a beneficial interest in a
Global Warrant pursuant to this Section 6(d) shall be registered in
such names and in such authorized denominations as the Depositary,
pursuant to instructions from its direct or indirect participants or
otherwise, shall instruct the Warrant Agent in writing, provided such
designation is in accordance with this Section 6(d). The Warrant Agent
shall deliver such Definitive Warrants to the persons in whose names
such Definitive Warrants are registered.
(e) Restrictions on Transfer and Exchange of Global Warrants.
--------------------------------------------------------
Notwithstanding any other provisions of this Warrant Agreement (other than the
provisions set forth in subsection (f) of this Section 6), a Global Warrant may
not be transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary
6
<PAGE>
or by the Depositary or any such nominee to a successor Depositary or a nominee
of such successor Depositary.
(f) Authentication of Definitive Warrants in Absence of Depositary.
---------------------------------------------------------------
If at any time:
(i) the Depositary for the Global Warrants notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the
Global Warrant and a successor Depositary for the Global Warrant is
not appointed by the Company within 90 days after delivery of such
notice; or
(ii) the Company, at its sole discretion, notifies the Warrant Agent in
writing that it elects to cause the issuance of Definitive Warrants
under this Warrant Agreement,
then the Company will execute, and the Warrant Agent, upon receipt of an
officers' certificate, signed by the President, Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer or a Vice President of the Company,
requesting the counter-signature and delivery of Definitive Warrants, will
countersign and deliver Definitive Warrants, in an aggregate number equal to the
aggregate number of Warrants represented by the Global Warrant, in exchange for
such Global Warrant.
(g) Cancellation and/or Adjustment of a Global Warrant. At such time
--------------------------------------------------
as all beneficial interests in a Global Warrant have either been exchanged for
Definitive Warrants, redeemed, repurchased or cancelled, such Global Warrant
shall be returned to or retained and cancelled by the Warrant Agent. At any time
prior to such cancellation, if any beneficial interest in a Global Warrant is
exchanged for Definitive Warrants, redeemed, repurchased or cancelled, the
number of Warrants represented by such Global Warrant shall be reduced and an
endorsement shall be made on such Global Warrant, by the Warrant Agent to
reflect such reduction.
(h) Obligations with Respect to Transfers and Exchanges of Definitive
-----------------------------------------------------------------
Warrants.
- --------
(i) To permit registrations of transfers and exchanges in accordance with
the terms of this Agreement, the Company shall execute, and the
Warrant Agent shall countersign Definitive Warrants and Global
Warrants.
7
<PAGE>
(ii) All Definitive Warrants and Global Warrants issued upon any
registration, transfer or exchange of Definitive Warrants or Global
Warrants shall be the valid obligations of the Company, entitled to
the same benefits under this Warrant Agreement as the Definitive
Warrants or Global Warrants surrendered upon the registration of
transfer or exchange.
(iii) Prior to due presentment for registration of transfer of any
Warrant, the Warrant Agent and the Company may deem and treat the
person in whose name any Warrant is registered as the absolute owner
of such Warrant, and neither the Warrant Agent nor the Company shall
be affected by notice to the contrary.
Section 7. Terms of Warrants; Exercise of Warrants. Subject to the
---------------------------------------
terms of this Agreement, each Warrant Holder shall have the right, which may be
exercised commencing on or after the Exercisability Date (as defined below) and
until 5:00 p.m., New York City time, on the six-month anniversary of the
Exercisability Date (the "Expiration Date"), to receive from the Company the
---------------
number of fully paid and nonassessable Warrant Shares which the Holder may at
the time be entitled to receive on exercise of such Warrants and payment of the
Exercise Price (as defined below) then in effect for such Warrant Shares
together, if applicable, with cash payable as provided in Section 13 hereof and
any dividends or distributions payable as provided in Section 14 hereof. If the
Exercisability Date is on or prior to December 31, 2001, the Holders shall then
be entitled to receive from the Company (on exercise of such Warrants and
payment of the Exercise Price then in effect for such Warrant Shares) (together,
if applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
20,654,360 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 1.153846 Warrant Shares)/2/ in the event the Adjustment Event
(as defined in the Merger Agreement) has not occurred prior to the
Exercisability Date or (b) 17,900,445 Warrant Shares (in the aggregate) (with
each Warrant being
__________________
/2/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Stock in the Merger, shall equal 35% of the shares of Parent
Common Stock on a fully diluted basis (excluding the effect of the Algos
Warrants as if no Adjustment Event had occurred).
8
<PAGE>
exercisable for 1.000000 Warrant Shares)/3/ in the event the Adjustment Event
has occurred prior to the Exercisability Date. If the Exercisability Date is
after December 31, 2001 and on or prior to June 30, 2002, the Holder shall then
be entitled to receive from the Company (on exercise of such Warrants and
payment of the Exercise Price then in effect for such Warrant Shares) (together,
if applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
12,786,032 Warrant Shares (in the aggregate) (with each Warrant being
exercisable for 0.714286 Warrant Shares)/4/ in the event the Adjustment Event
has not occurred prior to the Exercisability Date or (b) 11,015,658 Warrant
Shares (in the aggregate) (with each Warrant being exercisable for 0.615385
Warrant Shares)/5/ in the event the Adjustment Event has occurred prior to the
Exercisability Date. If the Exercisability Date is after June 30, 2002 and on or
prior to December 31, 2002 (the "Ultimate Expiration Date"), the Holders shall
------------------------
then be entitled to receive from the Company (on exercise of such Warrants and
payment of the Exercise Price then in effect for such Warrant Shares) (together,
if applicable, with cash payable as provided in Section 13 hereof and any
dividends or distributions payable as provided in Section 14 hereof) (a)
5,966,815 Warrant Shares (in the aggregate) (with each Warrant being exercisable
for 0.333333 Warrant Shares)/6/ in the event the Adjustment Event has not
occurred prior to the
_____________________
/3/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 40% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of
the Algos Warrants and after giving effect to the Adjustment Event as if
it had occurred).
/4/ These number shall be adjusted in the final Agreement and Warrants in order
at the Effective Time such aggregate number, when taken together with the
shares of Parent Common Stock issuable to holders of Company Stock in the
Merger, shall equal 30% of the shares of Parent Common Stock on a fully
diluted basis (excluding the effect of the Algos Warrants as if no
Adjustment Event had occurred).
/5/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
of Company Common Stock in the Merger, shall equal 35% of the shares of
Parent Common Stock on a fully diluted basis (excluding the effect of the
Algos Warrants as if no Adjustment Event had occurred).
/6/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent
(continued...)
9
<PAGE>
Exercisability Date or (b) 5,114,413 Warrant Shares (in the aggregate) (with
each Warrant being exercisable for 0.285714 Warrant Shares)/7/ in the event
the Adjustment Event has occurred prior to the Exercisability Date. Each
Warrant not exercised prior to the Expiration Date shall become void and all
rights thereunder and all rights in respect thereof under this Agreement
shall cease as of the Expiration Date. Without limiting the foregoing, in the
event the Ultimate Expiration Date occurs before the Exercisability Date, each
Warrant shall become void and all rights thereunder and all rights in respect
thereof under this Agreement shall cease as of the Ultimate Expiration Date.
If applicable, dividends and other distributions will be made upon exercise of
the Warrants as set forth in Section 14 hereof.
"Exercisability Date" shall mean the fifth (5/th/) Business Day (as
-------------------
defined below) following the date on which the Company (or any of its
subsidiaries) receives approval from the U.S. Food and Drug Administration (the
"FDA") with respect to its New Drug Application for MorphiDex(R) for the
---
treatment of one or more pain indications. In addition to the notices
required by Section 14 hereof, the Company shall give prompt written notice to
the Warrant Agent that the Exercisability Date has occurred and shall cause the
Warrant Agent, on behalf of and at the expense of the Company, within 5 Business
Days after such notification is received by the Warrant Agent, to mail by first
class mail, postage prepaid, to each Holder a notice specifying that the
Exercisability Date has occurred and that the Warrant has become exercisable
pursuant to its terms and that the Warrant will expire at 5:00 p.m., New York
City time, on the Expiration Date. In addition, the Company shall post
appropriate notices of the Exercisability Date on its web pages
- ----------------------
/6/ (...continued)
Common Stock issuable to holders of Company Common Stock in the Merger,
shall equal 25% of the shares of Common Stock on a fully diluted basis
(excluding the effect of Algos Warrants as if no Adjustment Event had
occurred).
/7/ These numbers shall be adjusted in the final Agreement and Warrants in
order to reflect that at the Effective Time such aggregate number, when
taken together with the shares of Parent Common Stock issuable to holders
Company Common Stock in the Merger, shall equal 30% of the shares of Parent
Common Stock on a fully diluted basis (excluding the effect of the Algos
Warrants and after giving effect to the Adjustment Event as if it had
occurred).
10
<PAGE>
and issue press releases to wire services. A "Business Day" is a day that is not
------------
a Legal Holiday. A "Legal Holiday" is a Saturday a Sunday, a federally
-------------
recognized holiday or a day on which banking institutions are not required to be
open in the State of New York.
From and after the Effective Time, Parent agrees to use its reasonable
efforts to continue to process the FDA application for MorphiDex(R) in a timely
fashion. The parties acknowledge that there are many variables in the process of
obtaining FDA approval in such a situation and many different approaches which
may be used by an applicant in order to obtain such approval; as a result, the
parties hereto agree that all determinations relating to such process and all
actions taken in connection with seeking such approval shall be in the sole
discretion of Parent and shall be binding upon the parties for all purposes. The
parties further acknowledge that (i) on August 2, 1999, the Company received
notification from the FDA that such application was not approvable, (ii) the
failure to obtain such approval, either at all or on or before a certain date,
shall not be deemed a breach by Parent of the provisions hereof and (iii) in any
event Parent shall have no responsibility in connection with the provisions of
this paragraph, except for its willful breach hereof.
The initial price per share at which Warrant Shares shall be
purchasable upon exercise of Warrants (the "Exercise Price") shall equal $0.01.
