UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the Securities Exchange Act of 1934
IMPAX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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65-0403311
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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30831 Huntwood Avenue, Hayward, CA
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94544
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(Address of principal executive offices)
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Zip Code
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Registrants telephone number, including area code:
(510) 476-2000
Copies to:
Michael Joseph, Esquire
Blank Rome LLP
600 New Hampshire Avenue, NW
Washington, DC 20037
Telephone: (202) 772-5959
Facsimile: (202) 772-5960
Securities to be registered pursuant to Section 12(b) of the Act:
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Title of each class to be so registered
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Name of each exchange on which
each class is to be registered
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None
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None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $ 0.01 par value per share
(Title of class)
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of large accelerated filer, accelerated
filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Explanatory Note
Our common stock was registered under Section 12(g) of the Securities Exchange Act of 1934
(the Exchange Act) until May 23, 2008, when the Securities and Exchange Commission, in SEC
Release No. 34-57864 (Admin. Proc. File No. 3-12519), revoked such registration because of our
failure to file the quarterly and annual reports required by Section 13 of the Exchange Act
subsequent to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.
Forward-Looking Statements
Statements included in this registration statement that do not relate to present or historical
conditions are forward-looking statements. Additional oral or written forward-looking statements
may be made by Impax Laboratories, Inc. (we, us, our, the Company or Impax) from time to
time. Such forward-looking statements involve risks and uncertainties that could cause results or
outcomes to differ materially from those expressed in the forward-looking statements.
Forward-looking statements may include statements relating to our plans, strategies, objectives,
expectations and intentions. Words such as believes, forecasts, intends, possible,
estimates, anticipates, and plans and similar expressions are intended to identify
forward-looking statements. Our ability to predict results or the effect of events on our
operating results is inherently uncertain. Forward-looking statements involve a number of risks,
uncertainties and other factors that could cause actual results to differ materially from those
discussed in this registration statement. Such risks and uncertainties include our ability to
obtain sufficient capital to fund our operations, the difficulty of predicting Food and Drug
Administration (FDA) filings and approvals, consumer acceptance and demand for new pharmaceutical
products, the impact of competitive products and pricing, our ability to successfully develop and
commercialize pharmaceutical products, our reliance on key alliance agreements, the uncertainty of
patent litigation, the availability of raw materials, the regulatory environment, dependence on
patent and other protection for innovative products, exposure to product liability claims,
fluctuations in operating results and other risks described in Item 1A. Risk Factors below. You
should not place undue reliance on forward-looking statements. Forward-looking statements speak
only as to the date on which they are made, and we undertake no obligation to update publicly or
revise any forward-looking statement, regardless of whether new information becomes available,
future developments occur or otherwise.
Recent Developments
In August 2008, Charles Hsiao, Ph.D., our Chairman and a Director since December 1999, died.
Dr. Hsiao co-led our research and development activities until January 1, 2004, when he became our
non-executive chairman and took charge of exploratory research activities at a newly established
laboratory in Pleasanton, California. Dr. Hsiao was a co-founder of our predecessor, Impax
Pharmaceuticals, Inc., in 1994, and served as our Co-Chief Executive Officer from 1999 to 2003. In
1986, he was one of three co-founders of IVAX Corporation, which, by 1994, when he left the
Vice-Chairman position at IVAX, had become the worlds largest generic pharmaceutical company.
At June 30, 2008, we had approximately $ 155 million of cash, cash equivalents and short-term
investments and had outstanding $ 75 million principal amount of 3.5% convertible senior
subordinated debentures due 2012 (3.5% Debentures). In August and September 2008, we repurchased at
a discount, an aggregate face value of $ 62.25 million principal amount of the 3.5% Debentures, paying $ 60.3 million including $ 433,000 of accrued interest. Proceeds to fund the repurchase of the
3.5% Debentures were generated from the sale of our short-term investments. The remaining $ 12.75
million principal amount of the 3.5% Debentures are subject to repurchase by us at 100% of the face
value on June 15, 2009 at the option of the holders.
Item 1. Business.
Our Business
We are a technology-based, specialty pharmaceutical company focused on the development and
commercialization of bioequivalent and brand-name pharmaceuticals, utilizing our controlled-release
and other in-house development and formulation expertise. Bioequivalent pharmaceuticals, commonly
referred to as generics, are the pharmaceutical and therapeutic equivalents of brand-name drug
products and are usually marketed under their established nonproprietary drug names rather than by
a brand name. Brand-name products are generally protected by patents or regulatory exclusivities,
which provide for a period of market exclusivity during which they are sold with little or no
competition. Brand-name products may continue to have a significant presence in the market even
after the expiration of the patent protection period as a result of consumer and physician loyalty.
Bioequivalent pharmaceuticals contain the same active ingredient and are of the same route of
administration, dosage form, strength and indication(s) as brand-name pharmaceuticals already
approved for use in the United States by the FDA.
In the generic pharmaceuticals market, we focus our efforts on controlled-release generic
versions of selected brand-name pharmaceuticals covering a broad range of therapeutic areas and
having technically challenging drug delivery mechanisms or limited competition. We employ our
technologies and formulation expertise to develop generic products that will reproduce the
brand-name products physiological characteristics but not infringe any valid patents relating to
the brand-name product. We are also developing specialty generic pharmaceuticals that we believe
present one or more barriers to entry by competitors, such as difficulty in raw materials sourcing,
complex formulation or development characteristics or special handling requirements. In the
brand-name pharmaceuticals market, we are developing products for the treatment of central nervous
system, or CNS, disorders. Our brand-name product portfolio consists of development-stage projects
to which we are applying our formulation and development expertise to develop differentiated,
modified, or controlled-release versions of currently marketed drug substances. We intend to
expand our brand-name products portfolio primarily through internal development and also through
licensing and acquisition.
To obtain FDA approval for a new drug product, a prospective manufacturer must submit a new
drug application (NDA) containing the results of clinical studies supporting the products safety
and efficacy. The Drug Price Competition and Patent Term Restoration Act of 1984, commonly known
as the Hatch-Waxman amendments, established an abbreviated new drug application (ANDA) for
obtaining FDA approval of generic versions of certain drugs. An ANDA is similar to a NDA except
that the applicant is not required to conduct and submit to the FDA clinical studies to demonstrate
the safety and effectiveness of the drug. Instead, for drugs that contain the same active
ingredient and are of the same route of administration, dosage form, strength and indication(s) as
drugs already approved for use in the United States, the FDA ordinarily requires only
bioavailability data demonstrating the generic formulation is bioequivalent to the previously
approved reference listed drug, indicating that the rate of absorption and the levels of
concentration of the generic drug in the body do not show a significant difference from those of
the previously approved reference listed drug product. The FDA currently takes approximately 18-19
months on average to approve an ANDA following the date of its first submission. See
Regulation.
If we intend to market our product before patent expiration and believe our product will not
infringe the innovators patents or that such patents are invalid or unenforceable, we are required
to so certify in our filing of an ANDA and to send a notice thereof to the patent holder once our
filing is accepted. If the patent holder responds with a timely suit against us to enforce the
patent, the FDA is required to withhold its approval of our ANDA for up to 30 months. See
Regulation. Filings made under the Hatch-Waxman amendments often result in the initiation of
litigation by the patent holder. See Item 8. Legal Proceedings.
2
We operate in two segments, referred to as the Global Pharmaceuticals Division (Global
Division) and the Impax Pharmaceutical Division (Impax Division). The Global Division
develops, manufactures, sells, and distributes generic pharmaceutical products, through three sales
channels, including: the Global sales channel, for sales of generic pharmaceutical prescription
(Rx) products, directly to wholesalers, large retail drug chains, and others; the RX Partner
sales channel, for generic prescription (Rx) products sold through other unrelated third-party
pharmaceutical entities pursuant to alliance agreements; and the OTC Partner sales channel, for
sales of generic pharmaceutical over-the-counter (OTC) products sold through other unrelated
third-party pharmaceutical entities pursuant to alliance agreements. Our Impax Division is engaged
in the development of proprietary brand pharmaceutical products through improvements to already
approved pharmaceutical products to address CNS disorders. The Impax Division is also engaged in
the co-promotion through a direct sales force focused on marketing to physicians, primarily in the
CNS community, pharmaceutical products developed by other unrelated third-party pharmaceutical
entities. Our total revenues for the six months ended June 30, 2008 and the fiscal year ended
December 31, 2007 were predominantly derived from our Global Division. See Item 15. Financial
Statements and Exhibits Note 18 to Consolidated Financial Statements, and Note 12 to
Interim Consolidated Financial Statements for financial information about our segments for the
fiscal years ended December 31, 2007, 2006 and 2005, respectively, and six months ended June 30,
2008. We sell our products within the continental United States and the Commonwealth of Puerto
Rico. We do not operate and have no sales in foreign countries.
We market generic pharmaceutical prescription and over-the-counter products through our Global
Division and intend to market our branded pharmaceutical products through our Impax Division.
Additionally, when strategically appropriate, we enter into alliance agreements to fully leverage
our technology platform. As of June 30, 2008, we marketed 65 generic pharmaceuticals representing
dosage variations of 24 different pharmaceutical compounds through our Global Pharmaceuticals
division and another 14 products representing dosage variations of four different pharmaceutical
compounds through our alliance agreements partners.
The following summarizes our generic pharmaceutical product development activities to date:
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46 ANDAs approved by the FDA, which include generic versions of brand-name
pharmaceuticals such as Brethine
®
, Florinef
®
, Minocin
®
,
Claritin-D
®
12-hour, Claritin-D
®
24-hour, Wellbutrin
SR
®
, OxyContin
®
and Prilosec
®
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19 applications pending at the FDA, including four tentatively approved, that address
approximately $ 11.0 billion in recent 12-month U.S. product sales.
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50 products in various stages of development for which applications have not yet been
filed. These products are for generic versions of brand-name pharmaceuticals that had
recent 12-month U.S. product sales of approximately $ 23.0 billion.
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In addition, we have one branded pharmaceutical product for which we have recently completed a
Phase III clinical study, a second for which we have filed an Investigational New Drug (IND)
application to allow us to begin clinical studies, and four others in early exploratory phase.
Unless otherwise indicated, all product sales data and U.S. market size data in this
registration statement are based on information obtained from Wolters Kluwer Health, an unrelated
third-party provider of prescription market data. We have not independently verified information
provided by Wolters Kluwer Health, and our reference to such information does not imply our
endorsement of such information.
We were incorporated in the State of Delaware in 1995. Our corporate headquarters are located
at 30831 Huntwood Avenue, Hayward, California 94544. We were formerly known as Global
Pharmaceutical Corporation until December 14, 1999, when Impax Pharmaceuticals, Inc., a privately
held drug delivery company, merged into Global Pharmaceutical Corporation, which changed its name
to Impax Laboratories, Inc. in connection with the merger. We treated the merger as the
recapitalization of Impax Pharmaceuticals, Inc., with Impax Pharmaceuticals, Inc. deemed the
acquirer of Global Pharmaceutical Corporation, and such transaction was deemed a reverse
acquisition for accounting purposes.
3
Our Products
Generic Pharmaceuticals
The following table lists our 38 ANDAs that have been approved or tentatively approved by the
FDA from January 1, 2004 through June 30, 2008 (U.S. market size in millions):
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U.S. Market Size
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Product
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Generic of
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(Estimate)
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2004
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Bupropion Hydrochloride 100 &
150mg ER Tablets
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Wellbutrin SR
®
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$
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560.3
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Bupropion Hydrochloride 150mg ER
Tablets
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Zyban
®
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$
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7.1
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Loratadine and Pseudoephedrine
Sulfate 10/240mg ER Tablets
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Claritin-D
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24-Hour
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$
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6.8
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Demeclocycline Hydrochloride 150
and 300mg Tablets
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Declomycin
®
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$
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31.8
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Carbidopa/Levodopa 25/100 &
50/200mg ER Tablets
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Sinemet
®
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$
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83.9
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Midodrine Hydrochloride 2.5, 5 and
10mg Tablets
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Proamatine
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$
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54.8
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Metformin HCl 500mg ER Tablets
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Glucophage XR
®
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$
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259.4
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Oxycodone Hydrochloride 80mg ER
Tablets
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OxyContin
®
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$
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956.3
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Bupropion Hydrochloride 200mg ER
Tablets
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Wellbutrin SR
®
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$
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100.3
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Fexofenadine Hydrochloride and
Pseudoephedrine Hydrochloride
60/120mg ER Tablets (tentative)
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Allegra-D
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$
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343.2
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2005
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Dantrolene Sodium 25, 50 and 100mg
Capsules
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Dantrium
®
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$
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10.2
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Anagrelide Hydrocloride HCI 0.5
and 1.0mg Capsules
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Agrylin
®
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$
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43.9
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Carprofen 25, 75 and 100mg Caplets
(a veterinary product)
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Rimadyl
®
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$
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20.0
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Metformin HCI 750mg ER Tablets
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Glucophage XR
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$
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25.3
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Oxycodone Hydrochloride 10, 20 and
40mg Tablets
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OxyContin
®
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$
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1096.4
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2006
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Pilocarpine Hydrochlorine 5 and
7.5mg Tablets
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Salagen
®
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$
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19.0
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Colestipol Hydrochloride 5g Packet
and 5g Scoopful
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Colestid
®
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$
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6.0
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Colestipol Hydrochloride 1g Tablets
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Colestid
®
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$
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21.8
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Bethanechol Chloride 5mg Tablets
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Urecholine
®
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$
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0.4
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Bethanechol Chloride 10mg Tablets
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Urecholine
®
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$
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3.3
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Bethanechol Chloride 25mg Tablets
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Urecholine
®
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$
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21.1
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Bethanechol Chloride 50mg Tablets
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Urecholine
®
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$
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5.9
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Oxybutynin Chloride 15mg ER Tablets
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Ditropan XL
®
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$
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36.7
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Bupropion Hydrochloride 300mg ER
Tablets
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Wellbutrin XL
®
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$
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642.9
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Bupropion Hydrochloride 150mg ER
Tablets (tentative)
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Wellbutrin XL
®
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$
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959.0
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4
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Product
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Generic of
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U.S. Market Size
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2007
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Nadolol /Bendroflumethiazide
40/5 and 80/5mg Tablets
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Corzide
®
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$
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4.3
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Oxybutynin Chloride 5 and 10mg
ER Tablets
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Ditropan XL
®
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$
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169.0
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Alprazolam 0.5, 1, 2 and 3mg ER
Tablets
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Xanax XR
®
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$
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51.0
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Gemfibrozil 600mg Tab
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Lopid
®
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$
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190.7
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Dipyridamole 25, 50, 75mg Tab
USP
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Persantine
®
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$
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21.6
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Baclofen 10mg Tab
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Baclofen
®
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$
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96.9
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Baclofen 20mg Tab
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Baclofen
®
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$
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70.1
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Venlafaxine HCl 37.5, 75 and
150mg ER Caps (tentative)
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Effexor XR
®
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$
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3012.6
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2008
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Primidone 50, 250mg Tab
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Mysoline
®
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$
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54.2
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Promethazine 12.5, 25, 50mg Tab
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Phenergan
®
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$
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93.9
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Fenofibrate 54, 160mg Tab
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Lofibra
®
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$
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13.3
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Brand-Name Pharmaceuticals
In the brand-name pharmaceuticals market, we have thus far focused our efforts on the
development of products for the treatment of CNS disorders, which include Alzheimers disease,
attention deficit hyperactivity, depression, epilepsy, migraines, multiple sclerosis, Parkinsons
disease, and schizophrenia. We estimate there are approximately 11,000 neurologists, of which,
historically, a concentrated number are responsible for writing the majority of neurological CNS
prescriptions. CNS is the largest therapeutic category in the United States with 2007 sales of
$ 65.9 billion, or 21% of the $ 321.0 billion U.S. drug market. CNS drug sales grew 9.5% in 2007,
compared with a sales growth of 6.5% for the entire industry. Our strategy is to build this
portfolio primarily through internal development and through licensing and acquisition. We intend
to utilize our formulation and development expertise as well as our drug delivery technologies in
the formulation of off-patent drug substances as differentiated, modified, or controlled-release
pharmaceutical products that we will market as brand-name products.
We have recently completed a Phase III clinical study of one product intended to treat
spasticity in patients with multiple sclerosis. We have also recently filed an IND application to
allow us to begin clinical studies of another CNS product and are in the early exploratory phase
with respect to four other CNS products.
5
Competition
The pharmaceutical industry is highly competitive and is affected by new technologies, new
developments, government regulations, health care legislation, availability of financing, and other
factors. Many of our competitors have longer operating histories and substantially greater
financial, research and development, marketing, and other resources than we have. We compete with
numerous other companies that currently operate, or intend to operate, in the pharmaceutical
industry, including companies that are engaged in the development of controlled-release drug
delivery technologies and products, and other manufacturers that may decide to undertake
development of such products.
