SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14a INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-12
HALSEY DRUG CO., INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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(1) Title of each class of securities to which transaction applies:
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previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
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HALSEY PHARMACEUTICALS
695 NORTH PERRYVILLE ROAD
CRIMSON BUILDING NO. 2
ROCKFORD, ILLINOIS 61107
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 2003 Annual Meeting of Shareholders (the
"Meeting") of Halsey Drug Co., Inc., a New York corporation, doing business as
Halsey Pharmaceuticals (the "Company"), will be held at the [Newark Airport
Marriott Hotel, Newark International Airport, Newark, New Jersey 07114] on
, 2003 at 10:00 a.m., Eastern Time, for the purposes listed below:
1. To elect ten directors to the Board of Directors who shall serve
until the 2004 Annual Meeting of Shareholders, or until their successors
have been elected and qualified;
2. To authorize an amendment to the Company's Certificate of
Incorporation (the "Charter") to increase the number of authorized shares
of its $.01 par value common stock (the "Common Stock") from 80,000,000
shares to 350,000,000 shares;
3. To authorize an amendment to the Charter to entitle the holders of
the Company's 5% Convertible Senior Secured Debentures due March 31, 2006
(the "2002 Debentures"), issued pursuant to that certain Debenture Purchase
Agreement dated December 20, 2002 between the Company, Care Capital
Investments II, LP, Essex Woodlands Health Ventures V, L.P. and the other
signatories thereto (the "2002 Purchase Agreement"), to vote on all matters
submitted to a vote of shareholders of the Company, voting together with
the holders of Common Stock (and any other shares of capital stock or
securities of the Company entitled to vote at a meeting of shareholders) as
one class;
4. To adopt an amendment to the Company's 1998 Stock Option Plan to
(a) increase the number of shares available for grant under the Plan, (b)
permit the grant of non-qualified stock options having an exercise price
per share which is less than the fair market value of the Company's Common
Stock, and (c) set a limit of 5,500,000 option awards that may be granted
to one individual in any calendar year;
5. To ratify the appointment of Grant Thornton LLP as the Company's
independent certified public accountants for the fiscal year ending
December 31, 2003; and
6. To transact such other business as may properly come before the
Meeting or any adjournment thereof.
Only shareholders of record at the close of business on , 2003
are entitled to notice of and to vote at the Meeting or any adjournment thereof.
For a period of 10 days prior to the Meeting, a shareholders list will be
kept at the Company's principal office and shall be available for inspection by
shareholders during normal business hours. A shareholders list shall also be
present and available for inspection at the Meeting.
Your attention is directed to the accompanying Proxy Statement for the text
of the resolutions to be proposed at the Meeting and further information
regarding each proposal to be made.
SHAREHOLDERS UNABLE TO ATTEND THE MEETING ARE URGED TO COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE. IF YOU ATTEND
THE MEETING, YOU MAY REVOKE YOUR PROXY AND VOTE IN PERSON IF YOU WISH.
By Order of the Board of Directors
JERRY KARABELAS
Chairman
, 2003
Rockford, Illinois
HALSEY PHARMACEUTICALS
695 NORTH PERRYVILLE ROAD
CRIMSON BUILDING NO. 2
ROCKFORD, ILLINOIS 61107
PROXY STATEMENT
2003 ANNUAL MEETING OF SHAREHOLDERS
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Halsey Drug Co., Inc., doing business as Halsey
Pharmaceuticals (the "Company") of proxies in the accompanying form, to be voted
at the 2003 Annual Meeting of Shareholders of the Company (the "Meeting") to be
held on , 2003, and at any adjournment(s) thereof, for the purposes
set forth in the accompanying Notice of Annual Meeting of Shareholders. This
Proxy Statement and the form of proxy were first mailed to shareholders on or
about , 2003.
The close of business on , 2003 has been fixed as the record date
(the "Record Date") for the determination of shareholders entitled to notice of
and to vote at the Meeting. On the Record Date, the Company's outstanding voting
securities consisted of 60,106,721 shares of common stock, $.01 par value per
share (the "Common Stock"), which is comprised of 21,224,398 shares of Common
Stock issued and outstanding and 38,882,323 shares of Common Stock underlying
the Company's issued and outstanding 5% convertible senior secured debentures
issued by the Company in 1998 and 1999 (including debentures issued in
satisfaction of interest payments under such debentures) (collectively, the
"Debentures") for which the Debenture holders are entitled to vote on
shareholder matters on an as-converted basis. Under the New York Business
Corporation Law and the Company's Certificate of Incorporation and Bylaws, each
stockholder will be entitled to one vote for each share of Common Stock held at
the Record Date, and each Debenture holder will be entitled to one vote for each
share of Common Stock into which such Debenture holder's Debentures are
convertible at the Record Date, for all matters, including the election of
directors. The required quorum for the transaction of business at the Meeting is
a majority of the votes eligible to be cast by holders of shares of Common Stock
and holders of Debentures issued and outstanding on the Record Date. Shares that
are voted "FOR," "AGAINST," "WITHHELD" or "ABSTAIN" are treated as being present
at the Meeting for the purposes of establishing a quorum and are also treated as
shares entitled to vote at the Meeting (the "Votes Cast") with respect to such
matter. Abstentions will have the same effect as voting against a proposal.
Broker non-votes will be counted for purposes of determining the presence or
absence of a quorum for the transaction of business, but such non-votes will not
be counted for purposes of determining the number of Votes Cast with respect to
the particular proposal on which a broker has expressly not voted. Thus a broker
non-vote will not effect the outcome of the voting on a proposal. Holders of
Common Stock have no cumulative voting rights in the election of directors.
TABLE OF CONTENTS
ITEM PAGE
---- ----
Voting of Proxies............................................................ 3
The Board of Directors....................................................... 3
Proposal 1 -- Election of Directors....................................... 4
-- Executive Officers.......................................... 4
-- Agreements Governing Appointment of Directors............... 7
Compensation of Executive Officers and Directors............................. 8
Summary Compensation Table................................................... 8
-- Other Compensatory Arrangements............................. 8
-- Employment Agreements....................................... 9
-- Compensation of Directors................................... 10
-- Stock Option Plans.......................................... 11
-- Securities Authorized for Issuance Under Equity Compensation
Plans....................................................... 12
Option Grants in 2002........................................................ 12
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End Option 12
Values.....................................................................
Compensation Committee Interlocks and Insider Participation.................. 13
Section 16(a) Beneficial Ownership Reporting Compliance...................... 13
Report of the Compensation Committee on Executive Compensation............... 14
Executive Compensation Philosophy............................................ 14
Components of Executive Compensation Program................................. 15
Performance Graph............................................................ 16
Certain Relationships and Related Transactions............................... 16
-- Vote Required............................................... 20
-- Recommendation of the Board of Directors.................... 21
Proposal 2 -- Amendment to Certificate of Incorporation to Increase
Authorized Capital Stock.................................... 21
-- General..................................................... 21
-- Purpose and Effect of the Proposed Charter Amendment........ 22
-- 2002 Debenture Offering..................................... 25
-- Vote Required............................................... 28
-- Recommendation of the Board of Directors.................... 29
Proposal 3 -- Amendment to Certificate of Incorporation Granting Voting
Rights to Holders of Convertible Senior Secured
Debentures.................................................. 29
-- General..................................................... 29
-- Description of the 2002 Purchase Agreement and the 2002
Debentures.................................................. 30
-- The Proposed Amendment...................................... 34
-- Vote Required............................................... 35
-- Recommendation of the Board of Directors.................... 36
-- Dissenting Shareholders' Rights of Appraisal................ 36
Proposal 4 -- Amendment to the Company's 1998 Stock Option Plan........... 38
-- Administration.............................................. 40
-- Shares Subject to the 1998 Plan............................. 40
-- Eligibility................................................. 40
-- Exercise Price of Options................................... 41
-- Terms....................................................... 41
1
ITEM PAGE
---- ----
-- Exercise of Options......................................... 41
-- Federal Income Tax Consequences Relating to Incentive Stock
Options..................................................... 42
-- Federal Income Tax Consequences Relating to Non-Qualified
Stock Options............................................... 42
-- Accounting Treatment of Discounted Non-Qualified Stock
Options..................................................... 42
-- Previously Granted Options.................................. 44
-- 2003 Stock Option Grants.................................... 44
-- Amendments and Discontinuance of the 1998 Plan.............. 45
-- Vote Required............................................... 45
-- Recommendation of the Board of Directors.................... 45
Proposal 5 -- Ratification of Appointment of Independent Certified Public
Accountants................................................. 46
-- Audit Fees.................................................. 46
-- Financial Information Systems Design and Implementation
Fees........................................................ 46
-- All Other Fees.............................................. 46
-- Audit Committee Report...................................... 46
-- Recommendation of the Board of Directors.................... 47
Security Ownership of Certain Beneficial Owners and Management............... 47
General...................................................................... 50
Shareholder Proposals for 2004 Annual Meeting................................ 52
Appendix A -- Charter of Audit Committee..................................... A-1
Appendix B -- Section 623 of the New York Business Corporation Law relating
to Dissenters' Appraisal Rights................................ B-1
Appendix C -- Amended 1998 Stock Option Plan................................. C-1
2
VOTING OF PROXIES
Proxies may be revoked by shareholders at any time prior to the voting
thereof by giving notice of revocation in writing to the Secretary of the
Company or by voting in person at the Meeting.
If the enclosed proxy is properly signed, dated and returned, the Common
Stock represented thereby will be voted at the Meeting and will be voted in
accordance with the specifications made thereon. IF NO INSTRUCTIONS ARE
INDICATED, THE COMMON STOCK REPRESENTED THEREBY WILL BE VOTED (i) FOR the
election of Directors, (ii) FOR the amendment to the Company's Certificate of
Incorporation (the "Charter") to increase the number of authorized shares of the
Company's Common Stock, (iii) FOR the amendment to the Company's Charter to
entitle the holders of the Company's 5% Convertible Senior Secured Debentures
due March 31, 2006 (the "2002 Debentures"), issued pursuant to that certain
Debenture Purchase Agreement dated December 20, 2002 between the Company, Care
Capital Investments II, LP ("Care Capital"), Essex Woodlands Health Ventures V,
L.P. ("Essex") and the other signatories thereto (the "2002 Purchase
Agreement"), to vote on all matters submitted to a vote of shareholders of the
Company, (iv) FOR the adoption of the amendment to the Company's 1998 Stock
Option Plan, and (v) FOR the ratification of the appointment of Grant Thornton
LLP as the Company's independent certified public accountants for the fiscal
year ending December 31, 2003.
THE BOARD OF DIRECTORS
During the year ended December 31, 2002, the Board of Directors held eight
meetings. None of the Company's Board members attended less than 75% of the
Board meetings held during 2002.
BOARD COMMITTEES
During 2002, the Company had an Audit Committee, a Compensation Committee,
a Stock Option Committee, an Executive Committee and a Technology Committee of
the Board of Directors.
The Audit Committee is composed of Messrs. William A. Sumner, Chairman,
Immanuel Thangaraj and Bruce F. Wesson. The Audit Committee is responsible for
selecting the Company's independent auditors, approving the audit fee payable to
the auditors, working with independent auditors and other corporate officials,
reviewing the scope and results of the audit by, and the recommendations of, the
Company's independent auditors, approving the services provided by the auditors,
reviewing the financial statements of the Company and reporting on the results
of the audits to the Board, reviewing the Company's insurance coverage,
financial controls and filings with the Securities and Exchange Commission,
including, meeting quarterly prior to the filing of the Company's quarterly and
annual reports containing financial statements filed with the Securities and
Exchange Commission, and submitting to the Board its recommendations relating to
the Company's financial reporting, accounting practices and policies and
financial, accounting and operational controls. The Audit Committee had one
formal meeting and numerous informal meetings during 2002. A report of the Audit
Committee is also contained under Proposal 5 in this Proxy Statement. In June
2001, the Board of Directors adopted an Audit Committee Charter which is
attached as Appendix A to this Proxy Statement.
In assessing the independence of the Company's Audit Committee members, the
Company has reviewed and analyzed the factors provided in Section 121(A) of the
American Stock Exchange Listing Standards. Based on this analysis, the Company
has determined that each of Messrs. Sumner and Thangaraj are deemed independent
members of the Audit Committee. While Mr. Wesson does not satisfy the standards
for independence set forth in the American Stock Exchange Listing Standards as a
result of working capital bridge loans made to the Company during fiscal 2002 by
Galen Partners III, L.P., of which Mr. Wesson is a general partner, the Board
values Mr. Wesson's experience in the review of financial statements and
believes that Mr. Wesson is able to exercise independent judgment in the
performance of his duties on the Audit Committee.
The Company's Compensation Committee, composed of Messrs. Bruce F. Wesson,
Srini Conjeevaram, William Skelly, Michael K. Reicher and Immanuel Thangaraj
during 2002, is responsible for consulting with
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and making recommendations to the Board of Directors about executive
compensation arrangements and the compensation of employees. See "Compensation
of Executive Officers and Directors -- Report of the Compensation Committee on
Executive Compensation." The Compensation Committee met five times in 2002. If
elected as a director, Mr. Reddick will become a member of the Compensation
Committee.
The Stock Option Committee, composed of Messrs. William Skelly and William
A. Sumner, is responsible for reviewing Management's recommendations as to
employee option grants and to grant options under the Company's stock option
plans to employees, directors and consultants. The Stock Option Committee met
once in 2002.
The Executive Committee, composed of Messrs. Srini Conjeevaram, Joel D.
Liffmann, Bruce F. Wesson, Michael K. Reicher, William Skelly, Peter A. Clemens,
Jerry Karabelas and Immanuel Thangaraj during 2002, is responsible for acting on
behalf of the Board of Directors in lieu of a full Board meeting on such matters
that are not of the type required to be considered by the full Board of
Directors and to advise the Board as to the issues and matters under review by
the Executive Committee at the meetings of the Board of Directors. The Executive
Committee met three times in 2002. If elected as a director, Mr. Reddick will
become a member of the Compensation Committee.
The Technology Committee, composed of Messrs. Zubeen Shroff, Michael K.
Reicher and Jerry Karabelas during 2002, is responsible for addressing and
reviewing regulatory oversight of the Company's operations, including compliance
with applicable DEA and FDA regulations, compliance with state agency and
regulatory requirements, compliance with Medicare reimbursement requirements and
consulting with the Board regarding current and future compliance with
applicable Federal and state regulations, including current Good Manufacturing
Practice regulations. The Technology Committee did not meet in 2002.
The Company does not have a standing nominating committee.
Mr. Reicher resigned as a Director of the Company effective September 18,
2003.
PROPOSAL 1
ELECTION OF DIRECTORS
At the Meeting, ten individuals will be elected to serve as Directors until
the next annual meeting, and until their successors are elected and qualified.
During the fiscal year ended December 31, 2002, each of nominees to the Board
served as Directors. Each of Messrs. Karabelas and Thangaraj were appointed to
the Board of Directors effective December 20, 2002 in connection with the
completion of the Company's offering of the 2002 Debentures pursuant to the 2002
Purchase Agreement. See "Agreements Governing Appointment of Directors" below.
Unless a shareholder WITHHOLDS AUTHORITY, a properly signed and dated proxy
will be voted FOR the election of the persons named below, unless the proxy
contains contrary instructions. Management has no reason to believe that any of
the nominees will not be a candidate or will be unable to serve as a Director.
However, in the event any nominee is not a candidate or is unable or unwilling
to serve as a Director at the time of the election, unless the shareholder
withholds authority from voting, the proxies will be voted for any nominee who
shall be designated by the present Board of Directors to fill such vacancy.
The Company's Certificate of Incorporation provides for a maximum of eleven
directors. The Company's Board of Directors may fill the current vacancy on the
Board by a vote of a majority of directors in office. Such appointee would
continue in office until the next annual meeting of shareholders following such
appointment. The Board of Directors has not identified any person that it
currently intends to nominate to fill such vacancy.
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The name and age of each of the ten nominees, his principal occupation and
the period during which such person has served as a Director are set out below.
DIRECTOR
NAME OF NOMINEE AGE POSITION WITH THE COMPANY SINCE
--------------- --- ------------------------- --------
Jerry Karabelas(4)(5)................. 50 Chairman of the Board of Directors 2002
Andrew D. Reddick(3)(4)............... 51 Chief Executive Officer and President 2003
Peter A. Clemens(4)................... 51 Vice President, Chief Financial 1998
Officer and Director
Bruce F. Wesson(2)(3)(4).............. 61 Director 1998
William A. Sumner(1)(2)............... 65 Director 1997
William Skelly(1)(3)(4)............... 52 Director 1996
Srini Conjeevaram(3)(4)............... 45 Director 1998
Zubeen Shroff(5)...................... 38 Director 1998
Joel D. Liffmann(4)................... 42 Director 1999
Immanuel Thangaraj(2)(3)(4)........... 32 Director 2002
---------------
(1) Member of Stock Option Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Executive Committee
(5) Member of Technology Committee
Jerry Karabelas has been a Director of the Company since December, 2002 and
Chairman of the Board since May 2003. Mr. Karabelas was Head of Healthcare and
CEO of Worldwide Pharmaceuticals for Novartis AG from 1998 until July 2000.
Prior to joining Novartis, Mr. Karabelas was Executive Vice President of
SmithKline Beecham. From July, 2000 until December, 2001, Mr. Karabelas was the
Founder and Chairman of the Novartis Bio Venture Fund. Since November, 2001 he
has been a Partner with Care Capital LLC. Mr. Karabelas holds a Ph.D. in
pharmacokinetics from the Massachusetts College of Pharmacy and serves as a
Director of SkyePharma Plc., Human Genome Sciences, Nitromed, Anadys and Renova.
Andrew D. Reddick has been President and Chief Executive Officer since
August, 2003. From April, 2000 to September, 2002 Mr. Reddick was Chief
Operating Officer and Sr. Vice President Commercial Operations for Adolor
Corporation, a pharmaceutical company. From June, 1999 to March, 2000 he served
as President of Faulding Laboratories, Inc. and he served as Executive Vice
President Marketing, Sales & Business Development with Purepac Pharmaceuticals
from August, 1996 to June, 1999.
Peter A. Clemens has been the Vice President and Chief Financial Officer of
the Company since February 1998 and a Director of the Company since June 1998.
From February, 1988 until joining the Company, Mr. Clemens was employed by TC
Manufacturing Co., Inc. ("TC") which, through its various subsidiaries and
divisions, manufactures generic pharmaceuticals, industrial coatings and
flexible packaging. Mr. Clemens was TC's President from February, 1996 through
February, 1998. Prior to that time, he held the position of Vice President and
Chief Financial Officer.
Bruce F. Wesson has been a Director of the Company since March, 1998. Mr.
Wesson is President of Galen Associates, a health care venture firm, and a
General Partner of Galen Partners III, L.P. Prior to January, 1991, he was
Senior Vice President and Managing Director of Smith Barney, Harris Upham & Co.
Inc., an investment banking firm. He currently serves on the Boards of Encore
Medical Corporation, QMed, Inc., and Crompton Corporation, a publicly traded
company, and several privately held companies. Mr. Wesson earned a degree from
Colgate University and a Masters of Business Administration from Columbia
University.
5
Srini Conjeevaram has been a Director of the Company since March, 1998. Mr.
Conjeevaram is a General Partner of Galen Partners III, L.P. Prior to January,
1991, he was an Associate in Corporate Finance at Smith Barney, Harris Upham &
Co. Inc. from 1989 to 1990 and a Senior Project Engineer for General Motors
Corporation from 1982 to 1987. Mr. Conjeevaram serves as a Director of Derma
Sciences, Inc., a publicly traded company and ONI Incorporated. He earned a
Bachelor of Science degree in Mechanical Engineering from Madras University, a
Masters of Science degree in Mechanical Engineering from Stanford University,
and a Masters of Business Administration from Indiana University.
William A. Sumner has been a Director of the Company since August, 1997.
From 1974 until his retirement in 1995, Mr. Sumner held various positions within
Hoechst-Roussel Pharmaceuticals, Inc., a manufacturer and distributor of
pharmaceutical products, including Vice President and General Manager,
Dermatology Division from 1991 through 1995, Vice President, Strategic Business
Development, from 1989 to 1991 and Vice President, Marketing from 1985 to 1989.
Since his retirement from Hoechst-Roussel Pharmaceuticals, Inc. in 1995, Mr.
Sumner has acted as a consultant to various entities in the pharmaceutical
field.
William Skelly has been a Director of the Company since May, 1996 and
served as Chairman of the Company from October, 1996 through June, 2000. Since
1990, Mr. Skelly has served as Chairman, President and Chief Executive Officer
of Central Biomedia, Inc. and its subsidiary SERA, Inc., companies involved in
the animal health industry including veterinary biologicals and custom
manufacturing of animal sera products. From 1985 to 1990, Mr. Skelly served as
President of Martec Pharmaceutical, Inc., a distributor and manufacturer of
human generic prescription pharmaceuticals.
Zubeen Shroff has been a Director of the Company since June, 1998. Mr.
Shroff is a General Partner of Galen Partners III, L.P. He joined Galen
Associates, a health care venture firm, in January, 1997 from The Wilkerson
Group, a leading provider of management consulting services to the health care
industry. Prior to The Wilkerson Group, he worked for Schering-Plough
International from 1989 to 1993 in a variety of staff and line management
positions and as head of Schering-Plough France's biotech franchise. Mr. Shroff
received a Bachelor of Science in Biological Sciences from Boston University in
1986 and a Masters of Business Administration from The Wharton School in 1988.
Mr. Shroff serves as a Director of AmericasDoctor.com, Cortek, Inc., and Encore
Medical Corporation.
Joel D. Liffmann has been a Director of the Company since 1999. Mr.
Liffmann is a Principal of Oracle Investment Management, Inc. Prior to joining
Oracle in 1996, Mr. Liffmann was Senior Vice President of Business Development
at Merck-Medco, Inc. Prior to such time, Mr. Liffmann was Vice
President/Business Development at Medco Containment Services and Vice President
of Equity Research and later was Vice President of Corporate Finance at Drexel
Burnham Lambert. Mr. Liffmann holds a degree from Boston University.
Immanuel Thangaraj has been a Director of the Company since December, 2002.
Mr. Thangaraj has been a Managing Director of Essex Woodlands Health Ventures, a
venture capital firm specializing in the healthcare industry, since 1997. Prior
to joining Essex Woodlands Health Ventures, he helped form a telecommunication
services company, for which he served as its CEO. Mr. Thangaraj also worked as
an Associate for ARCH Venture Partners, LP and managing one of its portfolio
companies, a medical information technology company. Mr. Thangaraj holds a
Bachelor of Arts and a Masters in Business Administration from the University of
Chicago and serves as a Director of iKnowMed Systems, Sound ID and CBR Systems.
EXECUTIVE OFFICERS AND KEY EMPLOYEES
Andrew D. Reddick, Chief Executive Officer and President.
Vijai Kumar has been Chief Operations Officer of the Company since
November, 2002. From 1996 to 2002, Mr. Kumar was President & CEO of Pharmalogix
Inc., a pharmaceutical research and development company. From 1992 to 1996, Mr.
Kumar was Director, Research and Development for the Warner Chilcott Division of
Warner Lambert. In that capacity, he coordinated all technical aspects of the
Division responsible
6
for cGMP compliance, formulation development, analytical development and
clinical and bioequivalence studies. Mr. Kumar holds B.Sc. in Chemistry from the
University of Lucknow, India, a D.Pharm. from the College of Pharmacy, New
Delhi, an M.B.A. from Fairleigh Dickinson University and an M.S. in Industrial
Pharmacy from Long Island University. Age: 56.
Peter A. Clemens, Vice President and Chief Financial Officer.
James Emigh has been Vice President of Sales and Marketing since November,
2002. Mr. Emigh joined the Company in May, 1998, serving first as Executive
Director of Customer Relations and then as Vice President of Operations until
November, 2002. From 1991 until joining the Company, Mr. Emigh was employed by
Organon, Inc., a pharmaceutical company, in various management positions and
most recently as its Director of Managed Care and Trade Relations. Mr. Emigh
holds a Bachelor of Pharmacy from Washington State University and a Masters of
Business Administration from George Mason University. Age: 46.
Carol Whitney has been Vice President of Administration since April, 1998.
From 1992 until joining the Company, Ms. Whitney served as Director of Human
Resources for UDL Laboratories, Inc., a generic pharmaceutical manufacturer
located in Rockford, Illinois. Age: 56.
Robert Seiser has been Corporate Controller and Treasurer since March,
1998. From 1992 until joining the Company, Mr. Seiser served as Treasurer and
Corporate Controller of TC Manufacturing Co., Inc., a privately held company
based in Evanston, Illinois. Mr. Seiser is a Certified Public Accountant and
earned a B.B.A. degree from Loyola University of Chicago. Age: 40.
The term of office of each person elected as a director will continue until
the next annual meeting of shareholders and until such person's successor has
been elected and qualified. Officers are appointed by the Board of Directors and
serve at the discretion of the Board, although the employment of Andrew D.
Reddick, the Company's Chief Executive Officer and President, Vijai Kumar, the
Company's Chief Operations Officer, and Peter A. Clemens, the Company's Vice
President and Chief Financial Officer, are subject to the provisions of their
respective Employment Agreements. See "Compensation of Executive Officers and
Directors -- Employment Agreements."
AGREEMENTS GOVERNING APPOINTMENT OF DIRECTORS
On March 10, 1998, the Company consummated a certain Debenture and Warrant
Purchase Agreement (the "1998 Purchase Agreement") providing for a private
offering of securities for an aggregate purchase price of $20.8 million (the
"Galen Offering"). The terms of the Galen Offering provide, among other things,
that Galen Partners III, L.P., Galen Partners International III, L.P. and Galen
Employee Fund III, L.P., (collectively, "Galen") and each of the purchasers
listed on the signature page to the 1998 Purchase Agreement (inclusive of Galen,
collectively the "Galen Investor Group") has the right to designate for
nomination three persons to be members of the Company's Board of Directors. The
Company's by-laws provide that the Board of Directors shall consist of not more
than 11 members. Each of Bruce F. Wesson, Srini Conjeevaram and Zubeen Shroff
are designees of the Galen Investor Group. As part of the completion of the 2002
Purchase Agreement, the 1998 Purchase Agreement was amended, among other things,
to provide that the Galen Investor Group has the right to designate for
nomination of three persons to be members of the Company's Board of Directors
for year 2003 and two persons to be members of the Company's Board of Directors
thereafter. The Company has agreed to nominate and appoint to the Board of
Directors, subject to shareholder approval, the designees of the Galen Investor
Group for so long as the debentures and warrants issued pursuant to the 1998
Purchase Agreement remain outstanding.
On May 26, 1999, the Company consummated a certain Debenture and Warrant
Purchase Agreement (the "1999 Purchase Agreement") providing for a private
offering of securities for an aggregate purchase price of up to approximately
$22.8 million (the "Oracle Offering") with Oracle Strategic Partners, L.P.
("Oracle") and certain existing shareholders of the Company (the "Oracle
Investor Group"). The terms of the Oracle Offering provide, among other things,
that the holders of a majority in the principal amount of the securities issued
in the Oracle Offering will have the right to designate for nomination of one
person to be a member of
7
the Company's Board of Directors, subject to shareholder approval, for so long
as the securities issued by the Company in the Oracle Offering remain
outstanding. Mr. Liffmann is the designee of the Oracle Investor Group.
On December 20, 2002, the Company consummated the 2002 Purchase Agreement
providing for a private offering of securities for an aggregate purchase price
of up to $35 million (the "2002 Offering") with Care Capital, Essex, Galen and
the other purchasers listed on the signature page to the 2002 Purchase
Agreement. The terms of the 2002 Purchase Agreement provide, among other things,
that each of Care Capital and Essex have the right to designate one person for
nomination to the Company's Board of Directors, subject to shareholder approval,
for so long as the 2002 Debentures are held by Care Capital and Essex,
determined on an individual basis. Mr. Jerry Karabelas and Mr. Immanuel
Thangaraj are the designees of Care Capital and Essex, respectively.
