SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): February 10, 2004
HALSEY DRUG CO., INC.
695 North Perryville Road, Rockford, Illinois 61107
(815-399-2060)
Incorporated under the laws of Commission File Number I.R.S. Employer Identification Number
State of New York 1-10113 11-0853640
Item 5. Other Events
Debenture Offering
In General
On February 6, 2004, Halsey Drug Co., Inc. (the "Company") consummated a
private offering of securities for an aggregate purchase price of approximately
$12.3 million (the "Offering"). The securities issued in the Offering consisted
of convertible senior secured debentures (the "Debentures"). The Debentures were
issued by the Company pursuant to a certain Debenture Purchase Agreement dated
February 6, 2004 (the "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 each of the Purchasers listed on
the signature page thereto (collectively, the "2004 Debenture Investor Group").
Of the approximate $12.3 million in Debentures issued in the Offering,
approximately $2 million of Debentures were issued in exchange for the surrender
of like amount of principal plus accrued interest outstanding under Company's 5%
convertible senior secured debentures issued pursuant to working capital bridge
loan transactions with Care Capital, Essex Woodlands and Galen Partners III,
L.P., Galen International III, L.P., and Galen Employee Fund III, L.P.
(collectively, "Galen") during November and December, 2003.
The Debentures, issued at par, bear interest at the rate of 1.62% per
annum, the short-term Applicable Federal Rate on the date of issuance.
The Debentures (including the principal amount plus interest accrued at
the date of conversion) will convert automatically into the Company's Series A
convertible preferred stock (the "Series A Shares") immediately following the
Company's receipt of shareholder approval at its next shareholder's meeting to
restate the Company's Certificate of Incorporation (the "Charter Amendment") to
authorize the Series A Shares and the Junior Preferred Shares (as described
below) and the filing of the Charter Amendment with the Office of the New York
Department of State (the date of such filing, the "Charter Amendment Filing
Date"), as provided in the Purchase Agreement. The Debentures will convert into
Series A Shares at a price per share (the "Conversion Price") of $0.6425,
representing the average of the closing bid and asked prices of the Company's
Common Stock for the twenty (20) trading days ending two days immediately prior
to the date of the Purchase Agreement, as reported by the Over-the-Counter
("OTC") Bulletin Board. The Conversion Price is subject to adjustment, from time
to time, 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 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.
Based on the $0.6425 Conversion Price of the Series A Shares and
estimating the interest accrual under the Debentures prior to the Charter
Amendment Filing Date, the Debentures with an aggregate principal amount of $14
million would be convertible into an aggregate of approximately 22 million
Series A Shares.
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The Purchase Agreement provides that the holders of the Series A Shares
shall have the right to vote as part of a single class with all holders of the
Company's voting securities on all matters to be voted on by such security
holders. Each holder of Series A Shares shall have such number of votes as shall
equal the number of votes he would have had if such holder converted all Series
A Shares held by such holder into shares of Common Stock immediately prior to
the record date relating to such vote as further described under the caption
"General Description of Series A Shares" below. The Purchase Agreement also
provided for the execution of an Investor Rights Agreement providing the holders
of the Series A Shares with veto rights relating to certain material Company
transactions as further described under the caption "Investor Rights Agreement"
below.
The Purchase Agreement provides that each of Care Capital, Essex and Galen
(collectively, the "Lead Investors") has the right to designate for nomination a
member of the Company's Board of Directors, and that the Lead Investors
collectively may designate one additional member of the Board (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. The Designees of Care Capital, Essex and Galen are
Messrs. Karabelas, Thangjaraj and Wesson, respectively, each of whom are current
Board members. Effective as of the closing of the Purchase Agreement, the Lead
Investors may collectively nominate one additional Designee to the Board. The
Company has agreed to nominate and appoint to the Board of Directors, subject to
shareholder approval, one designee of each of Care Capital, Essex and Galen, and
one collective designee of the Lead Investors, for so long as each holds a
minimum of 50% of the Series A Shares initially issued to such party (or at
least 50% of the shares of Common Stock issuable upon conversion of the Series A
Shares). See "General Description of Series A Shares" and "Voting Agreement"
below.