Due to our focus on relatively hard-to-replicate controlled-release products, however,
competition in the generic pharmaceutical market is sometimes limited to those competitors who
possess the appropriate drug delivery technology. The principal competitive factors in the generic
pharmaceutical market are:
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the ability to introduce generic versions of products promptly after a patent
expires;
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price;
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product quality;
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customer service (including maintenance of inventories for timely delivery);
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breadth of product line; and
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the ability to identify and market niche products.
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In the brand-name pharmaceutical market, we are not marketing our products. However, if we
obtain the FDA approval for, and start marketing, our own CNS brand-name pharmaceuticals, we expect
that competition will be limited to large pharmaceutical companies, other drug delivery companies,
and other specialty pharmaceutical companies that have focused on CNS disorders.
Sales and Marketing
We market and sell our generic pharmaceutical prescription drug products within the
continental United States of America and the Commonwealth of Puerto Rico. The customer base for
our products consists primarily of drug wholesalers, warehousing chain drug stores, mass
merchandisers, and mail-order pharmacies. We market our products both directly, through our Global
Division, and indirectly through our alliance agreements partners, as described below. With
respect to products sold directly, our top five customers accounted for the following percentages
of gross sales during 2007: Customer #1 36.9%, Customer #2 13.7%, Customer #3 13.2%,
Customer #4 10.7% and Customer #5 5.7%.
6
Rx Partner and OTC Partner Alliance Agreements
We currently have alliance agreements with Teva Pharmaceutical Industries, Ltd. (Teva), DAVA
Pharmaceuticals, Inc. (DAVA), Wyeth, and Schering-Plough, or their affiliates. On a combined
basis, the alliance agreements with Teva and DAVA are referred to as Rx Partners, and the
alliance agreements with Wyeth, Schering-Plough, and others are referred to as OTC Partners.
Under each of these Rx Partners and OTC Partners alliance agreements, our partner distributes a
specified product or products developed and manufactured by us, and we either receive payment on
delivery of the product, share in the resulting profits, or receive royalty or other payments from
our partners.
Rx Partners Alliance Agreements
Teva Agreement
We entered into the Strategic Alliance Agreement with Teva in June 2001 (Teva Agreement).
The Teva Agreement is our most significant alliance agreement, and it covers generic versions of
the following 11 controlled-release generic pharmaceutical branded and over-the-counter products
and a 12th product we have not yet publicly identified, as follows:
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Prilosec
®
10mg, 20mg and 40mg delayed released capsules
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Wellbutrin SR
®
100mg and 150mg extended release tablets
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Zyban
®
150mg extended release tablets
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Claritin-D
®
12-hour 120 mg 12-hour extended release tablets
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Claritin-D
®
24-hour 240mg 24-hour extended release tablets
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Claritin Reditabs
®
10mg orally disintegrating tablets
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Ditropan XL
®
5mg, 10mg and 15mg extended release tablets
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Glucophage XR
®
500mg extended release tablets
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Allegra D
®
60mg/120mg extended release tablets
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Concerta
®
18mg, 27mg, 36mg and 54mg extended release tablets
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Wellbutrin XL
®
150mg and 300mg extended release tablets
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The 12 covered products under the Teva Agreement represent 22 different product /strength
combinations, of which 13 have been approved by the FDA and are currently being marketed, 7 are
awaiting FDA approval and 2 are under development. With the exception of Glucophage
XR
®
, which Teva elected to develop and manufacture itself, and Welbutrin XL
®
150mg, for which product rights have been returned to us, and the Claritan
®
products
noted above, we manufacture and supply each of these products to Teva. Teva pays us a fixed
percentage of defined profits on its sales of products, except for the Claritan
®
products noted above, and reimburses us for our manufacturing costs, for a term of 10 years from
the initial commercialization of each product. Additionally, under the Teva Agreement, we share
with Teva the profits (up to a maximum of 50%) from the sale of the generic pharmaceutical
over-the-counter versions of the Claritan products noted above, sold through our OTC Partners
alliance agreements.
7
The Teva Agreement also included a number of additional obligations, terms, and conditions. Under
the Teva Agreement, Teva provided us with an interest-bearing advance deposit payable of $ 22
million for the purchase of exclusive marketing rights to the 12 products, contingent upon our
achievement of specified product-development milestones. To the extent the milestones were not
met, we were required to repay the advance deposit, except to the extent Teva elected to purchase
market exclusivity for particular products in exchange for forgiveness of specified amounts of the
deposit. Ultimately, none of the milestones were met by us, and Teva elected to purchase market
exclusivity for two of the products, forgiving $ 6 million of the advance deposit payable. We also
had the option to repay the remaining $ 16 million of the advance deposit payable in shares of our
common stock and did so in 2003 and 2004 with approximately 1.05 million shares of our common
stock. Also pursuant to the Teva Agreement, Teva in 2001 and 2002 purchased approximately 1.46
million of our common shares for $ 15 million. The Teva Agreement gave us the right to repurchase
one-sixth of the shares for nominal consideration upon the first commercial sale of specified
products, which we achieved and exercised in 2006. These and other significant provisions of the
Teva Agreement are discussed in detail in Item 15. Financial Statements and Exhibits Note 13 to
Consolidated Financial Statements.
DAVA Agreement
In November 2005, we entered into an alliance agreement with DAVA Pharmaceuticals, Inc.
(DAVA) related to the exclusive supply and distribution of 10mg, 20mg, 40mg and 80mg strengths of
our generic pharmaceutical of the branded OxyContin
®
product (DAVA Agreement). The
DAVA Agreement originally provided for DAVAs payment of an appointment fee in installments over
five years, specified acquisition prices for the various strengths of the product, and a specified
share of the net profits resulting from DAVAs sales of the product. We amended the DAVA Agreement
in February 2007 to eliminate future installments of the appointment fee in exchange for an
increased share of the net profits. As a result of the May 2007 settlement of litigation brought
by the OxyContin
®
patent holder, distribution of our product for the foreseeable future
terminated in early 2008.
OTC Partners Alliance Agreements
We have five OTC Partner alliance agreements, with different unrelated third-party
pharmaceutical entities, who are our marketing partners for our generic pharmaceutical
over-the-counter drug product versions of the Claritan products noted above. In addition to being
referred to on a combined basis as the OTC Partners alliance agreements, they are also referred to
as the OTC Agreements. Two of the OTC Agreements were terminated due to lower than planned sales
volume, one in May 2005 and another in November 2006, while a third OTC Agreement was terminated in
2007. The remaining two OTC Agreements are summarized as follows:
We have a semi-exclusive development, license and supply agreement with Wyeth relating to our
generic Claritin-D
®
12-hour extended release product. Under the agreement, which was
entered into in 2002 and included an upfront payment and product-development milestone payments, we
receive quarterly royalty payments based on Wyeths sales. Wyeth launched the 12-hour product in
May 2003 as its OTC Alavert D-12 Hour
®
. The Wyeth agreement terminates in April 2018.
We also entered into a non-exclusive licensing, contract manufacturing and supply agreement
with Schering-Plough relating to our generic Claritin-D
®
12-hour extended release
product in 2002. The Schering-Plough agreement included an upfront payment and milestone payments
by Schering-Plough and reimbursement of our manufacturing cost plus royalty payments based on
Schering-Ploughs sales of the product. Schering-Plough launched our product as its
Claritin-D
®
12-hour in March 2003. After our product supply obligations to
Schering-Plough end, which is expected in the first quarter of 2009, at which time Schering-Plough
is expected to manufacture the product, and the Schering-Plough agreement terminates two years
later, during which Schering-Plough will pay us a royalty fee for sales of their product.
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Promotional Services Agreements
Shire Co-Promotion Agreement
In 2006, we entered into a promotional services agreement with Shire Laboratories, Inc. under
which we provide promotional services, consisting of physician detail sales calls, to promote a
Shire branded CNS product. In exchange for our services, we receive fixed sales force fees based
on the number of sales force members providing the services and are eligible to receive contingent
payments based on the number of prescriptions filled for the product. We began providing services
under the agreement in July 2006 and will continue to do so through mid-2009.
Wyeth Co-Promotion Agreement
In 2008, we entered into a similar agreement with Wyeth under which we will begin promoting
one of its CNS products in mid-2009 for a period of three years.
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Manufacturing
We manufacture our finished dosage form products at our Hayward, California facility and use
our larger and lower-operating-cost Philadelphia, Pennsylvania facility to package, warehouse and
distribute the products. We began full-scale manufacturing in the Hayward facility in June 2002
and believe we have sufficient capacity to produce new products in the immediate future. During
the quarter ended June 30, 2008, we were using about 68% of the facilitys estimated annual
production capacity of up to approximately 1.5 billion tablets and capsules.
In the second half of 2007, we began construction of a new manufacturing facility in Taiwan at
an estimated cost of $ 25.0 million. We expect construction of the facility, which will have an
annual production capacity of approximately 450 million tablets and capsules, to be completed in 2009, equipment to be installed, validated and approved by the FDA during 2009, and
product shipment to begin in early 2010.
We maintain an inventory of our products in connection with our obligations under alliance
agreements. In addition, for products pending approval, we may produce batches of inventory to be
used in anticipation of the launch of the products. In the event that FDA approval is denied or
delayed, we could be exposed to the risk of this inventory becoming obsolete.
Raw Materials
The active chemical raw materials, essential to our business, are generally readily available
from multiple sources in the U.S. and throughout the world. Certain raw materials used in the
manufacture of our products are, however, available from limited sources and, in some cases, a
single source. Any curtailment in the availability of such raw materials could result in
production or other delays and, in the case of products for which only one raw material supplier
exists or has been approved by the FDA, could result in material loss of sales with consequent
adverse effects on our business and results of operations. Also, because raw material sources for
pharmaceutical products must generally be identified and approved by regulatory authorities,
changes in raw material suppliers may result in production delays, higher raw material costs, and
loss of sales and customers. We obtain a portion of our raw materials from foreign suppliers, and
our arrangements with such suppliers are subject to, among other risks, FDA approval, governmental
clearances, export duties, political instability, and restrictions on the transfers of funds.
Any inability to obtain raw materials on a timely basis, or any significant price increases
not passed on to customers, could have a material adverse effect on us. We may experience delays
from the lack of raw material availability in the future, which could have a material adverse
effect on us.
Quality Control
In connection with the manufacture of drugs, the FDA requires testing procedures to monitor
the quality of the product, as well as the consistency of its formulation. We maintain a quality
control laboratory that performs, among other things, analytical tests and measurements required to
control and release raw materials, in-process materials, and finished products, and to routinely
test marketed products to ensure they remain within specifications.
Quality monitoring and testing programs and procedures have been established by us in our
effort to assure that all critical activities associated with the production, control, and
distribution of our drug products will be carefully controlled and evaluated throughout the
process. By following a series of systematically organized steps and procedures, we seek to assure
that established quality standards will be achieved and built into the product.
Our policy is to continually seek to meet the highest quality standards, with the goal of
thereby assuring the quality, purity, safety and efficacy of each of our drug products. We believe
that adherence to high operational quality standards will also promote more efficient utilization
of personnel, materials and production capacity.
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Research and Development
We conduct most of our research and development activities at our facilities in Hayward,
California, with a staff of approximately 155. In addition, we have outsourced a number of
research and development projects to offshore laboratories.
We spent approximately $ 27.6 million, $ 40.0 million, $ 29.6 million and $ 26.1 million on
research and development activities during the six months ended June 30, 2008 and the fiscal years
ended December 31, 2007, 2006 and 2005, respectively.
Regulation
The manufacturing and distribution of pharmaceutical products are subject to extensive
regulation by the federal government, primarily through the FDA and the Drug Enforcement
Administration (DEA), and to a lesser extent by state and local governments. The Food, Drug, and
Cosmetic Act (FFDCA), Controlled Substances Act and other federal statutes and regulations govern
or influence the manufacture, labeling, testing, storage, record-keeping, approval, advertising and
promotion of our products. Facilities used in the manufacture, packaging, labeling and repackaging
of pharmaceutical products must be registered with the FDA and are subject to FDA inspection to
ensure that drug products are manufactured in accordance with current Good Manufacturing Practices.
Noncompliance with applicable requirements can result in product recalls, seizure of products,
injunctions, suspension of production, refusal of the government to enter into supply contracts or
to approve drug applications, civil penalties and criminal fines, and disgorgement of profits.
FDA approval is required before any new drug may be marketed, including new formulations,
strengths, dosage forms and generic versions of previously approved drugs. Generally, the
following two types of applications are used to obtain FDA approval of a new drug:
New Drug Application (NDA)
. For a drug product containing an active ingredient not previously
approved by the FDA, a prospective manufacturer must submit a complete application containing the
results of clinical studies supporting the drug products safety and efficacy. An Investigational
New Drug (IND) application must be submitted before the clinical studies may begin, and the
required clinical studies can take two to five years or more to complete. An NDA is also required
for a drug with a previously approved active ingredient if the drug will be used to treat an
indication for which the drug was not previously approved or if the dosage form, strength or method
of delivery is changed.
Abbreviated New Drug Application (ANDA)
. For a generic version of an approved druga drug
product that contains the same active ingredient as a drug previously approved by the FDA and is in
the same dosage form and strength, utilizes the same method of delivery and will be used to treat
the same indications as the approved productthe FDA ordinarily requires only an abbreviated
application that need not include clinical studies demonstrating safety and efficacy. An ANDA
requires only bioavailability data demonstrating that the generic formulation is bioequivalent to
the previously approved reference listed drug, indicating that the rate of absorption and levels
of concentration of the generic drug in the body do not show a significant difference from those of
the reference listed drug. The FDA currently takes an average of approximately 18-19 months, to
approve an ANDA.
Under the Hatch-Waxman Act, which established the procedures for obtaining approval of generic
drugs, an ANDA filer must make certain patent certifications that can result in significant delays
in obtaining FDA approval. If the applicant intends to challenge the validity or enforceability of
an existing patent covering the reference listed drug or asserts that its drug does not infringe
such patent, the applicant files a so-called Paragraph IV certification and notifies the patent
holder that it has done so, explaining the basis for its belief that the patent is not infringed or
is invalid or unenforceable. If the patent holder initiates a patent infringement suit within 45
days after receipt of the Paragraph IV Certification, the FDA is automatically prevented from
approving an ANDA until the earlier of 30 months after the date the Paragraph IV Certification is
given to the patent holder, expiration of the patents involved in the certification, or when the
infringement case is decided in our favor. In addition, the first company to file an ANDA for a
given drug containing a Paragraph IV certification can be awarded 180 days of market exclusivity
following approval of its ANDA, during which the FDA may not approve any other ANDAs for that drug
product.
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The Hatch-Waxman Act contains additional provisions that can delay the launch of generic
products. A five-year marketing exclusivity period is provided for new chemical compounds, and a
three-year marketing exclusivity period is provided for approved applications containing new
clinical investigations essential to an approval, such as a new indication for use, or new delivery
technologies, or new dosage forms. The three-year marketing exclusivity period applies to, among
other things, the development of a novel drug delivery system, as well as a new use. In addition,
companies can obtain six additional months of exclusivity if they perform pediatric studies of a
reference listed drug product. The marketing exclusivity provisions apply to both patented and
non-patented drug products. The Act also provides for patent term extensions to compensate for
patent protection lost due to time taken in conducting FDA required clinical studies and during FDA
review of NDAs. In addition, by virtue of the Uruguay Round Agreements Act of 1994 that ratified
the General Agreement on Tariffs and Trade, known as GATT, certain brand-name drug patent terms
have been extended to 20 years from the date of filing of the pertinent patent application (which
can be longer than the former patent term of 17 years from date of issuance).
The Generic Drug Enforcement Act of 1992 establishes penalties for wrongdoing in connection
with the development or submission of an ANDA. In general, FDA is authorized to temporarily bar
companies, or temporarily or permanently bar individuals, from submitting or assisting in the
submission of an ANDA, and to temporarily deny approval and suspend applications to market generic
drugs under certain circumstances. In addition to debarment, FDA has numerous discretionary
disciplinary powers, including the authority to withdraw approval of an ANDA or to approve an ANDA
under certain circumstances and to suspend the distribution of all drugs approved or developed in
connection with certain wrongful conduct.
We are subject to the Maximum Allowable Cost Regulations, which limit reimbursements for
certain generic prescription drugs under Medicare, Medicaid, and other programs to the lowest price
at which these drugs are generally available. In many instances, only generic prescription drugs
fall within the regulations limits. Generally, the pricing and promotion of, method of
reimbursement and fixing of reimbursement levels for, and the reporting to federal and state
agencies relating to drug products is under active review by federal, state and local governmental
entities, as well as by private third-party reimbursers and individuals under whistleblower
statutes. At present, the Justice Department and U.S. Attorneys Offices and State Attorneys
General have initiated investigations, reviews, and litigation into industry-wide pharmaceutical
pricing and promotional practices, and whistleblowers have filed qui tam suits. We cannot predict
the results of those reviews, investigations, and litigation, or their impact on our business.