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
EXECUTIVE COMPENSATION
The following table sets forth a summary of the compensation paid by the
Company for services rendered in all capacities to the Company during the fiscal
years ended December 31, 2002, 2001 and 2000 to the Company's Chief Executive
Officer and the Company's next four most highly compensated executive officers
(collectively, the "named executive officers") whose total annual compensation
for 2002 exceeded $100,000:
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION SECURITIES
------------------------------- UNDERLYING
OTHER ANNUAL STOCK ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
--------------------------- ---- -------- ----- ------------ ---------- ------------
Michael K. Reicher(1)............ 2002 $200,000 0 -- -- --
Chairman and Chief 2001 191,346 0 -- -- --
Executive Officer 2000 175,000 0 -- 100,000 --
Gerald F. Price(2)............... 2002 $163,654 0 -- -- --
President and Chief 2001 176,346 0 -- -- --
Operating Officer 2000 49,846 0 -- 850,000 --
Peter A. Clemens................. 2002 $155,000 0 -- -- --
Vice President and Chief 2001 149,807 0 -- -- --
Financial Officer 2000 140,000 0 -- 100,000 --
Phyllis A. Lambridis(3).......... 2002 $166,006 0 -- -- --
Vice President -- 2001 115,384 0 -- -- --
Corporate Compliance
James Emigh...................... 2002 $139,565 0 -- -- --
Vice President -- Operations 2001 125,000 0 -- -- --
2000 125,000 0 -- 90,000 --
---------------
(1) Mr. Reicher's services as Chief Executive Officer ceased effective June 16,
2003.
(2) Mr. Price's services as President and Chief Operating Officer ceased
effective November 7, 2002.
(3) Ms. Lambridis' services as Vice President of Corporate Compliance ceased
effective April 30, 2003.
OTHER COMPENSATORY ARRANGEMENTS
Executive Officers and key employees participate in medical and disability
insurance plans provided to all non-union employees of the Company. The Company
also provided automobiles to certain of its executive Officers. Although the
Company is unable to assign a precise value to the possible personal benefit
derived
8
from the use of the automobiles, the Company believes that, as to each officer,
such personal benefit amount is less than the lesser of $6,000 or 10% of such
officer's compensation reported above in the Summary Compensation Table.
EMPLOYMENT AGREEMENTS
Andrew D. Reddick is employed pursuant to an Employment Agreement effective
as of August 26, 2003 which provides that Mr. Reddick will serve as the
Company's Chief Executive Officer and President for term expiring August 26,
2005. The Employment Agreement provides for an annual base salary of $300,000,
plus the payment of annual bonus of up to thirty-five percent (35%) of Mr.
Reddick's base salary based on the achievement of such targets, conditions, or
parameters as may be set from time to time by the Board of Directors or the
Compensation Committee of the Board of Directors. The Employment Agreement also
provides for the grant of stock options on August 26, 2003 to purchase 5,500,000
shares of the Company's Common Stock at an exercise price of $.34 per share
(which exercise price is equal to the conversion price per share under the 5%
Convertible Senior Secured Debentures issued pursuant to that certain Debenture
Purchase Agreement between the Company, Care Capital, Essex and the other
signatories thereto dated December 20, 2002). The Stock Option provides for
vesting of 1,000,000 shares on March 31, 2004 with the remaining balance vesting
in quarterly increments of 500,000 shares at the expiration of each quarterly
period commencing with the quarterly period ending June 30, 2004. The Employment
Agreement also permits the Company to purchase the vested portion of Mr.
Reddick's options upon his termination for Cause (as defined in the Employment
Agreement) or his resignation other than for Good Reason (as defined in the
Employment Agreement) at a purchase price equal to the positive difference, if
any, between (i) the average of the closing bid and asked prices of the
Company's Common Stock for the five trading days prior to the date of
termination or resignation, and (ii) the exercise price of the option shares,
multiplied by the numbers shares which, as of the date of termination or
resignation, are vested under the Stock Option. The Employment Agreement
contains standard termination provisions, including upon death, disability, for
Cause, for Good Reason and without Cause. In the event the Employment Agreement
is terminated due to death or disability, the Company is required to pay Mr.
Reddick, or his designee, a pro rata portion of the annual bonus that would have
been payable to Mr. Reddick during such year assuming full achievement of the
bonus criteria established for such bonus. Additionally, Mr. Reddick or his
designees shall have a period of twelve (12) months following such termination
to exercise Mr. Reddick's vested stock options. In the event that the Employment
Agreement is terminated by the Company without Cause or by Mr. Reddick for Good
Reason, the Company is required to pay Mr. Reddick an amount equal to the bonus
for such year, calculated on a pro rata basis assuming full achievement of the
bonus criteria for such year, as well as Mr. Reddick's base salary for the
greater of (i) the remainder of the initial term of the Employment Agreement,
and (ii) one year (the "Severance Pay"), payable in equal monthly installments
over a period of twelve (12) months. In addition, Mr. Reddick is entitled to
continued coverage under the Company's then existing benefit plans, including
medical and life insurance, for term equal to the greater of (i) the remainder
of the initial term of the Employment Agreement, or (ii) twelve (12) months from
the date of termination. The Employment Agreement permits Mr. Reddick to
terminate the Employment Agreement in the event of a Change of Control (as
defined in the Employment Agreement), in which case such termination is
considered to be made without Cause, entitling Mr. Reddick to the benefits
described above, except that (i) the Severance Pay is payable in a lump sum
within thirty (30) days of the date of termination, and (ii) all outstanding
stock options granted to Mr. Reddick shall fully vest and be immediately
exercisable. The Employment Agreement restricts Mr. Reddick from disclosing,
disseminating or using for his personal benefit or for the benefit of others,
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment Agreement
from competing with the Company at any time prior to one year after the
termination of his employment with the Company.
Peter A. Clemens is employed pursuant to an Employment Agreement effective
as of March 10, 1998, which after giving effect to amendments dated June 28,
2000 and May 4, 2001, provides that Mr. Clemens will serve as the Company's Vice
President and Chief Financial Officer for a term expiring April 30, 2005. The
Employment Agreement provides for an annual base salary of $155,000 plus the
payment of an annual bonus to be determined based on the satisfaction of such
targets, conditions or parameters as may be determined
9
from time to time by the Compensation Committee of the Board of Directors. No
bonus was paid for fiscal 2002. The Employment Agreement also provides for the
grant of stock options on March 10, 1998 to purchase 300,000 shares of the
Company's common stock at an exercise price of $2.375 per share, which options
vest in equal increments of 25,000 option shares at the end of each quarterly
period during the term of the Employment Agreement (as such vesting schedule may
be amended by mutual agreement of Mr. Clemens and the Board of Directors). The
Employment Agreement also permits the Company to repurchase the vested portion
of Mr. Clemens' options upon his termination for Cause (as defined in the
Employment Agreement) or his resignation (other than for Good Reason as defined
therein), at a purchase price equal to the positive difference, if any, between
(i) the average of the closing price of the Company's common stock for the five
trading days prior to the date of termination or resignation, and (ii) the
exercise price of the option shares, multiplied by the number of option shares
which, as of the date of termination, are vested under the option. The
Employment Agreement contains standard termination provisions, including upon
death, disability, for Cause, for Good Reason and without Cause. In the event
the Employment Agreement is terminated by the Company without Cause or by Mr.
Clemens for Good Reason, the Company is required to pay Mr. Clemens an amount
equal to $310,000 or twice his then base salary, whichever is greater, payable
in a lump sum within 30 days of termination and to continue to provide Mr.
Clemens coverage under the Company's then existing benefit plans, including
medical and life insurance, for a term of 24 months. The Employment Agreement
permits Mr. Clemens to terminate the Employment Agreement in the event of a
Change of Control (as defined in the Employment Agreement) and for Good Reason.
The Employment Agreement also restricts Mr. Clemens from disclosing,
disseminating or using for his personal benefit or for the benefit of others
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment
Agreement, from competing with the Company at any time prior to two years after
the earlier to occur of the expiration of the term and the termination of his
employment.
Vijai Kumar is employed pursuant to an Employment Agreement effective as of
November 18, 2002, which provides that Mr. Kumar will serve as the Company's
Chief Operations Officer for a term expiring November 18, 2004. The Employment
Agreement provides for an annual base salary of $180,000 plus the payment of an
annual bonus to be determined based on the satisfaction of such targets,
conditions or parameters as may be determined from time to time by the
Compensation Committee of the Board of Directors. The Employment Agreement also
provides for the grant of stock options on November 18, 2002 to purchase 400,000
shares of the Company's common stock at an exercise price of $1.125 per share,
which options vest in equal increments of 100,000 annually commencing on
November 18, 2003. The Employment Agreement permits the Company to repurchase
the vested portion of Mr. Kumar's options upon his termination for Cause (as
defined in the Employment Agreement) or his resignation, at a purchase price
equal to the positive difference, if any, between the average of the closing
price of the Company's common stock for the five trading days prior to the date
of termination or resignation, multiplied by the number of option shares which,
as of the date of termination, are vested under the option. The Employment
Agreement contains standard termination provisions, including upon death,
disability, for Cause (as defined in the Employment Agreement) and without
Cause. The Employment Agreement also provides that in the event of a Change of
Control (as defined in the Employment Agreement), or if Mr. Kumar's employment
with the Company is terminated without Cause, he is entitled to his base salary
for the lesser of (i) the remaining term of the Employment Agreement, and (ii)
one year. The Employment Agreement also restricts Mr. Kumar from disclosing,
disseminating or using for his personal benefit or the benefit of others
confidential or proprietary information (as defined in the Employment Agreement)
and, provided the Company has not breached the terms of the Employment
Agreement, from competing with the Company at any time prior to one year after
the earlier to occur of the expiration of the term and the termination of his
employment.
COMPENSATION OF DIRECTORS
Directors who are employees of the Company receive no additional or special
remuneration for their services as Directors. Directors who are not employees of
the Company receive an annual grant of options to purchase 10,000 shares of the
Company's common stock (15,000 shares in the case of the Chairman of the Board)
and $500 for each meeting attended ($250 in the case of telephonic meetings).
The Company also
10
reimburses Directors for travel and lodging expenses, if any, incurred in
connection with attendance at Board meetings. Directors who serve on any of the
Committees established by the Board of Directors receive $250 for each Committee
meeting attended unless held on the day of a full Board meeting.
STOCK OPTION PLANS
The Company currently maintains two stock option plans adopted in 1995 and
1998, respectively. The Company in the past has used, and will continue to use,
stock options to attract and retain key employees in the belief that employee
stock ownership and stock-related compensation devices encourage a community of
interest between employees and shareholders.
The 1995 Stock Option Plan. In September, 1995, the Company established
the 1995 Halsey Drug Co., Inc. Stock Option and Restricted Stock Purchase Plan
(the "1995 Stock Option Plan"). Under the 1995 Stock Option Plan, the Company
may grant options to purchase up to 1,000,000 shares of the Company's Common
Stock. Incentive Stock Options ("ISO's") may be granted to employees of the
Company and its subsidiaries and non-qualified options may be granted to
employees, directors and other persons employed by, or performing services for,
the Company and its subsidiaries. Subject to the 1995 Stock Option Plan, the
Stock Option Committee determines the persons to whom grants are made and the
vesting, timing, amounts and other terms of such grants. An employee may not
receive ISO's exercisable in any one calendar year for shares with a fair market
value on the date of grant in excess of $100,000. No quantity limitations apply
to the grant of non-qualified stock options.
As of August 1, 2003, ISO's to purchase 689,813 shares and non-qualified
options to purchase 257,780 shares have been granted under the 1995 Stock Option
Plan, leaving 52,407 shares available for grant under the Plan. The average per
share exercise price for all outstanding options under the 1995 Stock Option
Plan is approximately $1.44. No exercise price of an ISO was set at less than
100% of the fair market value of the underlying Common Stock, except for grants
made to any person who owned stock possessing more than 10% of the total voting
power of the Company, in which case the exercise price was set at not less than
110% of the fair market value of the underlying Common Stock.
The 1998 Stock Option Plan. The 1998 Stock Option Plan was adopted by the
Board of Directors in April, 1998 and approved by the Company's shareholders in
June 1998. The 1998 Stock Option Plan was amended by the Board of Directors in
April, 1999 to increase the number of shares available for the grant of options
under the Plan from 2,600,000 to 3,600,000 shares. The Company's shareholders
ratified the Plan amendment on August 19, 1999. The 1998 Stock Option Plan was
further amended by Board of Directors in April, 2001 to increase the number of
shares available for grant of options under the Plan from 3,600,000 to 8,100,000
shares. The Company's shareholders ratified the Plan amendment on June 14, 2001.
In accordance with the description contained under the caption "Proposal
4 -- Amendment to the Company's 1998 Stock Option Plan" the Board is seeking
authorization to amend the 1998 Stock Option Plan to (a) increase the number of
shares available for grant of options under the Plan from 8,100,000 to
12,000,000 shares, (b) permit the grant of non-qualified stock options having an
exercise price per share which is less than the fair market value of the
Company's Common Stock, and (c) set a limit of 5,500,000 option awards that may
be granted to one individual in any calendar year. The 1998 Stock Option Plan
permits the grant of ISO's and non-qualified stock options to purchase shares of
the Company's Common Stock. As of August 31, 2003, ISO's to purchase 1,568,151
shares and non-qualified options to purchase 7,062,446 shares have been granted
under the 1998 Stock Option Plan, leaving 3,369,383 shares available for grant
under the Plan. The average per share exercise price for all outstanding options
under the 1998 Stock Option Plan is approximately $.92. For a description of the
1998 Stock Option Plan as well as the proposed amendment thereto, see "Proposal
4 -- Amendment to the Company's 1998 Stock Option Plan" contained in this Proxy
Statement.
11
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table includes information as of December 31, 2002 relating
to the Company's 1995 Stock Option Plan and 1998 Stock Option Plan, which
comprise all of the equity compensation plans of the Company. The table provides
the number of securities to be issued upon the exercise of outstanding options
under such plans, the weighted-average exercise price of such outstanding
options and the number of securities remaining available for future issuance
under such equity compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE FUTURE ISSUANCE UNDER EQUITY
BE ISSUED UPON EXERCISE EXERCISE PRICE OF COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN(A))
------------- ----------------------- -------------------- ----------------------------
(A) (B) (C)
Equity Compensation Plans
Approved by Security
Holders...................... 5,008,950 $1.79 3,928,590
Equity Compensation Plans Not
Approved by Security
Holders...................... 0 0 0
TOTAL........................ 5,008,950 $1.79 3,928,590(1)
---------------
(1) As described under the caption "Proposal 4 -- Amendment to the Company's
1998 Stock Option Plan", the Board is seeking authorization to amend the
Company's 1998 Stock Option Plan to increase the number of shares available
for grant of options under the Plan from 8,100,000 to 12,000,000 shares.
Subject to shareholder approval of Proposal 2, to amend the Company's
charter to increase its authorized shares, and Proposal 4, to amend the 1998
Stock Option Plan, effective August 26, 2003, the Stock Option Committee of
the Board of Directors granted stock options exercisable for an aggregate of
5,500,000 shares of Common Stock. Of such stock options, 478,210 are in
excess of the current 8,100,000 shares available for grant under the Plan.)
In the event shareholders do not approve the Plan amendment, such excess
stock options will be cancelled. (See "Proposal 4 -- Amendment to the
Company's 1998 Stock Option Plan" for a discussion of the recent stock
option grants by the Stock Option Committee.) In the event the Company's
shareholders authorize the amendment to the Company's 1998 Stock Option
Plan, after giving effect to the stock option grants made by the Stock
Option Committee effective August 26, 2003, the number of shares remaining
available for future issuance under the Company's equity compensation plans
would be 3,421,790 shares.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
No stock options were granted, or exercised by, the named executive
officers during 2002. The following table presents information regarding the
value of options outstanding at December 31, 2002 for each of the named
executive officers.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR END FISCAL YEAR END(4)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Michael K. Reicher(1)......................... 1,225,000 200,000 $ -- $ --
Gerald F. Price(2)............................ 425,000 425,000 26,000 26,000
Peter A. Clemens.............................. 487,500 137,500 -- --
Phyllis Lambridis............................. 18,750 56,250 -- --
James Emigh................................... 83,250 67,750 -- --
12
---------------
(1) Mr. Reicher's services as Chief Executive Officer ceased effective June 16,
2003.
(2) Mr. Price's services as President and Chief Operating Officer ceased
effective November 7, 2002.
(3) Ms. Lambridis' services as Vice President of Corporate Compliance ceased
effective April 30, 2003.
(4) Value is based upon the average of the closing bid and ask price of $.96 per
share at December 31, 2002.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consisted of Messrs. Wesson,
Conjeevaram, Skelly and Reicher during fiscal 2002. During 2002, except for Mr.
Reicher, there were no Compensation Committee interlocks or insider
participation in compensation decisions. Mr. Reicher resigned as a Director of
the Company effective September 18, 2003.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors and executive officers, and persons who own beneficially
more than ten percent (10%) of the Common Stock of the Company, to file reports
of ownership and changes of ownership with the Commission and, during the period
in which the Company's common stock was traded on the American Stock Exchange,
the AMEX. Copies of all filed reports are required to be furnished to the
Company pursuant to Section 16(a). Based solely on the reports received by the
Company and on written representations from reporting persons, the Company
believes that the Directors, executive officers and greater than ten percent
(10%) beneficial owners of the Company's Common Stock complied with all Section
16(a) filing requirements during the year ended December 31, 2002, except that
(i) a Form 3 filing requirement for Mr. Vijai Kumar following his appointment as
the Company's Chief Operations Officer was filed late (ii) a Form 4 filing
requirement by each of Galen Partners III, L.P. and Galen Partners International
III, L.P., each a beneficial owner of in excess of 10% of the Company's Common
Stock, were filed late, and (iii) a Form 3 filing requirement by Mr. Dennis
Adams, a beneficial owner of in excess of 10% of the Company's Common Stock, has
not been filed to date.
The following report of the Compensation Committee and the performance
graph in the next section shall not be deemed to be "soliciting material" or to
be "filed" with the Commission or subject to regulations 14A or 14C of the
Commission or to the liabilities of Section 18 of the Exchange Act and shall not
be deemed to be incorporated by reference into any filing under the Securities
Act of 1933 or the Exchange Act, notwithstanding any general incorporation by
reference of this Proxy Statement into any other document.
13
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This report has been prepared by the Compensation Committee of the Board of
Directors of the Company (the "Compensation Committee"). The Compensation
Committee was formed in February, 1993. Messrs. Wesson, Conjeevaram, Skelly and
Reicher served as members of the Compensation Committee during 2002. The
Committee meets at least annually or more frequently, as the Company's Board of
Directors may request. The Compensation Committee's primary responsibilities
include the review of compensation, consisting of salary, bonuses, benefits, and
other annual compensation, of the Company's executive officers.
EXECUTIVE COMPENSATION PHILOSOPHY
In 2003, the Company's executive compensation program will reflect the
following executive compensation philosophy, which was developed by the
Compensation Committee of the Board of Directors:
The Company's mission is to be a significant provider of quality
generic drugs and active pharmaceutical ingredients in the markets it
serves. To support this and other strategic objectives as approved by the
Board of Directors and to provide adequate returns to shareholders, the
Company must compete for, attract, develop, motivate and retain top quality
executive talent at the corporate office and operating business units of
the Company during periods of both favorable and unfavorable world-wide
business conditions.
The Company's executive compensation program is a critical management tool
in achieving this goal. "Pay for performance" is the underlying philosophy for
the Company's executive compensation program. Consistent with this philosophy,
the program has been carefully conceived and will be independently administered
by the Compensation Committee of the Board of Directors which will meet
regularly during the year and a majority of whom are independent non-employee
directors. The program is designed to link executive pay to corporate
performance, including share price, recognizing that there is not always a
direct and short-term correlation between executive performance and share price.
To align shareholder interests and executive rewards, portions of each of
the Company's executive's compensation will represent "at risk" pay
opportunities related to accomplishment of specific business goals.
The program is designed and administered to:
- provide annual and longer term incentives that help focus each
executive's attention on approved corporate business goals the attainment
of which, in the judgment of the Compensation Committee, should increase
long-term shareholder value;
- link "at risk" pay with appropriate measurable quantitative and
qualitative achievements against approved performance parameters;
- reward individual and team achievements that contribute to the attainment
of the Company's business goals; and
- provide a balance of total compensation opportunities, including salary,
bonus, and longer term cash and equity incentives, that are competitive
with similarly situated companies and reflective of the Company's
performance.
In seeking to link executive pay to corporate performance, the Compensation
Committee believes that the most appropriate measure of corporate performance is
the increase in long-term shareholder value, which involves improving such
quantitative performance measures as revenue, net income, cash flow, operating
margins, earnings per share and return on shareholders' equity. The Compensation
Committee may also consider qualitative corporate and individual factors which
it believes bear on increasing the long-term value of the Company to its
shareholders. These include (i) the development of competitive advantages, (ii)
the ability to deal effectively with the complexity and globalization of the
Company's businesses, (iii) success in developing business strategies, managing
costs and improving the quality of the Company's products and services as well
as customer satisfaction, (iv) the general performance of individual job
responsibilities, and (v) the introduction of new active pharmaceutical
ingredient and finished dosage pharmaceutical products.
14
COMPONENTS OF EXECUTIVE COMPENSATION PROGRAM
The Company's executive compensation program consists of (i) an annual
salary and bonus and (ii) long-term incentives represented by the issuance of
stock options. As explained below, the bonuses and stock options serve to link
executive pay to corporate performance, since the attainment of these awards
depends upon meeting the quantitative and, if applicable, qualitative
performance goals which serve to increase long-term shareholder value.
Salary and Bonus. The Company's Chief Executive Officer, Chief Operations
Officer and Chief Financial Officer are parties to employment contracts with the
Company which provide the minimum annual base salary to be payable to such
officers. In addition, the employment contracts provide for an annual bonus, in
the discretion of the Compensation Committee, subject to the satisfaction of
such targets, conditions or parameters as may be set from time to time by the
Compensation Committee. For those executive officers not subject to an
employment contract, the Compensation Committee will set the annual salary for
such executive officer in or about December of each year and establish potential
bonus compensation (including Messrs. Reddick, Kumar and Clemens) that such
executives may earn based upon quantitative and, if applicable, qualitative
performance goals established by the Compensation Committee. The goals for 2003
will consist of a mix of targets and performance measures of corporate revenue,
development milestones relating to the Company's Opiate Synthesis Technologies
and qualitative goals relating to each officer's job function. No bonus will be
earned with respect to a performance measure unless a performance "floor" for
that measure is exceeded; the bonus opportunity with respect to a measure will
be earned if the target is achieved; achievement between the floor and the
target results in a lower bonus with respect to that performance measure. An
amount larger than the bonus opportunity for each performance measure can be
earned, up to a specified limit, for exceeding the target for that measure. In
setting compensation levels, the Compensation Committee compares the Company to
a self-selected group of companies of comparable size, market capitalization,
technological and marketing capabilities, performance and market place in which
the Company competes for executives.
In ascertaining the achieved level of performance against the targets, the
effects of certain extraordinary events, as determined by the Compensation
Committee, such as (i) major acquisitions and divestitures, (ii) significant
one-time charges, and (iii) changes in accounting principles required by the
Financial Accounting Standards Board, are "compensation neutral" for the year in
which they occurred; that is, they are not taken into account in determining the
degree to which the targets are met in that year.
Stock Options. The long-term component of the Company's executive
compensation program consists of stock option grants. The options generally
permit the option holder to buy the number of shares of Common Stock covered by
the option (an "option exercise") at a price equal to or greater than the market
price of the stock at the time of grant. Thus, the options generally gain value
only to the extent the stock price exceeds the option exercise price during the
life of the option. Generally, a portion of the options vest over a period of
time and expire no later than ten years, and in some cases five years after
grant. Executives will generally be subject to limitations in selling the option
stock immediately, and therefore will be incentivized to increase shareholder
value.
During fiscal 2002, the Company's Chief Executive Officer, Chief Operations
Officer and Chief Financial Officer were parties to employment contracts which
provided for a certain minimum annual base salary. There were no bonuses paid
for fiscal 2002.
In conclusion, the Compensation Committee believes the compensation
policies and practices of the Company, as described, are fair and reasonable and
are in keeping with the best interests of the Company, its employees and its
shareholders.
Submitted September 1, 2003 and signed by the members of the Compensation
Committee.
Bruce F. Wesson Srini Conjeevaram William Skelly Immanuel Thangaraj Michael
K. Reicher
15
PERFORMANCE GRAPH
The following graph provides a comparison on a cumulative basis of the
yearly percentage change over the last five fiscal years in (a) the total
shareholder return on the Company's Common Stock with (b) the total return on
the American Stock Exchange ("AMEX") of all domestic issuers traded on the AMEX
and (c) the total return of domestic issuers having the same Standard Industrial
Classification ("SIC") Industry Group Number as the Company (283-Drug
Manufacturers) (the "Industry Index"). Such yearly percentage change has been
measured by dividing (i) the sum of (A) the amount of dividends for the
measurement period, assuming dividend reinvestment, and (B) the difference
between the price per share at the end and at the beginning of the measurement
period, by (ii) the price per share at the beginning of the measurement period.
The AMEX Index has been selected as the required broad equity market index. The
Industry Index consists of publicly traded companies in a business similar to
that of the Company. The price of each investment unit has been set at $100 on
December 31, 1997 for purposes of preparing this graph.
PERFORMANCE GRAPH
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG HALSEY DRUG COMPANY,
AMEX MARKET INDEX AND SIC CODE INDEX
ASSUMES $100 INVESTED ON JAN. 01, 1998
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2002
COMPANY/INDEX/MARKET 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002
-------------------- ---------- ---------- ---------- ---------- ---------- ----------
HALSEY DRUG CO...... 100.00 88.00 60.00 44.80 124.80 59.52
SIC CODE INDEX...... 100.00 141.84 136.27 177.98 152.67 117.09
AMEX MARKET INDEX... 100.00 98.64 122.98 121.47 115.87 111.25
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 10, 1998, the Company completed a private offering of securities
(the "Galen Offering") to Galen Partners III, L.P., Galen Partners International
III, L.P., Galen Employee Fund III, L.P., (collectively "Galen") and each of the
purchasers listed on the signature page to a certain Debenture and Warrant
Purchase Agreement (the "1998 Purchase Agreement") dated March 10, 1998
(inclusive of Galen, collectively the "Galen Investor Group"). The securities
issued in the Galen Offering consisted of 5% convertible senior secured
debentures (the "1998 Debentures") and common stock purchase warrants (the
16
"1998 Warrants"). After giving effect to the Company's issuance of additional
debentures to Galen in satisfaction of interest payments under the 1998
Debentures and the 1999 Debentures described below, as well as the 2002
Debentures issued to Galen in the 2002 Debenture Offering (as further described
below), an aggregate of approximately 123,302,173 shares are issuable to Galen
upon conversion of outstanding convertible debentures and exercise of
outstanding common stock purchase warrants issued to Galen. See "Security
Ownership of Certain Beneficial Owners and Management."
Each of Messrs. Wesson, Conjeevaram and Shroff, nominees to the Board of
Directors, are designees of the Galen Investor Group pursuant to the terms of
the 1998 Purchase Agreement which provides, among other things, that the Company
must nominate and appoint to the Board of Directors, subject to shareholder
approval, three designees of the Galen Investor Group for 2003, and two
designees of the Galen Investor Group thereafter, for so long as the 1998
Debentures and 1998 Warrants remain outstanding. Each of Messrs. Wesson,
Conjeevaram and Shroff is a General Partner of Galen Partners III, L.P., a
member of the Galen Investor Group.