The Purchase Agreement further provides that the Company may issue
additional Debentures in the principal amount of up to approximately $1.23
million within 120 days of the date of the Purchase Agreement, provided that the
aggregate principal amount of Debentures issued pursuant to the Purchase
Agreement shall not exceed $14 million without the consent of the holders of 60%
of the principal amount of the Debentures then held by Care Capital, Essex and
Galen.
Simultaneous with the execution of the Purchase Agreement, and as a
condition to the initial closing of the Purchase Agreement, the Company, the
2004 Debenture Investor Group and each of the holders of the Company's
outstanding 5% convertible senior secured debentures maturing March 31, 2006
(collectively, the "Outstanding Debentures") executed a certain Debenture
Conversion Agreement, dated February 6, 2004 (the "Conversion Agreement"). In
accordance with the terms of the Conversion Agreement, each holder of the
Outstanding Debentures agreed to convert the Outstanding Debentures held by such
holder into the Company's Series B convertible preferred stock (the "Series B
Shares") and/or Series C-1, C-2 and/or C-3 convertible preferred stock
(collectively, the "Series C Shares"). The Series C Shares together with the
Series B Shares are herein referred to as, the "Junior Preferred Shares", and
the Junior Preferred Shares together with the Series A Shares, are collectively,
the "Preferred Shares". The Conversion Agreement provides, among other things,
for the automatic conversion of the Outstanding Debentures into the appropriate
class of Junior Preferred Shares immediately following the Company's receipt of
shareholder approval to the Charter Amendment authorizing the creation of the
Series B Shares and Series C Shares and the filing of the Charter Amendment with
the Office of the New
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York Department of State. See "Junior Preferred Shares Offering" below for a
description of the Conversion Agreement and the Junior Preferred Shares.
The Company was a party to a certain Loan Agreement with Watson
Pharmaceuticals, Inc. ("Watson") pursuant to which Watson has made term loans to
the Company (the "Watson Loan Agreement") in the aggregate principal amount of
approximately $21.4 million as evidence by two (2) promissory notes (the "Watson
Notes"). It was a condition to the completion of the Debenture Offering that
simultaneous with closing of the Purchase Agreement, the Company shall have paid
to Watson the sum of approximately $4.3 million (which amount was funded by the
Company from the proceeds of the Debenture Offering) and conveyed to Watson
certain Company assets in consideration for Watson's forgiveness of
approximately $16.4 million of indebtedness under the Watson Notes. In addition,
the Watson Notes were amended to, among other things, extend the maturity date
of the Watson Notes from March 31, 2006 to June 30, 2007 and to provide for the
satisfaction of interest under the Watson Notes in the form of the Company's
Common Stock. Following such amendments, the Watson Notes were purchased from
Watson by Care Capital, Essex, Galen and certain other investors in
consideration for a $1 million payment to Watson. See "Watson Loan Agreement
Restructuring" for a description of the restructuring of the Watson term loans.
Additional Terms of the Purchase Agreement, Debentures and Series A Shares
General Description of Series A Shares
The Series A Shares have a liquidation preference equal to five times the
initial $0.6425 Conversion Price of the Series A Shares (the "Liquidation
Preference"). In addition, the Series A Shares are convertible into the
Company's Common Stock, with each Series A Share convertible into the number of
shares of common stock obtained by dividing (i) the Liquidation Preference, by
(ii) the $0.6425 Series A Share Conversion Price, as such Conversion Price may
be adjusted, from time to time, pursuant to the dilution protections described
below. Without limiting the Liquidation Preference, the holders of the Series A
Shares have the right to participate with the holders of the Company's Common
Stock upon the occurrence of a liquidation event, including the Company's
merger, sale of all or substantially all of its assets or a change of control
transaction, on an as converted basis (but for these purposes only, assuming the
Series A Shares to be convertible into only 30% of the shares of Common Stock
into which they are otherwise then convertible).