--------------
A Warrant may be exercised upon surrender at the office or agency of the Company
maintained for such purpose, which initially will be the corporate trust office
of the Warrant Agent or its agents in [LOCATION OF WARRANT AGENT'S OFFICE], of
the Warrant Certificate(s) evidencing the Warrants to be exercised with the form
of election to purchase on the reverse thereof duly filled in and signed, which
signature shall be guaranteed by a participant in a recognized Signature
Guarantee Medallion Program, and upon payment to the Warrant Agent for the
account of the Company of the Exercise Price, as adjusted as herein provided,
for the number of Warrant Shares together, if applicable, with cash payable as
provided in Section 13 hereof and any dividends or distributions as provided in
Section 14 hereof in respect of which such Warrants are then exercised. Payment
of the Exercise Price may be made (a) in the form of cash or by certified or
official bank check payable to the order of the Company in New York Clearing
House Funds, (b) by delivering to the Company a written notice accompanying the
surrender of a Warrant to, at the time of
11
<PAGE>
exercise, apply to the payment of Exercise Price such number of Warrant Shares
as shall be specified in such notice, in which case an amount equal to the
excess of the Current Market Value (as defined in Section 12(d) hereof) of such
Warrant Shares on the date of exercise over the Exercise Price required for such
exercise shall be deemed to have been paid to the Company and the number of
Warrant Shares issuable upon such exercise shall be reduced by such specified
number (a "Cashless Exercise") or (c) any combination of (a) and (b) above.
-----------------
Subject to the provisions of Section 6 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
Holder and in such name or names as the Warrant Holder may designate a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 13
hereof. Such certificate or certificates shall be deemed to have been issued and
any person so named therein shall be deemed to have become a holder of record of
such Warrant Shares as of the date of the surrender of such Warrants and payment
of the Exercise Price.
On or after the Exercisability Date, the Warrants shall be
exercisable, at the election of the Holders thereof, either in full or from time
to time in part and, in the event that a certificate evidencing Warrants is
exercised in respect of fewer than all of the Warrant Shares issuable on such
exercise at any time prior to the Expiration Date, a new certificate evidencing
the remaining Warrant or Warrants will be issued, and the Warrant Agent is
hereby irrevocably authorized to countersign and to deliver the required new
Warrant Certificate or Certificates pursuant to the provisions of this Section 7
and of Section 3 hereof, and the Company, whenever required by the Warrant
Agent, will promptly supply the Warrant Agent with Warrant Certificates duly
executed on behalf of the Company for such purpose.
All Warrant Certificates surrendered upon exercise of Warrants shall
be cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall
then be either delivered to the Company or disposed of by the Warrant Agent in a
manner consistent with the Warrant Agent's customary procedure for such disposal
and in a manner reasonably satisfactory to the Company. The Warrant Agent shall
account promptly to the Company with respect to Warrants exercised and
concurrently pay to
12
<PAGE>
the Company all monies received by the Warrant Agent for the purchase of the
Warrant Shares through the exercise of such Warrants.
The Warrant Agent shall keep copies of this Agreement available for
inspection by the Holders during normal business hours at its office. The
Company shall supply the Warrant Agent from time to time with such numbers of
copies of this Agreement as the Warrant Agent may request.
Section 8. Payment of Taxes. The Company will pay all documentary
----------------
stamp taxes attributable to the initial issuance of Warrant Shares upon the
exercise of Warrants; provided, however, that the Company shall not be required
-------- -------
to pay any tax or taxes which may be payable in respect of any transfer involved
in the issue of any Warrant Certificates or any certificates for Warrant Shares
in a name other than that of the registered Holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
Section 9. Mutilated or Missing Warrant Certificates. In case any of
-----------------------------------------
the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue and the Warrant Agent may countersign, in
exchange and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificate and indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
Section 10. Reservation of Warrant Shares. The Company will at all
-----------------------------
times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to
13
<PAGE>
issue Warrant Shares upon exercise of Warrants, the maximum number of shares of
Common Stock which may then be deliverable upon the exercise of all outstanding
Warrants.
The Company will keep a copy of this Agreement on file with the
transfer agent for the Common Stock (the "Transfer Agent") and with every
--------------
subsequent transfer agent for any shares of the Company's capital stock issuable
upon the exercise of the rights of purchase represented by the Warrants. The
Warrant Agent is hereby irrevocably authorized to requisition from time to time
from such Transfer Agent the stock certificates required to honor outstanding
warrants upon exercise thereof in accordance with the terms of this Agreement.
The Company will supply such Transfer Agent with duly executed certificates for
such purposes and will provide or otherwise make available any cash which may be
payable as provided in Section 13 hereof. The Company will furnish such Transfer
Agent a copy of all notices of adjustments and certificates related thereto
transmitted to each Holder pursuant to Section 14 hereof.
The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon payment of the Exercise Price therefor and
issue, be validly authorized and issued, fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issuance thereof. The Company will use its reasonable best
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to enable
the Company to perform its obligations under this Agreement.
Section 11. Obtaining Stock Exchange Listings. The Company will from
---------------------------------
time to time take all action which may be necessary so that the Warrants and,
immediately upon their issuance upon exercise of the Warrants, the Warrant
Shares will be listed on the principal securities exchanges and markets within
the United States of America, if any, on which other shares of Common Stock are
then listed.
14
<PAGE>
Section 12. Adjustment of Exercise Price and Number of Warrant Shares
---------------------------------------------------------
Issuable.
- --------
(a) If the Company:
(i) pays a dividend or makes a distribution on its Common Stock in shares
of its Common Stock or other capital stock of the Company; or
(ii) subdivides, splits, combines or reclassifies its outstanding shares of
Common Stock into a different number of securities of the same class,
then the number of shares of Common Stock issuable upon the exercise of each
Warrant (the "Exercise Rate") in effect immediately prior to such action shall
-------------
be proportionately adjusted so that the Holder of any Warrant thereafter
exercised may receive the aggregate number and kind of shares of capital stock
of the Company which such Holder would have owned immediately following such
action if such Warrant had been exercised immediately prior to such action and
the Exercise Price in effect immediately prior to such action shall be adjusted
to a price determined by multiplying the Exercise Price in effect immediately
prior to such action by a fraction, the numerator of which shall be the number
of shares of Common Stock outstanding before giving effect to such action and
the denominator of which shall be the number of shares of Common Stock and/or
such other capital stock outstanding referred to in the foregoing clause (a)(1)
after giving effect to such action.
An adjustment pursuant to this Section 12(a) shall become effective
immediately after the record date in the case of a dividend or distribution and
immediately after the effective date in the case of a subdivision, combination
or reclassification.
If, after an adjustment pursuant to this Section 12(a), a Holder of a
Warrant upon exercise of it may receive shares of two or more classes of capital
stock of the Company, the board of directors of the Company shall determine the
allocation of the adjusted Exercise Price between the classes of capital stock.
After such allocation, the exercise privilege and the Exercise Price of each
class of capital stock shall thereafter be subject to adjustment on terms
comparable to those applicable to Common Stock in this Section 12.
15
<PAGE>
Such adjustment shall be made successively whenever any event listed
above shall occur.
(b) Adjustment for Certain Issuances of Common Stock. If the Company
------------------------------------------------
issues or sells to any Affiliate (as defined in Section 12(d) hereof) of the
Company shares of its Common Stock or distributes to any Affiliate of the
Company any rights, options or warrants entitling them to purchase shares of
Common Stock, or securities convertible into or exchangeable for Common Stock,
in each case, at a price per share less than the Current Market Value on the
record date for determining entitlements of such Affiliates to participate in
such issuance, sale or distribution (the "Time of Determination") and prior to
--------------------- ---
such issuance, sale or distribution the Company did not first offer to issue,
sell or distribute such shares of its Common Stock or such rights, options or
warrants or such securities convertible into or exchangeable for Common Stock to
all holders of Common Stock on the same economic terms and on a pro rata basis
with the issuance, sale or distribution to the Affiliates of the Company, then
----
the Exercise Rate shall be adjusted in accordance with the formula:
E' = E x O + N
---------------
O + N x P
-----
M
and the Exercise Price shall be adjusted in accordance with the following
formula:
EP'= EP x E
---
E'
where:
E' = the adjusted Exercise Rate.
E = the Exercise Rate immediately prior to the Time of Determination
for any such issuance, sale or distribution.
EP' = the Adjusted Exercise Price.
16
<PAGE>
EP = the Exercise Price immediately prior to the Time of
Determination for any such issuance, sale or distribution.
O = the number of Fully Diluted Shares (as defined below)
outstanding immediately prior to the Time of Determination for
any such issuance, sale or distribution.
N = the number of additional shares of Common Stock issued, sold or
issuable upon exercise of such rights, options or warrants.
P = the per share price received and receivable by the Company in
the case of any issuance or sale of Common Stock or rights,
options or warrants as to which such adjustment is being made,
inclusive of the exercise price per share of Common Stock
payable upon exercise of such rights, options or warrants.
M = the Current Market Value per share of Common Stock on the Time
of Determination for any such issuance, sale or distribution.
For purposes of this Section 12(b), the term "Fully Diluted Shares"
--------------------
shall mean (i) the shares of Common Stock outstanding as of a specified date,
and (ii) the shares of Common Stock into or for which rights, options, warrants
or other securities of the Company outstanding as of such date are exercisable
or convertible (other than the Warrants).
Any adjustments shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after the
relevant Time of Determination. Notwithstanding the foregoing, the Exercise
Rate and the Exercise Price shall not be subject to adjustment in connection
with (i) the issuance of any shares of Common Stock upon exercise of any such
rights, options or warrants which have previously been the subject of an
adjustment under this Agreement for which the required adjustment has been made
and (ii) any exercise of the Warrants. If at the end of the period during which
any such rights,
17
<PAGE>
options or warrants are exercisable, not all rights, options or warrants shall
have been exercised, the Warrant shall be immediately readjusted to what it
would have been if "N" in each of the above formulas had been the number of
shares actually issued.
(c) When De Minimis Adjustment May Be Deferred. No adjustment in the
------------------------------------------
Exercise Rate need be made unless the adjustment would require an increase or
decrease of at least 1% in the Exercise Rate. Notwithstanding the foregoing, any
adjustments that are not made shall be carried forward and taken into account in
any subsequent adjustment, provided that no such adjustment shall be deferred
-------- ----
beyond the date on which a Warrant is exercised.
All calculations under this Section 12 shall be made to the nearest
cent or to the nearest 1/100/th/ of a share, as the case may be.