Virtually every state, as well as the District of Columbia, has enacted legislation permitting
the substitution of equivalent generic prescription drugs for brand-name drugs where authorized or
not prohibited by the prescribing physician, and some states mandate generic substitution in
Medicaid programs.
In addition, numerous state and federal requirements exist for a variety of controlled
substances, such as narcotics, that may be part of our product formulations. The DEA, which has
authority similar to the FDAs and may also pursue monetary penalties, and other federal and state
regulatory agencies have far-reaching authority.
The State of California requires that any manufacturer, wholesaler, retailer or other entity
in California that sells, transfers or otherwise furnishes certain so-called precursor substances
must have a permit issued by the California Department of Justice, Bureau of Narcotic Enforcement.
The substances covered by this requirement include ephedrine, pseudoephedrine, norpseudoephedrine,
and phenylpropanolamine, among others. The Bureau has authority to issue, suspend and revoke
precursor permits, and a permit may be denied, revoked or suspended for various reasons, including
(i) failure to maintain effective controls against diversion of precursors to unauthorized persons
or entities; (ii) failure to comply with the Health and Safety Code provisions relating to
precursor substances, or any regulations adopted thereunder; (iii) commission of any act which
would demonstrate actual or potential unfitness to hold a permit in light of the public safety and
welfare, which act is substantially related to the qualifications, functions or duties of the
permit holder; or (iv) if any individual owner, manager, agent, representative or employee of the
permit applicant/permit holder willfully violates any federal, state or local criminal statute,
rule, or ordinance relating to the manufacture, maintenance, disposal, sale, transfer or furnishing
of any precursor substances.
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Environmental Laws
We are subject to comprehensive federal, state and local environmental laws and regulations
that govern, among other things, air polluting emissions, waste water discharges, solid and
hazardous waste disposal, and the remediation of contamination associated with current or past
generation handling and disposal activities, including the past practices of corporations as to
which we are the successor. We are subject periodically to environmental compliance reviews by
various environmental regulatory agencies.
Employees
As of June 30, 2008, we had 759 full-time employees, of which 366 were in operations, 155 in
research and development, 140 in the quality area, 66 in legal and administration, and 32 in sales
and marketing. None of our employees are subject to collective bargaining agreements with labor
unions, and we believe our employee relations are good.
13
Item 1A. Risk Factors.
An investment in our common stock involves a high degree of risk. In deciding whether to
invest in our common stock, you should consider carefully the following risk factors, as well as
the other information included in this registration statement. The materialization of any of these
risks could have a material adverse effect on our business, financial position and results of
operations. This registration statement contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to these differences include
those discussed in this Risk Factors section. See Forward-Looking Statements on page 1 of this
registration statement.
Risks Related to Our Business
We have experienced operating losses and negative cash flow from operations and our future
profitability is uncertain.
Although we recorded our first net income in 2007, we do not know whether our business will
continue to be profitable or generate positive cash flow, and our ability to remain profitable or
obtain positive cash flow is uncertain. As of June 30, 2008, our accumulated deficit was $ 41.7
million, and we had outstanding indebtedness in an aggregate principal amount of $ 83.7 million.
Through the date hereof, we have repurchased $ 62.25 million principal amount of our 3.5%
debentures, constituting a part of such indebtedness. To remain operational, we must, among other
things:
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obtain FDA approval of our products;
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successfully launch new products;
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prevail in patent infringement litigation in which we are involved;
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continue to generate or obtain sufficient capital on acceptable terms to fund our
operations; and
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comply with the many complex governmental regulations that deal with virtually every
aspect of our business activities.
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Our limited capital may make it difficult for us to repay indebtedness, or require us to modify our
business operations and plans by spending less money on research and development programs,
developing fewer products, and filing fewer drug applications with the FDA.
Prior to 2005, our cash used in operations exceeded cash generated from operations in each
period since our inception. At June 30, 2008, we had outstanding indebtedness of approximately
$ 83.7 million, which bears interest at rates ranging from 3.1% to 6.0% annually. In August and
September 2008, we repurchased in the aggregate $ 62.25 million principal amount of our 3.5%
debentures constituting a part of such indebtedness. For the quarter ended June 30, 2008 and the
year ended December 31, 2007, we paid interest on our indebtedness of approximately $ 2.0 million
and $ 4.6 million, respectively. Additionally, as of June 30, 2008, we had an accumulated
stockholders deficit of approximately $ 41.7 million. We may not be able to maintain adequate
capital at any given time or from time to time in the future, which could result in less money
being spent on research and development programs, fewer products being developed or at a slower
pace, and fewer drug applications being filed with the FDA.
If we are unable to continue to obtain financing, we may not be able to sustain our business
operations.
As of June 30, 2008, we had approximately $ 155.0 million of cash, cash equivalents and
short-term investments. In August and September 2008, we used approximately $ 62.25 from the
liquidation of our short-term investments to repurchase in the aggregate $ 62.25 million principal
amount of our 3.5% debentures. Although we expect to fund our operations, including planned
research and development and capital investments, with our cash, cash equivalents, short-term
investments and working capital generated from operations, we may seek additional financing through
alliances or equity or debt markets to fund future capital expenditures and to fund our research
and development. The exact amount and timing of future capital requirements will depend upon many
factors, including
14
continued progress with our research and development programs, expansion of these programs,
the approval and launch of new products, as well as the amount of revenues generated by our
existing products. We may not be successful in obtaining additional capital in amounts sufficient
to fund our operations. Additional financing also may not be available to us on favorable terms,
or at all. In the event that adequate funds are not available, our business, results of operations
and stock price may be adversely affected.
Any delays or unanticipated expenses in connection with the construction of our Taiwan facility
could have a material adverse effect on our results of operations, liquidity and financial
condition.
In the second half of 2007, we began construction of a new manufacturing facility in Taiwan at
an estimated cost of $ 25.0 million, of which we spent
approximately $ 8.2 million, in the aggregate,
in 2008 and 2007. No assurance can be given that we will timely complete the construction of the
facility or that its construction costs will not exceed any amounts budgeted by us. There can also
be no assurance that the facility will be approved by the FDA within the timeframe we expect, or at
all. In addition, there can be no assurance that the facility will become operational as
anticipated or ultimately result in profitable operations.
Our continued growth is dependent on our ability to continue to successfully introduce new products
to the market.
Sales of a limited number of our products often represent a significant portion of our
revenues in a given period. Revenue from newly launched products that we are the first to market
is typically relatively high during the period immediately following launch and can be expected
generally to decline over time. Revenue from generic drugs in general can also be expected to
decline over time. Our continued growth is therefore dependent upon our ability to continue to
successfully introduce new products. As of June 30, 2008, we had 19 applications pending at the
FDA for generic versions of brand-name pharmaceuticals. The FDA and the regulatory authorities may
not approve our products submitted to them or our other products under development. Additionally,
we may not successfully complete our development efforts. Even if the FDA approves our products,
we may not be able to market them if we do not prevail in the patent infringement litigation in
which we are involved. Our future results of operations will depend significantly upon our ability
to develop, receive FDA approval for, and market new pharmaceutical products or otherwise acquire
new products.
Our ability to develop or license, or otherwise acquire, and introduce new products on a timely
basis in relation to our competitors product introductions, all of which is subject to numerous
uncertainties.
Product development is inherently risky, especially for new drugs for which safety and
efficacy have not been established and the market is not yet proven. Likewise, product licensing
involves inherent risks including uncertainties due to matters that may affect the achievement of
milestones, as well as the possibility of contractual disagreements with regard to terms such as
license scope or termination rights. The development and commercialization process, particularly
with regard to new drugs, also requires substantial time, effort and financial resources. The
process of obtaining FDA approval to manufacture and market new and generic pharmaceutical products
is rigorous, time consuming, costly and largely unpredictable. We, or a partner, may not be
successful in obtaining FDA approval or in commercializing any of the products that we are
developing or licensing.
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Our approved products may not achieve expected levels of market acceptance.
Even if we are able to obtain regulatory approvals for our new products, the success of those
products is dependent upon market acceptance. Levels of market acceptance for our new products
could be affected by several factors, including:
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the availability of alternative products from our competitors;
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the prices of our products relative to those of our competitors;
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the timing of our market entry;
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the ability to market our products effectively at the retail level; and
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the acceptance of our products by government and private formularies.
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Some of these factors are not within our control, and our products may not achieve expected levels
of market acceptance. Additionally, continuing and increasingly sophisticated studies of the
proper utilization, safety and efficacy of pharmaceutical products are being conducted by the
industry, government agencies and others can call into question the utilization, safety and
efficacy of previously marketed products. In some cases, studies have resulted, and may in the
future result, in the discontinuance of product marketing or other risk management programs such as
the need for a patient registry.
We expend a significant amount of resources on research and development efforts and may not lead to
successful product introductions.
We conduct research and development primarily to enable us to manufacture and market
pharmaceuticals in accordance with FDA regulations. We spent approximately $ 27.6 million, $ 40.0
million, $ 29.6 million and $ 26.1 million on research and development activities during the six
months ended June 30, 2008 and the fiscal years ended December 31, 2007, 2006 and 2005,
respectively. We are required to obtain FDA approval before marketing our drug products. The FDA
approval process is costly and time consuming. Typically, research expenses related to the
development of innovative compounds and the filing of NDAs are significantly greater than those
expenses associated with ANDAs. As we continue to develop new products, our research expenses will
likely increase. Because of the inherent risk associated with research and development efforts in
our industry, particularly with respect to new drugs, our research and development expenditures may
not result in the successful introduction of FDA-approved new bioequivalent pharmaceuticals.
Our bioequivalence studies, other clinical studies and /or other data may not result in FDA
approval to market our new drug products. While we believe that the FDAs ANDA procedures will
apply to our bioequivalent versions of controlled-release drugs, these drugs may not be suitable
for, or approved as part of, these abbreviated applications. In addition, even if our drug
products are suitable for FDA approval by filing an ANDA, the abbreviated applications are costly
and time consuming to complete. After we submit an NDA or ANDA, the FDA may require that we
conduct additional studies, and as a result, we may be unable to reasonably determine the total
research and development costs to develop a particular product. Also, for products pending
approval, we may obtain raw materials or produce batches of inventory to be used in anticipation of
the products launch. In the event that FDA approval is denied or delayed, we could be exposed to
the risk of this inventory becoming obsolete. Finally, we cannot be certain that any investment
made in developing products or product-delivery technologies will be recovered, even if we are
successful in commercialization. To the extent that we expend significant resources on research and
development efforts and are not able, ultimately, to introduce successful new products or new
delivery technologies as a result of those efforts, we will be unable to recover those
expenditures.
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The time necessary to develop generic drugs may adversely affect whether, and the extent to which,
we receive a return on our capital.
We begin our development activities for a new generic drug product several years in advance of
the patent expiration date of the brand-name drug equivalent. The development process, including
drug formulation, testing, and FDA review and approval, often takes three or more years. This
process requires that we expend considerable capital to pursue activities that do not yield an
immediate or near-term return. Also, because of the significant time necessary to develop a
product, the actual market for a product at the time it is available for sale may be significantly
less than the originally projected market for the product. If this were to occur, our potential
return on our investment in developing the product, if approved for marketing by the FDA, would be
adversely affected and we may never receive a return on our investment in the product. It is also
possible for the manufacturer of the brand-name product for which we are developing a generic drug
to obtain approvals from the FDA to switch the brand-name drug from the prescription market to the
over-the-counter market. If this were to occur, we would be prohibited from marketing our product
other than as an over-the-counter drug, in which case revenues could be substantially less than we
anticipated.
We face intense competition from both brand-name and generic manufacturers.
The pharmaceutical industry is highly competitive and many of our competitors have longer
operating histories and substantially greater financial, research and development, marketing, and
other resources than we have. In addition, pharmaceutical manufacturers customer base consists of
an increasingly limited number of large pharmaceutical wholesalers, chain drug stores that
warehouse products, mass merchandisers, mail-order pharmacies. Our competitors may be able to
develop products and delivery technologies competitive with or more effective or less expensive
than our own for many reasons, including that they may have:
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proprietary processes or delivery systems;
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larger research and development and marketing staffs;
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larger production capabilities in a particular therapeutic area;
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more experience in preclinical testing and human clinical trials;
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more experience in obtaining required regulatory approvals, including FDA approval;
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more products; or
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more experience in developing new drugs and financial resources, particularly with
regard to brand manufacturers.
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The FDA approval process often results in the FDA granting final approval to a number of ANDAs
for a given product at the time a patent claim for a corresponding brand product or other market
exclusivity expires. This often forces us to face immediate competition when we introduce a
generic product into the market. As competition from other manufacturers intensifies, selling
prices and gross profit margins often decline, which has been our experience with our existing
products. Moreover, with respect to products which we file a Paragraph IV certification, if we are
not the first ANDA filer challenging a listed patent for a product, we are at a significant
disadvantage to the competitor that first filed an ANDA for that product containing such a
challenge, which is awarded 180 days of market exclusivity for the product. See Item 1. Business
Regulation. Additionally, ANDA approvals often continue to be granted for a given product
subsequent to the initial launch of the generic product. These circumstances generally result in
significantly lower prices and reduced margins for generic products compared to brand products.
New generic market entrants generally cause continued price and margin erosion over the generic
product life cycle.
In addition to the competition we face from other generic manufacturers, our competition from
brand-name manufacturers involves intensive efforts to thwart generic competition, including sales
of their branded products as authorized generics, obtaining new patents on drugs whose original
patent protection is about to expire, filing patent-infringement suits that automatically delay FDA
approval of generics, filing citizen petitions contesting FDA
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approvals of generics on alleged health and safety grounds, developing next generation
versions of products that reduce demand for generic versions we are developing, changing product
claims and labeling, and marketing as over-the-counter branded products about to face generic
competition.
Approvals for our new drug products may be delayed or become more difficult to obtain if the FDA
institutes changes to its approval requirements.
Some abbreviated application procedures for controlled-release drugs and other products,
including those related to our ANDA filings, are or may become, the subject of petitions filed by
brand-name drug manufacturers seeking changes from the FDA in the approval requirements for
particular drugs as part of their strategy to thwart generic competition. We cannot predict
whether the FDA will make any changes to its abbreviated application requirements as a result of
these petitions, or the effect that any changes may have on us. Any changes in FDA regulations may
make it more difficult for us to file ANDAs or obtain approval of our ANDAs and generate revenues
and thus may materially harm our business and financial results.
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Our inexperience in conducting clinical trials and submitting New Drug Applications and
uncertainties inherent in clinical trials could result in delays or failure in development and
commercialization of our own branded products, which could have a material adverse effect on our
results of operations, liquidity, financial condition, and our growth prospects.
With respect to products that we develop that are not generic equivalents of existing
brand-name drugs and thus do not qualify for the FDAs abbreviated application procedures, we must
demonstrate through clinical trials that these products are safe and effective for use. We have
only limited experience in conducting and supervising clinical trials. The process of completing
clinical trials and preparing an NDA may take several years and requires substantial resources.
Our studies and filings may not result in FDA approval to market our new drug products and, if the
FDA grants approval, we cannot predict the timing of any approval. There are substantial filing
fees for NDAs that are not refundable if FDA approval is not obtained.
Additionally, a number of difficulties and uncertainties are associated with clinical trials.
The results of clinical trials may not be indicative of results that would be obtained from
large-scale testing. Clinical trials are often conducted with patients having advanced stages of
disease and, as a result, during the course of treatment these patients can die or suffer adverse
medical effects for reasons that may not be related to the pharmaceutical agents being tested, but
which nevertheless affect the clinical trial results. In addition, side effects experienced by the
patients may cause delay of approval or limited profile of an approved product. Moreover, our
clinical trials may not demonstrate sufficient safety and efficacy to obtain FDA approval.
There is no assurance that our expenses related to NDAs and clinical trials will lead to the
development of brand-name drugs that will generate revenues in the near future. Delays or failure
in the development and commercialization of our own branded products could have a material adverse
effect on our results of operations, liquidity and financial condition.
Failure can occur any time during the clinical trial process and in addition, the results from
early clinical trials may not be predictive of results obtained in later and larger clinical
trials, and product candidates in later clinical trials may fail to show the desired safety or
efficacy despite having progressed successfully through earlier clinical testing. A number of
companies in the pharmaceutical industry, including us, have suffered significant setbacks in
clinical trials, even in advanced clinical trials after showing positive results in earlier
clinical trials. The completion of clinical trials for our product candidates may be delayed or
halted for many reasons, including:
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delays in patient enrollment, and variability in the number and types of patients available for clinical trials;
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regulators or institutional review boards may not allow us to commence or continue a clinical trial;
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our inability, or the inability of our partners, to manufacture or obtain from third parties materials sufficient to
complete our clinical trials;
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delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective
clinical trial sites;
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risks associated with trial design, which may result in a failure of the trial to show statistically significant results
even if the product candidate is effective;
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difficulty in maintaining contact with patients after treatment commences, resulting in incomplete data;
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poor effectiveness of product candidates during clinical trials;
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safety issues, including adverse events associated with product candidates;
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the failure of patients to complete clinical trials due to adverse side effects, dissatisfaction with the product
candidate, or other reasons;
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governmental or regulatory delays or changes in regulatory requirements, policy and guidelines; and
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varying interpretation of data by the FDA or foreign regulatory agencies.