The Conversion Price of the Series A Shares is subject to adjustment, from
time to time, to equal the consideration per share received by the Company for
the Company's Common Stock, or the conversion or the exercise price per share of
the Company's Common Stock issuable under Convertible Securities, if lower than
the then applicable Conversion Price. The anti-dilution provisions applicable to
the Series A Shares do not apply to customarily excluded issuances of the
Company's Common Stock or Convertible Securities, including (i) to officers,
directors, employees and consultants of the Company pursuant to stock option or
purchase plans approved by the Board of Directors, or (ii) upon conversion or
exercise of existing Convertible Securities or other rights to purchase Common
Stock.
The Series A Shares are subject to mandatory conversion into the Company's
Common Stock provided (i) the average of the closing bid and asked prices per
share of the Company's Common Stock as
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reported by the OTC Bulletin Board (or such other over-the-counter market or
exchange on which the Company's Common Stock may then be traded or admitted for
traded) during thirty (30) consecutive trading days exceeds $2.80 (as adjusted
for stock splits and similar recapitalizations), and during such thirty (30)
consecutive trading days the average daily trading volume is at least $1.75
million (based on the number of shares traded, multiplied by the average of the
closing bid and asked prices for each such trading day), or (ii) the Company has
obtained the written consent of the holders of at least 75% of the then
outstanding Series A Shares held by each of Care Capital, Essex and Galen to
convert the Series A Shares into Common Stock.
The Series A Shares also have certain pre-emptive rights to participate in
the purchase of future sales of the Company's Common Stock or Convertible
Securities. See "Pre-emptive Right" below for description of such pre-emptive
rights.
Investor Rights Agreement
As part of the closing of the Purchase Agreement, the Company, the 2004
Debenture Investor Group and the holders of the Outstanding Debentures executed
a certain Investor Rights Agreement providing, among other things, that the
approval of the holders of at least sixty percent (60%) of the Series A Shares
is required to authorize certain material Company transactions, including,
without limitation (a) any amendment to the Company's Certificate of
Incorporation or by-laws, (b) any alteration of the preferences, voting power,
rights or privileges of the Series A Shares, (c) any action to create or issue
any securities having any preference or priority as to dividends or assets,
whether in liquidation or otherwise, superior to or pari passu with the Series A
Shares, (d) any reclassification of any outstanding shares of any class of stock
of the Company into shares having any preference or priority as to dividends or
assets, whether in liquidation or otherwise, superior to or pari passu with the
Series A Shares, (e) payment of any dividends or distributions on any securities
of the Company ranking junior in priority into the Series A Shares, other than
dividends or distributions payable solely in Common Stock, (f) any redemption or
acquisition of Company securities, (g) any merger, reorganization, consolidation
or other business combination involving the Company, or sale, transfer, lease,
license or other disposition of all or substantially all of the assets of the
Company, (h) any liquidation, dissolution, commencement of any bankruptcy or
similar proceeding, recapitalization or reorganization of the Company, (i) the
consummation of any strategic alliance, 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, (j) entering into any transaction, contract or
commitment or the taking of any action other than at arm's length, (k) entering
into or engaging in any business other than the business currently conducted or
proposed to be conducted by the Company, (l) the creation of any mortgage,
pledge, lien or security interest on the assets or properties of the Company
(subject to certain customary exceptions), and (m) the incurrence of any
indebtedness (subject to certain customary exceptions). In addition, the review
and approval of an Independent Committee of the Board of Directors shall be
required as a condition to the completion of (i) any transaction between or
among the Company and any holders of Series A Shares and (ii) any liquidation
event, including any merger, consolidation or sale of all or substantially all
of the Company's assets.