(d) Certain Definitions. "Current Market Value" per share of Common
------------------- --------------------
Stock or of any other security (herein collectively referred to as a "Security")
--------
at any date shall be:
(1) if the Security is not registered under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), (i) the value of the Security
------------
determined in good faith by the board of directors of the Company and
certified in a board resolution, based on the most recently completed
arm's-length transaction between the Company and a person other than an
Affiliate of the Company and the closing of which occurs on such date or
shall have occurred within the six months preceding such date or (ii) if no
such transaction shall have occurred on such date or within such six-month
period, the value of the Security determined as of a date within 30 days
preceding such date by an Independent Financial Expert (as defined below),
or
(2) if the Security is registered under the Exchange Act, the average
of the daily closing bid prices of such Security for 30 consecutive
Business Days selected by the Company from the period of 45 Business Days
preceding such date, but only if such Security shall have been listed on a
national securities exchange or the Nasdaq National Market or traded
through an automated quotation system during such entire 45-Business Day
period.
18
<PAGE>
The "closing bid price" for any Security on each Business Day means
-----------------
the closing price, regular way, on such day on the principal exchange on which
such Security is traded, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day.
"Independent Financial Expert" shall mean any nationally recognized
----------------------------
investment banking firm that is not an Affiliate of the Company. Any such
person may receive customary compensation and indemnification by the Company for
opinions or services it provides as an Independent Financial Expert.
"Affiliate" of any specified person means any other person which
---------
directly or indirectly through one or more intermediaries controls or is
controlled by, or is under common control with, such specified person. For the
purposes of this definition, "control" (including with correlative meanings, the
terms "controlling," "controlled by" and "under common control with") as used
with respect to any person, means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of such
person, whether through the ownership of voting securities, by agreement or
otherwise.
"Ordinary Cash Distribution" means any quarterly cash dividend on the
--------------------------
Common Stock to the extent that the aggregate cash dividend per share of Common
Stock in any calendar quarter does not exceed the greater of (x) the amount per
share of Common Stock of the next preceding quarterly cash dividend on the
Common Stock (as adjusted to reflect subdivisions or combinations of the Common
Stock) and (y) 3.0% of the average of the last reported sales prices of the
Common Stock during the ten trading days immediately prior to the date of
declaration of such dividend.
(e) When No Adjustment Required. If an adjustment is made upon the
---------------------------
establishment of a record date for an issuance, sale or distribution subject to
subsection (a) or (b) hereof and such issuance, sale or distribution is
subsequently cancelled or is not otherwise made, the Exercise Rate and Exercise
Price then in effect shall be readjusted, effective as of the date when the
board of directors of the Company determines to cancel such issuance, sale or
distribution or when it is otherwise evident that such issuance, sale or
distribution will not be so made, to that
19
<PAGE>
which would have been in effect if such record date had not been fixed. If an
adjustment would be required under both subsections (a) and (b) above, such
adjustments will be determined without duplication.
To the extent the Warrants become convertible into cash, no adjustment
need be made thereafter as to the amount of cash into which such Warrants are
exercisable. Interest will not accrue on the cash.
(f) Notice of Adjustment. Whenever the Exercise Rate or Exercise
--------------------
Price is adjusted, the Company shall provide the notices required by Section 14
hereof.
(g) Voluntary Reduction. The Company from time to time may increase
-------------------
the Exercise Rate or reduce the Exercise Price by any amount for any period of
time (including, without limitation, permanently) if the period is at least 20
Business Days after the Company has given notice of such increase or reduction
in accordance with Section 14 hereof.
An increase of the Exercise Rate or reduction in the Exercise Price
under this subsection (g) (other than a permanent increase) does not change or
adjust the Exercise Rate otherwise in effect for purposes of subsection (a) and
(b) of this Section 12.
(h) When Issuance or Payment May Be Deferred. In any case in which
----------------------------------------
this Section 12 shall require that an adjustment in the Exercise Rate or
Exercise Price be made effective as of a record date for a specified event, the
Company may elect to defer until the occurrence of such event (i) issuing to the
Holder of any Warrant exercised after such record date the Warrant Shares and
other capital stock of the Company, if any, issuable upon such exercise over and
above the Warrant Shares and other capital stock of the Company, if any,
issuable upon such exercise on the basis of the Exercise Rate prior to such
adjustment, and (ii) paying to such Holder any amount in cash in lieu of a
fractional share pursuant to Section 13 hereof; provided, however, that the
-------- -------
Company shall deliver to the Warrant Agent and shall cause the Warrant Agent, on
behalf of and at the expense of the Company, to deliver to such Holder a due
bill or other appropriate instrument evidencing such
20
<PAGE>
Holder's right to receive such additional Warrant Shares, other capital stock
and cash upon the occurrence of the event requiring such adjustment.
(i) Reorganizations. In case of (i) any capital reorganization,
---------------
other than in the cases referred to in Section 12(a) and (b) hereof and other
than any capital reorganization that does not result in any reclassification of
the outstanding shares of Common Stock into shares of other stock or other
securities or property, or (ii) the consolidation or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the continuing corporation and which does not result in any
reclassification of the outstanding shares of Common Stock into shares of other
stock or other securities or property), or (iii) the sale of all or
substantially all of the assets of the Company (collectively such actions being
hereinafter referred to as "Reorganizations"), there shall thereafter be
---------------
deliverable upon exercise of any Warrant in accordance with the terms hereof (in
lieu of the number of shares of Common Stock theretofore deliverable) the number
of shares of stock or other securities or property to which a holder of the
number of shares of Common Stock that would otherwise have been deliverable upon
the exercise of such Warrant would have been entitled upon such Reorganization
if the Exercisability Date had occurred and such Warrant had been exercised in
full immediately prior to such Reorganization. In case of any Reorganization,
appropriate adjustment, as determined in good faith by the board of directors
of the Company, whose determination shall be described in a duly adopted
resolution certified by the Company's Secretary or Assistant Secretary, shall be
made in the application of the provisions herein set forth with respect to the
rights and interests of Holders so that the provisions set forth herein shall
thereafter be applicable, as nearly as possible, in relation to any such shares
or other securities or property thereafter deliverable upon exercise of
Warrants.
The Company shall not effect any such Reorganization unless prior to
or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such Reorganization or the corporation or
other entity purchasing such assets shall expressly assume, by a supplemental
warrant agreement or other acknowledgment executed and delivered to the Warrant
Agent, the obligation to deliver to the Warrant Agent and to cause the Warrant
Agent to deliver to each such Holder such shares of stock, securities or assets
as, in
21
<PAGE>
accordance with the foregoing provisions, such Holder may be entitled to
purchase in accordance with the terms hereof upon the occurrence of the
Exercisability Date, and the due and punctual performance and observance of each
and every covenant, condition, obligation and liability under this Agreement to
be performed and observed by the Company in the manner prescribed herein.
The foregoing provisions of this Section 12(i) shall apply to
successive Reorganization transactions.
(j) Form of Warrants. Irrespective of any adjustments in the number
----------------
or kind of shares purchasable upon the exercise of the Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Agreement.
(k) Warrant Agent's Disclaimer. The Warrant Agent has no duty to
--------------------------
determine when an adjustment under this Section 12 should be made, how it should
be made or what it should be. The Warrant Agent has no duty to determine
whether any provisions of a supplemental warrant agreement under subsection (i)
of this Section 12 are correct. The Warrant Agent makes no representation as to
the validity or value of any securities or assets issued upon exercise of
Warrants. The Warrant Agent shall not be responsible for the Company's failure
to comply with this Section 12.
(l) Miscellaneous. For purpose of this Section 12 the term "shares of
------------- ---------
Common Stock" shall mean (i) shares of the class of stock designated as the
- ------------
Common Stock, par value $.01 per share, of the Company as of the date of this
Agreement, and (ii) shares of any other class of stock resulting from successive
changes or reclassification of such shares consisting solely of changes in par
value, or from par value to no par value, or from no par value to par value. In
the event that at any time, as a result of an adjustment made pursuant to this
Section 12, the Holders of Warrants shall become entitled to purchase any
securities of the Company other than, or in addition to, shares of Common Stock,
thereafter the number or amount of such other securities so purchasable upon
exercise of each Warrant shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Warrant Shares contained in subsections (a) through (l) of this
Section 12, inclusive, and the
22
<PAGE>
provisions of Sections 7, 8, 10 and 13 with respect to the Warrant Shares or the
Common Stock shall apply on like terms to any such other securities.
Section 13. Fractional Interests. The Company shall not be required
--------------------
to issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
Holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 13,
be issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the excess of the Current Market
Value of a Warrant Share over the Exercise Price on the day immediately
preceding the date the Warrant is presented for exercise, multiplied by such
fraction.
Section 14. Notices to Warrant Holders; Reservation of Dividends. No
----------------------------------------------------
later than April 6, 2001, the Company shall give written notice of the
occurrence or non-occurrence of the Adjustment Event to the Warrant Agent and
shall cause the Warrant Agent, on behalf of and at the expense of the Company,
within 10 days after such notification is received by the Warrant Agent, to mail
by first class mail, postage prepaid, to each Holder a notice of such occurrence
or non-occurrence of the Adjustment Event. Upon any adjustment pursuant to
Section 12 hereof, the Company shall give prompt written notice of such
adjustment to the Warrant Agent and shall cause the Warrant Agent, on behalf of
and at the expense of the Company, within 10 days after notification is received
by the Warrant Agent of such adjustment, to mail by first class mail, postage
prepaid, to each Holder a notice of such adjustment(s) and shall deliver to the
Warrant Agent a certificate of the Chief Financial Officer of the Company,
setting forth in reasonable detail (i) the number of Warrant Shares purchasable
upon the exercise of each Warrant and the Exercise Price of such Warrant after
such adjustment(s), (ii) a brief statement of the facts requiring such
adjustment(s) and (iii) the computation by which such adjustment(s) was made.
Where appropriate, such notice may be given in advance and included as a part of
the notice required under the other provisions of this Section 14.