The Company secured bridge financing from Galen and certain other lenders
in the aggregate principal amount of approximately $15,277,761, funded through
numerous bridge loan transactions during the period from August 15, 2001 through
December 2002 (collectively, the "2001/2002 Galen Bridge Loans"). Approximately
$14,770,186 in aggregate principal amount of the 2001/2002 Galen Bridge Loans
was advanced by Galen with a balance of approximately $507,575 advanced by
certain members of the Galen Investor Group. As part of the closing of the 2002
Debenture Offering, as defined and provided below, the Company issued 2002
Debentures to Galen in the aggregate principal amount $15,483,731 in exchange
for the surrender of a like amount of principal and accrued interest then
outstanding under the 10% Convertible Promissory Notes ("Convertible Notes")
issued to Galen in the 2001/2002 Galen Bridge Loans. See Proposal 3 for a more
detailed discussion of the 2002 Debenture Offering. Prior to the surrender of
the Convertible Notes for 2002 Debentures issued in the 2002 Debenture Offering,
the 2001/2002 Galen Bridge Loans accrued interest at the rate of 10% per annum
and were secured by a lien on all the Company's assets. In consideration for the
extension of the 2001/2002 Galen Bridge Loans, the Company issued Common Stock
purchase warrants to Galen to purchase an aggregate of 6,401,029 shares of the
Company's Common Stock. The warrants issued pursuant to the 2001/2002 Galen
Bridge Loans have an exercise price equal to the fair market value of the
Company's Common Stock on the date of issuance of such warrants and are
substantially identical to those issued in the Galen Offering. The 2001/2002
Galen Bridge Loans were obtained by the Company in order to provide necessary
working capital.
Assuming the receipt of Shareholder approval to Proposals 2 and 3 of this
Proxy Statement, Galen would control approximately 86.0% of the Company's voting
securities (or approximately 55.5% after giving effect to the conversion of
other convertible securities issued by the Company). Holders of the 1998
Debentures and the 1999 Debentures (as defined in the paragraph below) are
permitted to vote on all matters submitted to a vote of shareholders, voting
together with holders of common stock as one class and having such number of
votes as equals the number of votes represented by the Common Stock that would
be acquired upon conversion of such debentures into common stock. In addition,
assuming the receipt of Shareholder approval to Proposal 3 of this Proxy
Statement, holders of the 2002 Debentures, including Galen, would be permitted
to vote on all matters submitted to a vote of shareholders of the Company,
voting together with holders of Common Stock as one class and having such number
of votes as equal the numbers of votes represented by the Common Stock that
would be acquired upon conversion of the 2002 Debentures into Common Stock.
Accordingly, Galen possesses sufficient voting rights to control the nomination
and election of the board of directors of the Company without the need to
convert its debentures into common stock.
On May 26, 1999, the Company completed a private offering of securities for
an aggregate purchase price of up to approximately $22.8 million (the "Oracle
Offering"). The securities issued in the Oracle Offering consist of 5%
convertible senior secured debentures (the "1999 Debentures") and common stock
purchase warrants (the "1999 Warrants"). The 1999 Debentures and 1999 Warrants
were issued by the Company pursuant to a certain Debenture and Warrant Purchase
Agreement dated May 26, 1999 (the "1999 Purchase Agreement") by and among the
Company, Oracle Strategic Partners, L.P. ("Oracle") and such other investors in
the Galen Offering electing to participate in the Oracle Offering (inclusive of
Oracle, collectively,
17
the "Oracle Investor Group"). On the closing date of the Oracle Offering, the
Company issued an aggregate of approximately $12,862,000 in principal amount of
1999 Debentures. In accordance with the Oracle Purchase Agreement, Oracle funded
an additional $5 million investment installment on July 27, 1999. Pursuant to an
agreement reached between the Company and Oracle on March 20, 2000, the final $5
million investment to be made to Oracle under the 1999 Purchase Agreement has
been waived.
The holders of the 1999 Debentures (including Oracle) are permitted to vote
on all matters submitted to a vote of shareholders of the Company, voting
together with holders of common stock as one class and having such number of
votes as equals the number of votes represented by the common stock that would
be acquired upon conversion of the 1999 Debentures into Common Stock.
Accordingly, Oracle controls approximately 41.3% of the Company's voting
securities without the need to convert the 1999 Debentures into Common Stock.
The Oracle Purchase Agreement also provides that the Company must nominate and
appoint to the Board of Directors, subject to shareholder approval, one designee
of the Oracle Investor Group for so long as the 1999 Debentures and 1999
Warrants remain outstanding. Mr. Joel D. Liffmann, a current member of the Board
of Directors, is a designee of the Oracle Investor Group and is a General
Partner of Oracle Partners, L.P.
On December 20, 2002, the Company completed a private offering of
securities for an approximate aggregate purchase price of $26,394,000 (the "2002
Debenture Offering"). The securities issued in the 2002 Debenture Offering
consisted of 5% convertible senior secured debentures (the "2002 Debentures").
The Debentures were issued by the Company pursuant to a certain Debenture
Purchase Agreement dated December 20, 2002 (the "2002 Purchase Agreement") by
and among the Company, Care Capital, Essex, Galen and each of the purchasers
listed on the signature page thereto (collectively, the "2002 Debenture Investor
Group"). Reference is made to Proposal 3 for a more detailed description of the
2002 Debenture Offering.
The 2002 Purchase Agreement provides that the holders of the 2002
Debentures shall have the right to vote as part of a single class with all
holders of the Company's Common Stock on all matters to be voted on by such
stockholders. Each 2002 Debenture holder shall have such number of votes as
shall equal the number of votes he would have had if such holder converted the
entire outstanding principal amount of his 2002 Debenture into shares of Common
Stock immediately prior to the record date relating to such vote; provided,
however, that any 2002 Debentures held by Care Capital shall, for so long as
they are held by Care Capital, have no voting rights. Assuming the receipt of
shareholder approval to Proposal 3 of this Proxy Statement, Essex would control
approximately 44.4% of the Company's voting securities (without giving effect to
the conversion of other convertible securities issued by the Company).
The 2002 Purchase Agreement also provides that each of Care Capital and
Essex has the right to designate one person for nomination to be a member of the
Company's Board of Directors as of the closing date of the 2002 Debenture
Offering (collectively, the "Designees"). The Purchase Agreement further
provides that the Designees shall be, if so requested by such Designee in his
sole discretion, appointed to the Company's Executive Committee, Compensation
Committee and any other Committee of the Board of Directors. Accordingly,
effective as of the closing of the 2002 Purchase Agreement, the Board of
Directors appointed each of Jerry Karabelas and Immanuel Thangaraj to the
Company's Board of Directors. Mr. Karabelas is a General Partner of Care Capital
Investments II, LP an affiliate of Care Capital, LLC. Mr. Thangaraj is a
Managing Director of Essex Woodlands Health Ventures V, L.P., an affiliate of
Essex. The Company has agreed to nominate and appoint to the Board of Directors,
subject to shareholder approval, one designee of each of Care Capital and Essex
for so long as each holds the 2002 Debentures.
As part of the closing of the 2002 Purchase Agreement, the Company and the
purchasers of the 2002 Debentures, including Care, Essex and Galen, executed a
certain Debentureholders Agreement providing, among other things, that the
approval of the holders of at least sixty six and two-thirds percent (66 2/3%)
of the aggregate principal amount of the 2002 Debentures is required to
authorize (a) any modification of the rights of the holders of the 2002
Debentures, (b) any issuance of securities of the Company which rank senior or
pari passu to the 2002 Debentures, (c) any dividends or distributions on, or
redemption of, any securities ranking junior in priority to the 2002 Debentures,
other than dividends or distributions payable in the
18
Company's Common Stock or cash interest paid to individual investors in the
Company's 1998 Debentures and 1999 Debentures (collectively, the "Existing
Debentures"), (d) the merger or consolidation of the Company, the sale,
transfer, lease or other disposition of all or substantially all the Company's
consolidated assets, or the liquidation, recapitalization or reorganization of
the Company, other than any such transaction where the cash, securities and/or
other liquid consideration received for the voting stock of the Company in such
transaction is at least four (4) times the then applicable conversion price of
the 2002 Debentures, (e) any increase in the number of members comprising the
Company's Board of Directors above eleven (11) members, and (f) the consummation
of a strategic alliance, business combination, licensing arrangement or other
corporate partnering involving the issuance by the Company of in excess of
$10,000,000 in equity securities of the Company.
The Debentureholders Agreement further provides that the holders of at
least sixty six and two-thirds percent (66 2/3%) of the aggregate principal
amount of the 2002 Debentures and Existing Debentures is required in order to
authorize (a) any amendment to the Company's Certificate of Incorporation, (b)
dividends or distributions on, or redemptions of, any securities ranking junior
to the Existing Debentures, other than distributions or dividends payable in the
Company's capital stock or cash interest paid to individual investors in the
Existing Debentures, (c) any issuance of the Company's securities ranking senior
or pari passu to the Existing Debentures, and (d) the completion of any
transaction described in subsections (d), (e) and (f) in the preceding
paragraph.
As part of the closing of the 2002 Purchase Agreement, each of Galen,
Oracle, Michael Reicher, the Company's former Chief Executive Officer, and Peter
Clemens, the Company's Chief Financial Officer (collectively, the "Voting
Agreement Parties") executed a Voting Agreement dated December 20, 2002 pursuant
to which each agreed to vote all of their respective voting securities of the
Company in favor of the amendments to the Company's Charter described in each of
Proposals 2 and 3 of this Proxy Statement. The voting securities held by the
Voting Agreement Parties represent an aggregate of approximately 69.6% of the
voting rights under the Company's outstanding voting securities.
As part of the closing of the 2002 Debenture Offering, the Company's term
loan agreement (the "Watson Loan Agreement") with Watson Pharmaceuticals, Inc.
("Watson") was amended to (i) extend the maturity date of the Watson Loan
Agreement from March 31, 2003 to March 31, 2006, and (ii) increase the principal
amount of the Watson Loan Agreement from $17,500,000 to $21,401,331 (the "Watson
Term Loan") to reflect the inclusion of approximately $3,901,331 owed by the
Company to Watson under a product supply agreement between the parties. In
consideration for the amendment to the Watson Loan Agreement, the Company issued
to Watson a Common Stock Purchase Warrant exercisable for 10,700,665 shares of
the Company's Common Stock (the "Watson Warrant"). The Watson Warrant has a term
expiring December 31, 2009 and has an exercise price of $.34 per share. After
giving effect to the terms of a Reserved Share Agreement (as defined and
described in the paragraph below) the Watson Warrant is immediately exercisable
for approximately 33.5% of the Company's Common Stock (without giving effect to
the conversion of other convertible securities issued by the Company, including
those issued to Galen).
In furtherance of the completion of the 2002 Debenture Offering, each of
the Company, Galen, Oracle, Care Capital, Essex and Watson executed a certain
Reserved Share Waiver Agreement dated December 20, 2002 (the "Reserved Share
Agreement"). Under the terms of the Reserved Share Agreement, each of Galen and
Oracle authorized the release of shares previously reserved by the Company for
issuance under the 1998 Debentures, 1999 Debentures, 1998 Warrants and 1999
Warrants previously issued to Galen and Oracle, in order to provide sufficient
authorized and unreserved shares to permit the conversion of the 2002 Debentures
issued to each of Care Capital and Essex as well as the exercise of the Watson
Warrant. As a consequence, even in the absence of the approval of the amendment
to the Company's Charter described in Proposal 2 to this Proxy Statement, an
aggregate of 40,112,429 shares of the Company's authorized Common Stock have
been reserved for issuance in the event of the conversion of the 2002 Debentures
issued to each of Care Capital and Essex and in the event of Watson's exercise
of the Watson Warrant.
On December 20, 2002, as part of the completion of the 2002 Debenture
Offering, the Company consummated the terms of a Warrant Recapitalization
Agreement (the "Recapitalization Agreement") between
19
the Company and certain holders of an aggregate of 8,145,736 Common Stock
Purchase Warrants issued by the Company (i) pursuant to the 1998 Purchase
Agreement (the "1998 Warrants"), (ii) pursuant to the 1999 Purchase Agreement
(the "1999 Warrants"), and (iii) pursuant to various bridge loan transactions
during the period from 1998 through 2002 (the "Bridge Loan Warrants" and
collectively with the 1998 Warrants and 1999 Warrants, the "Recapitalization
Warrants"). As part of the closing of the Recapitalization Agreement, the
warrantholders a party thereto surrendered to the Company for cancellation the
Recapitalization Warrants in exchange for the issuance of an aggregate of
5,970,083 shares of Common Stock.
At the Company's request, on May 5, 2003, the Company received a letter
executed by each of Care Capital, Galen and Essex (the "Majority 2002
Debentureholders") advising that the Majority 2002 Debentureholders would
provide funding to meet the Company's 2003 capital requirements, up to an
aggregate amount not to exceed $8.6 million (the "2003 Letter of Support"). The
2003 Letter of Support provides that the amount of any funding provided by the
Majority 2002 Debentureholders would be reduced to the extent of any funding
obtained by the Company from third-party sources during 2003. The 2003 Letter of
Support further provides that the terms of any funding provided by the Majority
2002 Debentureholders would be subject to negotiation between the Company and
the Majority 2002 Debentureholders at the time of any funding. In consideration
for the issuance of the 2003 Letter of Support, the Company authorized the
issuance of warrants to the Majority 2002 Debentureholders exercisable for an
aggregate of 645,000 shares of the Company's Common Stock at an exercise price
of $.34 per share (which is equivalent to the conversion price of the 2002
Debentures), subject to downward adjustment to equal the consideration per share
received by the Company for its Common Stock, or the conversion/exercise price
per share of the Company's Common Stock issuable under convertible securities,
in a third party investment, if lower than the exercise price of the warrants.
As of August 1, 2003, the Majority 2002 Debentureholders had advanced an
aggregate of $1,800,000 to the Company under the 2003 Letter of Support to fund
the Company's operating losses and capital requirements (the "Letter of Support
Advances"). The Letter of Support Advances were made in accordance with the
terms of 2002 Debenture Purchase Agreement resulting in the Company's issuance
of 2002 Debentures in an aggregate principal amount of $28,194,199 having a
maturity date of March 31, 2006. After giving effect to the Letter of Support
Advances made through August 1, 2003, there remains $6,800,000 available for
advance to the Company by the Majority 2002 Debentureholders under the 2003
Letter of Support. All additional advances to be made by the Majority 2002
Debentureholders under the 2003 Letter of Support will be made in accordance
with the 2002 Debenture Purchase Agreement.
Each of Oracle, Michael and Susan Weisbrot, Dennis Adams, Bernard Selz and
Hemant and Varsha Shah beneficially own in excess of 5% of the Company's voting
securities. (See "Security Ownership of Certain Beneficial Owners and
Management"). Each of such security holders participated in the Recapitalization
Agreement. Oracle surrendered 4,786,956 Recapitalization Warrants in exchange
for 3,649,461 shares of Common Stock. Michael and Susan Weisbrot surrendered
557,319 Recapitalization Warrants in exchange for 405,727 shares of Common
Stock. Dennis Adams surrendered 913,034 Recapitalization Warrants in exchange
for 608,844 shares of Common Stock. Bernard Selz surrendered 489,765
Recapitalization Warrants in exchange for 360,243 shares of Common Stock. Hemant
and Varsha Shah surrendered 741,388 Recapitalization Warrants in exchange for
497,727 shares of Common Stock.
In addition to their participation in the Recapitalization Agreement,
Michael and Susan Weisbrot and Bernard Selz surrendered their 10% Convertible
Promissory Notes (issued by the Company pursuant to the 2001/2002 Galen Bridge
Loans), plus accrued and unpaid interest in the aggregate amount of $40,590 and
$342,454, respectively, in exchange for a 2002 Debenture in a like principal
amount. Hemant and Varsha Shah surrendered their 10% Convertible Promissory
Notes to the Company on December 20, 2002 for payment in full of $128,535.
VOTE REQUIRED
Directors are elected by a plurality of the votes cast. The ten candidates
receiving the highest number of votes will be elected as directors.
20
Pursuant to the terms of 2002 Purchase Agreement executed in connection
with the 2002 Debenture Offering, each of Galen Partners III, L.P., Galen
Partners International III, L.P., Galen Employee Fund III, L.P., Oracle
Strategic Partners, L.P., Michael Reicher, the Company's former Chairman and
Chief Executive Officer, and Peter Clemens, the Company's Chief Financial
Officer (collectively, the "Voting Agreement Parties"), have executed a certain
Voting Agreement pursuant to which each has agreed to vote all of his respective
voting securities of the Company in favor of the director designees of each of
Care Capital and Essex, as provided in this Proposal 1. The Voting Agreement
further provides that each such party will vote their respective voting
securities of the Company for each of the designees to the Board of Directors of
Care Capital and Essex for so long as each of Care Capital and Essex continues
to be a holder of the 2002 Debentures, such determination to be made on an
individual basis.
The shares of the Company's Common Stock and shares underlying 1998
Debentures and 1999 Debentures held by the Voting Agreement Parties represent an
aggregate of approximately 65.1% percent of the aggregate voting rights under
the Company's outstanding voting securities.
The Board of Directors recommends that the shareholders vote FOR each of
the above nominees for Director.
PROPOSAL 2
AMENDMENT TO CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED CAPITAL STOCK
GENERAL
On December 17, 2002, the Board of Directors unanimously approved and
recommended that the Company's shareholders consider and approve an amendment to
Article THIRD of the Company's Certificate of Incorporation (the "Charter") that
would increase the number of authorized shares of the Company's Common Stock
from 80,000,000 shares to 350,000,000 shares. Assuming shareholder approval of
this Proposal 2, after giving effect to the conversion and exercise of the
Company's outstanding convertible securities, including the 2002 Debentures, the
1999 Debentures, the 1998 Debentures, Common Stock purchase warrants and shares
reserved under the Company's stock option plans (assuming shareholder approval
of Proposal 4 to increase the number of shares available under the 1998 Stock
Option Plan), the Company would have approximately 114,357,388 shares unreserved
and available for future issuance.
As of August 1, 2003, the Company had 21,224,398 shares of Common Stock
issued and outstanding. In addition to its issued and outstanding shares, as of
August 1, 2003, the Company had reserved shares under its stock option plans and
issued convertible securities providing for the issuance of up to an aggregate
of approximately 214,418,214 shares of the Company's Common Stock. The following
table describes, as of August 1, 2003, the Company's outstanding shares, the
number of shares issuable upon conversion and exercise of the Company's
outstanding convertible securities and shares reserved under the Company's stock
option plans, and the shares remaining available for issuance (assuming
shareholder approval of this Proposal 2 to increase the Company's authorized
shares).
AUTHORIZED SHARES OF THE COMPANY'S COMMON STOCK....... 350,000,000(1)
Shares of Common Stock issued and outstanding......... 21,224,398
Shares of Common Stock issuable by the Company under
convertible securities(2)
- Convertible Debentures(3)......................... 171,138,853
- Common Stock Purchase Warrants(3)(4).............. 33,778,611
- Stock Option Plans(5)............................. 9,500,750
-----------
214,418,214 214,418,214
-----------
TOTAL SHARES ISSUED AND ISSUABLE UPON CONVERSION OF
CONVERTIBLE SECURITIES.............................. 235,642,612 235,642,612
-----------
SHARES OF COMMON STOCK UNRESERVED AND AVAILABLE FOR
ISSUANCE(2)......................................... 114,357,388(1)
===========
21
---------------
(1) Assumes receipt of shareholder approval of this Proposal 2 of this Proxy
Statement.
(2) Assumes receipt of shareholder approval of Proposals 2 and 3 hereof. Except
for the 2002 Debentures issued to Care Capital and Essex which are
convertible into the Company's Common Stock at any time following their
issuance, the 2002 Debentures issued to the other investors in the 2002
Debenture Investor Group by their terms are not convertible until the
receipt of shareholder approval of this Proposal 2 of this Proxy Statement.
(3) Includes an aggregate of approximately 59,060,010 additional shares of
Common Stock issuable under the Company's outstanding 1998 Debentures, 1999
Debentures, 1998 Warrants, 1999 Warrants and other outstanding warrants as a
result of dilution adjustments to the conversion and exercise price of such
convertible securities due to the Company's issuance of the 2002 Debentures.
See "Dilution Adjustments to 1998 Debentures, 1999 Debentures and Warrants"
below.
(4) Includes (i) 645,000 warrants issued to Galen, Care Capital and Essex in
consideration for their commitment to fund the Company's 2003 capital
requirements (See "2003 Letter of Support").
(5) Gives effect to the grant of 5,500,000 stock options on August 26, 2003
under the Company's amended 1998 Stock Option Plan. See "Proposal
4 -- Amendment to the Company's 1998 Stock Option Plan."
The Company's Charter currently provides for 80,000,000 authorized shares.
As of the date of this Proxy Statement, after giving effect to the terms of the
2002 Debenture Offering, the Company has committed to issue 155,642,612 shares
of common stock in excess of its currently authorized shares pursuant to its
outstanding convertible securities and stock option plans. Additionally, the
2002 Debentures issued to the 2002 Debenture Investor Group (other than Care
Capital and Essex) provide that they are convertible into Common Stock following
shareholder approval of the amendment to the Company's Charter to increase its
authorized shares of Common Stock as provided in this Proposal 2. A description
of the transactions pursuant to which the Company issued convertible securities
providing for the issuance of Common Stock in excess of its currently authorized
shares is set forth below under the caption "2002 Debenture Offering", "Dilution
Adjustments to the 1998 Debentures, 1999 Debentures and Warrants", "Reallocated
Reserved Shares; "Amendments to Term Loan Agreement with Watson
Pharmaceuticals", Amendment to 1998 Stock Option Plan" and "2003 Letter of
Support" below.
PURPOSE AND EFFECT OF THE PROPOSED CHARTER AMENDMENT
The proposed increase in the authorized Common Stock has been recommended
by the Board of Directors to (i) provide sufficient authorized, unissued and
unreserved shares to permit the conversion of the 2002 Debentures issued
pursuant to the 2002 Purchase Agreement, (ii) provide sufficient authorized,
unissued and unreserved shares to permit the conversion of the 1998 Debentures,
1999 Debentures, 1998 Warrants and 1999 Warrants issued in each of the Galen
Offering and Oracle Offering after giving effect to dilution adjustments
provided in such convertible securities as a result of the issuance of the 2002
Debentures (the "Dilution Adjustments"), (iii) provide sufficient authorized,
unissued and unreserved shares to be issued to each of Galen and Oracle upon
conversion and exercise of their 1998 Debentures, 1999 Debentures, 1998 Warrants
and 1999 Warrants as well as the warrants issued to Galen in the 2001/2002 Galen
Bridge Loans, to the extent of 40,112,429 previously reserved shares that were
reallocated from Galen and Oracle to Care Capital and Essex, for their
respective 2002 Debentures, and to Watson, for the Watson Warrant, pursuant to
the terms of the Reserved Share Agreement (the "Reserved Share Agreement") dated
December 20, 2002 (the "Reallocated Reserved Shares"), (iv) provide sufficient
authorized, unissued and unreserved shares to permit the grant of options and
exercise of such options, under the Company's amended 1998 Stock Option Plan, to
the extent of the increase in the shares available under the Plan from 8,100,000
shares to 12,000,000 shares (the "Option Plan Shares"), (v) provide sufficient
authorized, unissued and unreserved shares to permit the exercise of the common
stock purchase warrants issued to Galen, Care Capital and Essex for an aggregate
of 645,000 shares (the "Commitment Warrants") in consideration for their
commitment to fund the Company's 2003 capital requirements (the "2003 Letter of
Support"), and (vi) assure that an adequate supply of authorized, unissued and
unreserved shares is available for general corporate needs and to provide the
Board the necessary flexibility to issue Common Stock in connection with
acquisitions, merger
22
transactions or financings without the expense and delay incidental to obtaining
shareholder approval of any amendment to the Charter at the time of such action,
except as may be required for a particular issuance by applicable law or by the
rules of any stock exchange on which the Company's securities may then be
listed. The additional authorized shares may be used for such purposes as
raising additional capital or the financing of an acquisition or business
combination, and in this respect, the Company is actively seeking additional
financing through the issuance of its Common Stock or convertible securities.
As of the date of the printing of this Proxy Statement, other than the
satisfaction of the Company's obligations under the 2002 Debentures, the
Dilution Adjustments, the Reallocated Reserved Shares, and the Option Plan
Shares and the Commitment Warrants, the Company has no definitive commitments or
agreements with any third party related to the issuance or reservation of any of
the additional shares of Common Stock proposed to be authorized by the amendment
to the Charter. Such shares would, however, be available for issuance without
further action by the shareholders, unless required by applicable law.
Assuming receipt of shareholder approval of this Proposal 2, Galen would
control approximately 85.7% of the Company's Common Stock (without giving effect
to the conversion of other convertible securities issued by the Company). In
addition, Bruce F. Wesson, Srini Conjeevaram and Zubeen Shroff, nominees to
continue as members of the Board of Directors, are designees of the Galen
Investor Group. The Company has agreed to nominate and appoint to the Board of
Directors, subject to shareholder approval, three designees of the Galen
Investor Group in year 2003, and two designees of the Galen Investor Group
thereafter, for so long as the 1998 Debentures issued in the Galen Offering
remain outstanding.
The additional shares of Common Stock for which authorization is sought
would be identical to the shares of the Common Stock of the Company now
authorized. Holders of Common Stock do not have preemptive rights to subscribe
for additional securities which may be issued by the Company.
The issuance of additional shares by the Company, whether pursuant to the
conversion of the 2002 Debentures or the conversion of the 1998 Debentures and
the 1999 Debentures, including the Dilution Adjustments, or otherwise, could
have an effect on the potential realizable value of a shareholder's investment.
In the absence of a proportionate increase in the Company's earnings and book
value, an increase in the aggregate number of outstanding shares of the Company
caused by the issuance of additional shares, such as those underlying the
Company's outstanding convertible securities, would dilute the earnings per
share and book value per share of all outstanding shares of the Company's Common
Stock. If such factors were reflected in the price per share of Common Stock,
the potential realizable value of a shareholder's investment could be adversely
affected.
As of August 1, 2003, the Company had issued and outstanding 21,224,398
shares of its Common Stock. Assuming the receipt of shareholder approval to this
Proposal 2, the Company could issue up to 214,418,214 million shares of its
Common Stock upon the conversion or exercise of the Company's outstanding
convertible securities, including the 2002 Debentures, the 1998 Debentures and
the 1999 Debentures (after giving effect to the Dilution Adjustments), the
Reallocated Reserved Shares, the Watson Warrant, the Option Plan Shares and the
Commitment Warrants and other outstanding warrants. If all of such convertible
instruments were exercised, the Company would have issued and outstanding
approximately 235,642,612 shares of common stock. Assuming shareholder approval
of this Proposal 2, after giving effect to the Company's outstanding convertible
securities, including shares underlying stock options issued pursuant to the
Company's stock option plans, the Company would have approximately 114,357,388
shares unreserved and available for future issuance.
Although the Board of Directors has no present intention of issuing
additional shares for such purposes, the proposed increase in the number of
authorized shares of Common Stock could enable the Board of Directors to render
more difficult or discourage an attempt by another person or entity to obtain
control of the Company. Such additional shares could be issued by the Board in a
public or private sale, merger or similar transaction, increasing the number of
outstanding shares and thereby diluting the equity interest and voting power of
a party attempting to obtain control of the Company. The increase in the
authorized shares of Common Stock has not, however, been proposed for an
antitakeover-related purpose and the Board of
23
Directors and Management have no knowledge of any current efforts to obtain
control of the Company or to effect large accumulations of its Common Stock.