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In addition, our product candidates could be subject to competition for clinical study sites
and patients from other therapies under development which may delay the enrollment in or initiation
of our clinical trials. Many of these companies have more significant resources than we do.
19
The FDA or foreign regulatory authorities may require us to conduct unanticipated additional
clinical trials, which could result in additional expense and delays in bringing our product
candidates to market. Any failure or delay in completing clinical trials for our product
candidates would prevent or delay the commercialization of our product candidates. There is no
assurance our expenses related to NDAs and clinical trials will lead to the development of
brand-name drugs which will generate revenues in the near future. Delays or failure in the
development and commercialization of our own branded products could have a material adverse effect
on our results of operations, liquidity, financial condition, and our growth prospects.
We rely on third parties to conduct clinical trials for our product candidates, and if they do not
properly and successfully perform their legal and regulatory obligations, as well as their
contractual obligations to us, we may not be able to obtain regulatory approvals for our product
candidates.
We design the clinical trials for our product candidates, but rely on contract research
organizations and other third parties to assist us in managing, monitoring and otherwise carrying
out these trials, including with respect to site selection, contract negotiation and data
management. We do not control these third parties and, as a result, they may not treat our clinical
studies as their highest priority, or in the manner in which we would prefer, which could result in
delays.
Although we rely on third parties to conduct our clinical trials, we are responsible for
confirming that each of our clinical trials is conducted in accordance with our general
investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to
comply with regulations and standards, commonly referred to as good clinical practices, for
conducting, recording and reporting the results of clinical trials to ensure that the data and
results are credible and accurate and that the trial participants are adequately protected. Our
reliance on third parties does not relieve us of these responsibilities and requirements. The FDA
enforces good clinical practices through periodic inspections of trial sponsors, principal
investigators and trial sites. If we, our contract research organizations or our study sites fail
to comply with applicable good clinical practices, the clinical data generated in our clinical
trials may be deemed unreliable and the FDA may require us to perform additional clinical trials
before approving our marketing applications. We cannot assure you that, upon inspection, the FDA
will determine that any of our clinical trials comply with good clinical practices. In addition,
our clinical trials must be conducted with product manufactured under the FDAs current Good
Manufacturing Practices, or cGMP, regulations. Our failure, or the failure of our contract
manufacturers if any are involved in the process, to comply with these regulations may require us
to repeat clinical trials, which would delay the regulatory approval process.
If third parties do not successfully carry out their duties under their agreements with us, if
the quality or accuracy of the data they obtain is compromised due to failure to adhere to our
clinical protocols or regulatory requirements, or if they otherwise fail to comply with clinical
trial protocols or meet expected deadlines, our clinical trials may not meet regulatory
requirements. If our clinical trials do not meet regulatory requirements or if these third parties
need to be replaced, our clinical trials may be extended, delayed, suspended or terminated. If any
of these events occur, we may not be able to obtain regulatory approval of our product candidates.
20
We are routinely subject to patent litigation that can delay or prevent our commercialization of
products, force us to incur substantial expense to defend, and expose us to substantial liability.
Brand-name pharmaceutical manufacturers routinely bring patent-infringement litigation against
ANDA applicants seeking FDA approval to manufacture and market generic forms of their branded
products. Likewise, patent holders may bring patent infringement suits against companies that are
currently marketing and selling their approved generic products. Such litigation usually involves
significant expense and can delay or prevent introduction or sale of our products.
There may also be situations in which we decide to market and sell products prior to the
resolution of patent-infringement claims against us. Because patent infringement litigation
involves many complex technical and legal issues and its outcome is often difficult to predict, the
risk involved in doing so can be substantial, because the remedies available to the owner of a
patent in the event of an unfavorable outcome include damages measured by the profits lost by the
patent owner rather than the profits earned by the infringer. In the case of a willful
infringement, the definition of which is subjective, such damages may be trebled. Moreover,
because generic products are typically sold at a discount from the price of the branded product,
patented brand products generally realize a substantially higher profit margin than generics.
A substantial portion of our total revenues is derived from sales to a limited number of customers.
We derive a substantial portion of our revenue from sales to a limited number of customers.
Our five major customers, McKesson, Amerisource-Bergen, Cardinal Health, Teva, and DAVA, accounted
for 82% and 80% of revenue from direct sales for the six months ended June 30, 2008 and the year
ended December 31, 2007, respectively. A reduction in or loss of business with any one of these
customers, or any failure of a customer to pay us on a timely basis, would adversely affect our
business.
We are dependent on a small number of suppliers for our raw materials that we use to manufacture
our products.
We typically purchase the ingredients, other materials and supplies that we use in the
manufacturing of our products, as well as certain finished products, from a small number of foreign
and domestic suppliers. The FDA requires identification of raw material suppliers in applications
for approval of drug products. If raw materials were unavailable from a specified supplier or the
supplier were not in compliance with FDA or other applicable requirements, the FDA approval of a
new supplier could delay the manufacture of the drug involved. As a result, there is no guarantee
we will always have timely and sufficient access to a required raw material or other product. In
addition, some materials used in our products are currently available from only one supplier or a
limited number of suppliers. Generally, we would need as much as 18 months to find and qualify a
new sole-source supplier. If we receive less than one years termination notice from a sole-source
supplier that it intends to cease supplying raw materials, it could result in disruption of our
ability to produce the drug involved. Further, a significant portion of our raw materials may be
available only from foreign sources. Foreign sources can be subject to the special risks of doing
business abroad, including:
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greater possibility for disruption due to transportation or communication problems;
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the relative instability of some foreign governments and economies;
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interim price volatility based on labor unrest, materials or equipment shortages,
export duties, restrictions on the transfer of funds, or fluctuations in currency
exchange rates; and
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uncertainty regarding recourse to a dependable legal system for the enforcement of
contracts and other rights.
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Any inability to obtain raw materials on a timely basis, or any significant price increases
which cannot be passed on to customers, could have a material adverse effect on us.
21
Many third-party suppliers are subject to governmental regulation and, accordingly, we are
dependent on the regulatory compliance of these third parties. We also depend on the strength,
enforceability and terms of our various contracts with these third-party suppliers.
We depend on qualified scientific and technical employees, and our limited resources may make it
more difficult to attract and retain these personnel.
Because of the specialized scientific nature of our business, we are highly dependent upon our
ability to continue to attract and retain qualified scientific and technical personnel. Loss of
the services of, or failure to recruit, key scientific and technical personnel would be
significantly detrimental to our product-development programs. Our small size and limited
financial and other resources may make it more difficult for us to attract and retain qualified
officers and qualified scientific and technical personnel.
22
We may be adversely affected by alliance agreements or licensing arrangements we make with other
companies.
We have entered into several alliance agreements or license agreements with respect to certain
of our products and may enter into similar agreements in the future. These arrangements may
require us to relinquish rights to certain of our technologies or product candidates, or to grant
licenses on terms that ultimately may prove to be unfavorable to us, either of which could reduce
the value of our common stock. Relationships with alliance agreements partners may include risks
due to incomplete information regarding the marketplace, inventories, and commercial strategies of
our alliance agreements partners, and our alliance agreements and /or other licensing agreements
may be the subject of contractual disputes. If we or our alliance agreements partners are not
successful in commercializing the alliance agreements product(s), such commercial failure could
adversely affect our business.
We are subject to significant costs and uncertainties related to compliance with the extensive
regulations that govern the manufacturing, labeling, distribution, and promotion of pharmaceutical
products as well as environmental, safety and health regulations.
The manufacturing, distribution, processing, formulation, packaging, labeling and advertising
of our products are subject to extensive regulation by federal agencies, including the FDA, the
Drug Enforcement Administration (DEA), the Federal Trade Commission (FTC), the Consumer Product
Safety Commission and the Environmental Protection Agency (EPA), among others. We are also subject
to state and local laws, regulations and agencies in California, Pennsylvania and elsewhere.
Compliance with these regulations requires substantial expenditures of time, money and effort in
such areas as production and quality control to ensure full technical compliance. Failure to
comply with FDA and other governmental regulations can result in fines, disgorgement, unanticipated
compliance expenditures, recall or seizure of products, total or partial suspension of production
or distribution, suspension of the FDAs review of NDAs or ANDAs, enforcement actions, injunctions
and criminal prosecution.
We cannot accurately predict the outcome or timing of future expenditures that we may be
required to make in order to comply with the federal, state, and local environmental, safety, and
health laws and regulations that are applicable to our operations and facilities. We are also
subject to potential liability for the remediation of contamination associated with both present
and past hazardous waste generation, handling, and disposal activities. We are subject
periodically to environmental compliance reviews by environmental, safety, and health regulatory
agencies. Environmental laws have changed in recent years and we may become subject to stricter
environmental standards in the future and face larger capital expenditures in order to comply with
environmental laws.
We may experience reductions in the levels of reimbursement for pharmaceutical products by
governmental authorities, HMOs or other third-party payers. Any such reductions could have a
material adverse effect on our business, financial position and results of operations.
Various governmental authorities and private health insurers and other organizations, such as
HMOs, provide reimbursement to consumers for the cost of certain pharmaceutical products. Demand
for our products depends in part on the extent to which such reimbursement is available. In
addition, third-party payors are attempting to control costs by limiting the level of reimbursement
for medical products, including pharmaceuticals, and increasingly challenge the pricing of these
products which may adversely affect the pricing of our products. Moreover, health care reform has
been, and is expected to continue to be, an area of national and state focus, which could result in
the adoption of measures that could adversely affect the pricing of pharmaceuticals or the amount
of reimbursement available from third-party payers for our products.
23
Reporting and payment obligations under the Medicaid rebate program and other government programs
are complex, and failure to comply could result in sanctions and penalties or we could be required
to reimburse the government for underpayments, which could have a material adverse affect on our
business.
Medicaid and other government reporting and payment obligations are highly complex and
somewhat ambiguous. State attorneys general and the U.S. Department of Justice have brought suits
or instituted investigations against a number of other pharmaceutical companies for failure to
comply with Medicaid and other government reporting obligations. Our methodologies for making
these calculations are complex and the judgments involved require us to make subjective decisions,
such that these calculations are subject to the risk of errors. Government agencies may impose
civil or criminal sanctions, including fines, penalties and possible exclusion from federal health
care programs, including Medicaid and Medicare. Any such penalties or sanctions could have a
material adverse effect on our business.
Legislative or regulatory programs that may influence prices of prescription drugs could have a
material adverse effect on our business.
Current or future federal or state laws and regulations may influence the prices of drugs and,
therefore, could adversely affect the prices that we receive for our products. Programs in
existence in certain states seek to set prices of all drugs sold within those states through the
regulation and administration of the sale of prescription drugs. Expansion of these programs, in
particular, state Medicaid programs, or changes required in the way in which Medicaid rebates are
calculated under such programs, could adversely affect the price we receive for our products and
could have a material adverse effect on our business, financial position and results of operations.
Decreases in health care reimbursements could limit our ability to sell our products or decrease
our revenues.
We depend on our intellectual property, and our future success is dependent on our ability to
protect our intellectual property and not infringe on the rights of others.
We believe intellectual property protection is important to our business and that our future
success will depend, in part, on our ability to obtain patents, maintain trade secret protection,
and operate without infringing on the rights of others. The issuance of a patent is not conclusive
as to its validity or as to the enforceable scope of the claims of the patent. In addition, the
issuance of a patent to us does not mean that our products do not infringe the patents of others.
We cannot assure you that:
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our future patents will prevent other companies from developing similar or
functionally equivalent products or from successfully challenging the validity of the
patents we obtain;
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any of our future processes or products will be patentable;
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any pending patent applications will be issued as patents in any or all appropriate
jurisdictions;
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our processes or products will not infringe upon the patents of third parties; or
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we will have the resources to defend against charges of patent infringement by third
parties or to protect our own rights against infringement by third parties.
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We rely on trade secrets and proprietary knowledge which we generally seek to protect by
confidentiality and non-disclosure agreements with employees, consultants, licensees and
pharmaceutical companies. If these agreements are breached, we may not have adequate remedies for
any breach, and our trade secrets may otherwise become known by our competitors.
24
We are subject to potential product liability claims that can result in substantial litigation
costs and liability.
The design, development and manufacture of pharmaceutical products involve an inherent risk of
product liability claims and associated adverse publicity. Product liability insurance coverage is
expensive, difficult to obtain, and may not be available in the future on acceptable terms, or at
all. Although we currently carry such insurance, we believe that no reasonable amount of insurance
can fully protect against all such risks because of the potential liability inherent in the
business of producing pharmaceutical products for human consumption.
If we fail to maintain an effective system of internal control over financial reporting, we may not
be able to accurately report our financial results or prevent fraud.
The existence of material weaknesses in our internal control over financial reporting may
affect our ability to obtain audited financial information and comply with applicable SEC reporting
requirements. We identified five material weaknesses in our internal control over financial
reporting relating to our Teva Agreement; our financial close and reporting process relating to our
inability to file the required periodic financial reports with the SEC within the prescribed time
periods from 2005 through the second quarter of 2008; our billing controls for non-electronic data
interchange orders; our inventory valuation procedures; and our reserve for shelf-stock
adjustments. In addition, we restated our financial statements for the fiscal year ended December
31, 2003 to give effect to the restatement of accounting for the Teva Agreement, the OTC
Agreements, common stock purchase warrants issued in May 2003, stock-based compensation, accrued
legal fee operating expense, and accrued interest expense for the fiscal year ended December 31,
2003.
While we believe the internal control material weaknesses discussed above have been
remediated, there can be no assurance our independent registered public accounting firm will agree
with our assessment of all material weaknesses have been remediated or we may identify additional
internal control material weaknesses in the future, as a result of which current and potential
stockholders and alliance agreements partners could lose confidence in our financial reporting,
which could harm our business, the market price of our common stock, and our ability to retain our
current alliance agreements partners, and to obtain new alliance agreement partners.
We face risks relating to our goodwill and intangibles.
At June 30, 2008, our goodwill, originally generated as a result of the December 1999 merger
of Global Pharmaceuticals Corporation and Impax Pharmaceuticals, Inc., was approximately $ 27.6
million, or approximately 5.3% of our total assets. We may never realize the value of our goodwill
and intangibles. We will continue to evaluate, on a regular basis, whether events or circumstances
have occurred to indicate all, or a portion, of the carrying amount of goodwill may no longer be
recoverable, in which case an impairment charge to earnings would become necessary. Although as of
December 31, 2007, the carrying value of goodwill was not impaired based on our assessment
performed in accordance with GAAP, any such future determination requiring the write-off of a
significant portion of carrying value of goodwill could have a material adverse effect on our
financial condition or results of operations.
25
Our revenues and operating income could fluctuate significantly.
Our revenues and operating results may vary significantly from quarter to quarter as well as
in comparison to the corresponding quarter of the preceding year. Variations may result from,
among other factors:
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the timing of FDA approvals we receive;
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the timing of process validation for particular generic drug products;
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the timing of product launches;
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the introduction of new products by others that render our products obsolete or
noncompetitive;
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the ability to maintain selling prices and gross margins on our products;
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the outcome of our patent infringement litigation; and
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the addition or loss of customers.
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If we are unable to manage our growth, our business will suffer.
We have experienced rapid growth in the past several years and anticipate continued rapid
expansion in the future. The number of ANDAs pending approval at the FDA has increased from 11 at
June 30, 2001 to 19 at June 30, 2008. This growth has required us to expand, upgrade, and improve
our administrative, operational, and management systems, internal controls and resources. We
anticipate additional growth in connection with the expansion of our manufacturing operations,
development of our brand-name products, and our marketing and sales efforts for the products we
develop. Although we cannot assure you that we will, in fact, grow as we expect, if we fail to
manage growth effectively or to develop a successful marketing approach, our business and financial
results will be materially harmed.
There are inherent uncertainties involved in estimates, judgments and assumptions used in the
preparation of financial statements in accordance with GAAP. Any future changes in estimates,
judgments and assumptions used or necessary revisions to prior estimates, judgments or assumptions
could lead to a restatement of our results.