23
<PAGE>
In case the Exercisability Date has occurred and:
(a) the Company shall authorize the issuance to all holders of shares
of Common Stock of rights, options or warrants to subscribe for or purchase
shares of Common Stock or of any other subscription rights or warrants; or
(b) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets or cash; or
(c) of any consolidation or merger to which the Company is a party
and for which approval of any stockholders of the Company is required, or of the
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, or of any reclassification or change of Common Stock issuable
upon exercise of the Warrants (other than a change in par value, or from par
value to no par value, or from no par value to par value, or as a result of a
subdivision or combination), or a tender offer or exchange offer for shares of
Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(e) the Company proposes to take any action that would require an
adjustment to the Exercise Rate pursuant to Section 12 hereof;
then the Company shall give prompt written notice to the Warrant Agent and shall
cause the Warrant Agent, on behalf of and at the expense of the Company to give
to each of the registered holders of the Warrant Certificates at his, her or its
address appearing on the Warrant Register, at least 30 days (or 20 days in any
case specified in clauses (a) or (b) above) prior to the applicable record date
hereinafter specified, or the date of the event in the case of events for which
there is no record date, by first-class mail, postage prepaid, a written notice
stating (i) the date as of which the holders of record of shares of Common Stock
to be entitled to receive any such rights, options, warrants or distribution are
to be determined, or (ii) the initial expiration date set forth in any tender
offer or exchange offer for shares of Common Stock, or (iii) the date on which
any such consolidation, merger, conveyance, transfer, dissolution, liquidation
or winding up is expected to become effective or consummated, and the date as of
which it is expected that holders of record of shares of Common Stock shall be
entitled to exchange such shares for securities or other property, if any,
deliverable upon such reclassification, consolidation, merger,
24
<PAGE>
conveyance, transfer, dissolution, liquidation or winding up. The failure by the
Company or the Warrant Agent to give such notice or any defect therein shall not
affect the legality or validity of any distribution, right, option, warrant,
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up, or the vote upon any action.
The Company shall give prompt written notice to the Warrant Agent and
shall cause the Warrant Agent, on behalf of and at the expense of the Company to
give to each Holder written notice of any determination to make a distribution
or dividend to the holders of its Common Stock of any assets (including cash
(other than any Ordinary Cash Distribution)), debt securities, preferred stock,
or any rights or warrants to purchase debt securities, preferred stock, assets
or other securities (other than Common Stock, or rights, options, or warrants to
purchase Common Stock) of the Company, which notice shall state the nature and
amount of such planned dividend or distribution and the record date therefor,
and shall be given by the Company at least 20 days prior to such record date
therefor.
At any time prior to the date that is 30 Business Days after the
Exercisability Date, with respect to any distribution or dividend made by the
Company to all of the holders of its Common Stock for which notice to the
Holders of the Warrants under this Section 14 would be required had such
dividend or distribution occurred after the Exercisability Date and except for
such distributions or dividends as are provided for in Section 12 hereof, the
Company shall hold in reserve the amount of any such dividend or distribution
that would have been payable to the Holders in respect of their Warrant Shares
had the Holders exercised their Warrants immediately prior to such dividend or
distribution. The Company shall release to each Holder of Warrants his, her or
its pro rata share of such reserved dividends or distributions upon the exercise
of such Holder's Warrants pursuant to Section 7 hereof. Any notice delivered to
the Holders by the Company pursuant to this Section 14 shall state the nature
and amount of such dividend or distribution that shall be held in reserve.
Nothing contained in this Agreement or in any Warrant Certificate
shall be construed as conferring upon the Holders the right to vote or to
consent or to receive notice as stockholders in respect of the meetings of
stockholders or the election of directors of the Company or any other matter, or
any rights whatsoever as stockholders of the Company.
25
<PAGE>
Section 15. Notices to the Company and Warrant Agent. Any notice or
----------------------------------------
demand authorized by this Agreement to be given or made by the Warrant Agent or
by any Holder to or on the Company shall be sufficiently given or made when
received at the office of the Company expressly designated by the Company as its
office for purposes of this Agreement (until the Warrant Agent is otherwise
notified in accordance with this Section 15 by the Company), as follows:
Endo Pharmaceuticals Holdings Inc.
c/o Kelso & Company
320 Park Avenue
24/th/ Floor
New York, New York 10022
Attention: Managing Director
with copy to General Counsel
with a copy to:
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, New York 10022-3897
Attention: Eileen Nugent Simon, Esq.
Any notice pursuant to this Agreement to be given by the Company or by
any Holder(s) to the Warrant Agent shall be sufficiently given when received by
the Warrant Agent at the address appearing below (until the Company is otherwise
notified in accordance with this Section by the Warrant Agent).
[WARRANT AGENT]
[ADDRESS]
Attention: [CONTACT]
Section 16. Supplements and Amendments; Actions. The Company and the
-----------------------------------
Warrant Agent may from time to time supplement or amend this Agreement without
the approval of any holders of Warrants in order to cure any ambiguity or to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provision herein, or to make any other provisions in
regard to matters or questions arising hereunder which the Company and the
Warrant Agent may deem necessary or desirable and which shall not in any
26
<PAGE>
way adversely affect the rights of any holder of Warrants hereunder. Any
amendment or supplement to this Agreement that has a material adverse effect on
the rights of holders hereunder shall require the written consent of registered
holders of a majority of the then outstanding Warrants, which consent shall then
be effective against all the Holders of Warrants hereunder. The consent of each
holder of a Warrant affected shall be required for any amendment pursuant to
which the Exercise Price would be increased or the number of Warrant Shares
purchasable upon exercise of Warrants would be decreased (not including
adjustments contemplated hereunder). The Warrant Agent shall be entitled to
receive and shall be fully protected in relying upon an officers' certificate
and opinion of counsel as conclusive evidence that any such amendment or
supplement is authorized or permitted hereunder, that it is not inconsistent
herewith, and that it will be valid and binding upon the Company in accordance
with its terms.
Any actions seeking enforcement of the rights of Holders hereunder
(including paragraph 3 of Section 7 hereof) may be brought either by the Warrant
Agent or the Holders of more than 50% of the Warrants issued hereunder and then
outstanding.
Section 17. Concerning the Warrant Agent. The Warrant Agent
----------------------------
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the Holders, by
their acceptance of Warrants, shall be bound:
(a) The statements contained herein and in the Warrant Certificate
shall be taken as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as describe
the Warrant Agent or any action taken by it. The Warrant Agent assumes no
responsibility with respect to the distribution of the Warrants except as
herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with the covenants contained in this Agreement or in the
Warrants to be complied with by the Company.
(c) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself (through
its employees) or by or through its attorneys or agents (which shall not include
its
27
<PAGE>
employees) and shall not be responsible for the misconduct of any agent
appointed with due care.
(d) The Warrant Agent may consult at any time with legal counsel
satisfactory to it (who may be counsel for the Company), and the Warrant Agent
shall incur no liability or responsibility to the Company or to any Holder in
respect of any action taken, suffered or omitted by it hereunder in good faith
and in accordance with the opinion or the advice of such counsel.
(e) Whenever in the performance of its duties under this Agreement
the Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless such evidence in respect thereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a certificate signed by the Chairman of the Board, the President,
Chief Financial Officer, one of the Vice Presidents, the Treasurer or the
Secretary of the Company and delivered to the Warrant Agent; and such
certificate shall be full authorization to the Warrant Agent for any action
taken or suffered in good faith by it under the provisions of this Agreement in
reliance upon such certificate.
(f) The Company agrees to pay the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the performance
of its duties under this Agreement, to reimburse the Warrant Agent for all
expenses, taxes and governmental charges and other charges of any kind and
nature incurred by the Warrant Agent (including reasonable fees and expenses of
the Warrant Agent's counsel and agents) in the performance of its duties under
this Agreement, and to indemnify the Warrant Agent and save it harmless against
any and all liabilities, including judgments, costs and counsel fees, for
anything done or omitted by the Warrant Agent in the performance of its duties
under this Agreement, except as a result of the Warrant Agent's negligence or
bad faith.
(g) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to involve
expense unless the Company or one or more Holders shall furnish the Warrant
Agent with reasonable security and indemnity satisfactory to the Warrant Agent
for any costs and expenses which may be incurred, but this provision shall not
affect the power of the Warrant Agent to take such action as the Warrant Agent
may consider proper, whether with or without any such security or indemnity.
28
<PAGE>
All rights of action under this Agreement or under any of the Warrants may be
enforced by the Warrant Agent without the possession of any of the Warrants or
the production thereof at any trial or other proceeding relative thereto, and
any such action, suit or proceeding instituted by the Warrant Agent shall be
brought in its name as Warrant Agent, and any recovery of judgment shall be for
the ratable benefit of the Holders, as their respective rights or interests may
appear.
(h) The Warrant Agent and any stockholder, director, officer or
employee of the Warrant Agent may buy, sell or deal in any of the Warrants or
other securities of the Company or become pecuniarily interested in any
transactions in which the Company may be interested, or contract with or lend
money to the Com pany or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement or such director, officer or employee.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity including, without
limitation, acting as Transfer Agent or as a lender to the Company or an
Affiliate thereof.
(i) The Warrant Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The Warrant Agent
shall not be liable for anything which it may do or refrain from doing in
connection with this Agreement except for its own negligence or bad faith.
(j) The Warrant Agent will not incur any liability or responsibility
to the Company or to any Holder for any action taken in reliance on any notice,
resolution, waiver, consent, order, certificate, or other paper, document or
instrument reasonably believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(k) The Warrant Agent shall not be under any responsibility in
respect of the validity of this Agreement or the execution and delivery hereof
(except the due execution hereof by the Warrant Agent) or in respect of the
validity or execution of any Warrant (except its countersignature thereof); nor
shall the Warrant Agent by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any Warrant
Shares (or other stock) to be issued pursuant to this Agreement or any Warrant,
or as to whether any Warrant Shares (or other stock) will, when issued, be
validly issued, fully paid and nonassessable, or as to the Exercise Price or the
number or amount of Warrant Shares or other securities or other property
issuable upon exercise of any Warrant.
29
<PAGE>
(l) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chair man of the Board, the President, any Vice President or the Secretary of
the Company, and to apply to such officers for advice or instructions in
connection with its duties, and shall not be liable for any action taken or
suffered to be taken by it in good faith and without negligence in accordance
with instructions of any such officer or officers.