The Company's Charter does not provide for cumulative voting. As a result,
in order to be ensured of representation on the Board, a shareholder must
control the votes of a majority of the voting securities present and voting at a
shareholder's meeting at which a quorum is present. The lack of cumulative
voting requires an entity seeking a takeover to acquire a substantially greater
number of shares to ensure representation on the Board, than would otherwise be
necessary were cumulative voting available.
Certain provisions of the Company's by-laws could also have the effect of
deterring takeover attempts because of the procedural provisions contained
therein. The by-laws provide that special shareholder meetings may be called
only by the President or Secretary of the Company, or by resolution of the Board
of Directors. The Company's by-laws further provide that the Board of Directors
has the authority to postpone any previously scheduled annual or special meeting
of shareholders upon public notice given in accordance with the by-laws. In
addition, except as otherwise required by law, the by-laws limit the business
that may be transacted at a special meeting of shareholders to the matters
specified in the notice of such special meeting.
Neither this Proposal 2 nor Proposal 3 is part of any plan by the Company's
Management to adopt a series of amendments to its Charter or by-laws so as to
render the takeover of the Company more difficult. Moreover, the Company is not
submitting this Proposal to enable it to frustrate any efforts by another party
to acquire a controlling interest or to seek Board representation.
The Company believes that the proposed amendment to Article THIRD of the
Charter will provide several long-term advantages to the Company and its
shareholders. The passage of the Proposal will enable the Company to satisfy its
contractual obligations under the 2002 Purchase Agreement and the dilution
adjustment provisions under each of the 1998 Purchase Agreement and 1999
Purchase Agreement. Specifically, the 2002 Purchase Agreement obligates the
Company to obtain shareholder approval to this Proposal 2 as well as Proposal 3
included in this Proxy Statement. Additionally, the 1998 Debentures and the 1999
Debentures as well as the Warrants issued in each of the Galen Offering and the
Oracle Offering, obligate the Company to make adjustments to the conversion
price of such Debentures and Warrants in the event of the Company's issuance of
Common Stock or convertible securities at a price less than the then fair market
value (as defined in such agreements) of the Company's Common Stock. As the
conversion price of the 2002 Debentures of $.34 per share was less than the then
current fair market value of the Company's Common Stock on December 20, 2002,
the date of issuance of the 2002 Debentures, the conversion and the exercise
prices of the 1998 Debentures, the 1999 Debentures and the Warrants issued in
each of the Galen Offering and the Oracle Offering are adjusted downward on a
weighted-average basis, resulting in an increase in the number of shares
issuable under such convertible securities. The Company's failure to obtain
shareholder approval to this Proposal 2 in order to provide for the conversion
of the 2002 Debentures and provide a sufficient number of shares of Common Stock
for the Dilution Adjustments would constitute a default under each of the 2002
Purchase Agreement, the 1998 Purchase Agreement and the 1999 Purchase Agreement
and would materially adversely affect the Company's financial condition.
In the event the Company's shareholders do not approve this Proposal 2, the
Company will have insufficient authorized shares to satisfy its obligations
under its outstanding convertible securities.
The approval of this Proposal 2 also will make available shares of Common
Stock for issuance in contemplated equity financings and also might enable the
Company to pursue acquisitions or enter into transactions which Management
believes provide the potential for growth and profit. If additional authorized
shares are available, transactions dependent upon the issuance of additional
shares will be less likely to be undermined by delays and uncertainties
occasioned by the need to obtain shareholder authorization prior to consummation
of such transactions. The ability to issue shares, as deemed in the Company's
best interest by the Board, will also permit the Company to avoid the expenses
which are incurred in holding certain shareholders meetings.
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If Proposal 2 is adopted, the Charter will be amended to restate Article
THIRD by deleting the first paragraph thereof and replacing same with the
following:
"THIRD: The amount of authorized capital stock of the Corporation
shall be Three Million Five Hundred Thousand ($3,500,000) Dollars
consisting of 350,000,000 shares of Common Stock, each share having a par
value of $.01 per share."
2002 DEBENTURE OFFERING
In accordance with the terms of the 2002 Purchase Agreement, on December
20, 2003 the Company issued 5% convertible senior secured debentures (the "2002
Debentures") in the aggregate principal amount of $26,394,000. The 2002 Purchase
Agreement allows for the Company's issuance of up to an additional $8,606,000 in
principal amount of 2002 Debentures on or before December 31, 2003, subject to
the consent of Care Capital and Essex. As of August 1, 2003, the Company had
issued additional 2002 Debentures to Care Capital, Essex and Galen in the
aggregate principal amount of $1,800,000 reflecting advances made to the Company
under the 2003 Letter of Support, leaving $6,800,000 in principal amount
available for the issuance of additional 2002 Debentures under the 2002 Purchase
Agreement. The 2002 Debentures are convertible into the Company's Common Stock
at a conversion price of $ .34 per share. As described below under the caption
"Reallocated Reserved Shares", an aggregate of 40,112,429 shares of Common Stock
previously reserved for Galen and Oracle under their respective 1998 Debentures,
1999 Debentures and Warrants issued in each of the Galen Offering and Oracle
Offering, and shares of Common Stock previously reserved for Galen under the
2001/2002 Galen Bridge Loans, have been reallocated to (i) Care Capital and
Essex in order to permit the conversion of the 2002 Debentures issued for Care
Capital and Essex, and (ii) Watson in order to provide sufficient shares for the
exercise of the Watson Warrant. Accordingly, the 2002 Debentures issued to Care
Capital and Essex are convertible at any time into shares of the Company's
Common Stock. The remaining 2002 Debentures issued to the 2002 Debentures
Investor Group are convertible into the Company's Common Stock only after
receipt of shareholder approval of this Proposal 2 to amend the Company's
Charter to increase the Company's authorized shares of Common Stock.
Accordingly, the Company needs an additional 25,311,765 authorized shares
available and reserved for issuance in order to provide for the conversion of
the 2002 Debentures issued to 2002 Debenture Investor Group. The additional
authorized shares made available pursuant to the Charter amendment described in
this Proposal 2 will permit the Company to satisfy its obligations under the
2002 Debentures. Reference is made to Proposal 3 for a more detailed description
of the terms of the 2002 Purchase Agreement and the 2002 Debentures.
DILUTION ADJUSTMENTS TO THE 1998 DEBENTURES, 1999 DEBENTURES AND WARRANTS
On March 10, 1998, the Company consummated a private offering of securities
for an aggregate purchase price of approximately $25.8 million (the "Galen
Offering"). The securities issued in the Galen Offering consisted of 5%
Convertible Senior Secured Debentures (the "1998 Debentures") and Common Stock
Purchase Warrants (the "1998 Warrants"). The 1998 Debentures and 1998 Warrants
were issued by the Company pursuant to a certain Debenture and Warrant Purchase
Agreement dated March 10, 1998 (the "1998 Purchase Agreement") by and among the
Company, Galen Partners III, L.P., Galen Partners International III, L.P., Galen
Employee Fund III, L.P., (collectively, "Galen") and each of the purchasers
listed on the signature page to the 1998 Purchase Agreement (inclusive of Galen,
collectively, the "Galen Investor Group"). The 1998 Debentures had an initial
conversion price of $1.404 per share, for an aggregate of up to approximately
18,376,068 shares of the Company's Common Stock. The 1998 Warrants were
initially exercisable for an aggregate of approximately 5,500,084 shares of the
Company's Common Stock. Of such Warrants, 2,784,250 Warrants were exercisable at
$1.404 per share and the remaining 2,715,834 Warrants were exercisable at $2.279
per share. Approximately 951,938 of the 1998 Warrants were surrendered to the
Company as part of the completion of the Warrant Recapitalization Agreement,
leaving 4,548,146 1998 Warrants issued and outstanding to Galen.
On May 26, 1999, the Company consummated a private offering of securities
for an aggregate purchase price of approximately $22.8 million (the "Oracle
Offering"). The securities issued in the Oracle Offering consisted of 5%
Convertible Senior Secured Debentures (the "1999 Debentures") and Common Stock
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Purchase Warrants (the "1999 Warrants"). The 1999 Debentures and 1999 Warrants
were issued by the Company pursuant to a certain Debenture and Warrant Purchase
Agreement dated May 26, 1999 (the "1999 Purchase Agreement") by and among the
Company, Oracle Strategic Partners, L.P. ("Oracle"), Galen and each of the
purchasers listed on the signature page to the 1999 Purchase Agreement
(inclusive of Oracle and Galen, collectively, the "Oracle Investor Group"). The
1999 Debentures had an initial conversion price of $1.404 per share, for an
aggregate of up to approximately 16,239,316 shares of the Company's Common
Stock. The 1999 Warrants were initially exercisable for an aggregate of
approximately 3,608,602 shares of the Company's Common Stock. Of such Warrants,
1,804,301 Warrants were exercisable at $1.404 per share and the remaining
1,804,301 Warrants were exercisable at $2.285 per share. Approximately 2,289,633
of the 1999 Warrants were surrendered to the Company as part of the completion
of the Warrant Recapitalization Agreement, leaving approximately 1,318,869 1999
Warrants issued and outstanding to Galen. Accordingly, after giving effect to
the Warrant Recapitalization Agreement and prior to the Company's completion of
the 2002 Debenture Offering and the Dilution Adjustments described in the
paragraphs below, the 1998 Debentures, the 1999 Debentures and remaining 1998
Warrants and 1999 Warrants were convertible and exercisable for an aggregate of
48,467,084 shares of the Company's Common Stock.
Each of the 1998 Debentures, 1999 Debentures, 1998 Warrants and 1999
Warrants contain customary anti-dilution protections. Specifically, each of such
convertible securities provides that in the event the Company issues shares of
its Common Stock or securities convertible into Common Stock at a price less
than the fair market value of the Company's Common Stock on the date of issuance
(fair market value being equal to the average of the closing bid and asked price
for the Company's Common Stock as reported by the Over-the-Counter Bulletin
Board for the 20 trading days preceding the date of issuance), the conversion
and exercise prices of the 1998 Debentures, 1999 Debentures, 1998 Warrants and
1999 Warrants are adjusted downward on a weighted-average basis. In addition,
once having determined the new conversion/exercise price of such convertible
securities, the holder of such convertible securities is entitled to acquire
upon conversion or exercise of such instrument, the number of shares of Common
Stock obtained by multiplying the conversion/exercise price in effect
immediately prior to such adjustment by the number of shares of Common Stock
acquirable immediately prior to such adjustments, and dividing the product
thereof by the new conversion/exercise price.
Under the terms of the 2002 Purchase Agreement, on December 20, 2002 the
Company issued 2002 Debentures in the aggregate principal amount of
approximately $26,394,000. The conversion price of the 2002 Debentures is $.34
per share, subject to adjustment. As part of the completion of the 2002
Debenture Offering, the Company also amended its term loan agreement with Watson
Pharmaceuticals and issued to Watson a common stock purchase warrant for
10,700,665 shares (the "Watson Warrant") (see "Amendments to Term Loan Agreement
with Watson Pharmaceuticals" below.) The exercise price of the Watson Warrant is
$.34 per share, subject to adjustment. The fair market value of the Company's
Common Stock on December 20, 2002, the date of the closing of the 2002 Purchase
Agreement (as calculated in accordance with the definition of fair market value
contained in the 1998 Debentures, 1999 Debentures, 1998 Warrants and 1999
Warrants), was $.99 per share. As the conversion price of the 2002 Debentures
and exercise price of the Watson Warrant was less than the fair market value of
the Company's Common Stock on the date of issuance of the 2002 Debentures, the
dilution adjustment provisions contained in each of the 1998 Debentures, 1999
Debentures, 1998 Warrants and 1999 Warrants were triggered. As a result, the
conversion price of the 1998 Debentures was reduced from $1.34 per share to $.59
per share and the conversion price of the 1999 Debentures was reduced from
$1.404 per share to $.61 per share. Additionally, the exercise price of the
remaining 1998 Warrants was reduced from $1.34 per share to $.59 per share and
from $2.16 per share to $.95 per share. The conversion price of the 1999
Warrants was reduced from $1.404 per share to $.61 per share and from $2.285 per
share to $1.00 per share. After giving effect to the Dilution Adjustments, the
number of shares issuable upon conversion of the 1998 Debentures and 1999
Debentures has been increased by 48,725,784 shares of Common Stock, from
37,059,059 to 85,784,841 shares. In addition, the number of shares issuable upon
exercise of the remaining 1998 Warrants and 1999 Warrants has been increased by
8,229,996 shares, from 5,867,013 shares to 14,097,009 shares. Accordingly, the
Company needs an additional 56,955,780 authorized shares available for issuance
upon conversion of the 1998 Debentures, 1999 Debentures, 1998 Warrants and 1999
Warrants, after giving effect to the Dilution Adjustments. The additional
authorized shares made
26
available pursuant to the Charter Amendment described in this Proposal 2 will
permit the Company to satisfy its obligations under such convertible securities.
REALLOCATED RESERVED SHARES
As part of the completion of the 2002 Debenture Offering, the Company is a
party to a Reserved Share Waiver Agreement dated December 20, 2002 (the
"Reserved Share Agreement") with Care Capital, Essex, Watson, Galen and Oracle.
The Reserved Share Agreement provides for a proportional reallocation of shares
of Common Stock previously reserved for issuance by the Company to each of Galen
and Oracle under their respective 1998 Debentures, 1999 Debentures, 1998
Warrants and 1999 Warrants, and shares of Common Stock previously reserved for
issuance by the Company to Galen under Warrants issued to Galen under the
2001/2002 Galen Bridge Loans, in favor of Care Capital, Essex and Watson.
Specifically, the Company, Galen and Oracle have agreed to reallocate an
aggregate of 40,112,429 shares of Common Stock previously reserved for Galen and
Oracle under their respective convertible securities in order to provide
sufficient reserved shares to provide for the conversion of the 2002 Debentures
issued to each of Care Capital and Essex, and sufficient reserved shares to
provide for the exercise of the Watson Warrant by Watson (as described below in
the caption "Amendments to Term Loan Agreement with Watson Pharmaceuticals").
Of the aggregate of 40,112,429 shares which have been reallocated from
Galen and Oracle to be reserved for the convertible securities issued to Care
Capital, Essex and Watson, 14,705,882 shares are reserved for each of Care
Capital and Essex and 10,700,665 shares are reserved for Watson. Accordingly,
the Company needs an additional 40,112,429 authorized shares available for
issuance to be reserved in favor of Galen and Oracle under their respective
convertible securities to replenish the shares previously reserved for such
purpose and which have been reallocated in favor of Care Capital, Essex and
Watson pursuant to the terms of the Reserved Share Agreement. The additional
authorized shares made available pursuant to the Charter Amendment described in
this Proposal 2 will permit the Company to satisfy its obligations to reserve
the shares issuable under the outstanding convertible securities issued to Galen
and Oracle.
AMENDMENTS TO TERM LOAN AGREEMENT WITH WATSON PHARMACEUTICALS
The Company is a party to a term loan agreement with Watson
Pharmaceuticals, Inc. ("Watson") dated March 29, 2000, pursuant to which Watson
made a term loan to the Company in the initial principal amount of $17,500,000
(the "Watson Loan Agreement"). Amounts outstanding under the Watson Loan
Agreement (the "Watson Term Loan") are secured by a first lien on all of the
Company's assets, senior to the lien securing all other Company indebtedness. As
a condition to the completion of the 2002 Debenture Offering, the Watson Loan
Agreement was amended to (i) extend the maturity date of the Watson Loan
Agreement from March 31, 2003 to March 31, 2006, and (ii) increase the principal
amount of the Watson Term Loan from $17,500,000 to $21,401,331, to reflect the
inclusion of approximately $3,901,331 owed by the Company to Watson under a
product supply agreement between the parties. In consideration for the amendment
to Watson Loan Agreement, the Company issued to Watson a Common Stock Purchase
Warrant exercisable for 10,700,665 shares of the Company's Common Stock (the
"Watson Warrant"). The Watson Warrant has a term expiring December 31, 2009 and
has an exercise price of $.34 per share.
As described above under the caption "Reallocated Reserved Shares", Watson
is a party to the Reserved Share Agreement pursuant to which the Company, Galen
and Oracle have reallocated shares of Common Stock previously reserved for
issuance to Galen and Oracle under their respective convertible securities in
order to provide sufficient reserved shares available for issuance to Watson
upon the exercise of the Watson Warrant. The additional authorized shares made
available pursuant to the Charter Amendment described in this Proposal 2 will
permit the Company to replenish the 10,700,665 shares previously reserved for
Galen and Oracle for issuance upon their respective convertible securities, and
which has been reallocated to Watson for the Watson Warrant under the Reserved
Share Agreement, and otherwise comply with the Company's obligations to reserve
sufficient shares for issuance under the convertible securities issued to Galen
and Oracle.
27
AMENDMENT TO 1998 STOCK OPTION PLAN
On August 26, 2003, the Board of Directors of the Company amended the
Company's 1998 Stock Option Plan (the "1998 Plan"), to increase the number of
shares available for the grant of options under the 1998 Plan from 8,100,000
shares to 12,000,000 shares. Reference is made to "Proposal 4 -- Amendment to
the Company's 1998 Stock Option Plan" for a description of the terms of the 1998
Plan and the proposed amendment. Subject to shareholder approval of this
Proposal 2 and Proposal 4, effective August 26, 2003, the Stock Option Committee
of the Board of Directors granted stock options exercisable for an aggregate of
5,500,000 shares of Common Stock. Of such stock options, 478,210 are in excess
of the current 8,100,000 shares available for grant under the 1998 Stock Option
Plan (the "Excess Stock Option Grants"). In the event shareholders do not
approve Proposals 2 and 4, the Excess Stock Option Grants will be cancelled. The
additional shares made available pursuant to the Charter Amendment described in
this Proposal 2 will permit the Company to provide sufficient reserved shares
for issuance upon the exercise of the Excess Stock Option Grants as well as
provide up to an additional 3,421,790 shares for the award of stock options in
the future under the 1998 Plan.
2003 LETTER OF SUPPORT
At the Company's request, on May 5, 2003, the Company received a letter
executed by each of Care Capital, Galen and Essex (the "Majority 2002
Debentureholders") advising that the Majority 2002 Debentureholders would
provide funding to meet the Company's 2003 capital requirements, up to an
aggregate amount not to exceed $8.6 million (the "2003 Letter of Support"). The
2003 Letter of Support provides that the amount of any funding provided by the
Majority 2002 Debentureholders would be reduced to the extent of any funding
obtained by the Company from third-party sources during 2003. The 2003 Letter of
Support further provides that the terms of any funding provided by the Majority
2002 Debentureholders would be subject to negotiation between the Company and
the Majority 2002 Debentureholders at the time of any funding. In consideration
for the issuance of the 2003 Letter of Support, the Company authorized the
issuance of warrants to the Majority 2002 Debentureholders exercisable for an
aggregate of 645,000 shares of the Company's Common Stock (the "Commitment
Warrants") at an exercise price of $.34 per share (which is equivalent to the
conversion price of the 2002 Debentures), subject to downward adjustment to
equal the consideration per share received by the Company for its Common Stock,
or the conversion/exercise price per share of the Company's Common Stock
issuable under convertible securities, in a third part investment if lower than
the exercise price of the warrants.
As of August 1, 2003, the Majority 2002 Debentureholders had advanced an
aggregate of $1,800,000 to the Company under the 2003 Letter of Support to fund
the Company's operating losses and capital requirements (the "Letter of Support
Advances"). The Letter of Support Advances were made in accordance with the
terms of 2002 Debenture Purchase Agreement resulting in the Company's issuance
of 2002 Debentures in an aggregate principal amount of $28,194,000 having a
maturity date of March 31, 2006. After giving effect to the 2003 Letter of
Support Advances made through August 1, 2003, there remains $6,800,000 available
for advance to the Company by the Majority 2002 Debentureholders under the 2003
Letter of Support. All additional advances to be made by the Majority 2002
Debentureholders under the 2003 Letter of Support will be made in accordance
with the 2002 Debenture Purchase Agreement.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of the
Company's Common Stock is required to approve this Proposal 2 to authorize an
amendment to the Company's Charter to increase the Company's authorized capital
stock from 80,000,000 shares to 350,000,000 shares of Common Stock.
Pursuant to the terms of the 2002 Purchase Agreement executed in connection
with the 2002 Debenture Offering, each of Galen Partners III, L.P., Galen
Partners International III, L.P., Galen Employee Fund III, L.P., Oracle
Strategic Partners, L.P., Michael Reicher, the Company's former President and
Chief Executive Officer, and Peter Clemens, the Company's Chief Financial
Officer (collectively, the "Voting Agreement Parties"), have executed a certain
Voting Agreement pursuant to which each has agreed to vote
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all of their respective voting securities of the Company in favor of this
Proposal 2. The voting securities held by the Voting Agreement Parties
represents an aggregate of approximately 65.1% of the voting rights under the
Company's outstanding voting securities.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that the shareholders vote FOR the
proposed amendment to the Charter to increase the authorized capital stock of
the Company.
PROPOSAL 3
AMENDMENT TO CERTIFICATE OF INCORPORATION GRANTING VOTING
RIGHTS TO HOLDERS OF CONVERTIBLE SENIOR SECURED DEBENTURES
GENERAL
On December 20, 2002, the Company consummated a private offering of
securities for an aggregate purchase price of $26,394,000 (the "2002 Debenture
Offering"). The securities issued in the 2002 Debenture Offering consist of 5%
convertible senior secured debentures (the "2002 Debentures"). The 2002
Debentures were issued by the Company pursuant to a certain Debenture Purchase
Agreement dated December 20, 2002 (the "2002 Purchase Agreement") by and among
the Company, Care Capital Investments II, LP ("Care Capital"), Essex Woodlands
Health Ventures V, L.P. ("Essex"), Galen Partners III, L.P., and the other
investors listed on the signature page to the 2002 Purchase Agreement
(collectively, the "2002 Debenture Investor Group"). The 2002 Purchase Agreement
provides for the Company's issuance of up to an aggregate of $35,000,000 in
principal amount of 2002 Debentures (or an additional $8,606,000 in principal
amount of 2002 Debentures) at any time prior to January 1, 2004, subject to the
consent of each of Care Capital and Essex. Since the initial closing of the 2002
Debenture Offering on December 20, 2002, as of August 1, 2003 the Company had
issued additional 2002 Debentures in the aggregate principal amount of
$1,800,000 to Care Capital, Essex and Galen for advances made by such parties to
the Company under the 2003 Letter of Support. (See "Proposal 2 -- 2003 Letter of
Support"). The 2002 Debentures were issued at par and will become due and
payable as to principal on March 31, 2006. Interest on the principal amount of
the 2002 Debentures, at the rate of 5% per annum, is payable on a quarterly
basis. With the exception of the 2002 Debentures issued to Care Capital,
interest will be paid by the Company's issuance of a debenture instrument
substantially identical to the 2002 Debentures issued in the 2002 Debenture
Offering, in the principal amount equal to the accrued interest for each
quarterly period (the "Interest Debentures"). The 2002 Debentures issued to Care
Capital provide that fifty percent (50%) of the interest payments under such
2002 Debentures will be satisfied in cash with the balance satisfied by the
Company's issuance of Interest Debentures. See "Description of the 2002 Purchase
Agreement and the 2002 Debentures" below for a more detailed discussion of the
funding of the 2002 Debenture Offering.
The 2002 Debentures issued to each of Care Capital and Essex are
convertible at any time after issuance into shares of the Company's Common
Stock. Care Capital and Essex are parties to a certain Reserved Share Agreement
dated December 20, 2002 with the Company, Galen Partners, III L.P., Galen
Partners International III, L.P. and Galen Employee Fund III, L.P.
(collectively, "Galen"), and Oracle Strategic Partners, L.P. ("Oracle") pursuant
to which Oracle and Galen have reallocated shares of Common Stock previously
reserved for issuance under convertible securities issued to each of Galen and
Oracle in order to provide sufficient reserved shares available for issuance
upon the conversion of the 2002 Debentures issued to Care Capital and Essex. The
2002 Debentures issued to Galen and the other investors in the 2002 Debenture
Investor Group (excluding Care Capital and Essex) are convertible any time after
the receipt of shareholder approval of the amendment to the Company's Charter to
increase its authorized shares as provided in Proposal 2 of this Proxy
Statement, from 80,000,000 shares to 350,000,000 shares. Subject to the
foregoing, the 2002 Debentures are convertible into shares of the Company's
Common Stock at a price per share (the "Conversion Price") of $ .34. Until such
time as the Company completes a Subsequent Material Offering (as defined below),
the Conversion Price is subject to adjustment, from time to time, to equal the
consideration
29
per share received by the Company for its Common Stock or the
conversion/exercise price per share of the Company's Common Stock issuable under
the rights or options for the purchase of, or stock or other securities
convertible into, Common Stock ("Convertible Securities"), if lower than the
then applicable Conversion Price. Following the Company's completion of a
subsequent Material Offering, the Conversion Price is subject to adjustment from
time to time on a weighted-average dilution basis. A "Subsequent Material
Offering" is the grant or issuance of Common Stock or convertible securities by
the Company during any six month period for an aggregate gross consideration of
at least $10,000,000.
The Interest Debentures issuable to Care Capital and Essex are convertible
at any time after their issuance into shares of the Company's Common Stock. The
Interest Debentures issuable to the remaining investors in the 2002 Debenture
Investor Group are convertible at any time after the receipt of shareholder
approval to the Company's Charter Amendment to increase the number of the
Company's authorized shares from 80,000,000 shares to 350,000,000 shares. The
conversion price of the Interest Debentures is the average of the closing bid
and asked prices of the Company's Common Stock for the twenty (20) trading days
immediately preceding the applicable interest payment date under the 2002
Debentures, as reported by the Over-the-Counter Bulletin Board.
Assuming the receipt of shareholder approval to amend the Company's Charter
as provided in Proposal 2 of this Proxy Statement and the conversion of all 2002
Debentures issued through August 1, 2003 at the initial Conversion Price of $
..34 per share, the 2002 Debentures are convertible into an aggregate of
approximately 82,924,115 shares of the Company's Common Stock.
The 2002 Purchase Agreement provides that the holders of the 2002
Debentures shall have the right to vote as part of a single class with all
holders of the Company's Common Stock on all matters to be voted on by such
shareholders, subject to the approval of the Company's shareholders to amend the
Company's Charter pursuant to this Proposal 3. The 2002 Purchase Agreement also
provides for the execution of a certain Debentureholders Agreement which
provides, among other items, that the holders of the 2002 Debentures have veto
rights relating to certain specified material Company transactions. (See
"Additional Terms of the 2002 Purchase Agreement and the 2002
Debentures -- Debentureholders Agreement" below). In addition, each of Care
Capital and Essex has the right to designate for nomination one person to be a
member of the Company's Board of Directors. (See "Proposal 1 -- Election of
Directors"). The terms and provisions of the 2002 Debenture Offering, the 2002
Purchase Agreement and the 2002 Debentures are more specifically set forth below
under the caption "Description of the 2002 Purchase Agreement and 2002
Debentures."
Section 518 of the New York Business Corporation Law permits a corporation
to confer upon the holders of debentures the power to vote in respect of the
corporate affairs and management of the corporation to the extent provided in
its Certificate of Incorporation. Under the present Charter of the Company,
voting rights are conferred upon the holders of the Company's Common Stock and
the holders of the Company's 1998 Debentures due March 31, 2006 issued to the
Galen Investor Group pursuant to the 1998 Purchase Agreement and to the holders
of the Company's 1999 Debentures due March 31, 2006 issued to the Oracle
Investor Group pursuant to the 1999 Purchase Agreement. In the event this
Proposal 3 is approved, the holders of the 2002 Debentures will have voting
rights equivalent to those associated with the ownership of the Company's Common
Stock.