The consolidated and condensed consolidated financial statements included in this registration
statement are prepared in accordance with GAAP. This involves making estimates, judgments and
assumptions that affect reported amounts of assets (including intangible assets), liabilities,
revenues, expenses (including acquired in process research and development) and income. Estimates,
judgments and assumptions are inherently subject to change in the future and any necessary
revisions to prior estimates, judgments or assumptions could lead to a restatement. Any such
changes could result in corresponding changes to the amounts of assets (including goodwill and
other intangible assets), liabilities, revenues, expenses (including acquired in process research
and development) and income.
Terrorist attacks and other acts of violence or war may adversely affect our business.
Terrorist attacks may negatively affect our operations. These attacks or armed conflicts may
directly affect our physical facilities or those of our suppliers or customers and may further
limit or delay purchasing decisions of our customers. Furthermore, these attacks may make the
transportation of our products more difficult and more expensive, and ultimately affect our sales.
We carry insurance coverage on our facilities of types and in amounts that we believe are in
line with coverage customarily obtained by owners of similar properties. We continue to monitor the
state of the insurance market in general and the scope and cost of coverage for acts of terrorism
in particular, but we cannot anticipate what coverage will be available on commercially reasonable
terms in future policy years. Currently, we do not carry terrorism insurance coverage. If we
experience a loss that is uninsured or that exceeds policy limits, we could lose the capital
invested in the damaged facilities, as well as the anticipated future net sales from those
facilities.
26
Because of the location of our manufacturing and research and development facilities, our
operations could be interrupted by an earthquake.
Our corporate headquarters, manufacturing operations in California, and research and
development activities related to process technologies are located near major earthquake fault
lines. Although we have other facilities, we produce a substantial portion of our products at our
California facility. A disruption at these California facilities due to an earthquake or other
natural disaster, even on a short-term basis, could impair our ability to produce and ship products
to the market on a timely basis. In addition, we could experience a destruction of facilities
which would be costly to rebuild, or loss of life, all of which could materially adversely affect
our business and results of operations.
We are a defendant in securities litigation that exposes us to liability and could result in the
diversion of managements attention to our business.
We and current and former members of our senior management are defendants in a consolidated
class action brought on behalf of purchasers of our common stock between May 5 and November 3, 2004
alleging that, based upon the restatement of our results for the first two quarters of 2004, we
filed false and misleading financial statements for those two quarters, thereby artificially
inflating the market value of our stock. The pendency of this action could result in a significant
diversion of managements time and attention from the management of our business, and any expense
and any recovery in this action in excess of our insurance coverage could adversely affect our
financial results.
27
Risks Related to Our Stock
There is currently no market for our common stock.
Because we were unable to file our periodic reports with the SEC subsequent to our quarterly
report for the third quarter of 2004, our common stock was delisted by The NASDAQ Stock Market in
August 2005. From that time through December 29, 2006, the stock was quoted in the Pink
Sheets
®
, to which dealers submitted daily bid and asked prices for the stock. On
December 29, 2006, the SEC suspended all trading in the stock through January 16, 2007 and
instituted an administrative proceeding to determine whether, in light of our reporting
delinquency, to suspend or revoke the registration of our common stock under Section 12 of the
Exchange Act. Beginning January 17, 2007, our stock was again quoted in the Pink
Sheets
®
, but from that time forward dealers were permitted to publish quotations only on
behalf of customers that represented such customers indications of interest and did not involve
dealers solicitation of such interest. On May 23, 2008, the SEC revoked the registration of our
stock, and since that time brokers and dealers have been prohibited from effecting transactions in
our stock.
We expect that our stock will again be quoted in the Pink Sheets
®
following the
effectiveness of this registration statement. While we intend to apply for relisting of our stock
on The NASDAQ Stock Market once unrestricted trading in the stock is again permitted, there is no
assurance that, and we cannot predict when, the stock will again trade on The NASDAQ Stock Market
or any other exchange.
Our stockholders may sustain future dilution in ownership as a result of the terms of some of our
outstanding securities or future issuances of securities.
We may need to raise additional capital in the future to fund our operations and planned
expansion. To the extent we raise additional capital by issuing equity securities or securities
convertible into or exchangeable for equity securities, ownership dilution to our stockholders will
result. As of the date hereof, there were outstanding: $ 12.8 million of our 3.5% Debentures
convertible into 616,240 shares of common stock, subject to adjustment, and as of June 30, 2008,
there were also outstanding options to purchase an additional 9,133,285 shares, of which 6,910,118
are exercisable, and 384,843 shares of unvested restricted stock under our long-term incentive
compensation program. To the extent that these options are exercised, debentures converted and
shares of restricted stock issued, stockholders ownership interest in our common stock will be
diluted.
28
If shares of our common stock are listed or quoted on a public market, our stock price is likely to
be volatile.
The stock market has, from time to time, experienced significant price and volume fluctuations
that may be unrelated to the operating performance of particular companies. In addition, the
market price of our common stock, like the stock price of many publicly traded specialty
pharmaceutical companies, will likely be volatile. For example, the sale price of our stock during
the fiscal years ended December 31, 2007 and 2006 ranged from a high of $ 12.40 during the quarter
ended September 30, 2007 to a low of $ 4.25 during the quarter ended September 30, 2006. At
present, our stock is not traded on any exchange or quoted on any other public market.
Prices of our common stock may be influenced by many factors, including:
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our ability to maintain compliance with SEC reporting requirements;
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our ability to relist our common stock on The NASDAQ Stock Market or another
exchange, and maintain such listing;
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investor perception of us;
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analyst recommendations;
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market conditions relating to specialty pharmaceutical companies;
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announcements of new products by us or our competitors;
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publicity regarding actual or potential development relating to products under
development by us or our competitors;
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developments, disputes or litigation concerning patent or proprietary rights;
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delays in the development or approval of our product candidates;
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regulatory developments;
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period to period fluctuations in our financial results and those of our competitors;
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future sales of substantial amounts of common stock by stockholders; and
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economic and other external factors.
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29
We may in the future issue shares of preferred stock which could adversely affect the rights of
holders of our common stock and the value of our common stock.
Our board of directors has the authority to issue up to 2,000,000 shares of our preferred
stock and to determine the price, rights, preferences, and privileges of those shares without any
further vote or action by the stockholders. Although we have no preferred stock outstanding,
preferred stock issued in the future could adversely affect the rights and interests of holders of
common stock by:
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exercising voting, redemption, and conversion rights to the detriment of the holders
of common stock;
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receiving preferences over the holders of common stock regarding our assets in the
event of our dissolution or liquidation;
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delaying, deferring, or preventing a change in control of our company, even when
holders of common stock may desire to effect such a transaction;
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discouraging bids for our common stock at a premium over the market price of the
common stock; and
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otherwise adversely affecting the market price of the common stock.
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We do not pay dividends on our common stock and do not anticipate doing so in the foreseeable
future.
We have not paid any cash dividends on our common stock and we do not plan to pay any cash
dividends in the foreseeable future. We plan to retain any earnings for the operation and
expansion of our business. As a Delaware corporation, we may not declare or pay a dividend on our
capital stock if the amount paid exceeds an amount equal to the surplus, which represents the
excess of our net assets over paid-in-capital or, if there is no surplus, our net profits for the
current or immediately preceding fiscal year. In addition, our loan agreement prohibits the
payment of dividends without the lenders consent.
30
Item 2. Financial Information.
Selected Financial Data
The following selected consolidated financial data should be read together with our
consolidated financial statements and accompanying notes and Managements Discussion and Analysis
of Financial Condition and Results of Operations appearing elsewhere in this registration
statement. The selected consolidated financial data in this section are not intended to replace
our consolidated financial statements and the accompanying notes. Our historical results are not
necessarily indicative of our future results.
The selected consolidated financial data set forth below are derived from our consolidated
financial statements. The consolidated statements of operations data for the years ended December
31, 2007, 2006 and 2005 and the consolidated balance sheet data as of December 31, 2007, 2006 and
2005 are derived from our audited consolidated financial statements included elsewhere in this
registration statement. The consolidated statement of operations data for the six months ended
June 30, 2008 and June 30, 2007 and the consolidated balance sheet data as of June 30, 2008 have
been derived from our unaudited interim consolidated financial statements and related notes
appearing elsewhere in this registration statement. The unaudited consolidated financial
statements have been prepared on a basis consistent with our audited consolidated financial
statements contained in this registration statement and include, in the opinion of management, all
adjustments necessary for the fair presentation of our financial position and results of operations
for these periods.
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Six Months Ended
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June 30,
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Fiscal Year Ended December 31,
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Statements of Operations Data:
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2008
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2007
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2007
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2006
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2005
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2004
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2003(1)
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(in thousands, except per share data)
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Total revenues
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$
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128,602
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$
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92,865
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|
$
|
273,753
|
|
|
$
|
135,246
|
|
|
$
|
112,400
|
|
|
$
|
91,086
|
|
|
$
|
47,091
|
|
Research and development
|
|
|
27,563
|
|
|
|
16,496
|
|
|
|
39,992
|
|
|
|
29,635
|
|
|
|
26,095
|
|
|
|
23,069
|
|
|
|
14,575
|
|
Total operating expenses
|
|
|
52,542
|
|
|
|
41,561
|
|
|
|
89,590
|
|
|
|
74,245
|
|
|
|
59,588
|
|
|
|
76,301
|
|
|
|
29,060
|
|
Income (loss) from operations
|
|
|
31,978
|
|
|
|
3,018
|
|
|
|
76,507
|
|
|
|
(11,247
|
)
|
|
|
(5,623
|
)
|
|
|
(46,551
|
)
|
|
|
(17,621
|
)
|
Net income (loss)
|
|
|
18,556
|
|
|
|
76,022
|
|
|
|
125,925
|
|
|
|
(12,044
|
)
|
|
|
(5,780
|
)
|
|
|
(48,825
|
)
|
|
|
(25,176
|
)
|
Net income (loss) per share basic
|
|
$
|
0.32
|
|
|
$
|
1.29
|
|
|
$
|
2.14
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(0.49
|
)
|
Net income (loss) per share diluted
|
|
$
|
0.30
|
|
|
$
|
1.24
|
|
|
$
|
2.06
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.84
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
As of December 31,
|
Balance Sheet Data:
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003(1)
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
154,803
|
|
|
$
|
143,496
|
|
|
$
|
29,834
|
|
|
$
|
56,081
|
|
|
$
|
79,039
|
|
|
$
|
15,920
|
|
Restricted cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
Working capital
|
|
|
115,139
|
|
|
|
110,107
|
|
|
|
81,919
|
|
|
|
55,796
|
|
|
|
76,151
|
|
|
|
12,816
|
|
Total assets
|
|
|
534,311
|
|
|
|
516,459
|
|
|
|
343,888
|
|
|
|
260,285
|
|
|
|
259,077
|
|
|
|
142,972
|
|
Advance deposit payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,983
|
|
Long term debt
|
|
|
19,698
|
|
|
|
20,510
|
|
|
|
89,603
|
|
|
|
80,285
|
|
|
|
102,047
|
|
|
|
8,852
|
|
Mandatorily redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,500
|
|
Accumulated deficit
|
|
|
41,734
|
|
|
|
60,290
|
|
|
|
186,215
|
|
|
|
174,171
|
|
|
|
168,390
|
|
|
|
119,565
|
|
Total stockholders equity (deficit)
|
|
$
|
158,430
|
|
|
$
|
134,167
|
|
|
$
|
(3,976
|
)
|
|
$
|
8,886
|
|
|
$
|
14,246
|
|
|
$
|
47,608
|
|
|
|
|
(1)
|
|
Amounts give effect to the restatement of accounting for the Teva Agreement , the OTC
Agreements, common stock purchase warrants issued in May 2003, stock-based compensation,
accrued legal fee operating expense, and accrued interest expense.
|
31
Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis, as well as other sections in this registration
statement, should be read in conjunction with the Consolidated Financial Statements and related
Notes to Consolidated Financial Statements included elsewhere herein. All references to fiscal
years mean the relevant 12-month period ended December 31.
Overview
We are a technology based, specialty pharmaceutical company applying formulation and
development expertise, as well as our drug delivery technology, to the development, manufacture and
marketing of controlled-release and niche generics, in addition to the development of branded
products. As of June 30, 2008, we manufactured and marketed 65 generic pharmaceuticals, which
represent dosage variations of 24 different pharmaceutical compounds through our own Global
Pharmaceuticals division; another 14 of our generic pharmaceuticals representing dosage variations
of four different pharmaceutical compounds are marketed by our strategic partners. We have 19
applications pending at the FDA, including four that have been tentatively approved and 50 other
products in various stages of development for which applications have not yet been filed.
We sell our products both directly to drug wholesalers and through strategic alliances with
marketing partners. Our three principal revenue components are Global Product Revenues,
representing revenue received from sales of the products we sell directly, Rx Partner Revenues,
representing revenue received from sales of prescription drugs by our marketing partners, and OTC
Partner Revenues, representing revenue received from sales of over-the-counter drugs sold by our
strategic partners. A fourth revenue component since 2006 has been Promotional Partner Revenues,
which represents revenue that we receive for services promoting the products of other
pharmaceutical companies.
Direct Sales
. We recognize revenue from direct sales in accordance with SEC Staff Accounting
Bulletin No. 101,
Revenue Recognition in Financial Statements
(SAB 101), as revised by Staff
Accounting Bulletin No. 104,
Revenue Recognition
(SAB 104). Revenue from direct product sales is
recognized at the time title and risk of loss pass to customers. Provisions for estimated
discounts, rebates, chargebacks, returns and other adjustments are provided for in the period the
related sales are recorded.
Sales through Strategic Alliances.
Each of our strategic alliance agreements involves
multiple deliverables in the form of products, services or licenses over extended periods.
Emerging Issues Task Force Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables
(EITF
00-21) supplemented SAB 104 for accounting for such multiple-deliverable arrangements. With
respect to our multiple-deliverable arrangements, we determine whether any or all of the elements
of the arrangement should be separated into individual units of accounting under EITF 00-21. If
separation into individual units of accounting is appropriate, we recognize revenue for each
deliverable when the revenue recognition criteria specified by SAB 101 and SAB 104 are achieved for
that deliverable. If separation is not appropriate, we recognize revenue (and related direct
manufacturing costs) over the estimated life of the agreement utilizing a modified proportional
performance method. Under this method the amount recognized in the period of initial recognition
is based upon the number of years that have elapsed under the agreement relative to the estimated
life of the particular agreement. The amount of revenue recognized in the year of initial
recognition is thus determined by multiplying the total amount realized by a fraction, the
numerator of which is the then-current year of the agreement and the denominator of which is the
total number of estimated agreement years. The balance of the amount realized is recognized in
equal amounts in each of the remaining years. Thus, for example, with respect to profit share or
royalty payment reported by a strategic partner during the third year of an agreement with an
estimated life of 18
years, 3/18 of the amount reported is recognized in the year reported and 1/18 of the amount
is recognized during each of the remaining 15 years. A fuller description of our analysis under
EITF 00-21 and the modified proportional performance method is set forth in Item 15. Financial
Statements and Exhibits Note 2 to Consolidated Financial Statements.
Promotional Partner Revenues.
We have entered into promotional services agreements with other
pharmaceutical companies under which we provide physician detail sales calls to promote certain of
those companies branded drug products. In exchange for our services we receive fixed sales force
fees and are eligible for contingent payments based upon the number of prescriptions filled for the
product. We recognize revenue from sales force fees as the services are provided and the
performance obligations are met and from contingent payments at the time they are earned.
32
Critical Accounting Estimates
The preparation of our financial statements requires the use of estimates and assumptions,
based on complex judgments considered reasonable when made, that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and contingent liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. The most significant judgments are employed in estimates used in determining values of
tangible and intangible assets, legal contingencies, tax assets and tax liabilities, fair value of
stock purchase warrants, fair value of share-based compensation awards issued to employees, and
estimates used in applying our revenue recognition policy, particularly those related to sales
rebates, chargebacks and shelf-stock adjustments, Medicaid, sales returns accruals, and recognition
periods related to strategic alliance agreements.
Although we believe that our estimates and assumptions are reasonable when made, they are
based upon information available to us at the time they are made. We periodically review the
factors that influence our estimates and, if necessary, adjust them. For example, when we entered
into our strategic alliance agreement with DAVA Pharmaceuticals in 2005 we estimated that we would
recognize revenue under the agreement for the succeeding 10 years. We revised that estimate to 27
months in 2007 when, in connection with the settlement of patent-infringement litigation, we agreed
to stop manufacturing and selling the product covered by the DAVA agreement in January 2008.
Although historically our estimates have generally been reasonably accurate, due to the risks and
uncertainties involved in our business and evolving market conditions, and given the subjective
element of the estimates made, actual results may differ from estimated results. This possibility
may be greater than normal during times of pronounced market volatility or turmoil.
Rebates
. We maintain various rebate programs with our Global customers in an effort to
maintain a competitive position in the marketplace and to promote sales and customer loyalty. The
rebates generally take the form of a credit against the invoiced gross sales amount charged to a
customer for products shipped. A provision for rebate deductions is estimated based upon the terms
of the various rebate programs in effect at the time of product shipment.