Section 18. Change of Warrant Agent. The Warrant Agent may resign at
-----------------------
any time and be discharged from its duties under this Agreement by giving to the
Company 30-days' notice in writing. The Warrant Agent may be removed by like
notice to the Warrant Agent from the Company. If the Warrant Agent shall resign
or be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Warrant Agent. If the Company shall fail to make such
appointment within a period of 30 days after such removal or after it has been
notified in writing of such resignation or incapacity by the resigning or
incapacitated Warrant Agent or by any Holder (who shall with such notice submit
his, her or its Warrant for inspection by the Company), then any Holder may
apply to any court of competent jurisdiction for the appointment of a successor
to the Warrant Agent. Pending appointment of a successor warrant agent, either
by the Company or by such court, the duties of the Warrant Agent shall be
carried out by the Company. Any successor warrant agent, whether appointed by
the Company or such a court, shall be a bank or trust company in good standing,
incorporated under the laws of the United States of America or any State thereof
or the District of Columbia and having at the time of its appointment as warrant
agent a combined capital and surplus of at least $10,000,000. After appointment,
the successor warrant agent shall be vested with the same powers, rights, duties
and responsibilities as if it had been originally named as Warrant Agent without
further act or deed; but the former Warrant Agent shall deliver and transfer to
the successor warrant agent any property at the time held by it hereunder, and
execute and deliver any further assurance, conveyance, act or deed necessary for
such purpose. Failure to file any notice provided for in this Section 18,
however, or any defect therein, shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
warrant agent, as the case may be. In the event of such resignation or removal,
the Company or the successor warrant agent shall mail by first class mail,
postage prepaid, to each Holder, written notice of such removal or resignation
and the name and address of such successor warrant agent.
30
<PAGE>
Section 19. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company, the Warrant Agent or any holder
of Warrants shall bind and inure to the benefit of their respective successors
and assigns hereunder.
Section 20. Termination. This Agreement shall terminate at 5:00 p.m.,
-----------
New York City time, on the Expiration Date. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date if all Warrants have been exercised
pursuant to this Agreement.
Section 21. GOVERNING LAW. THIS AGREEMENT AND EACH WARRANT
-------------
CERTIFICATE ISSUED HEREUNDER SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE
LAWS OF THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF SAID STATE, WITHOUT REGARD TO THE CONFLICT OF LAW
RULES THEREOF.
Section 22. Benefits of This Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any person or corporation other than the Company,
the Warrant Agent and the registered Holders of the Warrant Certificates any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the
Warrant Agent and the registered Holders of the Warrant Certificates.
Section 23. Counterparts. This Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
Section 24. Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
ENDO PHARMACEUTICALS HOLDINGS INC.
By: ________________________________
Name:
Title:
[WARRANT AGENT],
as Warrant Agent
By: ________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[Form of Warrant Certificate]
[Face]
THIS SECURITY IS A GLOBAL CERTIFICATE AND IS REGISTERED IN THE NAME
OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS
SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON
OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES
DESCRIBED IN THE WARRANT AGREEMENT, DATED AS OF ____________, ____, BY AND
BETWEEN THE COMPANY AND THE WARRANT AGENT (THE "WARRANT AGREEMENT"), AND NO
TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY
THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY
TO THE DEPOSITORY OR AN OTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT AGREEMENT. UNLESS
THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY (A NEW YORK CORPORATION) ("DTC") TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR SUCH
OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
A-1
<PAGE>
EXERCISABLE ON OR AFTER THE EXERCISABILITY DATE
AND ON OR BEFORE THE EXPIRATION DATE
No. __________ __________ Class A Transferable Warrants
Class A Transferable Warrant Certificate
ENDO PHARMACEUTICALS HOLDINGS INC.
This Warrant Certificate certifies that _______, or registered
assigns, is the registered holder of Class A Transferable Warrants expiring on
or before the Expiration Date (the "Warrants") to purchase shares of Common
Stock, par value $.01 per share (the "Common Stock"), of Endo Pharmaceuticals
Holdings Inc., a Delaware corporation (the "Company"). Each Warrant entitles
the holder upon exercise to receive from the Company on or after the
Exercisability Date and on or before 5:00 p.m. New York City Time on the six-
month anniversary of the Exercisability Date (the "Expiration Date") a number of
fully paid and nonassessable shares of Common Stock (each such share, a "Warrant
Share") as determined in the following paragraph at the initial exercise price
(the "Exercise Price") equal to $0.01 payable upon surrender of this Warrant
Certificate and payment of the Exercise Price in the manner set forth in the
Warrant Agreement, subject only to the conditions set forth herein and in the
Warrant Agreement referred to on the reverse hereof.
If the Exercisability Date is on or prior to December 31, 2001, the
Holder shall then be entitled to receive from the Company (on exercise of such
Warrants and payment of the Exercise Price then in effect for such Warrant
Shares) (together, if applicable, with cash payable as provided in Section 13
hereof and any dividends or distributions payable as provided in Section 14
hereof) (a) 1.153846/8/ Warrant Shares in the event the Adjustment Event (as
defined in that certain Agreement and Plan of Merger, dated as of November __,
1999, by and among the Company, Endo Inc., a Delaware corporation and wholly
owned subsidiary of the
_________________
/8/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 35% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
A-2
<PAGE>
Company, and [TARGET] Pharmaceutical Corporation, a Delaware corporation) has
not occurred prior to the Exercisability Date or (b) 1.000000/9/ Warrant Shares
in the event the Adjustment Event has occurred prior to the Exercisability Date.
If the Exercisability Date is after December 31, 2001 and on or prior to June
30, 2002, the Holder shall then be entitled to receive from the Company (on
exercise of such Warrants and payment of the Exercise Price then in effect for
such Warrant Shares) (together, if applicable, with cash payable as provided in
Section 13 hereof and any dividends or distributions payable as provided in
Section 14 hereof) (a) 0.714286/10/ Warrant Shares in the event the Adjustment
Event has not occurred prior to the Exercisability Date or (b) 0.615385/11/
Warrant Shares in the event the Adjustment Event has occurred prior to the
Exercisability Date. If the Exercisability Date is after June 30, 2002 and on or
prior to December 31, 2002, the Holders shall then be entitled to receive from
the Company (on exercise of such Warrants and payment of the Exercise Price then
in effect for such Warrant Shares) (together, if applicable, with cash payable
as provided in Section 13 hereof and any dividends or distributions payable as
provided in Section 14 hereof) (a) 0.333333/12/ Warrant Shares in the event the
Adjustment Event has not occurred prior to the Exercisability Date or (b)
_________________
/9/ This number shall be adjusted in the final Agreements and Warrant in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 40% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
/10/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 30% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
/11/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 35% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
/12/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 25% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants as if no Adjustment Event had occurred).
A-3
<PAGE>
0.285714/13/ Warrant Shares in the event the Adjustment Event has occurred prior
to the Exercisability Date.
The Exercise Price and number of Warrant Shares issuable upon exercise of
the Warrants are subject to adjustment upon the occurrence of certain events as
set forth in the Warrant Agreement.
No Warrant may be exercised before the Exercisability Date or after
5:00 p.m., New York City Time, on the Expiration Date and to the extent not
exercised by such time such Warrants shall become void.
This Warrant Certificate shall not be valid unless countersigned by
the Warrant Agent, as such term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
_________________
/13/ This number shall be adjusted in the final Agreement and Warrants in order
to reflect that at the Effective Time the aggregate number on which it is
based, when taken together with the shares of Parent Common Stock issuable
to holders of Company Common Stock in the Merger, shall equal 30% of the
shares of Parent Common Stock on a fully diluted basis (excluding the
effect of the Algos Warrants and after giving effect to the Adjustment
Event as if it had occurred).
A-4
<PAGE>
IN WITNESS WHEREOF, Endo Pharmaceuticals Holdings Inc. has caused this
Warrant Certificate to be signed by its [OFFICER] and by its Secretary, each by
a facsimile of his or her signature, and has caused a facsimile of its corporate
seal to be affixed hereunto or imprinted hereon.
Dated: , ____
ENDO PHARMACEUTICALS HOLDINGS INC.
By: ___________________________
Name:
Title:
By: ___________________________
Name:
Title: Secretary
Countersigned:
[WARRANT AGENT],
as Warrant Agent
By: ___________________________
Name:
Title:
A-5
<PAGE>
[Form of Warrant Certificate]
[Reverse]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring on the "Expiration Date," entitling the
holder on exercise to receive shares of Common Stock, par value $.01 per share,
of the Company (the "Common Stock"), and are issued or to be issued pursuant to
a Warrant Agreement dated as of ________ __, ____ (the "Warrant Agreement"),
duly executed and delivered by the Company to [WARRANT AGENT], as warrant agent
(the "Warrant Agent"), which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Warrant Agent, the Company and the holders (the
words "holders" or "holder" meaning the registered holders or registered holder)
of the Warrants. A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
Warrants may be exercised at any time on or after the "Exercisability
Date" and on or before the "Expiration Date." The holder of Warrants evidenced
by this Warrant Certificate may exercise them by surrendering this Warrant
Certificate, with the form of election to purchase set forth hereon properly
completed and executed, together with payment in the manner provided for in the
Warrant Agreement at the office of the Warrant Agent. In the event that upon any
exercise of Warrants evidenced hereby, the number of Warrants exercised shall be
less than the total number of Warrants evidenced hereby, there shall be issued
to the holder hereof or his, her or its assignee a new Warrant Certificate
evidencing the number of Warrants not exercised.
The Warrant Agreement provides that upon the occurrence of certain
events the number of Warrants set forth on the face hereof and the Exercise
Price may, subject to certain conditions, be adjusted. No fractions of a share
of Common Stock will be issued upon the exercise of any Warrant, but the Company
will pay the cash value thereof determined as provided in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the Warrant
Agent by the registered holder thereof in person or by legal representative or
attorney duly authorized in writing, may be exchanged, in the manner and subject
to the limitations provided in the Warrant Agreement, but without payment of any
service
A-6
<PAGE>
charge, for another Warrant Certificate or Warrant Certificates of like tenor
evidencing in the aggregate a like number of Warrants.
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder(s) thereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
A-7
<PAGE>
[Form of Election to Purchase]
(To Be Executed upon Exercise of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive _____shares of Common Stock
and herewith tenders payment for such shares to the order of Endo
Pharmaceuticals Holdings Inc. in the amount of $______ payable in (select one or
more: (i) cash and/or (ii) pursuant to a Cashless Exercise) in accordance with
the terms hereof and of the Warrant Agreement. The undersigned requests that a
certificate for such shares be registered in the name of _________, whose
address is ________ and that such shares be delivered to ________ whose address
is ________. If said number of shares is less than all of the shares of Common
Stock purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the remaining balance of such shares be registered in
the name of ________, whose address is ________, and that such Warrant
Certificate be delivered to ________, whose address is ________.