DESCRIPTION OF THE 2002 PURCHASE AGREEMENT AND THE 2002 DEBENTURES
The 2002 Purchase Agreement provides that the holders of the 2002
Debentures shall have the right to vote as part of a single class with all
holders of the Company's Common Stock on all matters to be voted on by such
stockholders; provided, however, that any 2002 Debentures held by Care Capital
shall, for so long as they are held by Care Capital, have no voting rights. Each
2002 Debenture holder (other than Care Capital) shall have such number of votes
as shall equal the number of votes he would have had if such holder converted
the entire outstanding principal amount of his 2002 Debenture into shares of
Common Stock immediately prior to the record date relating to such vote. In
order to provide for such "as-converted" voting rights, the Company is obligated
under the 2002 Purchase Agreement to solicit shareholder approval to amend its
Certificate of Incorporation (the "Charter") to provide for such voting rights
for the 2002 Debentures. In addition, the 2002
30
Purchase Agreement obligates the Company to solicit shareholder approval to
amend its Charter to increase its authorized shares from 80,000,000 to
350,000,000 shares in order to provide sufficient authorized shares to permit
the conversion of the 2002 Debentures and the exercise and conversion of the
Company's other outstanding Convertible Securities. The amendment to the
Company's Charter to increase the Company's authorized shares is set forth in
Proposal 2 of this Proxy Statement.
Of the $28,194,199 invested through August 1, 2003 pursuant to the 2002
Purchase Agreement (including advances made by Care Capital, Essex and Galen
under the 2003 Letter of Support), approximately $15,894,000 of the 2002
Debentures were issued in exchange for the surrender of a like amount of
principal and accrued interest outstanding under the Company's 10% convertible
notes issued pursuant to the working capital bridge loan transactions funded by
Galen and certain other lenders during the period from August 15, 2001 through
December 2002 (the "2001/2002 Galen Bridge Loans"). See "Proposal 1 -- Election
of Directors -- Certain Relationships and Related Transactions" for a
description of the 2001/2002 Galen Bridge Loans.
The 2002 Purchase Agreement provides that each of Care Capital and Essex
has the right to designate for nomination one person to be a member of the
Company's Board of Directors as of the closing date of the 2002 Debenture
Offering. The Board of Directors has appointed Jerry Karabelas, the designee of
Care Capital, and Immanuel Thangaraj, the designee of Essex, to the Company's
Board of Directors. The 2002 Purchase Agreement provides that the Company will
nominate and appoint to the Board of Directors, subject to shareholder approval,
one designee of each of Care Capital and Essex for so long as each owns any 2002
Debentures, such determination to be made on an individual basis.
ADDITIONAL TERMS OF THE 2002 PURCHASE AGREEMENT AND 2002 DEBENTURES
DEBENTUREHOLDERS AGREEMENT
As part of the closing of the 2002 Purchase Agreement, the Company and the
purchasers of the 2002 Debentures executed a certain Debentureholders Agreement
providing, among other things, that the approval of the holders of at least
sixty six and two-thirds percent (66 2/3%) of the aggregate principal amount of
the 2002 Debentures is required to authorize (a) any modification of the rights
of the holders of the 2002 Debentures, (b) any issuance of securities of the
Company which rank senior or pari passu to the 2002 Debentures, (c) any
dividends or distributions on, or redemption of, any securities ranking junior
in priority to the 2002 Debentures, other than dividends or distributions
payable in the Company's Common Stock or cash interest paid to individual
investors in the Company's 1998 Debentures and 1999 Debentures (collectively,
the "Existing Debentures"), (d) the merger or consolidation of the Company, the
sale, transfer, lease or other disposition of all or substantially all the
Company's consolidated assets, or the liquidation, recapitalization or
reorganization of the Company, other than any such transaction where the cash,
securities and/or other liquid consideration received for the voting stock of
the Company in such transaction is at least four (4) times the then applicable
conversion price of the 2002 Debentures, (e) any increase in the number of
members comprising the Company's Board of Directors above eleven (11) members,
and (f) the consummation of a strategic alliance, business combination,
licensing arrangement or other corporate partnering involving the issuance by
the Company of in excess of $10,000,000 in equity securities of the Company.
The Debentureholders Agreement further provides that the holders of at
least sixty six and two-thirds percent (66 2/3%) of the aggregate principal
amount of the 2002 Debentures and Existing Debentures is required in order to
authorize (a) any amendment to the Company's Certificate of Incorporation, (b)
dividends or distributions on, or redemptions of, any securities ranking junior
to the Existing Debentures, other than distributions or dividends payable in the
Company's capital stock or cash interest paid to individual investors in the
Existing Debentures, (c) any issuance of the Company's securities ranking senior
or pari passu to the Existing Debentures, and (d) the completion of any
transaction described in subsections (d), (e) and (f) in the preceding
paragraph.
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VOTING AGREEMENT
The Company is obligated under the 2002 Purchase Agreement to solicit
shareholder approval to amend its Charter to (i) provide the holders of the 2002
Debentures with "as converted" voting rights; and (ii) to increase its
authorized shares of Common Stock from 80,000,000 to 350,000,000 shares (the
"Charter Amendments"). In this regard, as part of the closing of the 2002
Purchase Agreement, each of Galen Partners III, L.P., Galen Partners
International III, L.P., Galen Employee Fund III, L.P., Oracle Strategic
Partners, L.P., Michael Reicher, the Company's former President and Chief
Executive Officer, and Peter Clemens, the Company's Chief Financial Officer
(collectively, the "Voting Agreement Parties") executed a Voting Agreement dated
December 20, 2002 pursuant to which each agreed to vote all of his/its
respective voting securities of the Company (i) in favor of the Charter
Amendments, and (ii) in favor of one designee of each of Care Capital and Essex
to the Company's Board of Directors. The voting securities held by the Voting
Agreement Parties represents an aggregate of approximately 65.1% of the voting
rights under the Company's outstanding voting securities.
RIGHT OF FIRST REFUSAL
The 2002 Purchase Agreement provides the holders of the 2002 Debentures and
the holders of shares of Common Stock issued upon conversion of the 2002
Debentures (provided the 2002 Debentures remain outstanding and the shares
received upon conversion have not been sold, transferred or otherwise disposed
of), as well as the holders of the 1998 Debentures with a right of first refusal
relating to any subsequent issuance, sale or exchange of any shares of the
Company's Common Stock or convertible securities, exclusive of certain excluded
securities and offerings in an amount less than $200,000.
SECURED DEBT
The 2002 Debentures are secured by a lien on all assets of the Company,
tangible and intangible. In addition, each of Houba, Inc. and Axiom
Pharmaceutical Corporation, each a wholly-owned subsidiary of the Company, has
executed in favor of the 2002 Debenture Investor Group an Unconditional
Agreement of Guaranty of the Company's obligations under the 2002 Purchase
Agreement. Each Guaranty is secured by all assets of such subsidiary, and, in
the case of Houba, Inc., by a mortgage lien on its real estate. In addition, the
Company has pledged the stock of each such subsidiary to the 2002 Debenture
Investor Group to further secure its obligations under the 2002 Purchase
Agreement.
In accordance with the terms of a Subordination Agreement dated December
20, 2002 between the Company, the holders of the 2002 Debentures, the holders of
the Existing Debentures and Watson, the liens on the Company's and its
Subsidiaries' assets as well as the payment priority of the 2002 Debentures are
(i) subordinate to the Company's lien and payment obligations in favor of Watson
under the Watson Loan Agreement, and (ii) senior to the Company's lien and
payment obligations in favor of the holders of the Existing Debentures in the
aggregate principal amount of approximately $52,330,042. In addition to the
subordination of the liens and the payment priority of the Existing Debentures
in favor of the 2002 Debentures issued in the 2002 Debenture Offering, as part
of the completion of the 2002 Debenture Offering, each of the holders of the
Existing Debentures agreed to extend the maturity date of the Existing
Debentures from March 15, 2003 to March 31, 2006.
CONVERSION OF DEBENTURES AT COMPANY'S OPTION
Provided that no event of default relating to a failure to pay principal
and interest under the 2002 Debentures shall exist and then be continuing, in
the event that following December 20, 2005, (i) the average of the closing bid
and asked prices per share of the Company's Common Stock, as reported by the OTC
Bulletin Board (or the closing price per share as reported by the NASDAQ
National Market or any Exchange on which the shares may then be traded) exceeds
the product of (x) the then applicable Conversion Price of the 2002 Debentures,
multiplied by (y) four (4), for each of the twenty (20) consecutive trading days
during which the average daily trading volume for such twenty (20) trading day
period is at least one million dollars ($1,000,000), or (ii) the Company shall
have obtained the written consent of the holders of 75% of the
32
principal amount of the 2002 Debentures then outstanding to convert the 2002
Debentures into Common Stock, then the Company may upon written notice to the
holders of the 2002 Debentures require that all, but not less than all, of the
outstanding principal amount of the 2002 Debentures be converted into shares of
the Company's Common Stock at a price per share equal to the Conversion Price of
the 2002 Debentures (as such Conversion Price may be adjusted pursuant to the
terms of the 2002 Purchase Agreement).
REGISTRATION RIGHTS
The Company executed in favor of the holders of the 2002 Debentures, the
holders of the Existing Debentures, the holders of shares received in the
Warrant Recapitalization Agreement (as described below under the caption
"Warrant Recapitalization") and Watson, a Registration Rights Agreement dated
December 20, 2002 (the "Registration Rights Agreement") providing for (i) the
termination of the registration rights granted to the holders of the Existing
Debentures under the 1998 Purchase Agreement and the 1999 Purchase Agreement,
(ii) the termination of registration rights granted to Galen relating to the
common stock purchase warrants issued to Galen in consideration for various
bridge loans to the Company (the "Galen Warrants"), and (iii) the grant of
registration rights to Watson, the holders of the 2002 Debentures, the holders
of the Existing Debentures, the holders of shares of common stock received
pursuant to the Warrant Recapitalization Agreement (the "Warrant Recap Shares")
and Galen as holder of the Galen Warrants, to register under the Securities Act
of 1933, as amended, the Warrant Recap Shares, the shares issuable on exercise
of the Watson Warrant and the Galen Warrants, and the shares issuable on
conversion of the 2002 Debentures and the Existing Debentures (collectively, the
"Registrable Securities"). The Registration Rights Agreement provides each of
Galen and Watson with two (2) demand registrations on Form S-1 (or any successor
form) and the holders of 20% of the Registrable Securities with one (1) demand
registration on Form S-1 (or any successor form). The Registration Rights
Agreement also provides such parties with unlimited piggyback registration
rights.
OTHER TERMS
The 2002 Purchase Agreement contains other customary terms and provisions,
including, without limitation, customary representations and warranties,
affirmative covenants, negative covenants and requirements for the provision of
certain financial information during the term that the 2002 Debentures remain
outstanding, all of which are customary for the type of securities issued in the
2002 Debenture Offering.
WATSON LOAN AGREEMENT AMENDMENTS
As part of the closing of the 2002 Debenture Offering, the Company's
$17,500,000 term loan agreement with Watson (the "Watson Loan Agreement ") was
amended to (i) extend the maturity date of the Watson Loan Agreement from March
31, 2003 to March 31, 2006, (ii) increase the rate of interest from prime plus
two percent (2%) to prime plus four and one-half percent (4 1/2%), and (iii)
increase the principal amount of the Watson Term Loan from $17,500,000 to
$21,401,331 to reflect the inclusion of approximately $3,901,331 owed by the
Company to Watson under a product supply agreement between the parties.
In consideration for the amendment to the Watson Loan Agreement, the
Company issued to Watson a Common Stock Purchase Warrant exercisable for
10,700,665 shares of the Company's Common Stock (the "Watson Warrant"). The
Watson Warrant has a term expiring December 31, 2009 and has an exercise price
of $.34 per share. Watson is also a party to the Registration Rights Agreement
described above under the caption "Registration Rights".
WARRANT RECAPITALIZATION
As part of the completion of the transactions contemplated in the 2002
Purchase Agreement, the Company consummated the terms of a Warrant
Recapitalization Agreement dated December 20, 2002 (the "Warrant
Recapitalization Agreement") between the Company and certain holders of an
aggregate of 8,145,736 Common Stock Purchase Warrants issued by the Company (i)
pursuant to the 1998 Purchase Agreement (the "1998 Warrants"), (ii) pursuant to
the 1999 Purchase Agreement (the "1999 Warrants"),
33
and (iii) pursuant to various bridge loan transactions during the period from
1998 through 2002 (the "Bridge Loan Warrants" and collectively with the 1998
Warrants and 1999 Warrants, the "Recapitalization Warrants"). As part of the
closing of the Warrant Recapitalization Agreement, the warrantholders a party
thereto surrendered to the Company for cancellation the Recapitalization
Warrants in exchange for the issuance of an aggregate of 5,970,083 shares of
Common Stock.
THE PROPOSED AMENDMENT
It is proposed that the Company's Charter be amended to grant voting rights
to the holders of the 2002 Debentures, except for those 2002 Debentures held by
Care Capital which, for so long as they are held by Care Capital, have no voting
rights. The proposed amendment provides that the holders of the 2002 Debentures
(except Care Capital) will be entitled to vote on all matters submitted to a
vote of the shareholders of the Company, voting together with the holders of the
Company's Common Stock (and of any other shares of capital stock or securities
of the Company entitled to vote at a meeting of the shareholders) as one class.
Each holder of a 2002 Debenture will be entitled to a number of votes equal to
the number of votes represented by the Common Stock of the Company that could
then be acquired upon conversion of the 2002 Debentures into Common Stock,
subject to adjustments as provided in the 2002 Debentures. Holders of the 2002
Debentures will be deemed to be shareholders of the Company, and the 2002
Debentures will be deemed to be shares of stock for the purpose of any provision
of the New York Business Corporation Law that requires the vote of shareholders
as a prerequisite for any corporate action.
The net proceeds of the 2002 Debenture Offering, in large part, will be
used to provide the Company with a necessary source of working capital and to
fund capital improvements and research and development expenses relating to the
commercialization of the Company's opiate synthesis technologies.
On September 26, 2002, the Board of Directors of the Company formed an
Independent Committee of the Board (the "Independent Committee") for the purpose
of evaluating the capital raising activity of the Company with the intent of
seeing that those efforts were reasonable and unbiased and that all alternatives
were considered in the process. The Independent Committee consisted of Mr.
Sumner, Chairman, and Messrs. Alan Smith, William Skelly and Joel Liffmann. The
Independent Committee met formally on seven occasions during the period of its
formation on September 26, 2002 through December 16, 2002, and, in addition,
Independent Committee members had numerous other detailed discussions with each
other and with the Company's Chief Financial Officer and other members of
Management and with the Independent Committee special legal counsel in
connection with the capital raising efforts of the Company and, in particular,
the 2002 Debenture Offering. On December 16, 2002, the Independent Committee
delivered a resolution to the Board of Directors of the Company in which it
concluded that the 2002 Debenture Offering was fair from a financial point of
view to the public stockholders of the Company, other than Essex, Care Capital
and Galen and the other investors in the 2002 Debenture Offering, and that the
capital raising efforts of the Company had been reasonable and unbiased and that
all reasonable alternatives were considered in the process. Accordingly, the
Independent Committee recommended to the Board that the Board approve and
authorize the 2002 Debenture Offering, including the Conversion Price of the
2002 Debentures.
At a meeting of the Board of Directors of the Company held on December 17,
2002, the Board of Directors considered the recommendation of the Independent
Committee and, after concluding that the Conversion Price of the 2002 Debentures
represented fair value and that the terms and provisions of the 2002 Debenture
Offering were reasonable and the completion of the 2002 Debenture Offering would
permit the Company to satisfy its current liabilities and continue its
operations in an effort to enhance shareholder value, the Board of Directors
unanimously approved the terms of the 2002 Debenture Offering. Messrs. Wesson,
Conjeevaram, Shroff, the directors designee of Galen, abstained from the vote as
Galen was an investor in the 2002 Debenture Investor Group. Mr. Joel Liffmann,
the director designee of Oracle, abstained from that portion of the vote
relating to the Warrant Recapitalization Agreement as Oracle was a participant
in such Agreement.
Assuming receipt of shareholder approval of this Proposal 3 and Proposal 2
of this Proxy Statement, Galen, Oracle, Care Capital and Essex would control
approximately 86.0%, 56.9%, 44.0%, and 44.4%,
34
respectively, of the Company's Common Stock (approximately 55.5%, 10.1%, 7.3%,
and 7.4%, respectively, after giving effect to the conversion of all other
outstanding convertible securities of the Company).
The structure and the terms of the 2002 Purchase Agreement and the 2002
Debentures were negotiated at arms length by representatives of the Company,
Care Capital and Essex. The requirement to provide the holders with voting
rights on all matters submitted to a vote of shareholders of the Company was a
necessary component to obtain the investment from the 2002 Investor Group. The
terms of the 2002 Purchase Agreement provide that in the event the Company fails
to obtain shareholder approval to increase its authorized capital stock as
described in Proposal 2 or to provide the holders of the 2002 Debentures with
the right to vote on all matters submitted to a vote of the shareholders of the
Company as provided in this Proposal, the holders of 66 2/3 percent of the
principal amount of the 2002 Debentures may declare the Company in default under
the 2002 Purchase Agreement, resulting in the possible acceleration of the
indebtedness evidenced by the 2002 Debentures. Failure to comply with the terms
of the 2002 Purchase Agreement and the 2002 Debentures, including the failure to
obtain shareholder approval to this Proposal and Proposal 2, would materially
adversely affect the Company's business, financial condition and results of
operations.
Prior to the 2002 Debenture Offering, each of Care Capital and Essex was
unaffiliated with the Company.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of the
Common Stock of the Company is required to approve this Proposal 3 to authorize
an amendment to the Company's Charter to provide voting rights to the holders of
the 2002 Debentures.
Pursuant to the terms of the 2002 Purchase Agreement executed in connection
with the 2002 Debenture Offering, each of Galen Partners III L.P., Galen
Partners International III, L.P., Galen Employee Fund III, L.P., Oracle
Strategic Partners, L.P., Michael Reicher, the Company's former President and
Chief Executive Officer, and Peter Clemens, the Company's Chief Financial
Officer (collectively, the "Voting Agreement Parties") have executed a Voting
Agreement pursuant to which each has agreed to vote all of their respective
voting securities of the Company in favor of this Proposal 3. The voting
securities held by the Voting Agreement Parties represents an aggregate of
approximately 65.1% of the voting rights under the Company's outstanding voting
securities.
If this Proposal 3 is adopted, the Company's Charter will be amended to
restate Article THIRD by deleting the second paragraph thereof and replacing the
same with the following:
"The holders of (i) the Corporation's 5% Convertible Senior Secured
Debentures due March 31, 2006 issued pursuant to that certain Debenture and
Warrant Purchase Agreement dated March 10, 1998 between the Corporation,
Galen Partners III, L.P., Galen Partners International III, L.P., Galen
Employee Fund, III, L.P., and each of the other signatories thereto, as
amended pursuant to that certain Amendment to Debenture and Warrant
Purchase Agreement dated December 20, 2002 between the Corporation, Galen
Partners III, L.P. and each of the other signatories thereto (the "1998
Debentures"), (ii) the Corporation's 5% Convertible Senior Secured
Debentures due March 31, 2006 issued pursuant to that certain Debenture and
Warrant Purchase Agreement dated May 26, 1999 between the Corporation,
Oracle Strategic Partners, L.P. and each of the other signatories thereto,
as amended pursuant to that certain Amendment to Debenture and Warrant
Purchase Agreement dated December 20, 2002 between the Corporation, Oracle
Strategic Partners, L.P. and each of the other signatories thereto (the
"1999 Debentures"), and (iii) the Corporation's 5% Convertible Senior
Secured Debentures due March 31, 2006 issued pursuant to that certain
Debenture Purchase Agreement dated December 20, 2002 among the Corporation,
Care Capital Investments II, LP, Essex Woodlands Health Ventures V, L.P.
and each of the other signatories thereto (the "2002 Debentures" and
together with the 1998 Debentures and the 1999 Debentures, collectively,
the "Debentures"), shall be entitled to vote on all matters submitted to a
vote of the shareholders of the Corporation, together with the holders of
the Corporation's Common Stock (and any other shares of capital stock of
the Corporation entitled to vote at a meeting of shareholders) as one
class; provided, however, that any 2002 Debentures held by Care Capital
35
Investments II, LP shall, for so long as they are held by Care Capital
Investments II, LP, have no voting rights. Each Debenture shall be entitled
to a number of votes equal to the number of votes represented by the Common
Stock of the Corporation that could then be acquired upon conversion of the
Debentures into Common Stock, subject to adjustments as provided in the
Debentures. Holders of the Debentures shall be deemed to be shareholders of
the Corporation, and the Debentures shall be deemed to be shares of stock
for purposes of any provision of the New York Business Corporation Law that
requires the vote of shareholders as a prerequisite to any corporate
action."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends that shareholders vote FOR the proposed
amendment to the Company's Charter to grant holders of the 2002 Debentures the
voting rights as provided in this Proposal 3.
DISSENTING SHAREHOLDERS' RIGHTS OF APPRAISAL
Pursuant to Section 806 of the New York Business Corporation Law ("NYBCL"),
holders of the Company's Common Stock who follow the procedures set forth in
Section 623 of the NYBCL (the "Appraisal Statute") will be entitled to have
their Common Stock appraised by a New York State Court and to receive payment of
the "fair value" of such shares as determined by such court. The Appraisal
Statue is reprinted in its entirety as Appendix B to this Proxy Statement. While
the following discussion summarizes all material terms of the law pertaining to
appraisal rights under the NYBCL, it is qualified in its entirety by the full
text of the Appraisal Statute. Any shareholder who wishes to exercise such
appraisal rights or to preserve the right to do so, should review the following
discussion and Appendix B carefully because failure to timely and properly
comply with the procedures specified will result in the loss of dissenters'
appraisal rights under the NYBCL.
All references in the Appraisal Statute and in this summary to a
"shareholder" are to the recordholder of the Company's Common Stock on the
Record Date. A person having a beneficial interest in shares of the Company's
Common Stock that are held of record by another person such as a broker or
nominee must act promptly to cause the record holder to follow the steps
summarized below properly and in a timely manner to perfect whatever appraisal
rights the beneficial owner may have.
A shareholder wishing to exercise appraisal rights must (i) deliver to the
Company, prior to or at the Meeting but before the vote is taken on this
Proposal 3, a written objection to the proposed amendment to the Company's
Charter as provided in this Proposal 3 (the "Notice of Election"), which must
include a notice of his election to dissent, the shareholder's name, residence
address, the number of shares as to which the shareholder dissents and a demand
for payment of the fair value of such shares (which Notice of Election must be
in addition to and separate from any proxy or vote against the amendment to the
Company's Charter contemplated by this Proposal 3 (the "Charter Amendment")) and
(ii) not vote for approval and adoption of the Charter Amendment. BECAUSE A
PROXY WHICH DOES NOT CONTAIN VOTING INSTRUCTIONS WILL, UNLESS REVOKED, BE VOTED
FOR APPROVAL OF THE CHARTER AMENDMENT, A SHAREHOLDER WHO VOTES BY PROXY AND WHO
WISHES TO EXERCISE APPRAISAL RIGHTS MUST (A) VOTE AGAINST APPROVAL AND ADOPTION
OF THE CHARTER AMENDMENT OR (B) ABSTAIN FROM VOTING ON THE CHARTER AMENDMENT.
Neither a vote against the Charter Amendment, in person or by proxy, nor a Proxy
directing such vote for an abstention, will in and of itself constitute a
written objection to the Charter Amendment under the Appraisal Statute
(shareholders who timely file such Notice of Election and who do not vote in
favor of the Charter Amendment are referred to as "Dissenting Shareholders").
A shareholder may not dissent as to less than all of the shares, as to
which such shareholder has a right to dissent, held by such shareholder of
record and owned beneficially. A nominee or fiduciary may not dissent on behalf
of any beneficial owner as to less than all of the shares held of record by such
nominee or fiduciary on behalf of such owner and as to which such nominee or
fiduciary has a right to dissent. All Notices of Election should be addressed to
Halsey Drug Co., Inc., 695 North Perryville Road, Crimson Building No. 2,
Rockford, Illinois 61107, Attention: Mr. Peter Clemens, Vice President.
Within 10 days after the date on which shareholders approve and adopt the
Charter Amendment, the Company must send written notice by registered mail to
each Dissenting Shareholder to such effect (the
36
"Dissenting Shares"). At the time of the filing of the amended Charter with the
Secretary of State of the State of New York (the "Effective Time"), each
Dissenting Shareholder will cease to have any rights of a shareholder of the
Company except the right to be paid the fair value of his shares and rights
under the Appraisal Statute.
A Notice of Election may be withdrawn by a Dissenting Shareholder prior to
his acceptance in writing of an offer made by the Company to pay the value of
such Dissenting Shares, except that a Notice of Election may not be withdrawn
later than 60 days following the Effective Time unless the Company fails to make
a timely offer to pay such value, in which case such Dissenting Shareholder
shall have 60 days from the date an offer is made to withdraw his election. In
either event, after such time, a Notice of Election may not be withdrawn without
the written consent of the Company. In order to be effective, withdrawal of a
Notice of Election must be accompanied by a return to the Company of any advance
payment made to the Dissenting Shareholder by the Company as described below.
Upon filing the Notice of Election, or within one month thereafter,
Dissenting Shareholders must submit the certificates representing their Common
Stock to the Company, attention: Peter Clemens, Vice President, at the address
set forth above or to the Company's transfer agent, Continental Stock Transfer
and Trust Company, 2 Broadway, 19th Floor, New York, New York 10004 and there
will be noted thereon that a Notice of Election has been filed and the
certificates will be returned to the Dissenting Shareholders. Any Dissenting
Shareholders who fail to submit such certificates for such notation will, at the
option of the Company exercised by written notice to such Dissenting
Shareholders within 45 days of the date of filing of such Notice of Election,
lose their appraisal rights unless a court, for good cause shown, shall
otherwise direct.
Within 15 days after the expiration of the period within which shareholders
may file their Notice of Election, or within 15 days after the Effective Time,
whichever is later (but in no case later than 90 days after the shareholders'
vote to approve and adopt the Charter Amendment), the Company must make a
written offer to pay for the Dissenting Shares held by such Dissenting
Shareholder at a price which the Company considers to be their fair value. This
offer will be accompanied by a statement setting forth the aggregate number of
shares, which will be at the same price for all Dissenting Shares, with respect
to which Notices of Election to dissent have been received and the aggregate
number of holders of such shares.
If the Effective Time has occurred at the time the offer is made, the offer
will be accompanied by (i) advance payment to each Dissenting Shareholder who
has submitted certificates for notation thereon of the election to dissent of an
amount equal to 80% of such offer or (ii) as to each Dissenting Shareholder who
has not yet submitted certificates for notation thereon of the election to
dissent, a statement that advance payment of an amount equal to 80% of the
amount of such offer will be made by the Company promptly upon submission of
certificates. If the Effective Time of the Charter Amendment has not occurred at
the time of the making of such offer, such advance payment or statement as to
advance payment will be sent to each Dissenting Shareholder entitled thereto
upon the Effective Time. Acceptance of such advance payment by a Dissenting
Shareholder will not constitute a waiver of dissenter's rights. If the Charter
Amendment is not effective within 90 days after approval of the Charter
Amendment by shareholders, such offer will be conditioned upon consummation of
the Charter Amendment.