Returns
. We estimate a provision for product returns as a percentage of gross sales based
upon historical experience of Global product sales. The sales return reserve is estimated using a
historical lag period (the time between sale and return) and return rates, adjusted by estimates of
the future return rates based on various assumptions, which may include changes to internal
policies and procedures, changes in business practices, and commercial terms with customers,
competitive position of each product, amount of inventory in the wholesaler supply chain, the
introduction of new products, and changes in market sales information. We also consider other
factors, including levels of inventory in the distribution channel, significant market changes
which may impact future expected returns, and actual product returns and may record additional
provisions for specific returns we believe are not covered by the historical rates.
Chargebacks
. We have agreements establishing contract prices for certain products with
certain indirect customers, such as managed care organizations, hospitals and government agencies,
that purchase our products from drug wholesalers. The contract prices are lower than the prices
the customer would otherwise pay to the wholesaler, and the difference is referred to as a
chargeback, which generally takes the form of a credit against our invoiced gross sales amount
charged to the wholesaler. A provision for chargeback deductions is estimated based upon the terms
of the various chargeback arrangements in effect at the time of product shipment.
Shelf-Stock Adjustments.
When, based on market conditions, we reduce the selling price of a
product, we may choose to issue a credit to customers who agree to continue to purchase the product
from us based upon the customers remaining inventory of the product. Such a credit is referred to
as a shelf-stock adjustment, which is the difference between the invoiced gross sales price and the
revised lower gross sales price, multiplied by an estimate of the number of product units in the
customers inventory.
Medicaid
.
As required by law, we provide a rebate on drugs dispensed under the Medicaid
program. We determine our estimate of Medicaid rebate accrual primarily based on historical
experience of claims submitted by the various states and any new information regarding changes in
the Medicaid program which may impact our estimate of Medicaid rebates. In determining the
appropriate accrual amount, we consider historical payment rates and processing lag for outstanding
claims and payments. We record estimates for Medicaid rebates as a deduction from gross sales,
with corresponding adjustments to accrued liabilities.
33
Share-Based Compensation
. We account for stock-based employee compensation arrangements in
accordance with provisions of SFAS 123(R), Share-Based Payment, which we adopted on January 1,
2006 using the modified prospective method. Under this method, compensation expense is recognized
on a straight-line basis over the remaining vesting period of any outstanding unvested options at
the adoption date and any new options granted after the adoption date. Prior periods are not
restated under this method. Prior to adoption of SFAS 123(R), we recognized compensation expense
related to stock options in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Under APB 25, compensation cost for stock options, if
any, was measured as the excess of the quoted market price of the common stock at the date of grant
over the amount an employee must pay to acquire the stock.
Income Taxes.
We are subject to U.S. federal, state and local income taxes. We create a
deferred tax asset when we have temporary differences between the results for financial reporting
purposes and tax reporting purposes. Prior to June 30, 2007, we recorded a valuation allowance for
all of our deferred tax assets since up and until that time, it was more likely than not that we
would be unable to realize those assets primarily due to our history of operating losses. At June
30, 2007, due primarily to the successful sales of generic OxyContin
®
under a license,
we determined that it would be more likely than not that we would be able to realize these assets
and the valuation reserve was removed. This resulted in the recognition of a substantial tax
benefit in the three months ended June 30, 2007. We have determined that these assets remain
realizable primarily due to the amount of taxable income which has been or we expect will be
generated to utilize these amounts.
Fair Value of Financial Instruments
. The carrying values of the Companys cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses
approximate their fair values due to their short-term nature. The Company estimates the fair value
of its fixed-rate long-term debt to be $69,938,000, $73,313,000 and $72,375,000 at December 31,
2007, 2006 and 2005, respectively.
Contingencies
. In the normal course of business, the Company is subject to loss
contingencies, such as legal proceedings and claims arising out of its business, covering a wide
range of matters, including, among others, patent litigation, shareholder lawsuits, and product
liability. In accordance with SFAS No.5, Accounting for Contingencies, the Company records
accruals for such loss contingencies when it is probable a liability will be incurred and the
amount of loss can be reasonably estimated. The Company, in accordance with SFAS No. 5, does not
recognize gain contingencies until realized. A discussion of contingencies is included in Note 13,
Commitments and Contingencies and Note 14, Legal and Regulatory Matters.
Goodwill
. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No.
142), rather than recording periodic amortization, goodwill is subject to an annual assessment for
impairment by applying a fair-value-based test. According to SFAS No. 142, if the fair value of
the reporting unit exceeds the reporting units carrying value, including goodwill, then goodwill
is considered not impaired, making further analysis not required. We consider our Global Division
and Impax Division operating segments each to be a reporting unit, as this is the lowest level for
which discrete financial information is available. We attribute the entire carrying amount of
goodwill to the Global Division. We perform our annual goodwill impairment test in the fourth
quarter of each year. In addition, on a quarterly basis, we review our business operations to
determine whether events or changes in circumstances have occurred that could have a material
adverse effect on the estimated fair value of the reporting unit, and thus indicate a potential
impairment of the goodwill carrying value. If such events or changes in circumstances were deemed
to have occurred, we would perform an interim impairment analysis, which may include the
preparation of a discounted cash flow model, or consultation with one or more valuation
specialists, to analyze the impact, if any, on our assessment of the reporting units fair value.
Allowance for Doubtful Accounts
. We maintain allowances for doubtful accounts for estimated
losses resulting from amounts deemed to be uncollectible from our customers; these allowances are
for specific amounts on certain accounts.
Presentation of Non-GAAP Financial Data
Because application of EITF 00-21 to our strategic alliance agreements results in the deferral
of a substantial amount of revenue, we believe it is useful to present supplemental information
showing what our results of operations would have been had we not deferred such revenue. We
present such supplemental information in the following discussion of our results of operations,
under the caption Non-GAAP Financial Data. These non-GAAP data show what our results would have
been if revenue and related costs were recognized at the time our strategic marketing partners
reported the revenue to us, as compared to our reported results. We utilize this information in
the management of our business, including in defining performance goals for our executives, and
believe that it may be useful to investors, drug wholesalers and others in evaluating customer
acceptance of our products in comparison with our competitors that do not defer significant
portions of their revenue. However, our non-GAAP financial data should not be considered by
investors as an alternative to operating income or net income as an indicator of our performance.
Our non-GAAP financial data presentation is also not necessarily comparable to non-GAAP financial
data presentations by other companies.
34
Results of Operations
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Total Revenues
Total revenues for the six months ended June 30, 2008 were $ 128.6 million, an increase of 38%
over the same period in 2007. Global product sales, net were $ 50.1 million, an increase of 25%
primarily due to sales of our fenofibrate products, the generic versions of Lofibra
®
capsules, a cholesterol-lowering drug, of which ours was the only generic version in a market
experiencing increasing demand for drugs of this type, and Colestid
®
tablets due to the
increasing demand for the tablet form of this drug. Rx Partner revenues were $ 62.7 million up more
than 51%, primarily attributable to sales of generic OxyContin
®
and our generic
Wellbutrin
®
XL 300mg of which our customers inventories were relatively full during the
first quarter of 2007 as a result of the products launch in December 2006, and generic
OxyContin
®
. Under a litigation settlement agreement, our product was one of only two
generic version of OxyContin
®
in the marketplace during the second and fourth quarters
of 2007 and in January 2008, when we ceased further sales of this product. Promotional Partner
revenues were $ 6.5 million with nominal change to the same period in 2007. OTC Partner revenues
were $ 9.3 million, an increase of 98%, primarily attributable to higher demand for seasonal allergy
products.
Cost of Revenues
Cost of revenues was $ 44.1 million for the six months ended June 30, 2008, a decrease of 9%
primarily as a result of reduced amortization of deferred manufacturing costs with the completion
of sales of generic OxyContin
®
in 2008.
Gross Profit
Gross profit for the six months ended June 30, 2008 was $ 84.5 million or approximately 66% of
total revenues, as compared to 48% of total revenue in the prior period. The increase in profit
margin was due principally to sales of our generic versions of Oxycontin® during the first quarter
of 2008.
Research and Development Expenses
Total research and development expenses for the six months ended June 30, 2008 were $ 27.6
million, an increase of 67%. Generic project activity increased $ 7.1 million primarily due to
increased spending on bioequivalent studies related to five new and 23 pending ANDA filings,
higher patent prosecution expenses and investment in additional human resources. Expenses related
to our brand product pipeline increased $ 4 million related to higher spending on clinical trials
and additional research personnel.
Patent Litigation Expenses
Patent litigation expenses for the six months ended June 30, 2008 were down $ 3.4 million over
the prior year period due to two litigation settlements during 2008.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended June 30, 2008 were $ 22.0
million, an 18% increase primarily attributable to additional marketing and sales promotional
spending.
Interest Income
Interest income was $ 1.3 million higher for the six months ended June 30, 2008, primarily due
to higher cash balances as a result of the increase in net sales.
35
Interest Expense
Interest expense was $ 0.2 million lower for the six months ended June 30, 2008, due to reduced
amounts of average debt outstanding.
Income Taxes
The tax expense for the six months ended June 30, 2008 was $ 14.2 million compared to a tax
benefit of $ 76.0 million in 2007 (which was principally related to the reversal of a valuation
allowance on deferred tax assets).
Net Income
Net income for the six months ended June 30, 2008 was $ 18.6 million as compared to net income
of $ 76.0 million in 2007, primarily due to the factors described above.
Non-GAAP Financial Data
As noted, in accordance with GAAP, a substantial portion of our revenue is deferred and
recognized over the estimated remaining lives of our alliance agreements. The following data are
presented to show what our results for the six months ended June 30, 2008 and 2007, respectively,
would have been if we did not defer such revenue and recognized it at the time our alliance
agreements partners report the revenue to us. We derive the non-GAAP data by adding the deferred
revenues to our revenues determined in accordance with GAAP and deducting the amortized portion of
previously deferred revenues. While such data and hypothetical results are not in accordance with
GAAP and should not be considered as an indicator of our performance, we believe they provide a
reasonably reliable indication of the timing of the sales of our products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2008
|
|
|
|
Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
GAAP
|
|
|
Deferral
|
|
|
Amortization
|
|
|
GAAP
|
|
|
|
GAAP
|
|
|
Deferral
|
|
|
Amortization
|
|
|
Non-GAAP
|
|
Total Revenues
|
|
$
|
128,602
|
|
|
$
|
80,914
|
|
|
$
|
(72,016
|
)
|
|
$
|
137,500
|
|
|
|
$
|
92,865
|
|
|
$
|
174,794
|
|
|
$
|
(49,509
|
)
|
|
$
|
218,150
|
|
Gross Profit
|
|
$
|
84,520
|
|
|
$
|
52,446
|
|
|
$
|
(50,939
|
)
|
|
$
|
86,027
|
|
|
|
$
|
44,579
|
|
|
$
|
133,787
|
|
|
$
|
(25,405
|
)
|
|
$
|
152,961
|
|
% Total Revenues
|
|
|
65.7
|
%
|
|
|
|
|
|
|
|
|
|
|
62.6
|
%
|
|
|
|
48.0
|
%
|
|
|
|
|
|
|
|
|
|
|
70.1
|
%
|
Operating Expenses
|
|
$
|
52,542
|
|
|
$
|
(350
|
)
|
|
|
|
|
|
$
|
52,192
|
|
|
|
$
|
41,561
|
|
|
$
|
(382
|
)
|
|
|
|
|
|
$
|
41,179
|
|
Income (loss) from
Operations
|
|
$
|
31,978
|
|
|
$
|
52,796
|
|
|
$
|
(50,939
|
)
|
|
$
|
33,835
|
|
|
|
$
|
3,018
|
|
|
$
|
134,169
|
|
|
$
|
(25,404
|
)
|
|
$
|
111,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% Total Revenues
|
|
|
24.9
|
%
|
|
|
|
|
|
|
|
|
|
|
24.6
|
%
|
|
|
|
3.2
|
%
|
|
|
|
|
|
|
|
|
|
|
51.2
|
%
|
36
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
Total Revenues
Total revenues for 2007 were $ 273.8 million, an increase of 102% over 2006, driven primarily
by Rx Partner and Global Product sales.
Global product sales, net were $ 88.0 million, an increase of 13% primarily due to the launch
of our generic version of Colestid® tablets and increased sales of our fenofibrate product, the
generic version of Lofibra® capsules, a cholesterol-lowering drug of which ours was the only
generic version in a market of increasing demand for drugs of this type. These increases were
partially offset by lower sales of the generic versions of Brethine® and Minocin® due to increasing
price competition.
Rx Partner revenues were $ 161.1 million up more than 300%, primarily attributable to sales of
our generic version of OxyContin®. Under a litigation settlement agreement, our product was one
of only two generic version of OxyContin® in the marketplace during the second and fourth quarters
of 2007 and in January 2008, when we ceased further sales of this product. Higher sales of our new
generic versions of Ditropan® XL 5 mg, 10 mg and 15 mg tablets and Wellbutrin® XL 300 mg were
partially offset by a decline in sales of generic Wellbutrin® SR 100mg & 150mg tablets, and generic
Prilosec® 10 mg and 20 mg capsules due to a declining market which contributed to both lower volume
and pricing as competitors sought to maintain or grow market share.
Revenues under the Teva Agreement increased to $ 42.5 million, as compared to $ 33.9 million in
2006, an increase of over 25%, primarily due to generic Wellbutrin® XL 300 mg, sales of which did
not begin until December 2006.
OTC Partner revenues declined $ 1.9 million to $ 11.9 million due to lower demand.
Promotional Partner revenues were $ 12.8 million in 2007, double that of 2006 due to the fact
that we did not begin providing promotional services until mid-2006.
Cost of Revenues
Cost of revenues was $ 107.7 million in 2007, an increase of 49% primarily as a result of the
increases in product sales as described above. This amount includes the of cost of products sold
under our Teva Agreement in the amount of $ 20.7 million, an increase of $ 7.8 million from 2006,
primarily due to the launch of our 300 mg generic version of Wellbutrin® XL. It also includes
$ 10.8 million of costs associated with the Promotional Partner revenues.
Gross Profit
Gross Profit for 2007 was $ 166.1 million, or approximately 61% of total revenues, compared
with $ 63.0 million, or 47% of total revenue in 2006. Of the total increase of 14 percentage
points, nine percentage points resulted from the relatively high margins associated with sales of
Generic OxyContin® and the balance resulted from operational efficiencies.
Research and Development Expenses
Total research and development expenses for 2007 were $ 40.0 million, an increase of 35%.
Generic project activity increased to $ 31.2 million, a 28% increase primarily due to increased
spending on bioequivalent studies related to submission of 13 new ANDA filings in 2007 as compared
to seven filings in 2006. Investments in our brand product pipeline in 2007 were $ 8.8 million, an
increase of 66% related to higher spending on clinical trials.
Patent Litigation Expenses
Patent litigation expenses for 2007 were up $ 0.3 million over the prior year period related to
higher expenses related to our generic Effexor® litigation.
37
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2007 were $ 39.6 million, a 22% increase,
primarily driven by $ 1.7 million in professional fees related to legal, accounting, and audit
services and $ 3.9 million in incentive compensation
Litigation Settlement and Related Expenses
There were no material litigation settlement expenses in 2007, as compared with $ 2.6 million
for interest expense and legal fees related to a litigation settlement in 2006 of a suit brought
against us in 2003 by Solvay Pharmaceuticals, Inc.
Interest Income
Interest Income was $ 2.5 million higher in 2007, primarily due to higher cash balances as a
result of the increase in net sales.
Interest Expense
Interest expense was $ 0.3 million higher in 2007, due to higher amounts of average debt
outstanding.
Income Taxes
Income tax benefit for 2007 was $ 48.8 million with an effective tax rate of 35% before the
change in valuation allowance. There was a nominal income tax expense in 2006 as we reported a
loss from operations.
Net Income (Loss)
Net income for 2007 was $ 125.9 million as compared to a net loss of $ 12.0 million in 2006,
primarily due to the factors described above.
Non-GAAP Financial Data
As noted, in accordance with GAAP, a substantial portion of our revenue is deferred and
recognized over the estimated remaining lives of our alliance agreements. The following data are
presented to show what our results for 2006 and 2007 would have been if we did not defer such
revenue and recognized it at the time our alliance agreements partners report the revenue to us.