Signature:
Date:
Signature Guaranteed:
A-8
<PAGE>
SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS
The following exchanges of a part of this Global Warrant for certificated
Warrants have been made:
<TABLE>
<CAPTION>
Number of
Warrants of
Amount of Amount of this Global
decrease in increase in Warrant Signature of
Number of Number of following authorized
Date of Warrants of this Warrants of this such decrease officer of
Exchange Global Warrant Global Warrant (or increase) Warrant Agent
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
A-9
<PAGE>
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF
CLASS A TRANSFERABLE WARRANTS
Re: Class A Transferable Warrants to Purchase Common Stock (the "Warrants") of
Endo Pharmaceuticals Holdings Inc.
This Certificate relates to Warrants held in* ___book-entry or * ____
certificated form by ____________ (the "Transferor").
The Transferor:*
[_] has requested the Warrant Agent by written order to deliver in
exchange for its beneficial interest in the Global Warrant held by the
depository a Warrant or Warrants in definitive, registered form equal to its
beneficial interest in Warrants represented by such Global Warrant (or the
portion thereof indicated above); or
[_] has requested the Warrant Agent by written order to exchange or
register the transfer of a Warrant or Warrants.
________________________________
[INSERT NAME OF TRANSFEROR]
By: __________________________
Date: _____________________
*Check applicable box.
<PAGE>
INDEX OF DEFINED TERMS
----------------------
<TABLE>
<CAPTION>
<S> <C>
Affiliate....................................................................
Agreement....................................................................
Business Day.................................................................
Cashless Exercise............................................................
closing bid price............................................................
Common Stock.................................................................
Company......................................................................
Current Market Value.........................................................
Definitive Warrants..........................................................
Exchange Act.................................................................
Exercisability Date..........................................................
Exercise Price...............................................................
Exercise Rate................................................................
Expiration Date..............................................................
FDA..........................................................................
Fully Diluted Shares.........................................................
Global Warrants..............................................................
Holders......................................................................
Independent Financial Expert.................................................
Legal Holiday................................................................
Merger Agreement.............................................................
Ordinary Cash Distribution...................................................
Reorganizations..............................................................
Security.....................................................................
shares of Common Stock.......................................................
Sub..........................................................................
Target.......................................................................
Time of Determination........................................................
Transfer Agent...............................................................
Ultimate Expiration Date.....................................................
Warrant......................................................................
Warrant Agent................................................................
Warrant Certificates.........................................................
Warrant Register.............................................................
Warrant Shares...............................................................
Warrants.....................................................................
</TABLE>
<PAGE>
APPENDIX D
FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ENDO PHARMACEUTICALS HOLDINGS INC.
FIRST: The name of the Corporation is Endo Pharmaceuticals Holdings
-----
Inc. (hereinafter the "Corporation").
SECOND: The address of the registered office of the Corporation in
------
the State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at that address is the
Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
-----
or activity for which a corporation may be organized under the General
Corporation Law of the State of Delaware as set forth in Title 8 of the
Delaware Code (the "GCL").
FOURTH: The total number of shares of capital stock which the
------
Corporation shall have authority to issue is 175,078,160 shares, consisting of
(i) 142,656,279 shares of Common Stock, par value $.01 per share (the "Common
Stock") and (ii) 32,421,882 shares of Preferred Stock, par value $.01 per share
(the "Preferred Stock").
A. Common Stock. Except as otherwise pro vided in this Article
------------
FOURTH or as otherwise required by law, shares of Common Stock shall be
identical and shall entitle the holders thereof to the same rights and
privileges, subject to the same qualifications, limitations and restrictions.
<PAGE>
1. Voting Rights. Except as otherwise required by applicable
-------------
law, the holders of Common Stock will be entitled to one vote per share on all
matters to be voted on by the Corporation's Common Stockholders.
2. Dividends. When and as dividends are declared thereon,
---------
whether payable in cash, property or securities of the Corporation, the holders
of Common Stock will be entitled to share equally, share for share, in such
dividends.
B. Preferred Stock. The Board of Directors is expressly authorized
---------------
to provide for the issuance of all or any shares of the Preferred Stock in one
or more classes or series, and to fix for each such class or series such voting
powers, full or limited, or no voting powers, and such distinctive designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the GCL, including, without limitation, the authority to provide that any such
class or series may be (i) subject to such mandatory or optional redemption at
such time or times and at such price or prices, or, if appropriate, not subject
to such mandatory or optional redemption, (ii) entitled to receive dividends
(which may be cumulative or non-cumulative) at such rates, on such conditions,
and at such times, and payable in preference to, or in such relation to, the
dividends payable on any other class or classes or any other series, (iii)
entitled to such rights upon the dissolution of, or upon any distribution of the
assets of, the Corporation, or (iv) convertible into, or exchangeable for,
shares of any other class or classes of stock, or of any other series of the
same or any other class or classes of stock, of the Corporation at such price or
prices or at such rates of exchange and with such adjustments, all as may be
stated in such resolution or resolutions .
FIFTH: The following provisions are inserted for the management of
-----
the business and the conduct of
2
<PAGE>
the affairs of the Corporation, and for further definition, limitation and
regulation of the powers of the Corporation and of its directors and
stockholders:
(1) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stockholders
to make, alter, amend, change, add to or repeal the By-Laws of the
Corporation, as amended and restated from time to time (the "By-Laws").
(3) The number of directors of the Corporation shall not be less than
seven (7) nor more than eleven (11), the exact number of directors to be
fixed from time to time by, or in the manner provided in, the By-Laws of
the Corporation. The number of directors constituting the Board of
Directors shall be fixed at nine (9) as of the date hereof. Election of
directors need not be by written ballot unless the By-Laws so provide.
(4) No director shall be personally liable to the Corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) pursuant to Section 174 of the GCL or (iv) for any
transaction from which the director derived an improper personal benefit.
Any repeal or modification of this Article FIFTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or
modification with respect to acts or omissions
3
<PAGE>
occurring prior to such repeal or modification.
(5) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered
to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Certificate of Incorporation, and any By-Laws
adopted by the stockholders; provided, however, that no By-Laws hereafter
adopted by the stockholders shall invalidate any prior act of the directors
which would have been valid if such By-Laws had not been adopted.
SIXTH: The name and mailing address of the Sole Incorporator is as
-----
follows:
Name Address
---- -------
Deborah M. Reusch P.O. Box 636
Wilmington, DE 19899
SEVENTH: The Corporation shall indemnify its directors and officers
-------
to the fullest extent authorized or permitted by law, as now or hereafter in
effect, and such right to indemnification shall continue as to a person who has
ceased to be a director or officer of the Corporation and shall inure to the
benefit of his or her heirs, executors and personal and legal representatives;
provided, however, that, except for proceedings to enforce rights to
- -------- -------
indemnification, the Corporation shall not be obligated to indemnify any
director or officer (or his or her heirs, executors or personal or legal
representatives) in connection with a proceeding (or part thereof) initiated by
such person unless such proceeding (or part thereof) was authorized or consented
to by the Board of Directors. The right to indemnification conferred by this
Article SEVENTH shall include the right to be paid by the Corporation the
expenses incurred in defending or otherwise participating in any proceeding in
advance of its final disposition.
4
<PAGE>
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article SEVENTH to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses conferred
in this Article SEVENTH shall not be exclusive of any other right which any
person may have or hereafter acquire under this Certificate of Incorporation,
the By-Laws, any statute, agreement, vote of stockholders or disinterested
directors or otherwise.
Any repeal or modification of this Article SEVENTH by the stockholders
of the Corporation shall not adversely affect any rights to indemnification and
to the advancement of expenses of a director or officer of the Corporation
existing at the time of such repeal or modification with respect to any acts or
omissions occurring prior to such repeal or modification.
EIGHTH: Meetings of stockholders may be held within or without the
------
State of Delaware, as the By-Laws may provide. The books of the Corporation may
be kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws.
NINTH: The Corporation hereby elects not to be governed by Section
-----
203 of the GCL pursuant to Section 203(b)(3) therein.
TENTH: The Corporation reserves the right to amend, alter, change or
-----
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
5
<PAGE>
I, THE UNDERSIGNED, being the Sole Incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the GCL, do make this
Certificate, hereby declaring and certifying that this is my act and deed and
the facts herein stated are true, and accordingly have hereunto set my hand this
__ day of _________, ____.
______________________
Deborah M. Reusch
Sole Incorporator
6
<PAGE>
APPENDIX E
FORM OF AMENDED AND RESTATED BY-LAWS
OF
ENDO PHARMACEUTICALS HOLDINGS INC.
(hereinafter called the "Corporation")
As adopted ________ __, ____
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the
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Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation may also have offices
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at such other places both within and without the State of Delaware as the Board
of Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
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Section 1. Place of Meetings. Meetings of the stockholders for the
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election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware as shall be designated
from time to
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time by the Board of Directors and stated in the notice of the meeting or in a
duly executed waiver of notice thereof.
Section 2. Annual Meetings. The Annual Meetings of Stockholders
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shall be held on such date and at such time as shall be designated from time to
time by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect by a plurality vote a Board of Directors,
and transact such other business as may properly be brought before the meeting.
Written notice of the Annual Meeting stating the place, date and hour of the
meeting shall be given to each stockholder entitled to vote at such meeting not
less than ten nor more than sixty days before the date of the meeting.
Section 3. Nature of Business at Meetings of Stockholders. No
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business may be transacted at an annual meeting of stockholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors (or
any duly authorized committee thereof), (b) otherwise properly brought before
the annual meeting by or at the direction of the Board of Directors (or any duly
authorized committee thereof) or (c) otherwise properly brought before the
annual meeting by any stockholder of the Corporation (i) who is a stockholder of
record on the date of the giving of the notice provided for in this Section 3
and on the record date for the determination of stockholders entitled to vote at
such annual meeting and (ii) who complies with the notice procedures set forth
in this Section 3.
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In addition to any other applicable require ments, for business to be
properly brought before an annual meeting by a stockholder, such stockholder
must have given timely notice thereof in proper written form to the Secretary of
the Corporation.
To be timely, a stockholder's notice to the Secretary must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than sixty (60) days nor more than ninety (90) days prior
to the anniversary date of the immediately preceding annual meeting of
stockholders; provided, however, that in the event that the annual meeting is
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called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder in order to be timely must be so
received not later than the close of business on the tenth (10th) day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure of the date of the annual meeting was made, whichever
first occurs.