The Investor Rights Agreement also contains certain restrictions on the
transfer of Series A Shares by the 2004 Debenture Investor Group as well as any
shares of capital stock (together with the Series A
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Shares, the "Restricted Shares") held by each of Care Capital, Essex, Galen and
Oracle Strategic Partners, L.P. ("Oracle")(collectively, the "Restricted
Investors"). In the event of any proposed transfer by a Restricted Investor of
any Restricted Shares held by such Restricted Investor (collectively, the
"Offered Shares"), such Restricted Investor must first offer the Offered Shares
to the Company on the terms of the proposed sale or conveyance of such Offered
Shares to a third party. In the event the Company does not exercise its right to
purchase the Offered Shares on such terms, the other Restricted Investors may
purchase their pro rata share of the Offered Shares on the terms proposed for
transfer to such third party. Additionally, upon the sale of Offered Shares by a
Restricted Investor to a third party, the remaining Restricted Investors have
the right to participate in such sale on a pro rata basis. Finally, in the event
the holders of at least 66 2/3% of all Restricted Shares then held by all
Restricted Investors (collectively, the "Controlling Stockholders") wish to sell
to any third party all Restricted Shares held by the Controlling Stockholders,
then each other Restricted Investor must agree to sell all Restricted Shares
held by such Restricted Investors to such third party for the same price and on
the same terms as the sale by the Controlling Stockholders.
Voting Agreement
The Company is obligated under the Purchase Agreement to solicit
shareholder approval to the Charter Amendment to (i) authorize the creation of
the classes of Preferred Shares having the rights and preferences provided in
the Purchase Agreement and the Conversion Agreement; and (ii) increase its
authorized shares of capital stock from 80,000,000 to 940,000,000 shares,
consisting of 650,000,000 shares of common stock, par value $.01 per share, and
290,000,000 shares of preferred stock, par value $.01 per share, of which
45,000,000 shares shall be designated Series A Shares, 25,000,000 shares will be
designated Series B Shares, 70,000,000 will be designated Series C-1 Shares,
50,000,000 shares will be designated Series C-2 Shares and 100,000,000 shares
will be designated Series C-3 Shares. The Company anticipates soliciting
shareholder approval for the Charter Amendment at its upcoming 2004 Annual
Meeting of Shareholders. In this regard, as part of the closing of the Purchase
Agreement, the Company, each of the purchasers of the Debentures and the holders
of the Outstanding Debentures (collectively, the "Voting Agreement Parties")
executed a Voting Agreement dated February 6, 2004 pursuant to which each agreed
to vote all of their respective voting securities of the Company in favor of the
Charter Amendment. The Voting Agreement also provides that each of the Voting
Agreement Parties will vote all of their voting securities of the Company in
favor of the Designees to the Board of Directors of each of Care Capital, Essex
and Galen, as well as one collective designee to the Board of the Lead
Investors. The aggregate voting securities held by the Voting Agreement Parties
represents approximately 75% of the voting rights under the Company's
outstanding voting securities.
Pre-emptive Rights
The Investors Rights Agreement provides the holders of the Preferred
Shares 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.
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Debenture Maturity
The Debentures will convert automatically into Series A Shares on the
Charter Amendment Filing Date. Notwithstanding the foregoing, if the Charter
Amendment Filing Date shall not have occurred on or prior to the Maturity Date
(as defined below), the Debentures shall bear interest at the rate of 15% per
annum.
The Purchase Agreement provides that the Maturity Date of the Debentures
is July 31, 2004, provided, that (i) the Company may extend the Maturity Date
for up to 90 days, to the extent the filing of the Charter Amendment has been
delayed due to review by the Securities and Exchange Commission of the Company's
Proxy Statement soliciting shareholder approval of the Charter Amendment, and
(ii) the holders of at least 60% of the principal amount of the Debentures may
extend the Maturity Date from time to time in their sole discretion.
Secured Debt
The 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 2004 Debenture Investor Group an Unconditional
Agreement of Guaranty of the Company's obligations under the Purchase Agreement.
Each Guaranty is secured by all assets of such subsidiary. In addition, the
Company has pledged the stock of each such subsidiary to the 2004 Debenture
Investor Group to further secure its obligations under the Purchase Agreement.
In accordance with the terms of an Amended and Restated Subordination
Agreement dated February 6, 2004 between the Company, the holders of the
Debentures and the holders of the Outstanding Debentures, the liens on the
Company's and its Subsidiaries' assets as well as the payment priority of the
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
Outstanding Debentures in the aggregate principal amount of approximately 87.7
million.