We derive the non-GAAP data by adding the deferred revenues to our revenues determined in
accordance with GAAP and deducting the amortized portion of previously deferred revenues. While
such data and hypothetical results are not in accordance with GAAP and should not be considered as
an indicator of our performance, we believe they provide a reasonably reliable indication of the
timing of the sales of our products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
(unaudited)
|
|
GAAP
|
|
|
Deferral
|
|
|
Amortization
|
|
|
GAAP
|
|
|
|
GAAP
|
|
|
Deferral
|
|
|
Amortization
|
|
|
GAAP
|
|
Total Revenues
|
|
$
|
273,753
|
|
|
$
|
202,310
|
|
|
$
|
(172,980
|
)
|
|
$
|
303,083
|
|
|
|
$
|
135,246
|
|
|
$
|
124,435
|
|
|
$
|
(50,591
|
)
|
|
$
|
209,090
|
|
Gross Profit
|
|
$
|
166,097
|
|
|
$
|
124,615
|
|
|
$
|
(116,717
|
)
|
|
$
|
173,995
|
|
|
|
$
|
62,998
|
|
|
$
|
70,326
|
|
|
$
|
(24,164
|
)
|
|
$
|
109,160
|
|
% Total Revenues
|
|
|
60.7
|
%
|
|
|
|
|
|
|
|
|
|
|
57.4
|
%
|
|
|
|
46.6
|
%
|
|
|
|
|
|
|
|
|
|
|
52.2
|
%
|
Operating Expenses
|
|
$
|
89,590
|
|
|
$
|
(732
|
)
|
|
|
|
|
|
$
|
88,858
|
|
|
|
$
|
74,245
|
|
|
$
|
(861
|
)
|
|
|
|
|
|
$
|
73,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
Operations
|
|
$
|
76,507
|
|
|
$
|
125,347
|
|
|
$
|
(116,717
|
)
|
|
$
|
85,137
|
|
|
|
$
|
(11,247
|
)
|
|
$
|
71,187
|
|
|
$
|
(24,164
|
)
|
|
$
|
35,776
|
|
% Total Revenues
|
|
|
27.9
|
%
|
|
|
|
|
|
|
|
|
|
|
28.1
|
%
|
|
|
|
-8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
17.1
|
%
|
38
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Total Revenues
Total revenues for the year ended December 31, 2006 were $ 135.2 million, up 20% driven by Rx
Partner, OTC Partner, and Promotional Partner revenues, partially offset by a decline in Global
product sales, net.
Global product sales, net declined $ 11.1 million or 12% due primarily to the exclusion of
sales of generic OxyContin®, which we sold directly and reported as Global product sales, net in
2005 but sold through a marketing partner and thus reported as Rx Partner revenues in 2006, and to
lower sales of generic
Wellbutrin
®
SR in 2006 due to fewer stocking orders following
the launch on December 22, 2004. These reductions were partially offset by the launch of our
fenofibrate products, the generic Lofibra
®
67 mg, 134 mg, and 200 mg capsules, which
were introduced in the first quarter of 2006 and full-year sales of generic Rimadyl
®
25
mg, 75 mg and 100 mg tablets, a veterinary product launched in the second quarter of 2005.
Rx Partner revenues increased to $ 36.8 million or more than 191%, attributable to the
inclusion of, and increases in, the net sales of generic OxyContin
®
in this category
during 2006. The increase in the sales of generic OxyContin
®
is due to full year sales
of the 80mg strength, which was launched in March of 2005, and the additional 10mg, 20mg and 40mg
strengths, which were launched in December 2005.
Revenues under the alliance agreement with Teva increased to $ 33.9 million in 2006, an
increase of over 170%, primarily due to revenues associated with the launch of the generic versions
of Ditropan® in the 15mg strength and Wellbutrin® XL in the 300mg strength during the fourth
quarter of 2006. In addition, an increase in revenue of generic Prilosec® was offset by lower
sales of generic Wellbutrin® SR 100mg and 150mg product principally due to substitution of the
Wellbutrin XL 300mg strength.
OTC Partner revenues were $ 13.8 million, or 32% over 2006, due to increased demand for our
generic version of Claritin-D
®
. The $ 6.4 million of Promotional Partner revenues in
2006 was received under an arrangement that did not begin until mid-2006.
Cost of Revenues
Cost of revenues was $ 72.2 million, an increase of 24% primarily due to higher product sales
described above. This amount includes the cost of products sold under our Teva Agreement in the
amount of $ 12.9 million, a significant increase from $ 3.3 million in 2005 primarily due to the
launches of generic versions of Ditropan® XL and Wellbutrin® XL 300mg in the fourth quarter of
2006. The amount also includes $ 5.6 million of cost associated with the Promotional Partner
revenues.
Gross Profit
Gross Profit for 2006 was $ 63.0 million, or approximately 47% of total revenues, an increase
of 17% over 2005 primarily due to the introduction of the generic versions of
OxyContin
®
, Wellbutrin
®
XL and Ditropan
®
XL in 2006.
Combined,
these products added approximately 25% to total gross profit at favorable margins while improving
operational efficiencies.
39
Research and Development Expenses
Research and development expenses for 2006 were $ 29.6 million, an increase of 14%. Additional
expenses for our generic research and development projects were primarily the result of purchases
of active pharmaceutical ingredients associated with new product investigations, legal costs of
investigating existing and proposed intellectual property, higher depreciation expenses and higher
costs of clinical studies. Expenses related to our brand product projects increased due to higher
spending on research staff of $ 1.0 million and increased clinical study expenses of $ 0.5 million.
Patent Litigation Expenses
The $ 2.0 million increase in patent litigation expense for 2006 was primarily attributable to
receipt of $ 1.8 million in 2005 in connection with a litigation settlement.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2006 were $ 32.4 million, an increase of 26%
primarily due to higher salary and related expenses associated with new hires, a cash-based
employee retention program for 2006 and regular increases in employee compensation.
Litigation Settlement and Related Expenses
While we incurred expenses of $ 2.6 million in connection with the settlement of a litigation
matter in 2006, there were no material litigation settlements or related expenses in 2005.
Interest Income
Interest Income was $ 0.2 million higher in 2006, due to higher average cash and short-term
investment balances during 2006.
Interest Expense
Interest expense was $ 2.5 million lower in 2006, due to the absence of higher interest expense
in 2005 related to the write-off of deferred financing costs associated with the repayment of the
$ 1.25% Debentures and reduced average levels of debt outstanding resulting from the repayment of
certain bank loans in June 2005.
Income Taxes
In 2005 and 2006 there was no current federal or state income tax expense due to the
utilization of federal and state net operating loss carry forwards, except for one state in which
there was a statutory limitation on the maximum annual utilization of net operating loss carry
forwards to reduce current tax expense. As a result, a current state tax liability of $0.1 million
and $0.2 million was recorded in 2005 and 2006 respectively.
Net Loss
The net loss for 2006 was $ 12.0 million as compared to a net loss of $ 5.8 million in 2005.
40
Non-GAAP Financial Data
As noted, in accordance with GAAP, a substantial portion of our revenue is deferred and
recognized over the estimated remaining lives of our alliance agreements. The following data are
presented to show what our results for 2005 and 2006 would have been if we did not defer such
revenue and recognized it at the time our alliance agreements partners report the revenue to us.
We derive the non-GAAP data by adding the deferred revenues to our revenues determined in
accordance with GAAP and deducting the amortized portion of previously deferred revenues. While
such data and hypothetical results are not in accordance with GAAP and should not be considered as
an indicator of our performance, we believe they provide a reasonably reliable indication of the
timing of the sales of our products.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
(unaudited)
|
|
GAAP
|
|
|
Deferral
|
|
|
Amortization
|
|
|
Non-GAAP
|
|
|
|
GAAP
|
|
|
Deferral
|
|
|
Amortization
|
|
|
GAAP
|
|
Total Revenues
|
|
$
|
135,246
|
|
|
$
|
124,435
|
|
|
$
|
(50,591
|
)
|
|
$
|
209,090
|
|
|
|
$
|
112,400
|
|
|
$
|
47,786
|
|
|
$
|
(23,081
|
)
|
|
$
|
137,105
|
|
Gross Profit
|
|
$
|
62,998
|
|
|
$
|
70,326
|
|
|
$
|
(24,164
|
)
|
|
$
|
109,160
|
|
|
|
$
|
53,965
|
|
|
$
|
31,087
|
|
|
$
|
(12,416
|
)
|
|
$
|
72,636
|
|
% Total Revenues
|
|
|
46.6
|
%
|
|
|
|
|
|
|
|
|
|
|
52.2
|
%
|
|
|
|
48.0
|
%
|
|
|
|
|
|
|
|
|
|
|
53.0
|
%
|
Operating Expenses
|
|
$
|
74,245
|
|
|
$
|
(861
|
)
|
|
|
|
|
|
$
|
73,384
|
|
|
|
$
|
59,588
|
|
|
$
|
(803
|
)
|
|
|
|
|
|
$
|
58,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
Operations
|
|
$
|
(11,247
|
)
|
|
$
|
71,187
|
|
|
$
|
(24,164
|
)
|
|
$
|
35,776
|
|
|
|
$
|
(5,623
|
)
|
|
$
|
31,890
|
|
|
$
|
(12,416
|
)
|
|
$
|
13,851
|
|
% Total Revenues
|
|
|
-8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
17.1
|
%
|
|
|
|
-5.0
|
%
|
|
|
|
|
|
|
|
|
|
|
10.1
|
%
|
41
Liquidity and Capital Resources
We have historically funded our operations with the proceeds from the sale of debt and equity
securities, and more recently, with cash from operations. Currently, our primary source of
liquidity is cash from operations, consisting of the proceeds from the sales of our products. We
expect to incur significant operating expenses, including expanded research and development
activities and patent litigation expenses, for the foreseeable future. We also anticipate
incurring capital expenditures of $ 20 million to $ 28 million during the next twelve months,
primarily for our plant capacity expansion in Taiwan. We believe our existing cash and cash
equivalent balances, combined with cash generated from operations, together with our revolving line
of credit, will be sufficient to meet our financing requirements through the next twelve months.
We may, however, seek additional financing through alliance agreements or equity or debt markets to
fund the planned capital expenditures, and to fund our research and development plans, and
potential revenue shortfalls due to delays in new product introductions.
Cash and Cash Equivalents
At June 30, 2008, we had $ 49.7 million in cash and cash equivalents, an increase of $ 30.6
million as compared to June 30, 2007. At December 31, 2007, we had $ 37.5 million in cash and cash
equivalents, an increase of $ 31.1 million as compared to December 31, 2006. At December 31, 2006,
we had $ 6.4 million in cash and cash equivalents, a decrease of $ 49.5 million as compared to
December 31, 2005.
Cash Flows
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
.
Net cash provided by operating activities for the six month period ended June 30, 2008 was
$ 27.4 million, a decrease of $ 4.5 million from the prior year period. This decrease was primarily
attributable to reductions in product deferrals of $ 106.9 million, offset by an increase in
accounts receivable of $ 71.8 million, the absence of a $ 10.5 million deduction for the tax benefit
related to the exercise of employee stock options (which was classified as a source of cash flows
from financing activities under GAAP), and stronger margins.
Net cash used in investing activities declined by $ 19.6 million to $ 10.1 million, primarily
due to changes in short-term investments. Capital expenditures for the six months ended June 30,
2008 were $ 12.8 million as compared to $ 10.3 million for the same period in 2007. The 2008
expenditures included $ 7.7 million as part of the total estimated investment of $ 25.0 million for
our new Taiwan manufacturing facility which is expected to be completed in 2009. In addition, we
expect continued investment in facilities, equipment and information technology projects supporting
our quality initiatives to ensure we have a solid platform to properly manage and grow our global
business.
Net cash used by financing activities for the six month period ended June 30, 2008 was
approximately $ 5.1 million, consisting of the $ 0.2 million net proceeds from the exercise of stock
options and warrants and purchases under the employee stock purchase plan and $ 5.2 million used in
the repayment of long term debt. Net cash provided by financing activities for the six month
period ended June 30, 2007 was approximately $ 10.4 million, principally resulting from the $ 10.5
million tax benefit related to the exercise of employee stock options.
42
Y
ear Ended December 31, 2007 Compared to the Year Ended December 31, 2006.
Net cash provided by operating activities for the year ended December 31, 2007 was $ 119.0
million, an increase of $ 124.8 million from the prior year period. This increase was primarily
attributable to net income generated by the business principally due to sales of generic OxyContin®
and net deferred revenue from Rx Partners of approximately $ 55.4 million. In addition, $ 18.2
million in payments to Teva as exclusivity fees regarding the launch of generic
Wellbutrin
®
XL 300mg was partially offset by a $ 9.9 million increase in cash receipts
from trade accounts receivables, lower inventories of $ 6.5 million and other working capital items.
Net cash used in investing activities were purchases of short-term investments, net of sales
of $ 98.3 million, an increase of $ 54.6 million as compared to the prior period. This reflects our
decision to invest the excess portion of our cash balances into higher-yielding short term
investments. Our capital expenditures for the twelve months ended December 31, 2007 were $ 18.8
million as compared to $ 21.5 million for the same period in 2006. The 2007 expenditures included
$ 0.4 million as part of our total estimated investment of $ 25.0 million for our new Taiwan
manufacturing facility which is expected to be completed in 2009.
Net cash used by financing activities for the year ended December 31, 2007 was approximately
$ 10.3 million, principally resulting from the $ 10.5 million tax benefit related to the exercise of
employee stock options, and $ 0.1 million net proceeds from exercise of stock options and warrants
and purchases under the ESPP, offset by $ 0.3 million used for repayment of long-term debt. Cash
flows from financing activities for the year ended December 31, 2006, consisted of $ 0.1 million net
proceeds from exercise of stock options and warrants and purchases under the ESPP, fully offset by
$ 0.1 million used for repayment of long-term debt.
Year Ended December 31, 2006 Compared to the Year Ended December 31, 2005
.
Net cash used by operating activities for the year ended December 31, 2006 was $ 5.8 million, a
decrease of $ 26.9 million from the prior year period. This decrease was primarily attributable to
net deferred revenue from Rx Partners of approximately $ 50.2 million offset by $ 14.4 million in
payments to Teva as exclusivity fees regarding the launch of generic Wellbutrin® XL 300mg, payment
of a $ 12.0 million litigation settlement, a $ 24.7 million increase in trade accounts receivables
and other working capital items.
Net cash used in investing activities were purchases of short-term investments, net of sales
of $ 43.7 million, an increase of $ 79.1 million as compared to the prior period. Our capital
expenditures for the twelve months ended December 31, 2006 were $ 21.5 million as compared to $ 14.8
million for the same period in 2005.
Cash flows from financing activities for the year ended December 31, 2006, consisted of $ 0.1
million net proceeds from exercise of stock options and warrants and purchases under the ESPP,
fully offset by $ 0.1 million used for repayment of long-term debt. Cash flows used in financing
activities for the year ended December 31, 2005 amounted to $ 29.7 million, principally consisting
of $ 95.0 million used for repurchase of the 1.25% Debentures, offset by proceeds of $ 74.9 million
from the issuance of the 3.5% Debentures, along with the payment of $ 2.5 million used for the
payment of deferred financing fees associated with the 3.5% Debentures, $ 5.0 million used for the
repayment of the revolving line of credit, and $ 2.6 million used to repay long-term debt.
43
Outstanding Debt Obligations
Senior Lenders; Wachovia Bank
In December 2005, we entered into a new three year credit agreement with Wachovia, replacing
the previous loan and security agreement and providing for a $ 35 million revolving credit facility
we intend to use for working capital and general corporate purposes. There was no amount
outstanding under the revolving credit facility as of June 30, 2008 and December 31, 2007, 2006 and
2005, respectively. The revolving credit facility is collateralized by eligible accounts
receivable, inventory, and machinery and equipment, subject to limitations and other terms. The
interest rate for the revolving credit facility is either the prime rate, or LIBOR plus a margin
ranging from 1.5% to 2.25% based upon terms and conditions, at our option.
The credit agreement contains various financial covenants, the most significant of which
include a fixed charge coverage ratio and a capital expenditure limitation. The fixed charge
coverage ratio requires EBITDA less cash paid for taxes, dividends, and certain capital
expenditures, to be not less than 1.25 to 1.00 as compared to scheduled principal payments coming
due in the next 12 months plus cash interest paid during the applicable period. We were limited to
capital expenditures of no more than $ 50,000,000 for the period from January 1, 2005 through
December 31, 2006 and we were limited to capital expenditures of no more than $ 25,000,000 for the
period from January 1, 2007 through December 31, 2007 and for each calendar year thereafter. The
credit agreement also provides for certain information reporting covenants, including a requirement
to file all required reports with the SEC. At June 30, 2008 and December 31, 2007, we were in
compliance with the financial covenants contained in the credit agreement. We are negotiating an
amendment to the credit agreement with Wachovia, which would include a waiver of our failure to
timely deliver the annual and interim financial statements required by the credit agreement as well
as our noncompliance with the fixed charge coverage ratio at June 30, 2006. In addition, in the
process of negotiating an amendment to the credit agreement, we may agree to an increase in the
unused line fee from the current 25 basis points per annum to 50 basis points per annum. During
the six months ended June 30, 2008 and the year ended December 31, 2007, we paid $ 43,750 and
$ 87,500, respectively, as unused line fee to Wachovia.