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting (i) a brief description of the business desired to be brought
before the annual meeting and the reasons for conducting such business at the
annual meeting, (ii) the name and record address of such stockholder, (iii) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by such stockholder, (iv) a description of
all arrangements or understandings
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between such stockholder and any other person or persons (including their names)
in connection with the proposal of such business by such stockholder and any
material interest of such stockholder in such business and (v) a representation
that such stockholder intends to appear in person or by proxy at the annual
meeting to bring such business before the meeting.
No business shall be conducted at the annual meeting of stockholders
except business brought before the annual meeting in accordance with the
procedures set forth in this Section 3; provided, however, that, once business
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has been properly brought before the annual meeting in accordance with such
procedures, nothing in this Section 3 shall be deemed to preclude discussion by
any stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
Section 4. Special Meetings. Unless otherwise prescribed by law
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or by the certificate of incorporation of the Corporation, as amended and
restated from time to time (the "Certificate of Incorporation"), Special
Meetings of Stockholders, for any purpose or purposes, may be called by any
officer of the Corporation at the request in writing of a majority of the Board
of Directors or at the request in writing of stockholders owning a majority of
the capital stock of the Corporation issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of
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the proposed meeting. Written notice of a Special Meeting stating the place,
date and hour of the meeting and the purpose or purposes for which the meeting
is called shall be given not less than ten nor more than sixty days before the
date of the meeting to each stockholder entitled to vote at such meeting.
Section 5. Quorum. Except as otherwise provided by law or by the
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Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted
at the meeting as originally noticed. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder entitled to vote at the meeting.
Section 6. Voting. Unless otherwise required by law, the
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Certificate of Incorporation or these By-Laws, any question brought before any
meeting of stockholders shall be decided by the vote of the holders of a
majority of the stock
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represented and entitled to vote thereat. Unless otherwise provided in the
Certificate of Incorporation and subject to Section 5 of Article V hereof, each
stockholder represented at a meeting of stockholders shall be entitled to cast
one vote for each share of the capital stock entitled to vote thereat held by
such stockholder. Such votes may be cast in person or by proxy but no proxy
shall be voted on or after three years from its date, unless such proxy provides
for a longer period. The Board of Directors, in its discretion, or the officer
of the Corporation presiding at a meeting of stockholders, in his or her
discretion, may require that any votes cast at such meeting shall be cast by
written ballot.
Section 7. Consent of Stockholders in Lieu of Meeting. Unless
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otherwise provided in the Certificate of Incorporation, any action required or
permitted to be taken at any Annual or Special Meeting of Stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
Section 8. List of Stockholders Entitled to Vote. The officer of
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the Corporation who has charge of the stock ledger of the Corporation shall
prepare and
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make, at least ten days before every meeting of stockholders, a complete list
of the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder of the Corporation who is present.
Section 9. Stock Ledger. The stock ledger of the Corporation
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shall be the only evidence as to who are the stockholders entitled to examine
the stock ledger, the list required by Section 8 of this Article II or the
books of the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
ARTICLE III
DIRECTORS
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Section 1. Number and Election of Directors. The Board of Directors
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shall consist of not less than seven (7) nor more than eleven (11) members, the
exact number of which shall initially be fixed upon the adoption of these By-
Laws at nine (9) and, thereafter, shall be fixed from time to time by resolution
of the
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Board of Directors adopted in accordance with Section 6 of this Article III (the
"Board Resolution"), or by resolution adopted by the vote of a majority of the
stockholders of the Common Stock or by consent executed on behalf of such
stockholders (the "Stockholder Resolution"); provided, that in the event of a
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conflict between the Board Resolution and the Stockholder Resolution, the
Stockholder Resolution shall govern. Except as provided in Section 2 of this
Article, directors shall be elected by a plurality of the votes cast at Annual
Meetings of Stockholders, and each director so elected shall hold office until
the next Annual Meeting and until his or her successor is duly elected and
qualified, or until his or her earlier resignation or removal. Any director may
resign at any time upon notice to the Corporation. Directors need not be
stockholders.
Section 2. Vacancies. Vacancies and newly created directorships
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resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or
by a sole remaining director, and the directors so chosen shall hold office
until the next Annual Meeting and until their successors are duly elected and
qualified, or until their earlier death, resignation or removal.
Section 3. Duties and Powers. The business of the Corporation
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shall be managed by or under the direction of the Board of Directors which may
exercise all such powers of the Corporation and do all such lawful acts and
things as are not
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by statute or by the Certificate of Incorporation or by these By-Laws directed
or required to be exercised or done by the stockholders.
Section 4. Meetings. The Board of Directors of the Corporation may
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hold meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held without notice
at such time and at such place as may from time to time be determined by the
Board of Directors. Special meetings of the Board of Directors may be called by
the Chairman, if there be one, the President, or any director. Notice thereof
stating the place, date and hour of the meeting shall be given to each director
either by personal delivery, facsimile, telephone or telegram on twenty-four
(24) hours' notice, or on such shorter notice as the person or persons calling
such meeting may deem necessary or appropriate in the circumstances.
Section 5. Quorum. Except as may be otherwise specifically
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provided by law, the Certificate of Incorporation or these By-Laws, at all
meetings of the Board of Directors, a majority of the entire Board of Directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors; provided, however, that so long as
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(i) Kelso & Company ("Kelso") and its affiliates shall own at least 25% of the
outstanding shares of Common Stock and (ii) the Corporation's Common Stock is
not publicly traded, any act by the Board of Directors shall require the consent
of at least one member of the Board of Directors
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who is an officer, director or employee of Kelso or its affiliates (other than
the Corporation), if there exists such officer, director or employee of Kelso
serving as a member of the Board of Directors at such time. If a quorum shall
not be present at any meeting of the Board of Directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 6. Actions of Board by Written Consent. Unless otherwise
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provided by the Certificate of Incorporation or these By-Laws, any action
required or permitted to be taken at any meeting of the Board of Directors or of
any committee thereof may be taken without a meeting, if all the members of
the Board of Directors or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board of Directors or committee.
Section 7. Meetings by Means of Conference Telephone. Unless
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otherwise provided by the Certificate of Incorporation or these By-Laws, members
of the Board of Directors of the Corporation, or any committee designated by
the Board of Directors, may participate in a meeting of the Board of Directors
or such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 7 shall
constitute presence in person at such meeting.
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Section 8. Committees. The Board of Directors may, by resolution
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passed by a majority of the entire Board of Directors, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of any such committee. In the absence or disqualification
of a member of a committee, and in the absence of a designation by the Board of
Directors of an alternate member to replace the absent or disqualified member,
the member or members thereof present at any meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any absent or disqualified member. Notwithstanding the preceding
sentences, no absent or disqualified member of any committee who is a [Target]
Designee (as defined in Section 11 of this Article III) shall be replaced at any
meeting except by another [Target] Designee or a nominee thereof. Any committee,
to the extent allowed by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation.
Each committee shall keep regular minutes and report to the Board of Directors
when required.
Section 9. Compensation. The directors may be paid their
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expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a
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fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation there for. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Section 10. Interested Directors. No contract or transaction
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between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association, or
other organization in which one or more of its directors or officers are
directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the director or officer is present
at or participates in the meeting of the Board of Directors or committee thereof
which authorizes the contract or transaction, or solely because his or her or
their votes are counted for such purpose if (i) the material facts as to his or
her or their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or
(ii) the material facts as to his or her or their relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (iii) the contract
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or transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified, by the Board of Directors, a committee thereof or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
Section 11. Continuing Directors. Three (3) designees of [Target]
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(each of whom shall be satisfactory to the Corporation) shall be appointed to
the Board of Directors (such person and any subsequent designees thereof, the
"[Target] Designees"), and shall serve until their terms expire or until their
successors have been duly elected or appointed and qualified or until their
earlier death, resignation or removal in accordance with the terms hereof or the
Certificate of Incorporation. During the three-year period, from and including
[the Effective Date], (a) at any meeting of stockholders for the purpose of
electing the members of the Board of Directors, the Corporation shall use its
reasonable best efforts to cause to be nominated for election the [Target]
Designees, (b) any vacancies created by any [Target] Designee upon such [Target]
Designee's death, resignation or removal that are not filled pursuant to a
stockholder vote shall be filled by a nominee of the remaining [Target]
Designees and (c) one [Target] Designee shall be appointed as a member of any
compensation committee of the Board of Directors or any other committee of such
Board of Directors having the responsibility or power with respect to the
granting of employee stock options.
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ARTICLE IV
OFFICERS
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Section 1. General. The officers of the Corporation shall be
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chosen by the Board of Directors and shall be a President, a Secretary and a
Treasurer. The Board of Directors, in its discretion, may also choose a
Chairman of the Board of Directors (who must be a director) and one or more
Vice Presidents, Assistant Secretaries, Assistant Treasurers and other
officers. Any number of offices may be held by the same person, unless other-
wise prohibited by law, the Certificate of Incorporation or these By-Laws. The
officers of the Corporation need not be stockholders of the Corporation nor,
except in the case of the Chairman of the Board of Directors, need such officers
be directors of the Corporation.
Section 2. Election. The Board of Directors at its first meeting
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held after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time by the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
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Section 3. Voting Securities Owned by the Corporation. Powers of
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attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name
of and on behalf of the Corporation by the President or any Vice President and
any such officer may, in the name of and on behalf of the Corporation, take all
such action as any such officer may deem advisable to vote in person or by proxy
at any meeting of security holders of any corporation in which the Corporation
may own securities and at any such meeting shall possess and may exercise any
and all rights and power incident to the ownership of such securities and which,
as the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may, by resolution, from time to time confer
like powers upon any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of
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the Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. Except where by law the signature
of the President is required, the Chairman of the Board of Directors shall
possess the same power as the President to sign all contracts, certificates and
other instruments of the Corporation which may be authorized by the Board of
Directors. During the absence or disability of the President, the Chairman of
the Board of Directors shall exercise all the powers and discharge all the
duties of the President. The Chairman of the Board of Directors shall also
perform such other duties and may exercise such other powers
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as from time to time may be assigned to him or her by these By-Laws or by the
Board of Directors.
Section 5. President. The President shall be the Chief Executive
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Officer of the Corporation, and shall, subject to the control of the Board of
Directors and, if there be one, the Chairman of the Board of Directors, have
general supervision of the business of the Corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect. He or
she shall execute all bonds, mortgages, contracts and other instruments of the
Corporation requiring a seal, under the seal of the Corporation, except where
required or permitted by law to be otherwise signed and executed and except that
the other officers of the Corporation may sign and execute documents when so
authorized by these By-Laws, the Board of Directors or the President. In the
absence or disability of the Chairman of the Board of Directors, or if there be
none, the President shall preside at all meetings of the stockholders and the
Board of Directors. The President shall also perform such other duties and may
exercise such other powers as from time to time may be assigned to him by these
By-Laws or by the Board of Directors.