If within 30 days after making such offer, the Company and any Dissenting
Shareholder agree on the price to be paid for such Dissenting Shareholder's
Dissenting Shares, the Company will pay the agreed price to such holder within
60 days after the later of the date such offer was made or the Effective Time,
upon surrender of certificates representing such holder's Common Stock.
If the Company fails to make an offer within the 15-day period described
above, or if it makes an offer and any Dissenting Shareholder fails to agree
within 30 days of the making of such offer, the Company must, within 20 days
thereafter institute a special proceeding in an appropriate court to determine
the rights of Dissenting Shareholders and to fix the fair value of the shares.
If the Company does not institute such a proceeding within such 20-day period,
any Dissenting Shareholder may, within 30 days after such 20-day period expires,
institute a proceeding for the same purpose. If such proceeding is not
instituted by any Dissenting Shareholder within such 30-day period, all
dissenters' rights will be extinguished unless the New
37
York Supreme Court, for good cause shown, otherwise directs. All Dissenting
Shareholders, other than those who agree with the Company as to the price to be
paid for their shares, will be made parties to such proceeding
With respect to Dissenting Shareholders entitled to payment, the court will
proceed to fix the value of the Company's Common Stock which will be the fair
value as of the close of business on the day prior to the Meeting. In fixing the
fair value of the shares of the Company's Common Stock, the court will consider
the nature of the Charter Amendment and the effects on the Company and its
shareholders, the concepts and methods then customary in relevant securities and
financial markets for determining fair value of shares of a corporation engaging
in a similar transaction under comparable circumstances and all other relevant
factors.
The court will determine the fair value of such shares without a jury and
without referral to an appraiser or referee. The final order by the court will
include an allowance for interest (unless the court finds the refusal of any
Dissenting Shareholder to accept the offer of the Company thereof as arbitrary,
vexatious, or otherwise not in good faith) of such rate as the court finds to be
equitable, accruing from the Effective Time to the date of payment.
Each party in the appraisal proceeding will bear its own costs and
expenses, including the fees of counsel and any experts employed by it. The
court may, however, in its discretion, assess any of the costs, fees and
expenses incurred by the Company against Dissenting Shareholders (including
those who withdraw their Notice of Election) if the court finds that their
refusal to accept the offer of the Company was arbitrary, vexatious or otherwise
not in good faith. Similarly, the costs, fees and expenses incurred by
Dissenting Shareholders may be assessed by the court in its discretion, against
the Company if the fair value of the shares as determined by the court
materially exceeds the amount which the Company offered to pay, the Company
failed to follow certain procedures of the Appraisal Statute or the Company's
manner of compliance with the Appraisal Statue was arbitrary, vexatious or not
otherwise in good faith.
Within 60 days after the final determination of the proceeding, the Company
will pay to each Dissenting Shareholder the amount found in such proceeding to
be due such shareholder, upon surrender of certificates of the Company's Common
Stock.
Any shareholder who duly demands, prior to the Meeting, an appraisal in
compliance with the Appraisal Statute will not, after the Effective Time, be
entitled to vote the shares subject to such demand for any purpose or to the
payment of dividends or other distributions on those shares, except dividends or
other distributions payable to shareholders of record as of a date prior to the
Effective Time.
Failure to follow the steps required by the Appraisal Statute for
perfecting appraisal rights may result in the loss of such rights. IN VIEW OF
THE COMPLEXITY OF THE PROVISIONS OF THE APPRAISAL STATUTE, SHAREHOLDERS WHO ARE
CONSIDERING DISSENTING FROM THE CHARTER AMENDMENT SHOULD CONSULT THEIR LEGAL
ADVISORS.
PROPOSAL 4
AMENDMENT TO THE COMPANY'S 1998 STOCK OPTION PLAN
On August 26, 2003, the Board of Directors of the Company amended the
Company's 1998 Stock Option Plan (the "1998 Plan"), to (a) increase the number
of shares available for grant of options under the 1998 Plan from 8,100,000
shares to 12,000,000 shares, (b) permit the grant of non-qualified stock options
having an exercise price per share which is less than the fair market value of
the Company's Common Stock, and (c) set a limit of 5,500,000 option awards that
may be granted to one individual in any calendar year. A copy of the 1998 Plan,
as amended, is set forth in Appendix C to this Proxy Statement. The amendment to
the 1998 Plan will not become effective unless it is approved by the holders of
record of a majority of the shares of the Company's Common Stock. Shareholder
approval of the Board's amendment to the 1998 Plan is required within twelve
(12) months of the Board's approval of the amendment. The 1998 Plan provides for
the granting of stock options to the employees, officers, and consultants of the
Company. Approximately 35 employees, officers and directors were eligible to
participate in the 1998 Plan as of August 26, 2003. Except for the amendments
adopted by the Board on August 26, 2003 as described above, the 1998 Plan
remains unchanged.
38
The 1998 Plan is intended to assist the Company in securing and retaining
key employees and directors by allowing them to participate in the ownership and
growth of the Company through the grant of incentive stock options, as defined
in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options to which Section 422 of the Code does not apply
(collectively, the "Options"). The granting of Options will serve as partial
consideration for and give key employees, directors and consultants an
additional inducement to, remain in the service of the Company and will provide
them with an increased incentive to work for the Company's success.
The Company currently maintains a 1995 Stock Option Plan. See "Compensation
of Executive Officers and Directors -- Stock Option Plans." As of August 26,
2003, options to purchase an aggregate of 947,593 shares have been granted under
the Company's 1995 Stock Option Plan, of which Options for 140,460 shares had
been exercised. As of August 1, 2003, 52,407 shares remained available for
issuance under the 1995 Stock Option Plan.
The Board of Directors believes that it would be in the best interests of
the Company for the shareholders to ratify the amendment to the 1998 Plan to (a)
increase the number of shares available for the grant of Options under the 1998
Plan from 8,100,000 to 12,000,000 shares, (b) permit the grant of non-qualified
stock options having an exercise price per share which is less than the fair
market value of the Company's Common Stock, and (c) set a limit of 5,500,000
option awards that may be granted to one individual in any calendar year.
Subject to the receipt of shareholder approval of this Proposal 4 and Proposal
2, effective August 26, 2003, the Stock Option Committee of the Board of
Directors granted stock options exercisable for an aggregate of 5,500,000 shares
of Common Stock. Of such stock options, 478,210 are in excess of the current
8,100,000 shares available for grant under the 1998 Plan (the "Excess Stock
Option Grants"). In the event shareholders do not approve this Proposal 4 and
Proposal 2, the Excess Stock Option Grants will be cancelled. As of August 26,
2003, options to purchase an aggregate of 8,630,617 shares of Common Stock have
been granted under the 1998 Plan, of which 22,000 shares had been exercised.
Assuming the receipt of shareholder approval of the amendment to the 1998 Plan,
as of August 26, 2003, 3,369,383 shares remained available for the grant of
Options under the 1998 Plan.
In addition to the increase in the number of shares available for the grant
of Options under the 1998 Plan, the 1998 Plan has been amended to permit the
grant of non-qualified stock options at an exercise price per share which is
less than the fair market value of the Company's Common Stock on the date of
grant. Prior to the Board's amendment, the 1998 Plan provided that an Option
must have an exercise price no less than the fair market value of the Company's
Common Stock on the date of grant. In adopting the amendment to the 1998 Plan,
the Board determined that the additional flexibility afforded by the ability to
grant Options at less than fair market value would assist the Company in
attracting and retaining key employees, which will enhance long-term shareholder
value. Additionally, the grant of non-qualified stock options to employees at a
discount to fair market value would serve, in part, to offset the substantial
dilution to previously granted employee options as a result of the completion of
the Company's offering of 5% Convertible Senior Secured Debentures on December
20, 2002 (the "2002 Debentures") pursuant to the 2002 Debenture Purchase
Agreement between the Company, Care Capital, Essex and the other signatories
thereto. As described below under the caption "2003 Stock Option Grants", the
Stock Option Committee granted an aggregate of 5,500,000 options effective
August 26, 2003. All of such Options (the "Discounted Options") are non-
qualified stock options that were issued at less than the fair market value of
the Company's Common Stock on the date of grant and were issued to Mr. Andrew D.
Reddick, the Company's new CEO and President.
Except for grant of the Discounted Options described below under the
caption "2003 Stock Option Grants", the Stock Option Committee does not
contemplate granting non-qualified stock options in the future having an
exercise price less than fair market value. Any such discounted Options granted
in the future would be of considerably smaller magnitude and be made on an
isolated basis.
In addition to the increase in the number of shares available under the
1998 Plan and the discretion to grant non-qualified stock options having an
exercise prior less than the fair market value of the Company's Common Stock,
the Board amended the 1998 Plan effective August 26, 2003 to set a limit of
5,500,000 option awards that may be made to an individual in any calendar year.
Prior to the Board's amendment, the 1998
39
Plan contained no limit on the number of Options that the Board or Stock Option
Committee may grant to any employee in any year or during the term of the 1998
Plan. The annual option limit of 5,500,000 Options to any individual under the
1998 Plan is included to qualify the 1998 Plan under Section 162(m) of the
Internal Revenue Code. Section 162(m) of the Internal Revenue Code precludes a
public company from taking a deduction for annual compensation in excess of
$1,000,000 paid to its Chief Executive Officer or any of its four other
highest-paid officers. However, compensation that qualifies under Section 162(m)
of the Internal Revenue Code as "performance-based" is specifically exempted
from the deduction limit. Based on Section 162(m) and the regulations
promulgated under such section, the Company's ability to deduct compensation
expense generated in connection with the exercise of stock options should not be
limited for stock options granted at fair market value, provided the 1998 Plan
contains the annual limit proposed in this Proposal 4. The inclusion in the 1998
Plan of the limit of 5,500,000 Options to an individual within any calendar year
will be used by the Company to determine whether the compensation realized by an
individual would be included in the amount in determining whether an executive's
annual compensation exceeds the $1,000,000 deductibility limitation under
Section 162(m) of the Internal Revenue Code. The exercise of Options having a
fair market value exercise price which have been granted within the limitations
provided in the amended 1998 Plan are not counted toward the deductibility
limitation. The annual limit provided in the amended 1998 Plan of 5,500,000
Options is arbitrary and the number is not specified in the Internal Revenue
Code. The Board of Directors believes, however, that the amount provides
sufficient flexibility to address the Company's compensation objectives while
allowing the Company to take advantage of the tax benefits of compensation paid
to an executive.
The following discussion of the principal features and effects of the 1998
Plan, as amended, is qualified in its entirety by reference to the text of the
1998 Plan, as amended, set forth in Appendix C attached hereto.
ADMINISTRATION
The 1998 Plan is administered by the Stock Option Committee of the Board of
Directors (the "Stock Option Committee"), consisting of not less than two
members of the Board of Directors of the Company appointed by the Board. Each
member of the Stock Option Committee will be a "non-employee director" as
defined in Rule 16b-3 of the Securities Exchange Act of 1934, as amended. The
Stock Option Committee will select the employees, directors and consultants who
will be granted Options under the 1998 Plan and, subject to the provisions of
the 1998 Plan, will determine the terms and conditions and number of shares
subject to each Option. The Stock Option Committee will also make any other
determinations necessary or advisable for the administration of the 1998 Plan
and its determinations will be final and conclusive. The Stock Option Committee
is currently comprised of Messrs. Skelly and Sumner.
SHARES SUBJECT TO THE 1998 PLAN
The 1998 Plan authorizes the granting of either incentive stock options or
non-qualified stock options to purchase in the aggregate up to 8,100,000 shares
of the Company's Common Stock. The amendment to the 1998 Plan approved by the
Board on August 26, 2003, subject to shareholder approval as provided in this
Proposal 4, will increase the number of shares available for grant of Options
under the 1998 Plan to 12,000,000 shares. The shares available for issuance will
be increased or decreased according to any reclassification, recapitalization,
stock split, stock dividend or other such subdivision or combination of the
Company's Common Stock. Shares of the Company's Common Stock subject to
unexercised Options that expire or are terminated prior to the end of the period
during which Options may be granted under the 1998 Plan will be restored to the
number of shares available for issuance under the 1998 Plan. Assuming the
receipt of shareholder approval of this Proposal 4 and Proposal 2, after giving
effect to the Discounted Options issued on August 26, 2003, 3,421,790 shares of
common stock will remain available for issuance under the 1998 Plan.
ELIGIBILITY
Any employee of the Company or any subsidiary of the Company shall be
eligible to receive incentive stock options and non-qualified stock options
under the 1998 Plan. Non-qualified stock options may be granted to employees as
well as non-employee directors and consultants of the Company under the 1998
Plan
40
as determined by the Board or the Stock Option Committee. Any person who has
been granted an Option may, if he is otherwise eligible, be granted an
additional Option or Options.
Each grant of an Option shall be evidenced by an Option Agreement, and each
Option Agreement shall (i) specify whether the Option is an incentive stock
option or a non-qualified stock option and (ii) incorporate such other terms and
conditions as the Board of Directors or the Stock Option Committee acting in its
absolute discretion deems consistent with the terms of the 1998 Plan, including,
without limitation, a restriction on the number of shares of Common Stock
subject to the Option which first become exercisable during any calendar year.
To the extent that the aggregate fair market value of the Common Stock of
the Company underlying a grant of incentive stock options (determined as of the
date such an incentive stock option is granted), which first become exercisable
in any calendar year, exceeds $100,000, such Options shall be treated as
non-qualified stock options. This $100,000 limitation shall be administered in
accordance with the rules under Section 422(d) of the Code.
The amendment to the 1998 Plan approved by the Board on August 26, 2003,
subject to shareholder approval as provided in this Proposal 4, will set a limit
of 5,500,000 Option awards that may be made to an individual in any calendar
year.
EXERCISE PRICE OF OPTIONS
Upon the grant of an Option to an employee, director or consultant of the
Company, the Stock Option Committee will fix the number of shares of the
Company's Common Stock that the optionee may purchase upon exercise of the
Option and the price at which the shares may be purchased. The Option price for
incentive stock options shall not be less than the fair market value of the
Common Stock at the time the Option is granted, except that the Option price
shall be at least 110% of the fair market value where the Option is granted to
an employee who owns more than 10% of the voting power of all classes of stock
of the Company or any parent or subsidiary. Under the terms of the 1998 Plan,
the aggregate fair market value of the stock (determined at the time the Option
is granted) with respect to which incentive stock options are exercisable for
the first time by such individual during any calendar year shall not exceed
$100,000. The Option price for non-qualified stock options granted under the
1998 Plan may not be less than the fair market value of the Company's Common
Stock. The amendment to the 1998 Plan approved by the Board on August 26, 2003,
subject to shareholder approval as provided in this Proposal 4, permits the
Stock Option Committee to grant non-qualified stock options at a per share price
less than the fair market value of the Company's Common Stock on the date of
grant. "Fair market value" is determined by the Stock Option Committee based on
the average of the closing bid and asked price of the Common Stock on the
Over-the-Counter Bulletin Board (the "OTCBB"). On August 26, 2003, the average
of the closing bid and asked price of the Company's Common Stock, as reported by
the OTCBB, was $.82.
TERMS
All Options available to be granted under the 1998 Plan must be granted by
April 16, 2008. The Stock Option Committee will determine the actual term of the
Options but no Option will be exercisable after the expiration of 10 years from
the date of grant. No incentive stock option granted to an employee who owns
more than 10% of the combined voting power of all the outstanding classes of
stock in the Company may be exercised after five years from the date of grant.
The Options granted pursuant to the 1998 Plan shall not be transferable
except (i) by will or the laws of descent and distribution and (ii)
non-qualified options may be transferred in limited circumstances to immediate
family members and family limited partnerships, with the consent of the Stock
Option Committee.
EXERCISE OF OPTIONS
Options granted to employees, directors or consultants under the 1998 Plan
may be exercised during the optionee's lifetime only by the optionee during his
employment or service with the Company or for a period
41
not exceeding one year if the optionee ceased employment or service as a
director or consultant because of permanent or total disability within the
meaning of Section 22(e)(3) of the Code. Options may be exercised by the
optionee's estate, or by any person who acquired the right to exercise such
Option by bequest or inheritance from the optionee for a period of twelve months
from the date of the optionee's death. If such Option shall by its terms expire
sooner, such Option shall not be extended as a result of the optionee's death.
The consideration to be paid to the Company upon exercise of an Option may
consist of any combination of cash, checks, promissory notes, shares of Common
Stock, and/or any other forms of consideration permitted under New York law and
approved by the Stock Option Committee and/or the Board of Directors. With the
exception of the consideration received by the Company upon the exercise of
Options granted under the 1998 Plan, no consideration is received by the Company
for the granting or extension of any Options.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO INCENTIVE STOCK OPTIONS
Certain Options granted under the 1998 Plan are intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Code. Set
forth below is a general summary of certain of the principal Federal income tax
consequences to participants and the Company of incentive stock options granted
under the 1998 Plan.
An employee to whom an incentive stock option is granted pursuant to the
1998 Plan will not recognize any compensation income and the Company will not
recognize any compensation deduction, at the time an incentive stock option is
granted or at the time an incentive stock option is exercised. In the year of
exercise, however, the amount by which the fair market value of the Common Stock
exceeds the Option price will constitute a tax preference item under the
alternative minimum tax. If the employee incurs minimum tax in the year of
exercise, however, he should qualify for the credit for prior year maximum tax
liability in the first future year he has regular tax liability.
In order to obtain incentive stock option treatment for Federal income tax
purposes upon the subsequent sale (or other disposition) by the optionee of the
shares of Common Stock received upon exercise of the Option, the sale (or other
disposition) must not occur within two years from the date the Option was
granted nor within one year after the issuance of such shares upon exercise of
the Option (the "incentive stock option holding period requirements"). If the
incentive stock option holding period requirements are satisfied, on the
subsequent sale (or other disposition) by the optionee of the shares of Common
Stock received upon the exercise of an Option, the optionee generally will
recognize income from the sale of a capital asset equal to the difference, if
any, between the proceeds realized from the sale (or other disposition) and the
amount paid as the exercise price of the Option. Alternatively, if the incentive
stock option holding period requirements are not satisfied, on the subsequent
sale (or other disposition) by the optionee of the shares of Common Stock
received upon the exercise of the Option, the optionee generally will recognize
income taxable as compensation (and the Company will recognize a compensation
deduction) in an amount equal to the lesser of (a) the difference, if any,
between the fair market value of the shares on the date of exercise and the
amount paid as the exercise price of the Option and (b) the difference, if any,
between the proceeds realized from the sale or other disposition and the amount
paid as the exercise price of the Option. Any additional gain realized on such
sale or disposition (in addition to the compensation income referred to above)
would give rise to income from the sale of a capital asset and taxed
accordingly.
FEDERAL INCOME TAX CONSEQUENCES RELATING TO NON-QUALIFIED STOCK OPTIONS
The non-qualified stock options which may be granted under the 1998 Plan
are not intended to qualify as incentive stock options within the meaning of
Section 422 of the Code. An individual to whom a non-qualified stock option is
granted pursuant to the 1998 Plan will generally not recognize any compensation
income, and the Company will not realize any compensation deduction, at the time
the non-qualified stock option is granted. In the year of exercise, however, the
optionee generally will realize income taxable as compensation (and the Company
will realize a compensation deduction) in an amount equal to the difference, if
any, between the fair market value of the shares on the date of exercise and the
amount paid as the exercise price of the Option.
42
The tax basis of the shares of Common Stock received by the optionee upon
exercise will be equal to the amount paid as the exercise price plus the amount,
if any, includable in his gross income as compensation income. The holding
period for the shares will commence on the date of exercise.
On the subsequent sale (or other disposition) by the optionee of the shares
of Common Stock received upon the exercise of the Option, any gain realized on
such sale or disposition would give rise to income from the sale of a capital
asset and taxed accordingly.
Section 162(m) of the Internal Revenue Code generally disallows a public
corporation's tax deduction for compensation to its Chief Executive Officer or
any of its four other most highly compensated officers in excess of $1,000,000
within a year. Compensation that qualifies as "performance-based compensation"
is excluded from the $1,000,000 deductibility cap, and therefore remains fully
deductible by the corporation that pays it. The Company's 1998 Plan has been
amended by the Board of Directors and, subject to your approval of this Proposal
4, will set a limit of 5,500,000 Options that may be granted to an individual in
any calendar year. If the amended 1998 Plan is adopted by the Company's
shareholders, stock options granted to the Company's Chief Executive Officer and
next four highest compensated officers having an exercise price at least equal
to fair market value will be deemed "performance based" as provided in Section
162(m) of the Internal Revenue Code and not subject to the $1,000,000
deductibility cap. With respect to a stock options granted to the Company's
Chief Executive Officer and next four highest compensated officers having an
exercise price less than the fair market value of the Company's Common Stock at
the date of grant, the compensation expense resulting from the exercise of any
such stock options will not qualify as a "performance based" compensation under
the requirements of Section 162(m) of the Internal Revenue Code and will be
subject to the $1,000,000 deductibility cap.
43
PREVIOUSLY GRANTED OPTIONS
As of December 31, 2002, the Company had granted options to purchase an
aggregate of 3,193,617 shares of Common Stock under the 1998 Plan at a weighted
average exercise price of $1.97 per share. Of such options, 2,410,034 shares and
783,583 shares were vested and unvested, respectively, and 22,000 Options
granted under the 1998 Plan had been exercised. The following table sets forth
information concerning option grants made during fiscal 2002 with respect to (i)
each executive officer; (ii) all current executive officers as a group; (iii)
each nominee for election as a Director; (iv) all current Directors who are not
executive officers as a group; (v) each person who has received or is to receive
5% of such Options or rights; and (vi) all employees, including all current
officers who are not executive officers, as a group:
OPTIONS GRANTED WEIGHTED AVERAGE
DURING FISCAL 2002 EXERCISE PRICE
------------------ ----------------
Michael K. Reicher, Chief Executive Officer(1).............. -- $ --
Vijai Kumar, Chief Operations Officer....................... 400,000 1.15
Peter Clemens, Chief Financial Officer...................... -- --
James Emigh, Vice President -- Operations................... -- --
Phyllis A. Lambridis, Vice President -- Corporate
Compliance................................................ -- --
Carol Whitney, Vice President -- Administration............. -- --
Robert Seiser, Corporate Controller......................... -- --
William Skelly, Director.................................... 10,000 2.08
William A. Sumner, Director................................. 10,000 2.08
Bruce F. Wesson, Director(2)................................ -- --
Srini Conjeevaram, Director(2).............................. -- --
Zubeen Shroff, Director(2).................................. -- --
Joel D. Liffmann, Director(3)............................... -- --
Jerry Karabelas, Director(4)................................ -- --
Immanuel Thangaraj, Director(4)............................. -- --
All current executive officers as a group (6 persons)....... 400,000 1.15
All current directors who are not executive officers as a
Group (8 persons)......................................... 20,000 2.08
All employees, including current officers who are not
Executive officers as a group (114 persons)............... -- --
As of August 26, 2003, the average of the closing bid and ask price of the
Common Stock underlying the 1998 Plan was $.82 per share.
---------------
(1) Mr. Reicher's services as Chief Executive Officer ceased effective June 16,
2003.
(2) Stock options issuable to each of Messrs. Wesson, Conjeevaram and Shroff in
2002 to purchase 10,000 shares of the Company's Common Stock are issued to
Galen Partners III, L.P.
(3) Stock options issuable to Mr. Liffmann in 2002 to purchase 10,000 shares of
the Company's Common Stock are issued to Oracle Strategic Partners, L.P.
(1) Messrs. Karabelas and Thangaraj were appointed as Directors effective
December 20, 2002 and received no option grants in 2002.
2003 STOCK OPTION GRANTS
Subject to shareholder approval of Proposal 2 to amend the Company's
charter to increase its authorized shares, and this Proposal 4, effective August
26, 2003, the Stock Options Committee of the Board of Directors granted stock
options exercisable for an aggregate of 5,500,000 shares of Common Stock (the
"August 2003 Option Grants"). Of the August 2003 Option Grants, 478,210 are in
excess of the current 8,100,000 shares available for grant under the 1998 Plan
(the "Excess Stock Option Grants"). In the event shareholders do not approve
this Proposal 4, the Excess Stock Option Grants will be cancelled.
44
The following table sets forth information concerning the August 2003 Stock
Options with respect to (i) each executive officer; (ii) all current executive
officers as a group; (iii) each nominee for election as a Director; (iv) all
current Directors who are not executive officers as a group; (v) each person who
has received or is to receive 5% of such options or rights; and (vi) all
employees, including all current officers who are not executive officers, as a
group:
AUGUST 2003 WEIGHTED AVERAGE
STOCK OPTION EXERCISE PRICE
------------ ----------------
Andrew D. Reddick, Chief Executive Officer and President.... 5,500,000 $.34
Vijai Kumar, Chief Operations Officer....................... -- --
Peter Clemens, Chief Financial Officer...................... -- --
James Emigh, Vice President -- Operations................... -- --
Phyllis A. Lambridis, Vice President -- Corporate Compliance
Carol Whitney, Vice President -- Administration............. -- --
Robert Seiser, Corporate Controller......................... -- --
William Skelly, Director.................................... -- --
William A. Sumner, Director................................. -- --
Bruce F. Wesson, Director................................... -- --
Srini Conjeevaram, Director................................. -- --
Zubeen Shroff, Director..................................... -- --
Joel D. Liffmann, Director.................................. -- --
Jerry Karabelas, Director................................... -- --
Immanuel Thangaraj, Director................................ -- --
All current executive officers as a group (8 persons)....... 5,500,000 .34
All current directors who are not executive officers as a
Group (8 persons)......................................... -- --
All employees, including current officers who are not
Executive officers as a group (114 persons)............... -- --
As of August 26, 2003, the average of the closing bid and ask price of the
Common Stock underlying the 1998 Plan was $.82 per share.
AMENDMENTS AND DISCONTINUANCE OF THE 1998 PLAN
The 1998 Plan can be amended, suspended or terminated at any time by action
of the Company's Board of Directors, except that no amendment to the 1998 Plan
can be made without prior shareholder approval where such amendment would result
in (i) any material increase in the total number of shares of Common Stock
subject to the 1998 Plan, (ii) any change in the class of eligible participants
for Options under the 1998 Plan, (iii) any material increase in the benefits
accruing to participants under the 1998 Plan, or (iv) shareholder approval being
required for continued compliance with Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the shares of Common
Stock of the Company is required for the approval of the amendment to the 1998
Plan.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the approval of the amendment
to the 1998 Plan.
45
PROPOSAL 5
RATIFICATION OF APPOINTMENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
There will also be submitted for consideration and voting at the Meeting,
the ratification of the appointment by the Company's Board of Directors of Grant
Thornton LLP as independent certified public accountants for the purpose of
auditing and reporting upon the financial statements of the Company for the
fiscal year ending December 31, 2003. The Board of Directors of the Company
selected and approved the accounting firm of Grant Thornton LLP as independent
certified public accountants to audit and report upon the Company's financial
statements for the fiscal years ended December 31, 1984 through and including
2002. Grant Thornton LLP has no direct or indirect financial interest in the
Company.
Representatives of Grant Thornton LLP are expected to be present at the
Meeting, and they will be afforded an opportunity to make a statement at the
Meeting if they desire to do so. It is also expected that such representatives
will be available at the Meeting to respond to appropriate questions by
shareholders.
AUDIT FEES
The aggregate fees billed for professional services rendered for the audit
of the Company's annual financial statements for the fiscal year ended December
31, 2002, for other audit-related services, and for the reviews of the financial
statements included in the Company's Quarterly Reports on Form 10-Q for that
fiscal year, were $179,000, all of which were attributable to Grant Thornton
LLP.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
Grant Thornton LLP did not render professional services relating to
financial information systems design and implementation for the fiscal year
ended December 31, 2002.