Registration Rights
At part of the closing of Purchase Agreement, the Company executed in
favor of the holders of the Debentures, the holders of the Outstanding
Debentures, Galen, as the holder of certain warrants issued pursuant to bridge
loan transactions during the period 1998 through and including 2002 (the "Galen
Warrants"), the holders of shares received pursuant to a certain Warrant
Recapitalization Agreement dated December 20, 2002 between the Company and the
holders of common stock purchase warrants issued pursuant to the offerings of
the Outstanding Debentures completed in 1998 and 1999, and Watson, an Amended
and Restated Registration Rights Agreement providing for (i) the termination of
the registration rights granted to such holders pursuant to a certain
Registration Rights Agreement dated December 20, 2002, and (ii) the grant of
registration rights to Watson, the holders of the Debentures, the holders of the
Outstanding Debentures, the holders of shares of common stock received pursuant
to the Warrant Recapitalization Agreement (the "Warrant Recap Shares") and Galen
as the holder of the Galen
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Warrants, to register under the Securities Act of 1933, as amended, the Warrant
Recap Shares, the shares of Common Stock issuable upon exercise of the Watson
Warrant, the shares of Common Stock issuable upon exercise of the Galen
Warrants, and the shares of Common Stock issuable upon conversion of the Series
A Shares, the Series B Shares and the Series C Shares (collectively, the
"Registrable Securities"). The Registration Rights Agreement provides (i) Watson
with one (1) demand registration on Form S-1 (or any successor form), and (ii)
the holders of at least 25% of the Registrable Securities with three (3) demand
registrations on Form S-1 (or any successor form). The Registration Rights
Agreement also provides such parties with unlimited piggyback registration
rights.
Other Terms
The Purchase Agreement and the Investor Rights 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 Debentures and Series A Shares remain outstanding, all of which are
customary for the type of securities issued in the Offering.
Reference is made to the Company's Press Release dated February 6, 2004
which describes, among other things, the completion of the Offering. The Press
Release is hereby incorporated by this reference and is included as Exhibit 99.1
hereto.
Authorized Shares and Convertible Securities
The Company's Certificate of Incorporation, as amended to date, provides
that the Company is authorized to issue 80,000,000 shares of Common Stock, $.01
par value per share. No classes of preferred stock are currently authorized for
issuance under the Company's Certificate of Incorporation.
As of February 1, 2004, the Company had 21,601,704 shares of Common Stock
issued and outstanding. In addition to its issued and outstanding shares of
Common Stock, immediately prior to the initial closing of the Purchase
Agreement, the Company had issued Convertible Securities providing for the
issuance of up to an aggregate of approximately 233,445,000 shares of the
Company's Common Stock. Of such amount, approximately 190,100,000 shares of
Common Stock were issuable upon conversion of the Company's Outstanding
Debentures, approximately 34,320,000 shares of Common Stock were issuable upon
the exercise of outstanding common stock purchase warrants and approximately
9,025,000 shares of Common Stock were issuable upon the exercise of outstanding
common stock purchase options. As a consequence, after giving effect to the
number of shares of Common Stock issuable by the Company under outstanding
options and convertible securities, the Company has committed to issue
approximately 175,047,000 shares of Common Stock in excess of its currently
authorized shares.
After giving effect to the Debenture Offering and assuming the filing of
the Charter Amendment, the conversion of the Debentures into a Series A Shares
and the conversion of the Outstanding Debentures into Junior Preferred Shares
(as described below under the caption "Junior Preferred Shares Offering",) the
Series A Shares will be convertible into an aggregate of approximately 110
million shares of the Company's Common Stock (representing approximately 29.6%
of the Company's Common Stock on a fully-diluted basis) and the Junior Preferred
Shares will be convertible into an aggregate of
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approximately 195.6 million shares of the Company's Common Stock (representing
approximately 52.7% of the Company's Common Stock on a fully-diluted basis).
After giving effect to the issuance of the Series A Preferred Shares and the
Junior Preferred Shares, as well as the Company's outstanding common stock
purchase options and warrants, the Company will have issued and outstanding
securities convertible into an aggregate of approximately 349 million shares of
Common Stock.