Section 6. Vice Presidents. At the request of the President or in
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his or her absence or in the event of his or her inability or refusal to act
(and if there be no Chairman of the Board of Directors), the Vice President or
the Vice Presidents if there is more than one (in the order designated by the
Board of Directors) shall perform the duties of the President, and when so
acting, shall have all the powers of
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and be subject to all the restrictions upon the President. Each Vice President
shall perform such other duties and have such other powers as the Board of
Directors from time to time may prescribe. If there be no Chairman of the Board
of Directors and no Vice President, the Board of Directors shall designate the
officer of the Corporation who, in the absence of the President or in the event
of the inability or refusal of the President to act, shall perform the duties of
the President, and when so acting, shall have all the powers of and be subject
to all the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of
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the Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors,
and shall perform such other duties as may be prescribed by the Board of
Directors or President, under whose supervision he or she shall be. If the
Secretary shall be unable or shall refuse to cause to be given notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
if there be no Assistant Secretary, then either the Board of Directors or the
President may choose another officer to cause such notice to be given. The
Secretary shall have custody of the seal of the Corporation and the Secretary or
any Assistant Secretary, if there be one, shall have authority to affix the
same to any instrument requiring it and when so affixed, it may be attested by
the signature of the Secretary or by
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the signature of any such Assistant Secretary. The Board of Directors may give
general authority to any other officer to affix the seal of the Corporation and
to attest the affixing by his or her signature. The Secretary shall see that all
books, reports, statements, certificates and other documents and records
required by law to be kept or filed are properly kept or filed, as the case may
be.
Section 8. Treasurer. The Treasurer shall have the custody of the
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corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his or her transactions as Treasurer and of the financial condition of the
Corporation. If required by the Board of Directors, the Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his or her office and for the restoration to the Corporation, in case
of his or her death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in his or her
possession or under his or her control belonging to the Corporation.
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Section 9. Assistant Secretaries. Except as may be otherwise
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provided in these By-Laws, Assistant Secretaries, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by
the Board of Directors, the President, any Vice President, if there be one, or
the Secretary, and in the absence of the Secretary or in the event of his or her
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 10. Assistant Treasurers. Assistant Treasurers, if there
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be any, shall perform such duties and have such powers as from time to time may
be assigned to them by the Board of Directors, the President, any Vice
President, if there be one, or the Treasurer, and in the absence of the
Treasurer or in the event of his or her disability or refusal to act, shall
perform the duties of the Treasurer, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the Treasurer. If
required by the Board of Directors, an Assistant Treasurer shall give the
Corporation a bond in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of his or her office and for the restoration to the Corporation, in case
of his or her death, resignation, retirement or removal from office, of all
books, papers, vouchers, money and other property of whatever kind in his or her
possession or under his or her control belonging to the Corporation.
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Section 11. Other Officers. Such other officers as the Board of
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Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other offi cers and to prescribe their respective duties and
powers.
ARTICLE V
STOCK
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Section 1. Form of Certificates. Every holder of stock in the
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Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by him in the Corporation.
Section 2. Signatures. Any or all of the signatures on a
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certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he or she were such officer, transfer agent or registrar at
the date of issue.
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Section 3. Lost Certificates. The Board of Directors may direct a
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new certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his or her legal representative, to advertise the same in such
manner as the Board of Directors shall require and/or to give the Corporation a
bond in such sum as it may direct as indemnity against any claim that may be
made against the Corporation with respect to the certificate alleged to have
been lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be
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transferable in the manner prescribed by law and in these By-Laws. Transfers of
stock shall be made on the books of the Corporation only by the person named in
the certificate or by his or her attorney law fully constituted in writing and
upon the surrender of the certificate therefor, which shall be cancelled before
a new certificate shall be issued.
Section 5. Record Date. In order that the Corporation may
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determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or entitled to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of
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any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
shall not be more than sixty days nor less than ten days before the date of such
meeting, nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled
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to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by law.
ARTICLE VI
NOTICES
-------
Section 1. Notices. Whenever written notice is required by law,
--------- -------
the Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his or her
address as it appears on
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the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Written notice may also be given by personal delivery,
facsimile, telephone or telegram.
Section 2. Waivers of Notice. Whenever any notice is required by
--------- -----------------
law, the Certificate of Incorporation or these By-Laws, to be given to any
director, member of a committee or stockholder, a waiver thereof in writing,
signed, by the person or persons entitled to said notice, whether before or
after the time stated therein, shall be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
--------- ---------
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corpora-
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tion, or for any proper purpose, and the Board of Directors may modify or
abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and
--------- -------------
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall
--------- -----------
be fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed
--------- --------------
thereon the name of the Corporation, the year of its organization and the
words "Corporate Seal, Delaware". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 1. Power to Indemnify in Actions, Suits or Proceedings other
--------- ---------------------------------------------------------
than Those by or in the Right of the Corporation. Subject to Section 3 of this
- ------------------------------------------------
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director or officer of the
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Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the Corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe such person's conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which such person reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that such
person's conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or
--------- ---------------------------------------------------------
in the Right of the Corporation. Subject to Section 3 of this Article VIII,
- -------------------------------
the Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director,
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officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation; except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation unless and only to the
extent that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification
--------- --------------------------------
under this Article VIII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion or (iii) by the stockholders. To
the extent,
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however, that a director or officer of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding described
above, or in defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection therewith, without the necessity of
authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination
--------- ------------------
under Section 3 of this Article VIII, a person shall be deemed to have acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation, or, with respect to any
criminal action or proceeding, to have had no reasonable cause to believe such
person's conduct was unlawful, if such person's action is based on the records
or books of account of the Corporation or another enterprise, or on
information supplied to such person by the officers of the Corporation or
another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section 4 shall mean any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise of
which such person is or was serving at the request of the Corporation as a
director, officer, employee or agent.
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<PAGE>
The provisions of this Section 4 shall not be deemed to be exclusive or to limit
in any way the circumstances in which a person may be deemed to have met the
applicable standard of conduct set forth in Section 1 or 2 of this Article VIII,
as the case may be.
Section 5. Indemnification by a Court. Not withstanding any contrary
--------- --------------------------
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to the Court of Chancery in the State of Delaware for
indemnification to the extent otherwise permissible under Sections 1 and 2 of
this Article VIII. The basis of such indemnification by a court shall be a
determination by such court that indemnification of the director or officer is
proper in the circumstances because such person has met the applicable standards
of conduct set forth in Section 1 or 2 of this Article VIII, as the case may be.
Neither a contrary determination in the specific case under Section 3 of this
Article VIII nor the absence of any determination thereunder shall be a defense
to such application or create a presumption that the director or officer seeking
indemnification has not met any applicable standard of conduct. Notice of any
application for indemnification pursuant to this Section 5 shall be given to the
Corporation promptly upon the filing of such application. If successful, in
whole or in part, the director or officer seeking indemnification shall also be
entitled to be paid the expense of prosecuting such application.
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Section 6. Expenses Payable in Advance. Expenses incurred by a
--------- ---------------------------
director or officer in defending any civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that such person is not entitled to
be indemnified by the Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of
--------- ----------------------------------------------------
Expenses. The indemnification and advancement of expenses provided by or
- --------
granted pursuant to this Article VIII shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement of expenses may be
entitled under the Certificate of Incorporation, any By-Law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
such person's official capacity and as to action in another capacity while
holding such office, it being the policy of the Corporation that indemnification
of the persons specified in Sections 1 and 2 of this Article VIII shall be made
to the fullest extent permitted by law. The provisions of this Article VIII
shall not be deemed to preclude the indemnification of any person who is not
specified in Section 1 or 2 of this Article VIII but whom the Corporation has
the power or obligation to indemnify under the provisions of the General
Corporation Law of the State of Delaware, or otherwise.
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<PAGE>
Section 8. Insurance. The Corporation may purchase and maintain
--------- ---------
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise against any liability asserted against such person and
incurred by such person in any such capacity, or arising out of such person's
status as such, whether or not the Corporation would have the power or the
obligation to indemnify such person against such liability under the
provisions of this Article VIII.
Section 9. Certain Definitions. For purposes of this Article VIII,
--------- -------------------
references to "the Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers, so that any person who is or was a director or officer of
such constituent corporation, or is or was a director or officer of such
constituent corporation serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise, shall stand in
the same position under the provisions of this Article VIII with respect to the
resulting or surviving corporation as such person would have with respect to
such constituent corporation if its separate existence had continued. For
purposes of this Article VIII,
30
<PAGE>
references to "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan; and references to "serving at the request
of the Corporation" shall include any service as a director, officer, employee
or agent of the Corporation which imposes duties on, or involves services by,
such director or officer with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner such person reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses.
---------- -------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article VIII shall, unless otherwise provided when authorized
or ratified, continue as to a person who has ceased to be a director or officer
and shall inure to the benefit of the heirs, executors and administrators of
such a person.
Section 11. Limitation on Indemnification. Notwithstanding anything
---------- -----------------------------
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or officer in
connection with a proceeding (or part thereof) initiated by such person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors of the Corporation.
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<PAGE>
Section 12. Indemnification of Employees and Agents. The Corporation
---------- ---------------------------------------
may, to the extent authorized from time to time by the Board of Directors,
provide rights to indemnification and to the advancement of expenses to
employees and agents of the Corporation similar to those conferred in this
Article VIII to directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
----------
Section 1. These By-Laws may be altered, amended or repealed, in
---------
whole or in part, or new By-Laws may be adopted by the stockholders or by the
Board of Directors, provided, however, that notice of such alteration,
amendment, repeal or adoption of new By-Laws be contained in the notice of such
meeting of stockholders or Board of Directors as the case may be. All such
amendments must be approved by either the holders of a majority of the
outstanding capital stock entitled to vote thereon or by a majority of the
entire Board of Directors then in office.
Section 2. Entire Board of Directors. As used in this Article IX
--------- -------------------------
and in these By-Laws generally, the term "entire Board of Directors" means the
total number of directors which the Corporation would have if there were no
vacancies.
32