ALL OTHER FEES
The aggregate fees billed by Grant Thornton LLP for services rendered to
the Company, other than the services described under "Audit Fees", for fiscal
year ended December 31, 2002, were $81,000. These fees relate to services
provided in connection with the preparation and filing of the Company's tax
returns and audit of the Company's 401(k) and profit sharing plan.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors of the Company (the "Audit
Committee") is composed of three directors and operates under a written charter
adopted by the Board of Directors. The written charter is attached to this Proxy
Statement as Appendix A. Management is responsible for the Company's internal
control and financial reporting process. The Company's independent public
accountants are responsible for performing an independent audit of the Company's
consolidated financial statements in accordance with generally accepted auditing
standards and to issue a report thereon. The Audit Committee's responsibility is
to monitor and oversee these processes.
In this context, the Audit Committee has met and held discussions with
Management and the Company's independent public accountants. Management
represented to the Audit Committee that the Company's consolidated financial
statements were prepared in accordance with generally accepted accounting
principles, and the Audit Committee has reviewed and discussed the consolidated
financial statements with Management and the Company's independent public
accountants. The Audit Committee discussed with the independent public
accountants matters required to be discussed by Statement of Auditing Standards
Numbers 90 and 61 (communication with Audit Committees). The Company's
independent public accountants also provided to the Audit Committee the written
disclosures required by Independence Standard No. 1 (independent discussions
with Audit Committee), and the Audit Committee discussed with the independent
public accountants that firm's independence. The Audit Committee has also
considered whether the independent
46
auditors' provision of information technology and other non-audit services to
the Company is compatible with the auditor's independence.
Based upon the Audit Committee's discussions with Management and the
independent public accountants and the Audit Committee's review of the
representation of Management and the report of the independent public
accountants, the Audit Committee recommended that the Board of Directors include
the audited consolidated financial statements in the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 filed with the Securities and
Exchange Commission.
The foregoing has been approved by all members of the Audit Committee.
William A. Sumner (Chairman)
Bruce F. Wesson
Immanuel Thangaraj
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote FOR the ratification of the
appointment of Grant Thornton LLP as the Company's independent certified public
accountants for the fiscal year ending December 31, 2003.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Common Stock, as of August 1, 2003, for individuals or entities
in the following categories: (i) each of the Company's Directors and nominees
for Directors; (ii) the Chief Executive Officer and the next four highest paid
executive officers of the Company whose total annual compensation for 2002
exceeded $100,000 (the "named executive officers"); (iii) all Directors and
executive officers as a group; and (iv) each person known by the Company to be a
beneficial owner of more than 5% of the Common Stock. Unless indicated
otherwise, each of the shareholders has sole voting and investment power with
respect to the shares beneficially owned.
AMOUNT AND PERCENTAGE AMOUNT AND PERCENT
BENEFICIALLY OWNED IF BENEFICIALLY OWNED IF
SHAREHOLDER APPROVAL OF SHAREHOLDER APPROVAL OF
PROPOSAL 2 IS NOT OBTAINED PROPOSAL 2 IS OBTAINED
--------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT
NAME OF BENEFICIAL OWNER OWNED(1) OF CLASS OWNED(1) OF CLASS
------------------------ ----------- --------- ----------- --------
Galen Partners III, L.P. ................. 34,302,027(2) 62.2% 115,759,471(18) 84.7%
610 Fifth Avenue, 5th Floor
New York, New York 10020
Galen Partners International III, L.P. ... 3,512,006(3) 14.2% 11,443,475(19) 35.0%
610 Fifth Avenue, 5th Floor
New York, New York 10020
Oracle Strategic Partners, L.P. .......... 12,371,942(4) 41.3% 23,165,485(20) 56.9%
712 Fifth Ave, 45th Floor
New York, New York 10019
Care Capital Investments II, LP........... 14,705,882(5) 40.9% 16,698,141(5) 44.0%
c/o Care Capital, L.L.C.
Princeton Overlook One
100 Overlook Center, Suite 102
Princeton, New Jersey 08540
Essex Woodlands Health Ventures V,
L.P. ................................... 14,705,882(6) 40.9% 16,971,304(6) 44.4%
c/o Essex Woodlands Health
Ventures V, L.L.C.
190 South LaSalle Street, Suite 2800
Chicago, Illinois 60603
47
AMOUNT AND PERCENTAGE AMOUNT AND PERCENT
BENEFICIALLY OWNED IF BENEFICIALLY OWNED IF
SHAREHOLDER APPROVAL OF SHAREHOLDER APPROVAL OF
PROPOSAL 2 IS NOT OBTAINED PROPOSAL 2 IS OBTAINED
--------------------------- --------------------------
AMOUNT PERCENT AMOUNT PERCENT
NAME OF BENEFICIAL OWNER OWNED(1) OF CLASS OWNED(1) OF CLASS
------------------------ ----------- --------- ----------- --------
Watson Pharmaceuticals, Inc. ............. 10,700,665(7) 33.5% 10,700,665(7) 33.5%
311 Bonnie Circle
Corona, California 92880
Dennis Adams.............................. 2,317,370(8) 10.3% 4,025,147(21) 16.6%
c/o Delaware Investment Advisors
One Commerce Square
Philadelphia, Pennsylvania 19103
Hemant K. Shah and Varsha H. Shah......... 1,748,413(9) 7.9% 2,953,301(22) 12.7%
29 Christy Drive
Warren, New Jersey 07059
Bernard Selz.............................. 872,957(10) 4.0% 2,554,298(23) 10.9%
c/o Furman Selz
230 Park Avenue
New York, New York 10069
Michael and Susan Weisbrot................ 1,491,714(11) 6.8% 2,504,809(24) 10.9%
1136 Rock Creek Road
Gladwyne, Pennsylvania 19035
Andrew D. Reddick......................... -- * -- *
Michael K. Reicher........................ 1,567,244(12) 6.9% 1,754,749(25) 7.7%
William Skelly............................ 200,000(13) * 200,000(13) *
Bruce F. Wesson........................... -- * -- *
Srini Conjeevaram......................... -- * -- *
William A. Sumner......................... 50,000(14) * 50,000(14) *
Zubeen Shroff............................. -- * -- *
Peter A. Clemens.......................... 727,452(15) 3.3% 868,784(26) 3.9%
Joel D. Liffmann.......................... -- * -- *
Jerry Karabelas........................... -- * -- *
Immanuel Thangaraj........................ -- * -- *
Phyllis Lambridis......................... 25,000 * 25,000 *
James Emigh............................... 154,750(16) * 154,750(16) *
All Directors and Officers as a Group (15
persons)................................ 3,068,324(17) 12.8% 3,397,161(27) 13.9%
---------------
* Represents less than 1% of the outstanding shares of the Company's Common
Stock.
(1) The information with respect to Hemant K. Shah and Varsha H. Shah, Dennis
Adams, Bernard Selz and Michael and Susan Weisbrot and Watson
Pharmaceuticals, is based upon filings with the Commission and/or
information provided to the Company.
(2) Includes (i) 18,524,915 shares issuable upon conversion of 1998 Debentures
and 1999 Debentures, (ii) 5,483,034 shares issuable upon exercise of 1998
Warrants and 1999 Warrants, (iii) 4,932,223 shares issuable upon exercise
of common stock purchase warrants issued in connection with the 1998/1999
and 2001/2002 Galen Bridge Loans, (iv) 4,837,565 shares issuable upon
conversion of Debentures issued in lieu of quarterly cash interest
payments, and (v) 150,000 shares subject to currently exercisable stock
options.
(3) Includes (i) 1,966,652 shares issuable upon conversion of 1998 Debentures
and 1999 Debentures, (ii) 583,157 shares issuable upon exercise of 1998
Warrants and 1999 Warrants, (iii) 447,754 shares
48
issuable upon exercise of common stock purchase warrants issued in
connection with the 1998/1999 and 2001/2002 Galen Bridge Loans, and (iv)
514,443 shares issuable upon conversion of Debentures issued in lieu of
quarterly cash interest payments.
(4) Includes (i) 7,122,508 shares issuable upon conversion of the 1999
Debentures, and (ii) 1,569,974 shares issuable upon conversion of
Debentures issued in lieu of quarterly cash interest payments, and (iii)
30,000 shares subject to currently exercisable stock options.
(5) Includes 14,705,882 shares issuable upon conversion of 2002 Debentures.
(6) Includes 14,705,882 shares issuable upon conversion of 2002 Debentures.
(7) Includes 10,700,665 shares issuable upon exercise of the Watson Warrant.
(8) Includes 1,293,838 shares issuable upon conversion of 1998 Debentures and
1999 Debentures.
(9) Includes 916,413 shares issuable upon conversion of 1998 Debentures and
1999 Debentures.
(10) Includes 512,714 shares issuable upon conversion of 1998 Debentures and
1999 Debentures
(11) Includes 679,726 shares issuable upon conversion of 1998 Debentures and
1999 Debentures.
(12) Includes (i) 116,461 shares issuable upon conversion of 1998 Debentures,
(ii) 34,320 shares issuable upon conversion of Debentures issued in lieu of
quarterly interest payments and (iii) 1,343,750 shares subject to currently
exercisable stock options .
(13) Includes 200,000 shares subject to currently exercisable stock options.
(14) Includes 50,000 shares subject to currently exercisable stock options.
(15) Includes (i) 92,566 shares issuable upon conversion of 1998 Debentures,
(ii) 20,086 shares issuable upon conversion of Debentures issued in lieu of
quarterly interest payments, and (iii) 568,750 shares subject to currently
exercisable stock options.
(16) Includes 109,750 shares subject to currently exercisable stock options.
(17) Includes 2,848,623 shares which Directors and executive officers have the
right to acquire within the next 60 days through the conversion of
Debentures and the exercise of outstanding stock options.
(18) Includes (i) 42,881,749 shares issuable upon conversion of 1998 Debentures
and 1999 Debentures, (ii)12,692,088 shares issuable upon exercise of 1998
Warrants and 1999 Warrants, (iii) 6,325,542 shares issuable upon exercise
of common stock purchase warrants issued in connection with the 1998/1999
and 2001/2002 Galen Bridge Loans, (iv) 9,969,672 shares issuable upon
conversion of Debentures issued in lieu of quarterly interest payments, (v)
43,216,130 shares issuable upon conversion of 2002 Debentures, (vi) 150,000
shares issuable upon exercise of commons stock purchase warrants issued in
connection with the 2003 commitment and (vii) 150,000 shares subject to
currently exercisable stock options.
(19) Includes (i) 4,552,435 shares issuable upon conversion of 1998 Debentures
and 1999 Debentures, (ii) 1,350,072 shares issuable upon exercise of 1998
Warrants and 1999 Warrants, (iii) 575,560 shares issuable upon exercise of
common stock purchase warrants issued in connection with the 1998/1999 and
2001/2002 Galen Bridge Loans, (iv) 1,053,711 shares issuable upon
conversion of Debentures issued in lieu of quarterly interest payments and
(v) 3,911,697 shares issuable upon conversion of 2002 Debentures.
(20) Includes (i) 16,487,286 shares issuable upon conversion of the 1999
Debentures, and (ii) 2,998,738 shares issuable upon conversion of
Debentures issued in lieu of quarterly cash interest payments and (iii)
30,000 shares subject to currently exercisable stock options.
(21) Includes 3,001,615 shares issuable upon conversion of 1998 Debentures and
1999 Debentures.
(22) Includes 2,121,301 shares issuable upon conversion of 1998 Debentures and
1999 Debentures.
(23) Includes (i) 1,186,837 shares issuable upon conversion of 1998 Debentures
and 1999 Debentures, and (ii) 1,007,218 shares issuable upon conversion of
2002 Debentures.
(24) Includes (i) 1,573,439 shares issuable upon conversion of 1998 Debentures
and 1999 Debentures, and (ii) 119,382 shares issuable upon conversion of
2002 Debentures.
49
(25) Includes (i) 269,586 shares issuable upon conversion of 1998 Debentures,
(ii) 68,700 shares issuable upon conversion of Debentures issued in lieu of
quarterly interest payments, and (iii) 1,343,750 shares subject to
currently exercisable stock options.
(26) Includes (i) 214,272 shares issuable upon conversion of 1998 Debentures,
(ii) 39,712 shares issuable upon conversion of Debentures issued in lieu of
quarterly interest payments, and (iii) 568,750 shares subject to currently
exercisable stock options.
(27) Includes 3,177,460 shares which Directors and executive officers have the
right to acquire within the next 60 days through the conversion of
Debentures and exercise of outstanding stock options.
GENERAL
Management of the Company does not know of any matters other than those
stated in this Proxy Statement that are to be presented for action at the
Meeting. If any other matters should properly come before the Meeting, proxies
will be voted on those other matters in accordance with the judgment of the
persons voting the proxies. Discretionary authority to vote on such matters is
conferred by such proxies upon the persons voting them.
The Company will bear the cost of preparing, printing, assembling and
mailing all proxy materials that may be sent to shareholders in connection with
this solicitation. Arrangements will also be made with brokerage houses, other
custodians, nominees and fiduciaries, to forward soliciting material to the
beneficial owners of the Common Stock of the Company held by such persons. The
Company will reimburse such persons for reasonable out-of-pocket expenses
incurred by them. In addition to the solicitation of proxies by use of the
mails, officers and regular employees of the Company may solicit proxies without
additional compensation, by telephone or facsimile. The Company does not expect
to pay any compensation for the solicitation of proxies.
Copies of the Company's Annual Report to Shareholders on Form 10-K for the
fiscal year ended December 31, 2002, and the Company's Quarterly Reports on Form
10-Q for each of the quarters ended March 31, 2003 and June 30, 2003, each as
filed with the Commission, accompanies this Proxy Statement. Upon written
request, the Company will provide each shareholder being solicited by this Proxy
Statement with a free copy of any exhibits and schedules thereto. All such
requests should be directed to Halsey Drug Co., Inc., 695 North Perryville Road,
Crimson Building No. 2, Rockford, Illinois 61107, Attention: Mr. Peter A.
Clemens, Vice President and Chief Financial Officer.
The Company hereby incorporates by reference into this Proxy Statement the
following documents filed with the Commission pursuant to Section 13 or 15(b) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"):
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, as amended by Form 10-K/A as filed with the Commission
on October , 2003;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003;
(c) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2003; and
(d) All other Reports and other documents filed by the Company
pursuant to Section 13(e) or 15(d) of the Exchange Act subsequent to June
30, 2003 and prior to the date of the Meeting or such later date or dates
to which the Meeting may be adjourned.
All properly executed proxies delivered pursuant to this solicitation by
the Company and not revoked, will be voted at the Meeting and will be voted in
accordance with the specifications made thereon. In voting by proxy in regard to
the election of directors, shareholders may vote in favor of each nominee or
withhold votes as to all nominees or votes as to a specific nominee. With
respect to (i) voting on the authorization to amend the Company's Charter to
increase the number of authorized shares of common stock, (ii) voting on the
authorization to amend the Company's Charter to provide voting rights to the
holders of the 2002 Debentures, (iii) voting on the authorization to amend the
Company's 1998 Stock Option Plan, and (iv) the ratification of
50
the Company's independent public accountants, shareholders may vote in favor of,
may vote against or may abstain from voting on each of such proposals.
Shareholders should specify their choices on the enclosed Proxy. If no specific
instructions are given with respect to the matters to be acted upon, the shares
represented by the Proxy will be voted FOR the election of all directors, FOR
the authorization to amend the Company's Charter to increase the number of
authorized shares of common stock, FOR the authorization to amend the Company's
Charter to provide voting rights to the holders of the 2002 Debentures, FOR the
authorization to amend the Company's 1998 Stock Option Plan, and FOR the
ratification of the appointment of Grant Thornton LLP as the Company's
independent certified public accountants for the fiscal year ending December 31,
2003.
51
SHAREHOLDER PROPOSALS FOR 2004 ANNUAL MEETING
Any shareholder proposals intended to be presented at the Company's 2003
Annual Meeting of Shareholders must be received by the Company on or before
February 1, 2004 in order to be considered for inclusion in the Company's proxy
statement and proxy relating to such meeting.
By Order of the Board of Directors
PETER A. CLEMENS,
Secretary
October , 2003
52
APPENDIX A
HALSEY DRUG CO., INC.
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
CHARTER
It is the objective of the Audit Committee of the Board of Directors of
Halsey Drug Co., Inc. to provide assistance to the corporate directors in
fulfilling fiduciary responsibilities relating to internal controls, corporate
accounting, auditing and financial reporting practices.
MEMBERS
The Audit Committee of the Board of Directors shall consist of at least
three directors who shall be elected annually by the Board. The members should
be independent of senior management and the operating executives and free from
any relationship that might in the opinion of the Board of Directors be
considered a conflict of interest. One of the members shall be designated
Chairman by the Board.
RESPONSIBILITIES AND LIMITATIONS
- Recommend to the Board of Directors annually, after consultation with the
Chief Executive Officer and appropriate financial management, the
independent accountants to be selected by Halsey Drug Co., Inc. as its
independent auditors subject to ratification by the Company's
shareholders. Review proposed fees and determine whether any other
professional services provided by the independent accountants could
adversely affect their independence.
- Meet with the independent auditors and Halsey Drug Co., Inc.'s financial
management to review the scope of the proposed audit for the current year
and the audit procedures to be utilized, and review the completed audit
including any comments or recommendations of the independent accountants.
- Evaluate with Halsey's financial management and the independent
accountants, together and separately, the adequacy and effectiveness of
Halsey's internal administrative, business process and accounting
controls, and elicit any recommendations to correct any material
weaknesses in such controls.
- With general counsel, appropriate financial management, and the
independent accounts review programs being maintained by management with
respect to compliance with laws and regulations relating to financial
matters.
- Review Halsey's financial management function including the proposed
audit plan for the coming year and the coordination of such plan with the
external auditors and ascertain, through discussion with the independent
accountants whether the scope and procedures of the plan are adequate to
meet the objectives set forth in the Charter herewith presented.
- Review with independent accountants those major accounting policy changes
that could impact Halsey Drug Co., Inc.
- The Audit Committee may investigate any matter within the scope of its
duties or brought to its attention by the Board of Directors, with the
power to retain outside counsel for this purpose, subject to prior
approval of the Board. However, in no way is it intended that the Audit
Committee shall alter the traditional roles and responsibilities of
management and independent accountants with respect to internal
administrative, business process and accounting controls and financial
statement presentation.
MEETINGS
- The Committee will hold a minimum of four regular meetings per year, and
additional meetings as the Chairman of the Audit Committee may deem
necessary. In addition to the committee members, these meetings normally
will be attended by representatives of the independent accountants, and
by the Vice
A-1
President and Chief Financial Officer. The principal financial officers
as well as the Chairman, the CEO and the President, may attend, except
for portions of the meetings where their presence would be inappropriate,
as determined by the Chairman. Minutes will be kept of all meetings.
/s/ WILLIAM A. SUMNER
--------------------------------------
William A. Sumner
Chairman, Audit Committee of
The Board of Directors
A-2
APPENDIX B
NEW YORK BUSINESS CORPORATION LAW
SECTION 623
PROCEDURE TO ENFORCE SHAREHOLDER'S RIGHT TO RECEIVE PAYMENT FOR SHARES
(a) A shareholder intending to enforce his right under a section of this
chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of shareholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a notice of his election to dissent, his name and residence address, the
number and classes of shares as to which he dissents and a demand for payment of
the fair value of his shares if the action is taken. Such objection is not
required from any shareholder to whom the corporation did not give notice of
such meeting in accordance with this chapter or where the proposed action is
authorized by written consent of shareholders without a meeting.
(b) Within ten days after the shareholders' authorization date, which term
as used in this section means the date on which the shareholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite shareholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
shareholder who filed written objection or from whom written objection was not
required, excepting any shareholder who voted for or consented in writing to the
proposed action and who thereby is deemed to have elected not to enforce his
right to receive payment for his shares.
(c) Within twenty days after the giving of notice to him, any shareholder
from whom written objection was not required and who elects to dissent shall
file with the corporation a written notice of such election, stating his name
and residence address, the number and classes of shares as to which he dissents
and a demand for payment of the fair value of his shares. Any shareholder who
elects to dissent from a merger under section 905 (Merger of subsidiary
corporation) or paragraph (c) of section 907 (Merger or consolidation of
domestic and foreign corporations) or from a share exchange under paragraph (g)
of section 913 (Share exchanges) shall file a written notice of such election to
dissent within twenty days after the giving to him of a copy of the plan of
merger or exchange or an outline of the material features thereof under section
905 or 913.
(d) A shareholder may not dissent as to less than all of the shares, as to
which he has a right to dissent, held by him of record, that he owns
beneficially. A nominee or fiduciary may not dissent on behalf of any beneficial
owner as to less than all of the shares of such owner, as to which such nominee
or fiduciary has a right to dissent, held of record by such nominee or
fiduciary.
(e) Upon consummation of the corporate action, the shareholder shall cease
to have any of the rights of a shareholder except the right to be paid the fair
value of his shares and any other rights under this section. A notice of
election may be withdrawn by the shareholder at any time prior to his acceptance
in writing of an offer made by the corporation, as provided in paragraph (g),
but in no case later than sixty days from the date of consummation of the
corporate action except that if the corporation fails to make a timely offer, as
provided in paragraph (g), the time for withdrawing a notice of election shall
be extended until sixty days from the date an offer is made. Upon expiration of
such time, withdrawal of a notice of election shall require the written consent
of the corporation. In order to be effective, withdrawal of a notice of election
must be accompanied by the return to the corporation of any advance payment made
to the shareholder as provided in paragraph (g). If a notice of election is
withdrawn, or the corporate action is rescinded, or a court shall determine that
the shareholder is not entitled to receive payment for his shares, or the
shareholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a shareholder as of the consummation of the corporate action,
including any intervening preemptive rights and the right to payment of any
intervening dividend or other distribution or, if any such rights have expired
or any such dividend or distribution other than in cash has been completed, in
lieu thereof, at the election of the corporation, the fair value thereof in cash
as determined by the board as of the time of
B-1
such expiration or completion, but without prejudice otherwise to any corporate
proceedings that may have been taken in the interim.
(f) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder of shares represented by certificates shall
submit the certificates representing his shares to the corporation, or to its
transfer agent, which shall forthwith note conspicuously thereon that a notice
of election has been filed and shall return the certificates to the shareholder
or other person who submitted them on his behalf. Any shareholder of shares
represented by certificates who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within forty-five days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dissenting holder of the shares
and a transferee shall acquire no rights in the corporation except those which
the original dissenting shareholder had at the time of the transfer.
(g) Within fifteen days after the expiration of the period within which
shareholders may file their notices of election to dissent, or within fifteen
days after the proposed corporate action is consummated, whichever is later (but
in no case later than ninety days from the shareholders' authorization date),
the corporation or, in the case of a merger or consolidation, the surviving or
new corporation, shall make a written offer by registered mail to each
shareholder who has filed such notice of election to pay for his shares at a
specified price which the corporation considers to be their fair value. Such
offer shall be accompanied by a statement setting forth the aggregate number of
shares with respect to which notices of election to dissent have been received
and the aggregate number of holders of such shares. If the corporate action has
been consummated, such offer shall also be accompanied by (1) advance payment to
each such shareholder who has submitted the certificates representing his shares
to the corporation, as provided in paragraph (f), of an amount equal to eighty
percent of the amount of such offer, or (2) as to each shareholder who has not
yet submitted his certificates a statement that advance payment to him of an
amount equal to eighty percent of the amount of such offer will be made by the
corporation promptly upon submission of his certificates. If the corporate
action has not been consummated at the time of the making of the offer, such
advance payment or statement as to advance payment shall be sent to each
shareholder entitled thereto forthwith upon consummation of the corporate
action. Every advance payment or statement as to advance payment shall include
advice to the shareholder to the effect that acceptance of such payment does not
constitute a waiver of any dissenters' rights. If the corporate action has not
been consummated upon the expiration of the ninety day period after the
shareholders' authorization date, the offer may be conditioned upon the
consummation of such action. Such offer shall be made at the same price per
share to all dissenting shareholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting shareholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. Notwithstanding the foregoing,
the corporation shall not be required to furnish a balance sheet or profit and
loss statement or statements to any shareholder to whom such balance sheet or
profit and loss statement or statements were previously furnished, nor if in
connection with obtaining the shareholders' authorization for or consent to the
proposed corporate action the shareholders were furnished with a proxy or
information statement, which included financial statements, pursuant to
Regulation 14A or Regulation 14C of the United States Securities and Exchange
Commission. If within thirty days after the making of such offer, the
corporation making the offer and any shareholder agree upon the price to be paid
for his shares, payment therefor shall be made within sixty days after the
making of such offer or the consummation of the proposed corporate action,
whichever is later, upon the surrender of the certificates for any such shares
represented by certificates.
B-2
(h) The following procedure shall apply if the corporation fails to make
such offer within such period of fifteen days, or if it makes the offer and any
dissenting shareholder or shareholders fail to agree with it within the period
of thirty days thereafter upon the price to be paid for their shares:
(1) The corporation shall, within twenty days after the expiration of
whichever is applicable of the two periods last mentioned, institute a
special proceeding in the supreme court in the judicial district in which
the office of the corporation is located to determine the rights of
dissenting shareholders and to fix the fair value of their shares. If, in
the case of merger or consolidation, the surviving or new corporation is a
foreign corporation without an office in this state, such proceeding shall
be brought in the county where the office of the domestic corporation,
whose shares are to be valued, was located.
(2) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting shareholder may institute such
proceeding for the same purpose not later than thirty days after the
expiration of such twenty day period. If such proceeding is not instituted
within such thirty day period, all dissenter's rights shall be lost unless
the supreme court, for good cause shown, shall otherwise direct.
(3) All dissenting shareholders, excepting those who, as provided in
paragraph (g), have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall
have the effect of an action quasi in rem against their shares. The
corporation shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of this state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in
such other manner as is permitted by law. The jurisdiction of the court
shall be plenary and exclusive.
(4) The court shall determine whether each dissenting shareholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not
request any such determination or if the court finds that any dissenting
shareholder is so entitled, it shall proceed to fix the value of the
shares, which, for the purposes of this section, shall be the fair value as
of the close of business on the day prior to the shareholders'
authorization date. In fixing the fair value of the shares, the court shall
consider the nature of the transaction giving rise to the shareholder's
right to receive payment for shares and its effects on the corporation and
its shareholders, the concepts and methods then customary in the relevant
securities and financial markets for determining fair value of shares of a
corporation engaging in a similar transaction under comparable
circumstances and all other relevant factors. The court shall determine the
fair value of the shares without a jury and without referral to an
appraiser or referee. Upon application by the corporation or by any
shareholder who is a party to the proceeding, the court may, in its
discretion, permit pretrial disclosure, including, but not limited to,
disclosure of any expert's reports relating to the fair value of the shares
whether or not intended for use at the trial in the proceeding and
notwithstanding subdivision (d) of section 3101 of the civil practice law
and rules.
(5) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting shareholder who is a party to the
proceeding and is entitled thereto for the value of his shares so
determined.
(6) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the date the corporate action
was consummated to the date of payment. In determining the rate of
interest, the court shall consider all relevant factors, including the rate
of interest which the corporation would have had to pay to borrow money
during the pendency of the proceeding. If the court finds that the refusal
of any shareholder to accept the corporate offer of payment for his shares
was arbitrary, vexatious or otherwise not in good faith, no interest shall
be allowed to him.