Junior Preferred Shares Offering
As of February 1, 2004, the Company had issued an aggregate of
approximately $87.7 million in principal amount of 5% convertible senior secured
debentures maturing March 31, 2006 (collectively, the "Outstanding Debentures").
The Outstanding Debentures were issued by the Company pursuant to three (3)
separate Debenture Purchase Agreements, dated March 10, 1998, as amended (the
"1998 Debentures"), March 26, 1999, as amended (the "1999 Debentures") and
December 20, 2002 (the "2002 Debentures"), respectively. After giving effect to
the Company's issuance of additional 5% convertible senior secured debentures in
satisfaction of interest payments on the Outstanding Debentures, as of February
1, 2004, the Outstanding Debentures were convertible into an aggregate of
approximately 190,100,000 shares of the Company's Common Stock.
Conversion of Outstanding Debentures into Junior Preferred Shares
In accordance with the terms of the Debenture Conversion Agreement dated
February 6, 2004 between the Company, the 2004 Debentures Investor Group and
each of the holders of the Outstanding Debentures (the "Conversion Agreement"),
all Outstanding Debentures will be converted automatically (and without further
action of the debentureholders required) into Junior Preferred Shares
immediately upon the conversion of the Debentures into Series A Shares as
further described below.
The holders of approximately $6.7 million in principal amount of the
Outstanding Debentures agreed to convert such debentures (plus accrued and
unpaid interest) into Series B Shares, and the holders of the remaining
Outstanding Debentures in the principal amount of approximately $81 million
agreed to convert such debentures (plus accrued and unpaid interest) into Series
C Shares. The number of Junior Preferred Shares to be received by each holder of
Outstanding Debentures will be based on the respective prices at which the
Outstanding Debentures are convertible into Common Stock. The Series B Shares
conversion price is $.3420 per share. The Series C-1, C-2 and C-3 Shares
conversion prices are $.5776, $.5993 and $.3481 per share, respectively.
Based on the respective conversion prices of the Outstanding Debentures,
and estimating the interest accrued under the Outstanding Debentures prior to
the Charter Amendment Filing Date, the Outstanding Debentures are convertible
into an aggregate of approximately 20.2 million Series B Shares, 56.3 million
Series C-1 Shares, 37.4 million Series C-2 Shares and 81.7 million Series C-3
Shares.
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General Description of Junior Preferred Shares
The Junior Preferred Shares have a liquidation preference equal to the
principal amount and the accrued and unpaid interest under the Outstanding
Debentures converted into the Junior Preferred Shares. The liquidation
preference of the Series B Shares has priority over, and will be satisfied prior
to the liquidation preference of the Series C Shares. The liquidation preference
for each class of Junior Preferred Shares is equal to the conversion prices of
such shares. The Junior Preferred Shares are convertible into the Company's
Common Stock, with each Junior Preferred Share convertible into one share of
Common Stock. The holder of the Junior Preferred Shares have the right to vote
as part of the single class with all holders of the Company's Common Stock and
the holders of the Series A Shares on all matters to be voted on by such
stockholders, with each holder of Junior Preferred Shares having such number of
votes as shall equal the number of votes he would have had if such holder had
converted all Junior Preferred Shares held by such holder into shares of Common
Stock immediately prior to the record date relating to such vote.
The Junior Preferred Shares will automatically convert into the Company's
Common Stock upon the conversion of the Series A Shares into Common Stock.
Registrations Rights
The Company's Common Stock issuable upon conversion of the Junior
Preferred Shares have the rights for registration under the Securities Act of
1933, as amended, as described above under the caption "Debenture Offering", "
Registration Rights".
Watson Loan Agreement Restructuring
The Company was a party to a certain Loan Agreement with Watson dated
March 29, 2000, as amended (the "Watson Loan Agreement") pursuant to which
Watson made term loans to the Company in the aggregate principal amount of
$21,401,301 as evidenced by two (2) promissory notes (the "Watson Notes"). It
was a condition to the completion of the Debenture Offering that simultaneous
with the closing of the Purchase Agreement (i)(A) the Company shall have
remitted to Watson the sum of approximately $4.3 million in addition to certain
Company assets in consideration for Watson's forgiveness of approximately $16.4
million of indebtedness under the Watson Notes, and (B) the Watson Notes be
amended to extend the maturity date of the Watson Notes from March 31, 2006 to
June 30, 2007, to provide for satisfaction of future interest payments under the
Watson Notes in the form of the Company's Common Stock, and to provide
forbearance from the exercise of rights and remedies upon the occurrence of
certain Events of Default under the Watson Notes (the Watson Notes as so
amended, the "Amended and Restated Watson Note"), and (ii) each of the Lead
Investors and certain other investors in the Debentures (collectively, the
"Watson Note Purchasers") shall have purchased from Watson the Amended and
Restated Watson Note in consideration for a $1 million payment to Watson.
Simultaneous with the closing of the Purchase Agreement, each of the
Company, Watson and Watson Notes Purchasers executed an Umbrella Agreement dated
February 6, 2004 (the "Umbrella Agreement"). The Umbrella Agreement provides for
(i) the Company's payment to Watson of approximately $4.3 million in
consideration of the amendments to the Watson Notes described above, resulting
in the Amended and Restated Watson Note, and (ii) Watson's sale and conveyance
of the Amended and Restated Watson Note to the Watson Note Purchasers for cash
consideration of $1 million.
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Simultaneous with the approximate $4.3 million payment by the Company to Watson,
the Company conveyed to Watson approximately $165,000 in finished dosage product
free of charge as well as the Company's Abbreviated New Drug Application
("ANDA") for its acetaminophen, butalbital and caffeine finished dosage product,
the ANDA for its doxycycline hyclate finished dosage product, and the Drug
Master File and certain related assets for the Company's doxycycline monohydrate
active pharmaceutical ingredient ("API") and doxycycline hyclate API, including
an option for Watson to acquire, without additional cost or expense, the
Company's equipment dedicated to the production of doxycycline API
(collectively, the "Transferred Assets"). The Company's also granted Watson an
option to obtain a preferred source of supply of the Company's hydrocodone API
(the "Hydrocodone Option"). In addition to the Watson's forgiveness of
approximately $16.4 million under the Watson Notes, as additional consideration
for the Company's payment to Watson of approximately $4.3 million, the
conveyance of the Transferred Assets and the grant of the Hydrocodone Option,
all current supply agreements between the Company and Watson were cancelled and
Watson waived the dilution protections contained in the common stock purchase
warrant dated December 20, 2002 exercisable for 10,700,665 shares of Common
Stock issued by the Company to Watson, to the extent such dilution protections
were triggered by the transactions contemplated in the Purchase Agreement and
the Conversion Agreement.
The Amended and Restated Watson Note in the principal amount of $5 million
as purchased by the Watson Note Purchasers is secured by a first lien on all
Company's and its subsidiaries' assets, senior to the lien securing the
Debentures and all other Company indebtedness, carries a floating rate of
interest equal to the prime rate plus 4.5% and matures on June 30, 2007.
Item 7. Financial Statements and Exhibits.
(b) Exhibits
Exhibit
Number Description
------ -----------
4.1 Form of Convertible Senior Secured Debenture
10.1 Debenture and Share Purchase Agreement by and among Halsey Drug
Co., Inc., Care Capital Investments, II, LP, Essex Woodlands
Health Ventures V, L.P., Galen Partners III, L.P. and the other
purchasers listed on the signature page thereto.
10.2 Debenture Conversion Agreement by and among Halsey Drug Co.,
Inc., Care Capital, Essex Woodlands, Galen Partners and the
other signatories thereto.
10.3 Amended and Restated Certificate of Incorporation of Halsey Drug
Co., Inc.
11
10.4 Investor Rights Agreement by and among Halsey Drug Co., Inc.,
Care Capital, Essex Woodlands, Galen Partners and the other
signatories thereto.
10.5 Amended and Restated Voting Agreement by and among Halsey Drug
Co., Inc., Care Capital, Essex Woodlands, Galen Partners and the
other signatories thereto.
10.6 Amended and Restated Registration Rights Agreement by and among
Halsey Drug Co., Inc., Watson Pharmaceuticals, Care Capital,
Essex Woodlands, Galen Partners and the other signatories
thereto.