(7) Each party to such proceeding shall bear its own costs and
expenses, including the fees and expenses of its counsel and of any experts
employed by it. Notwithstanding the foregoing, the court may, in its
discretion, apportion and assess all or any part of the costs, expenses and
fees incurred by the corporation against any or all of the dissenting
shareholders who are parties to the proceeding, including
B-3
any who have withdrawn their notices of election as provided in paragraph
(e), if the court finds that their refusal to accept the corporate offer
was arbitrary, vexatious or otherwise not in good faith. The court may, in
its discretion, apportion and assess all or any part of the costs, expenses
and fees incurred by any or all of the dissenting shareholders who are
parties to the proceeding against the corporation if the court finds any of
the following: (A) that the fair value of the shares as determined
materially exceeds the amount which the corporation offered to pay; (B)
that no offer or required advance payment was made by the corporation; (C)
that the corporation failed to institute the special proceeding within the
period specified therefor; or (D) that the action of the corporation in
complying with its obligations as provided in this section was arbitrary,
vexatious or otherwise not in good faith. In making any determination as
provided in clause (A), the court may consider the dollar amount or the
percentage, or both, by which the fair value of the shares as determined
exceeds the corporate offer.
(8) Within sixty days after final determination of the proceeding, the
corporation shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificate for any such shares represented
by certificates.
(i) Shares acquired by the corporation upon the payment of the agreed value
therefor or of the amount due under the final order, as provided in this
section, shall become treasury shares or be cancelled as provided in section 515
(Reacquired shares), except that, in the case of a merger or consolidation, they
may be held and disposed of as the plan of merger or consolidation may otherwise
provide.
(j) No payment shall be made to a dissenting shareholder under this section
at a time when the corporation is insolvent or when such payment would make it
insolvent. In such event, the dissenting shareholder shall, at his option:
(1) Withdraw his notice of election, which shall in such event be
deemed withdrawn with the written consent of the corporation; or
(2) Retain his status as a claimant against the corporation and, if it
is liquidated, be subordinated to the rights of creditors of the
corporation, but have rights superior to the non-dissenting shareholders,
and if it is not liquidated, retain his right to be paid for his shares,
which right the corporation shall be obliged to satisfy when the
restrictions of this paragraph do not apply.
(3) The dissenting shareholder shall exercise such option under
subparagraph (1) or (2) by written notice filed with the corporation within
thirty days after the corporation has given him written notice that payment
for his shares cannot be made because of the restrictions of this
paragraph. If the dissenting shareholder fails to exercise such option as
provided, the corporation shall exercise the option by written notice given
to him within twenty days after the expiration of such period of thirty
days.
(k) The enforcement by a shareholder of his right to receive payment for
his shares in the manner provided herein shall exclude the enforcement by such
shareholder of any other right to which he might otherwise be entitled by virtue
of share ownership, except as provided in paragraph (e), and except that this
section shall not exclude the right of such shareholder to bring or maintain an
appropriate action to obtain relief on the ground that such corporate action
will be or is unlawful or fraudulent as to him.
(l) Except as otherwise expressly provided in this section, any notice to
be given by a corporation to a shareholder under this section shall be given in
the manner provided in section 605 (Notice of meetings of shareholders).
(m) This section shall not apply to foreign corporations except as provided
in subparagraph (e) (2) of section 907 (Merger or consolidation of domestic and
foreign corporations). (Last amended by Ch. 117, L. '86, eff. 9-1-86.)
B-4
APPENDIX C
HALSEY DRUG CO., INC.
1998 STOCK OPTION PLAN(1)
1. Purposes. The Plan described herein, as amended and restated, shall be
known as the "Halsey Drug Co., Inc. 1998 Stock Option Plan" (the "Plan"). The
purposes of the Plan are to attract and retain the best available personnel for
positions of substantial responsibility, to provide additional incentive to
Employees, Directors and Consultants of the Company or its Subsidiaries (as
defined in Section 2 below) to whom Option's may be granted under this Plan, and
to promote the success of the Company's business.
Options granted hereunder may be either "incentive stock options," as
defined in Section 422 of the Internal Revenue Code of 1986, as amended, or
"Non-ISO's," at the discretion of the Board and as reflected in the terms of the
written option agreement.
The Plan is not intended as an agreement or promise of employment. Neither
the Plan, nor any Option granted pursuant to the Plan, shall confer on any
person any right to continue in the employ of the Company. The right of the
Company to terminate an Employee is not limited by the Plan, nor by any Option
granted pursuant to the Plan, unless such right is specifically described by the
terms of any such Option.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company, if no Committee is appointed.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Committee" shall mean the Committee appointed under Section 4(a)
hereof.
(d) "Common Stock" shall mean the Common Stock, $.01 par value, of the
Company.
(e) "Company" shall mean Halsey Drug Co. Inc., a New York corporation.
(f) "Continuous Service or Continuous Status as an Employee" shall mean the
absence of any interruption or termination of service as an Employee. Continuous
Status as an Employee shall not be considered interrupted in the case of sick
leave, military leave, or any other leave of absence approved by the Board.
(g) "Director" shall mean any person serving on the Board of Directors.
(h) "Employee" shall mean any person, including officers, employed by the
Company or any Parent or Subsidiary of the Company. The payment of a Director's
fee by the Company shall not be sufficient to constitute "employment" by the
Company.
(i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
---------------
(1) Amended by the Board of Directors on April 15, 1999 to increase the number
of shares available for grant under the Plan from 2,600,000 shares to
3,600,000 shares. Ratified by the Company's shareholders on August 19, 1999.
Amended further by the Board of Directors on April 20, 2001 to increase the
number of shares available for grant under the Plan from 3,600,000 shares to
8,100,000 shares. Ratified by the Company's shareholders on June 14, 2001.
Amended further by the Board of Directors on August 26, 2003 to (i) increase
the number of shares available for grant under the Plan from 8,100,000
shares to 12,000,000 shares, (ii) permit the grant of Non-ISO's at a per
share price less than the fair market value of the Company's Common Stock on
the date of grant, and (iii) provide a maximum limit on options granted to
any individual during any calendar year of 5,500,000 shares. Plan amendment
subject to ratification by the Company's shareholders.
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(j) "Fair Market Value" shall mean (i) the closing price for a share of the
Common Stock on the exchange or quotation system which reports or quotes the
closing prices for a share of the Common Stock, as accurately reported for any
date (or, if no shares of Common Stock are traded on such date, for the
immediately preceding date on which shares of Common Stock were traded) in The
Wall Street Journal (or if The Wall Street Journal no longer reports such price,
in a newspaper or trade journal selected by the Committee) or (ii) if no such
price quotation is available, the price which the Committee acting in good faith
determines through any reasonable valuation method that a share of Common Stock
might change hands between a willing buyer and a willing seller, neither being
under any compulsion to buy or to sell and both having reasonable knowledge of
the relevant facts.
(k) "Incentive Stock Option" shall mean an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(l) "Non-ISO" shall mean an Option to purchase stock which is not intended
by the Committee to satisfy the requirements of Section 422 of the Code.
(m) "Option" shall mean a stock option granted pursuant to the Plan.
(n) "Optioned Stock" shall mean the Common Stock subject to an Option.
(o) "Optionee" shall mean an Employee, Director or Consultant who receives
an Option.
(p) "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(q) "Plan" shall mean this Halsey Drug Co. Inc. 1998 Stock Option Plan, as
amended from time to time.
(r) "Rule 16b-3" shall mean Rule 16b-3 of the General Rules and Regulations
under the Exchange Act.
(s) "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section 11 of the Plan.
(t) "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(u) "Ten Percent Shareholder" shall mean a person who owns (after taking
into account the attribution rules of Section 424(d) of the Code) more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company, or a Subsidiary.
3. Stock Authorized.
Subject to the provisions of Section 11 of the Plan, the maximum aggregate
number of shares which may be Optioned and sold under the Plan is Twelve Million
(12,000,000) shares of authorized, but unissued, or reacquired Common Stock. The
maximum number of shares which may be subject to an Option granted in any
calendar year shall not exceed 5,500,000 shares (subject to adjustment under
Section 11 hereof consistent with Section 162(m) of the Code). If the shares
that would be issued or transferred pursuant to any Options are not issued or
transferred and ceased to be issuable or transferable for any reason, the number
of shares subject to such Option will no longer be charged against a limitation
provided for herein and may again be subject to Options. Notwithstanding the
proceeding sentence, with respect to any Option granted to any individual who is
a "covered employee" within the meaning of Section 162(m) of the Code that is
cancelled, the number of shares subject to such Option shall continue to count
against the maximum number of shares which may be the subject of Options granted
to such individual. For purposes of the preceding sentence if, after grant, the
exercise price of an Option is reduced, such reduction shall be treated as a
cancellation of such Option and the grant of a new Option, and both the
cancellation of the Option and the new Option shall reduce the maximum number of
shares for which Options may be granted to the holder of such Option in a
calendar year.
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If an Option should expire or become unexercisable for any reason without
having been exercised in full, the unpurchased Shares which were subject thereto
shall, unless the Plan shall have been terminated, become available for further
grant under the Plan.
4. Administration.
(a) Procedure. The Company's Board of Directors may appoint a Committee to
administer the Plan which shall be constituted so as to permit the Plan to
continue to comply with Rule 16b-3, as currently in effect or as hereafter
modified or amended. The Committee appointed by the Board of Directors shall
consist of not less than two members of the Board of Directors, to administer
the Plan on behalf of the Board of Directors, subject to such terms and
conditions as the Board of Directors may prescribe. Once appointed, the
Committee shall continue to serve until otherwise directed by the Board of
Directors. From time to time, the Board of Directors may increase the size of
the Committee and appoint additional members thereof, remove members (with or
without cause), and appoint new members in substitution therefor, fill vacancies
however caused, or remove all members of the Committee and thereafter directly
administer the Plan; provided, however, that at no time shall a Committee of
less than two members administer the Plan. Subject to the provisions of the
Plan, the Committee shall be authorized to interpret the Plan, to establish,
amend and rescind any rules and regulations relating to the Plan and to make all
other determinations necessary or advisable for the administration of the Plan.
Notwithstanding anything to the contrary contained herein, no member of the
Committee shall serve as such under this Plan unless such person is a
"Non-Employee Director" within the meaning of Rule 16b-3(b)(3)(i) of the
Exchange Act. A majority vote of the members of the Committee shall be required
for all of its actions.
A majority of the entire Committee shall constitute a quorum, and the
action of the majority of the Committee members present at any meeting at which
a quorum is present shall be the action of the Committee. All decisions,
determinations, and interpretations of the Committee shall be final and
conclusive on all persons affected thereby and shall, as to Incentive Stock
Options, be consistent with Section 422 of the Code. The Committee shall have
all of the powers and duties set forth herein, as well as such additional powers
and duties as the Board of Directors may delegate to it; provided, however, that
the Board of Directors expressly retains the right in its sole discretion (i) to
elect and to replace the members of the Committee, and (ii) to terminate or
amend this Plan in any manner consistent with applicable law.
(b) Powers of the Committee. Subject to the provisions of the Plan, the
Committee shall have the authority, in its discretion: (i) to grant Incentive
Stock Options, in accordance with Section 422 of the Code, or to grant
Non-ISO's; (ii) to determine the Fair Market Value of the Common Stock; (iii) to
determine the exercise price per share of Options to be granted which exercise
price shall be determined in accordance with Section 8 of the Plan; (iv) to
determine the persons to whom (including, without limitation, members of the
Committee) and the time or times at which, Options shall be granted and the
number of Shares to be represented by each Option; (v) to interpret the Plan;
(vi) to prescribe, amend and rescind rules and regulations relating to the Plan;
(vii) to determine the terms and provisions of each Option granted (which need
not be identical) and, with the consent of the holder thereof, modify or amend
each Option; (viii) to accelerate or defer (with the consent of the Optionee)
the exercise date of any Option; (ix) to authorize any person to execute on
behalf of the Company any instrument required to effectuate the grant of an
Option previously granted by the Board; and (x) to make all other determinations
deemed necessary or advisable for the administration of the Plan.
(c) Subject to the provisions of this Plan and compliance with Rule 16b-3
of the Exchange Act, the Committee may grant options under this Plan to members
of the Company's Board of Directors, including members of the Committee, and in
such regard may determine:
(i) the time at which any such Option shall be granted;
(ii) the number of Shares covered by any such Option;
(iii) the time or times at which, or the period during which, any such
Option may be exercised or whether it may be exercised in whole or in
installments;
C-3
(iv) the provisions of the agreement relating to any such Option; and
(v) the Option Price of Shares subject to an Option granted such Board
member.
(d) Effect of the Committee's Decision. All decisions, determinations and
interpretations of the Committee shall be final and binding on all Optionees and
any other holders of any Options granted under the Plan.
5. Eligibility. Incentive Stock Options may be granted only to Employees.
Non-ISO's may be granted to Employees as well as non-employee Directors and
Consultants of the Company as determined by the Board or any Committee. Any
person who has been granted an Option may, if he is otherwise eligible, be
granted an additional Option or Options.
Each grant of an Option shall be evidenced by an Option Agreement, and each
Option Agreement shall (1) specify whether the Option is an Incentive Stock
Option or a Non-ISO and (2) incorporate such other terms and conditions as the
Committee acting in its absolute discretion deemsconsistent with the terms of
this Plan, including, without limitation, a restriction on the number of shares
of stock subject to the Option which first become exercisable during any
calendar year.
To the extent that the aggregate Fair Market Value of the stock of the
Company subject to Incentive Stock Options granted (determined as of the date
such an Incentive Stock Option is granted) which first become exercisable in any
calendar year exceeds $100,000, such Options shall be treated as Non-ISO's. This
$100,000 limitation shall be administered in accordance with the rules under
Section 422(d) of the Code.
6. Effective Date and Term of Plan. The effective date of this Plan
("Effective Date") shall be the date it is adopted by the Board, provided the
shareholders of the Company (acting at a duly called meeting of such
shareholders or by the written consent of shareholders) approve this Plan within
twelve (12) months after such Effective Date. The effectiveness of Options
granted under this Plan prior to the date such shareholder approval is obtained
shall be contingent on such shareholder approval.
Subject to the provisions of Section 13 hereof, no Option shall be granted
under this Plan on or after the earlier of
(1) the tenth anniversary of the Effective Date of this Plan in which
event the Plan otherwise thereafter shall continue in effect until all
outstanding Options shall have been surrendered or exercised in full or no
longer are exercisable, or
(2) the date on which all of the Common Stock reserved for issuance
under Section 3 of this Plan has (as a result of the exercise or expiration
of Options granted under this Plan) been issued or no longer is available
for use under this Plan, in which event the Plan also shall terminate on
such date.
7. Term of Option. An Option shall expire on the date specified in such
Option, which date shall not be later than the tenth anniversary of the date on
which the Option was granted, except that, if any Employee, at any time an
Incentive Stock Option is granted to him or her, owns stock representing more
than ten percent (10%) of the total combined voting power of all classes of
Common Stock (or, under Section 424(d) of the Code is deemed to own stock
representing more than ten percent (10%) of the total combined voting power of
all such classes of Common Stock, by reason of the ownership of such classes of
stock, directly or indirectly, by or for any brother, sister, spouse, ancestor
or lineal descendant of such Employee, or by or for any corporation,
partnership, state or trust of which such Employee is a shareholder, partner or
beneficiary), the Incentive Stock Option granted him or her shall not be
exercisable after the expiration of five years from the date of grant or such
earlier expiration as provided in the particular Option agreement.
C-4
8. Exercise Price and Consideration.
(a) The per Share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, immediately before the grant of
such Incentive Stock Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price shall be no
less than 110% of the Fair Market Value per Share on the date of grant.
(B) granted to any Employee, the per share exercise price shall be
no less than 100% of the Fair Market Value per Share on the date of
grant.
(ii) In the case of a Non-ISO, the per Share exercise price shall be
determined by the Board on the date of grant.
(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the Board
and may consist entirely of cash, check, promissory note, other Shares of Common
Stock having a Fair Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which said Option shall be exercised, or any
combination of such methods of payment, or such other consideration and method
of payment for the issuance of Shares to the extent permitted under New York
law.
If the optionee desires to pay for the optioned shares, in whole or in part, by
conversion of Shares, Optionee shall be entitled upon exercise of the Option to
receive that number of Shares equal to the quotient obtained by dividing
[(A-B)(X)] by (A) where:
(A) = the Fair Market Value of one Share of Common Stock on the date
of conversion.
(B) = the Option Price for one Share of Common Stock subject to an
Option.
(X) = the Number of Shares of Common Stock issuable upon exercise of
the Option if exercised for cash;
provided, if the above calculation results in a negative number, then no Shares
shall be issued or issuable upon conversion of the Option. Any payment made in
Shares of the Company's Common Stock shall be treated as equal to the Fair
Market Value of such Common Stock on the date the properly endorsed certificate
for such Common Stock is delivered to the Committee (or its delegate).
9. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
hereunder shall be exercisable at such times and under such conditions as
determined by the Committee, including performance criteria with respect to the
Company and/or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance, which in no event will be delayed more than thirty (30) days
from the date of the exercise of the Option, (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a shareholder shall exist with respect
to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in the Plan.
C-5
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Status as an Employee, or Director or Consultant with
Respect to Non-ISO's. Non-ISO's granted pursuant to the Plan may be exercised
notwithstanding the termination of the Optionee's status as an employee, a
non-employee Director or a Consultant, except as provided in the Plan or as
provided by the terms of the Stock Option Agreement.
(c) Termination of Service as an Employee with Respect to Incentive Stock
Options. If the Continuous Service of any Employee terminates, he or she may,
but only within thirty (30) days (or such other period of time not exceeding
three (3) months as is determined by the Committee) after the date he or she
ceases to be an Employee of the Company, exercise his or her Option to the
extent that he or she was entitled to exercise it as of the date of such
termination. To the extent that he or she was not entitled to exercise the
Option at the date of such termination, or if he or she does not exercise such
Option (which he or she was entitled to exercise) within the time specified
herein, the Option shall terminate.
(d) Disability of Optionee. Notwithstanding the provisions of Section 9(c)
above, in the event an Employee is unable to continue his or her Continued
Service with the Company as a result of his or her total and permanent
disability (within the meaning of Section 22(e)(3) of the Code), he or she may,
but only within three (3) months (or such other period of time not exceeding
twelve (12) months as is determined by the Committee) from the date of
disability, exercise his or her Option to the extent he or she was entitled to
exercise it at the date of such disability. To the extent that he or she was not
entitled to exercise the Option at the date of disability, or if he or she does
not exercise such Option (which he or she was entitled to exercise) within the
time specified herein, the Option shall terminate.
(e) Death of Optionee. In the event of the death of an Optionee:
(i) during the term of the Option who is at the time of his or her
death an Employee of the Company and who shall have been in Continuous
Status as an Employee, a Director or Consultant since the date of grant of
the Option, the Option may be exercised, at any time within twelve (12)
months following the date of death, by the Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that would have accrued had
the Optionee continued living one (1) month after the date of death; or
(ii) within thirty (30) days (or such other period of time not
exceeding three (3) months as is determined by the Committee) after the
termination of Continuous Status as an Employee, a Director or Consultant,
the Option may be exercised, at any time within three (3) months following
the date of death, by the Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the
extent of the right to exercise that had accrued at the date of
termination.
10. Transferability of Options.
(a) Incentive Stock Options may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will or by
the laws of descent or distribution and may be exercised, during the life time
of the Optionee only by the Optionee.
(b) The Committee may, in its discretion, authorize all or a portion of the
Non-ISOs to be granted to an Optionee to be on terms which permit transfer by
such Optionee to (i) the spouse, children or grandchildren of the Optionee (the
"Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of
such Immediate Family Members, or (iii) a partnership in which such Immediate
Family Members are the only partners, provided that (x) there may be no
consideration for any such transfer, (y) the Non-ISO Stock Option Agreement
pursuant to which such options are granted must be approved by the Committee,
and must expressly provide for transferability in a manner consistent with this
section, (z) subsequent transfers of transferred Options shall be prohibited
except those made by will or by the laws of descent or distribution, and (zz)
such transfer is approved in advance by the Committee. Following transfer, any
such Options shall continue to be subject to the same terms and conditions as
were applicable immediately prior to transfer,
C-6
provided that for purposes of determining the rights of exercise under the
Option, the term "Optionee" shall be deemed to refer to the transferee. The
termination of service as an employee, non-employee director or consultant shall
continue to be applied with respect to the original Optionee, following which
the options shall be exercisable by the transferee only to the extent, and for
the periods specified in Section 9 of the Plan and in the Stock Option
Agreement.
11. Adjustments Upon Changes in Capitalization or Merger. Subject to any
required action by the shareholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split or the payment of a stock dividend with
respect to the Common Stock or any other increase or decrease in the number of
issued shares of Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible securities of the
Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or
exercise price of shares of Common Stock subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, or
in the event of a proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another corporation, the
Option will terminate immediately prior to the consummation of such proposed
action, unless otherwise provided by the Board. The Board may, in the exercise
of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable.
12. Time for Granting Options. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee,
non-employee Director and Consultant to whom an Option is so granted within a
reasonable time after the date of such grant.
13. Amendment and Termination of the Plan. (a) The Board may amend or
terminate the Plan from time to time in such respects as the Board may deem
advisable; provided that, the following revisions or amendments shall require
approval of the holders of a majority of the outstanding shares of the Company
entitled to vote:
(i) any increase in the number of Shares subject to the Plan, other
than in connection with an adjustment under Section 11 of the Plan;
(ii) any change in the class of Employees which are eligible
participants for Options under the Plan; or
(iii) if shareholder approval of such amendment is required for
continued compliance with Rule 16b-3.
(b) Shareholder Approval. Any amendment requiring shareholder approval
under Section 13(a) of the Plan shall be solicited as described in Section 17 of
the Plan.
(c) Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall
C-7
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Shares may then be listed, and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. Option Agreement. Options shall be evidenced by written Option
agreements in such form as the Committee shall approve.
17. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve months before or after
the date the Plan is adopted. If such shareholder approval is obtained at a duly
held shareholders' meeting, it may be obtained by the affirmative vote of the
holders of a majority of the outstanding shares of the Company present or
represented and entitled to vote thereon. The approval of such shareholders of
the Company shall be (1) solicited substantially in accordance with Section
14(a) of the Exchange Act and the rules and regulations promulgated thereunder,
or (2) solicited after the Company has furnished in writing to the holders
entitled to vote substantially the same information concerning the Plan as that
which would be required by the rules and regulations in effect under Section
14(a) of the Exchange Act at the time such information is furnished.
18. Miscellaneous Provisions. An Optionee shall have no rights as a
shareholder with respect to any Shares covered by his Option until the date of
the issuance of a stock certificate to him for such shares.
19. Other Provisions. The stock option agreement authorized under the
Plan shall contain such other provisions, including, without limitation,
restrictions upon the exercise of the Option, as the Committee shall deem
advisable. Any such stock option agreement shall contain such limitations and
restrictions upon the exercise of the Option as shall be necessary in order that
such option will be an Incentive Stock Option as defined in Section 422 of the
Code if an Incentive Stock Option is intended to be granted.
20. Indemnification of Committee. In addition to such other rights of
indemnification as they may have as Directors or as members of the Committee,
the members of the Committee shall be indemnified by the Company against the
reasonable expenses, including attorneys' fees actually and necessarily incurred
in connection with the defense of any action, suit or proceeding, or in
connection with any appeal therein, to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by them in
settlement thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by them in satisfaction of a judgment
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in such action, suit or proceeding that such Board
member is liable for negligence or misconduct in the performance of his duties;
provided that within 60 days after institution of any such action, suit or
proceeding a Board member shall in writing offer the Company the opportunity, at
its own expense, to handle and defend the same.
21. Application of Funds. The proceeds received by the Company from the
sale of Common Stock pursuant to Options will be used for general corporate
purposes.
22. No Obligation to Exercise Option. The granting of an Option shall
impose no obligation upon the Optionee to exercise such Option.
C-8
23. Other Compensation Plans. The adoption of the Plan shall not affect
any other stock option or incentive or other compensation plans in effect for
the Company or any Subsidiary, nor shall the Plan preclude the Company from
establishing any other forms of incentive or other compensation for employees
and Directors of the Company or any Subsidiary.
24. Singular, Plural; Gender. Whenever used herein, nouns in the singular
shall include the plural, and the masculine pronoun shall include the feminine
gender.
25. Headings, Etc., No Part of Plan. Headings of Articles and Sections
hereof are inserted for convenience and reference; they constitute no part of
the Plan.
26. Governing Law. The Plan shall be governed by and construed in
accordance with the laws of the State of New York, except to the extent
preempted by Federal law. The Plan is intended to comply with Rule 16b-3. Any
provisions inconsistent with Rule 16b-3 shall be inoperative and shall not
affect the validity of the Plan, unless the Board of Directors shall expressly
resolve that the Plan is no longer intended to comply with Rule 16b-3.
Dated: August 26, 2003
C-9
HALSEY DRUG CO., INC.
PROXY
The undersigned hereby appoints Andrew D. Reddick and Peter A. Clemens, and
each of them, with full power of substitution as proxies for the undersigned, to
attend the annual meeting of shareholders of Halsey Drug Co., Inc. to be held at
the [Newark Airport Marriott Hotel, Newark International Airport, Newark, New
Jersey 07114] on , , 2003 at 10:00 a.m., Eastern Time, or any
adjournment thereof, and to vote the number of shares of Common Stock of the
Company that the undersigned would be entitled to vote, and with all the power
the undersigned would possess, if personally present, as follows:
1. [ ] FOR, or
[ ] WITHHOLD AUTHORITY to vote for the following nominees
for election as directors:
Andrew D. Reddick; Peter A. Clemens; Bruce F. Wesson; Srini
Conjeevaram; William A. Sumner; William Skelly; Zubeen
Shroff; Joel D. Liffmann; Jerry Karabelas; and Immanuel
Thangaraj.
(INSTRUCTION: To withhold authority to vote for any
individual nominee write that nominee's name on the line
provided below.)
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2. Approval of the Proposal to Amend the Certificate of Incorporation of the
Company to increase the number of authorized shares of Common Stock from
80,000,000 shares to 350,000,000 shares;
[ ] FOR, or [ ] AGAINST, or [ ] ABSTAIN
3. Approval of the Proposal to Amend the Certificate of Incorporation of the
Company to provide the holders of the Company's 5% Convertible Senior
Secured Debentures due March 31, 2006 issued pursuant to that certain
Debenture Purchase Agreement dated December 20, 2002 between the Company,
Care Capital Investments II, LP, Essex Woodlands Health Ventures V, L.P. and
the other signatories thereto, with the right to vote on all matters
submitted to a vote of shareholders of the Company;
[ ] FOR, or [ ] AGAINST, or [ ] ABSTAIN
(Continued and to be dated and signed on reverse side)
4. Approval of the Proposal to Amend the Company's 1998 Stock Option Plan to
(a) increase the number of shares of the Common Stock available for the
grant of options under the 1998 Stock Option Plan from 8,100,000 shares to
12,000,000 shares, (b) to permit the grant of non-qualified stock options
having an exercise price per share which is less than the fair market value
of the Company's Common Stock, and (c) set a limit of 5,500,000 stock
options that may be granted to one individual in any calendar year;
[ ] FOR, or [ ] AGAINST, or [ ] ABSTAIN
5. Ratification of Grant Thornton LLP as the Company's independent accountants
for the current fiscal year;
[ ] FOR, or [ ] AGAINST, or [ ] ABSTAIN
6. In their discretion, on such other business as may properly come before the
meeting or any adjournment thereof.
The proxies will vote as specified above, or if a choice is not specified,
they will vote for the nominees listed in Item 1 as well as for the proposals
listed in Items 2, 3, 4 and 5.
This proxy is solicited by the board of directors of the Company.
Receipt of Notice of Annual Meeting of Shareholders and Proxy Statement
dated , 2003 is hereby acknowledged:
Dated , 2003
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Signature(s)
(PLEASE SIGN EXACTLY AS YOUR NAME OR NAMES
APPEAR HEREON, INDICATING, WHERE PROPER,
OFFICIAL POSITION OR REPRESENTATIVE
CAPACITY.)