10.7 Amended and Restated Subordination Agreement by and among Halsey
Drug Co., Inc., Care Capital, Essex Woodlands, Galen Partners
and the other signatories thereto.
10.8 Company General Security Agreement.
10.9 Form of Unconditional Agreement of Guaranty.
10.10 Form of Guarantor Security Agreement.
10.11 Stock Pledge Agreement by and between Halsey Drug Co., Inc. and
Galen Partners, as agent.
10.12 Umbrella Agreement by and among Halsey Drug Co., Inc., Watson
Pharmaceuticals, Care Capital, Essex Woodlands, Galen Partners
and the other signatories thereto.
10.13 Third Amendment to Loan Agreement by and among Halsey Drug Co.,
Inc. and Watson Pharmaceuticals.
10.14 Amended and Restated Promissory Note in the principal amount of
$5,000,000 issued by Halsey Drug Co., Inc. in favor of Watson
Pharmaceuticals.
10.15 Hydrocodone API Supply Option Agreement between Halsey Drug Co,
Inc. and Watson Pharmaceuticals.
10.16 Noteholders Agreement by and among Halsey Drug Co., Inc., Care
Capital, Essex Woodlands, Galen Partners and the other
signatories thereto.
99.1 Press Release of Halsey Drug Co., Inc. dated February 6, 2004.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HALSEY DRUG CO., INC.
By: /s/ Andrew D. Reddick
------------------------------------
Andrew D. Reddick
President & Chief Executive Officer
Date: February 10, 2004
13
EXHIBIT INDEX
-------------
Exhibit
Number Description
------ -----------
4.1 Form of Convertible Senior Secured Debenture
10.1 Debenture and Share Purchase Agreement by and among Halsey Drug
Co., Inc., Care Capital Investments, II, LP, Essex Woodlands
Health Ventures V, L.P., Galen Partners III, L.P. and the other
purchasers listed on the signature page thereto.
10.2 Debenture Conversion Agreement by and among Halsey Drug Co.,
Inc., Care Capital, Essex Woodlands, Galen Partners and the
other signatories thereto.
10.3 Amended and Restated Certificate of Incorporation of Halsey Drug
Co., Inc.
10.4 Investor Rights Agreement by and among Halsey Drug Co., Inc.,
Care Capital, Essex Woodlands, Galen Partners and the other
signatories thereto.
10.5 Amended and Restated Voting Agreement by and among Halsey Drug
Co., Inc., Care Capital, Essex Woodlands, Galen Partners and the
other signatories thereto.
10.6 Amended and Restated Registration Rights Agreement by and among
Halsey Drug Co., Inc., Watson Pharmaceuticals, Care Capital,
Essex Woodlands, Galen Partners and the other signatories
thereto.
10.7 Amended and Restated Subordination Agreement by and among Halsey
Drug Co., Inc., Care Capital, Essex Woodlands, Galen Partners
and the other signatories thereto.
10.8 Company General Security Agreement.
10.9 Form of Unconditional Agreement of Guaranty.
10.10 Form of Guarantor Security Agreement.
10.11 Stock Pledge Agreement by and between Halsey Drug Co., Inc. and
Galen Partners, as agent.
14
10.12 Umbrella Agreement by and among Halsey Drug Co., Inc., Watson
Pharmaceuticals, Care Capital, Essex Woodlands, Galen Partners
and the other signatories thereto.
10.13 Third Amendment to Loan Agreement by and among Halsey Drug Co.,
Inc. and Watson Pharmaceuticals.
10.14 Amended and Restated Promissory Note in the principal amount of
$5,000,000 issued by Halsey Drug Co., Inc. in favor of Watson
Pharmaceuticals.
10.15 Hydrocodone API Supply Option Agreement between Halsey Drug Co,
Inc. and Watson Pharmaceuticals.
10.16 Noteholders Agreement by and among Halsey Drug Co., Inc., Care
Capital, Essex Woodlands, Galen Partners and the other
signatories thereto.
99.1 Press Release of Halsey Drug Co., Inc. dated February 6, 2004.