3.5% Debentures
In June 2005, we completed a private placement of $ 75 million of 3.5% debentures. The 3.5%
debentures are our senior subordinated, unsecured obligations that mature on June 15, 2012 and may
not be redeemed by us prior to maturity. Holders also have the right to require us to repurchase
all or any portion of the 3.5% debentures on June 15, 2009. We used the net proceeds from the sale
of the 3.5% debentures together with existing cash to repay our $ 95.0 million 1.25% Convertible
Senior Subordinated Debentures due 2024 (the 1.25% Debentures), which, together with accrued
interest thereon, had become due and payable following our default under the terms of the indenture
governing such 1.25% Debentures. Our default under the 1.25% Debentures resulted from our failure
to file our 2004 annual report on Form 10-K, which constituted a breach of a covenant of the
indenture governing the 1.25% Debentures.
The 3.5% debentures rank pari passu with our accounts payable and other liabilities and are
subordinate to certain senior indebtedness, including our credit agreement with Wachovia. The
indenture governing the 3.5% debentures limits the aggregate amount of our indebtedness ranking
senior to or pari passu with the 3.5% debentures to the greater of (i) $ 50 million or (ii) as of
any date, four times our EBITDA for the immediately preceding 12-month period for which public
financial information is available. The 3.5% debentures are convertible into shares of our common
stock at an initial conversion price of $ 20.69 per share.
Under a related registration rights agreement, we agreed to file a registration statement
covering the 3.5% debentures and shares of common stock issuable upon the conversion of such
debentures. Because we did not meet the deadlines set forth in the registration rights agreement,
we are required to pay liquidated damages, at an annual rate of 0.5% of the aggregate principal
amount of the 3.5% debentures, until the registration statement becomes effective. We paid
$ 601,000 in liquidated damages through December 15, 2007 and have not made any additional payments,
which payments are being accrued.
44
In August and September 2008, at the request of the holders, we repurchased at a discount, an
aggregate face value of $ 62.25 million principal amount of the 3.5% Debentures, paying $ 60.3 million including $ 433,000 of
accrued interest. Proceeds to fund the repurchase of the 3.5%
Debentures were generated from the liquidation of our short-term investments. The remaining $ 12.75
million principal amount of the 3.5% Debentures are subject to repurchase by us at 100% of the face
value on June 15, 2009 at the option of the holders.
Solvay Promissory Note
In June, 2006, we issued a subordinated promissory note in the amount of $ 11.0 million related
to the settlement of litigation brought by Solvay Pharmaceuticals, Inc. (Solvay), bearing
interest at 6.0% per annum, with 24 quarterly principal and interest installment payments of $ 549,165 commencing March 2007
through December 2012. The Solvay promissory note becomes immediately due and payable upon the
occurrence of a default in any payment due, a change in control of us, voluntary or involuntary
bankruptcy proceeding by or against us and failure to maintain working capital less than 150% of
the remaining unpaid balance of the promissory note. As of June 30, 2008, none of the four events
noted above occurred.
45
Commitments and Contractual Obligations
Our contractual obligations as of December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
Than 5
|
($ in thousands)
|
|
Total
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
Years
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facilities and Long Term Debt(a)
|
|
$
|
89,744
|
|
|
$
|
69,234
|
|
|
$
|
3,649
|
|
|
$
|
16,861
|
|
|
$
|
|
|
Operating Lease (b)
|
|
|
5,987
|
|
|
|
1,278
|
|
|
|
1,957
|
|
|
|
1,274
|
|
|
|
1,478
|
|
Construction Contracts (c)
|
|
|
422
|
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
96,153
|
|
|
$
|
70,934
|
|
|
$
|
5,606
|
|
|
$
|
18,135
|
|
|
$
|
1,478
|
|
|
|
|
(
a
)
|
|
Represents the principal portion of payments of debt obligations, including: (i) $ 75
million 3.5% Debentures due on June 15, 2012, interest paid semi-annually, starting December
15, 2005; (ii) 8.17% loan payable to Cathay Bank in 83 monthly principal and interest
installment payments of $ 19,540 commencing June 28, 2001, through May 27, 2008 with a balance
of $ 2,208,843 due on June 28, 2008; (iii) 7.5% loan payable to Cathay Bank in 83 monthly
principal and interest installment payments of $ 24,629 commencing November 14, 2001, through
October 13, 2008 with a balance of $ 2,917,598 due on November 14, 2008; (iv) 6.0% note
payable to Solvay in 24 quarterly principal and interest installment payments of $ 549,165
commencing March 2007 through December 2012; and (v) Vendor financing agreement related to
software licenses with interest at 3.10% in 2 monthly installments of $ 0 and 34 monthly
principal and interest installments of $ 12,871 commencing December 2006 through November
2009.
|
|
|
|
The 8.17% Cathay Bank loan was collateralized by land, building and building improvements in
our headquarters and research facility in Hayward, California. The 7.50% Cathay Bank loan was
collateralized by land, building and building improvements in our manufacturing facility in
Hayward, California. In May 2008, we prepaid, without penalty, all of our indebtedness under
the term loans with Cathay Bank in an aggregate amount of $ 5,159,000, including accrued
interest through the date of the prepayment.
|
|
(b
)
|
|
We lease office, warehouse, and laboratory facilities under non-cancelable operating leases
through January 2015. We also lease certain equipment under various non-cancelable operating
leases with various expiration dates through 2012.
|
|
(c)
|
|
Construction contracts
are related to our currently under-construction facility in Taiwan,
R.O.C., which is intended to be utilized for manufacturing, research and development,
warehouse, and administrative space. The construction phase of this project is expected to
be completed and equipment to be installed, validated, and approved by FDA in 2009, and product shipments to begin in early 2010. In conjunction with the
construction of our Taiwan facility, we have entered into several contracts, amounting to an
aggregate of approximately $ 853,000 as of December 31, 2007 and $ 16,519,000 as of June 30,
2008. As of December 31, 2007, we had remaining commitments under these contracts of
approximately $ 422,000 and $ 8,552,000 as of June 30, 2008.
|
|
|
|
The amounts shown above exclude uncertain tax positions as determined under FIN 48 as we
cannot predict if or when such amounts, if any, will be paid or payable to the taxing
authorities.
|
Off Balance-Sheet Arrangements
We have not entered into any off-balance arrangements other than $ 500,000 in letters of credit
entered into in the ordinary course of business.
46
Recent Accounting Pronouncements
In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements. SAB 108 was issued in order to eliminate the diversity of practice
surrounding how public companies quantify financial statement misstatements. Traditionally, there
have been two widely-recognized methods for quantifying the effects of financial statement
misstatements: the rollover method and the iron curtain method. The rollover method focuses
primarily on the impact of a misstatement on the income statementincluding the reversing effect of
prior year misstatementsbut its use can lead to the accumulation of misstatements in the balance
sheet. The iron curtain method, on the other hand, focuses primarily on the effect of correcting
the period-end balance sheet with less emphasis on the reversing effects of prior year errors on
the income statement. The staff believes registrants must quantify the impact of correcting all
misstatements, including both the carryover and reversing effects of prior year misstatements, on
the current year financial statements. The staff believes that this can be accomplished by
quantifying an error under both the rollover and iron curtain approaches as described above and by
evaluating the error measured under each approach. Thus, a registrants financial statements would
require adjustment when either approach results in quantifying a misstatement that is material,
after considering all relevant quantitative and qualitative factors. SAB 108 is effective for any
report for an interim period of the first fiscal year ending after November 15, 2006. Our SAB 108
analysis did not result in an adjustment to our consolidated financial statements for the effective
periods.
In September 2006, the FASB issued SFAS No. 157 (SFAS 157) Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. With respect to financial assets and liabilities SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The effective date of SFAS 157, with respect to non-financial
assets and liabilities, was deferred by FASB Staff Position FAS 157-2 and is effective for
financial statements issued for fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. The adoption of SFAS 157 did not have a significant impact on our
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for
Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115,
providing companies with an option to choose, at specific election dates, to measure eligible
financial assets and liabilities at fair value that are not otherwise required to be measured at
fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007, early
adoption is allowed. We have not elected to use the fair value option of SFAS 159, and therefore
do not expect SFAS 159 to have an impact on our consolidated financial statements.
In June 2007, the EITF reached a final consensus on EITF Issue No. 07-3 (EITF 07-3),
Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research
and Development Activities. EITF 07-3, which is effective for fiscal years beginning after
December 15, 2007, requires non-refundable advance payments for future research and development
activities to be capitalized until the goods have been delivered or related services have been
performed. Adoption is on a prospective basis and could impact the timing of expense recognition
for agreements entered into after December 31, 2007. We do not expect the adoption of EITF 07-3 to
have a significant impact on our consolidated financial statements.
In November 2007, the EITF reached a final consensus on EITF Issue No. 07-1 (EITF 07-1)
Accounting for Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property. EITF 07-1 is focused on how the parties to a collaborative agreement should
account for costs incurred and revenue generated on sales to third parties, how sharing payments
pursuant to a collaborative agreement should be presented in the income statement and certain
related disclosure questions. EITF 07-1 is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years. Adoption is on a retrospective basis to all
prior periods presented for all collaborative arrangements existing as of the effective date. We
are currently evaluating the impact of EITF 07-1 adoption on our consolidated financial statements.
47
In December 2007, the FASB issued SFAS 141 (Revised 2007) (SFAS 141(R)), Business
Combinations, which replaces SFAS No 141. The statement retains the purchase method of accounting
for acquisitions, but requires a number of changes, including changes in the way assets and
liabilities are recognized in the purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning January 1, 2009
and will apply prospectively to business combinations completed on or after that date. The effect
of SFAS 141 (R) on our consolidated financial statements will be dependent on the nature and terms
of any business combinations that occur after its effective date.
In December 2007, the FASB issued SFAS No. 160 (SFAS 160), Non-controlling Interests in
Consolidated Financial Statements. SFAS 160 clarifies that a non-controlling (minority) interest
in a subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements, and establishes a single method of accounting for
changes in a parents ownership interest in a subsidiary that do not result in deconsolidation.
SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing
minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. We do not expect the adoption
of SFAS 160 to have a significant impact on our consolidated financial statements unless a future
transaction results in a non-controlling interest in a subsidiary.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful
Life of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.
The FSP is intended to improve the consistency between the useful life of a recognized intangible
asset under Statement 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS 141(R) and other U.S. generally accepted accounting principles. The new
standard is effective for financial statements issued for fiscal years and interim periods
beginning after December 15, 2008. We are currently evaluating the impact of FSP FAS 142-3
adoption on our consolidated financial statements.
In May 2008, the FASB issued FASB Staff Position APB 14-1 (FSP APB 14-1), Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner will reflect the entitys nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. This FASB staff position is
effective for financial statements issued for fiscal years beginning after December 31, 2008. We
are currently evaluating the impact of FSP APB 14-1 on our consolidated financial statements.
Quantitative and Qualitative Disclosures about Market Risk
Our cash and cash equivalents include a portfolio of high credit quality securities, including
U.S. Government securities, treasury bills, short-term commercial paper, and high-rated money
market funds. Our entire portfolio matures in less than one year. The carrying value of the
portfolio approximates the market value at December 31, 2007. Our debt instruments at December 31,
2007, are subject to fixed and variable interest rates and principal payments. We estimate the
fair value of our fixed-rate long-term debt to be $ 72,187,500, $ 69,938,000, $ 73,313,000 and
$ 72,375,000 at June 30, 2008 and December 31, 2007, 2006, and 2005, respectively. While changes in
market interest rates may affect the fair value of our fixed and variable rate long-term debt, we
believe the effect, if any, of reasonably possible near-term changes in the fair value of such debt
on our financial statements will not be material.
We do not use derivative financial instruments and have no material foreign exchange or commodity
price risks.
48
Item 3. Properties.
Our primary properties consist of a 35,000 sq. ft. corporate headquarters and research and
development center and 50,000 sq. ft. manufacturing facility, both located in Hayward, CA, a
113,000 sq. ft. packaging, warehousing and distribution center in Philadelphia, PA, all of which
are owned by us, and a leased 44,000 sq. ft. facility in New Britain, PA housing sales, marketing
and administration personnel and providing additional warehouse space. In addition, we own a
19,000 sq. ft. office building containing additional administrative and laboratory facilities in
Hayward and lease four additional buildings aggregating 92,000 sq. ft. in Hayward and Pleasanton,
CA utilized for additional research and development, administrative services and equipment storage.
We also have currently under construction a 100,000 sq. ft. manufacturing facility in Taiwan. We
expect construction of the facility, which will have an annual production capacity of approximately
450 million tablets and capsules, to be completed and equipment to be installed,
validated, and approved by the FDA in 2009, and product shipments to begin in early 2010.
In our various facilities we maintain an extensive equipment base that includes new or
recently reconditioned equipment for the manufacturing and packaging of compressed tablets, coated
tablets, and capsules. The manufacturing and research and development equipment includes mixers and
blenders for capsules and tablets, automated capsule fillers, tablet presses, particle reduction,
sifting equipment, and tablet coaters. The packaging equipment includes fillers, cottoners,
cappers, and labelers. We also maintain two well-equipped, modern laboratories used to perform all
the required physical and chemical testing of our products. We also maintain a broad variety of
material handling and cleaning, maintenance, and support equipment. We own substantially all of
our manufacturing equipment and believe it is well maintained and suitable for its requirements.
We maintain property and casualty and business interruption insurance in amounts we believe
are sufficient and consistent with practices for companies of comparable size and business.
49
Item 4. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information as of June 17, 2008 (except as otherwise noted in
the footnotes) regarding the beneficial ownership of our common stock by: (i) each person known by
us to beneficially own more than five percent of our outstanding common stock; (ii) each director;
(iii) each executive officer named in the Summary Compensation Table for the fiscal year ended
December 31, 2007; and (iv) all of our directors and executive officers as a group. As of June 17,
2008, 59,019,743 shares of our common stock were outstanding. Except as otherwise indicated, to
our knowledge, the beneficial owners of shares of common stock listed below have sole voting and
investment power with respect to such shares.
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned (1)
|
|
|
Common Stock
|
|
|
Amount and Nature
|
|
|
|
|
of Beneficial
|
|
Percent
|
Name and Address of Beneficial Owner
|
|
Ownership
|
|
of Class
|
Leslie Z. Benet, Ph.D. (2)
|
|
|
30,600
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Robert L. Burr (3)
|
|
|
52,207
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
David S. Doll (4)
|
|
|
174,779
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Nigel Fleming, Ph.D. (5)
|
|
|
39,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Charles V. Hildenbrand (6)
|
|
|
61,459
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Charles Hsiao, Ph.D. (7)
|
|
|
4,104,456
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
Larry Hsu, Ph.D. (8)
|
|
|
2,711,271
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
Arthur A. Koch, Jr. (9)
|
|
|
50,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Michael Markbreiter (10)
|
|
|
31,500
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Michael Nestor
|
|
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Oh Kim Sun (11)
|
|
|
43,179
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
Peter R. Terreri (12)
|
|
|
37,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (10 persons) (13)
|
|
|
7,335,451
|
|
|
|
12.2
|
|
|
|
|
|
|
|
|
|
|
Jacob Gottlieb (14)
|
|
|
5,294,428
|
|
|
|
9.0
|
|
Visium Asset Management, LLC (14)
|
|
|
5,294,428
|
|
|
|
9.0
|
|
Visium Balanced Fund, LP
|
|
|
973,910
|
|
|
|
|
|
Visium Long Bias Fund, LP
|
|
|
531,117
|
|
|
|
|
|
Visium Balanced Offshore Fund, Ltd.
|
|
|
1,958,007
|
|
|
|
|
|
Visium Long Bias Offshore Fund, Ltd.
|
|
|
1,587,367
|
|
|
|
|
|
Atlas Master Fund, Ltd.
|
|
|
244,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Visium Capital Management, LLC
|
|
|
1,505,027
|
|
|
|
|
|
Visium Balanced Fund, LP
|
|
|
973,910
|
|
|
|
|
|
Visium Long Bias Fund, LP
|
|
|
531,117
|
|
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
Shares Beneficially Owned (1)
|
|
|
Common Stock
|
|
|
Amount and Nature
|
|
|
|
|
of Beneficial
|
|
Percent
|
Name and Address of Beneficial Owner
|
|
Ownership
|
|
of Class
|
Gabe Hoffman (15)
|
|
|
3,129,349
|
|
|
|
5.3
|
|
Candens Capital, LLC
|
|
|
1,594,638
|
|
|
|
|
|
Accipiter Life Sciences Fund, LP
|
|
|
708,108
|
|
|
|
|
|
Accipiter Life Sciences Fund II, LP
|
|
|
413,477
|
|
|
|
|
|
Accipiter Life Sciences Fund II (QP), LP
|
|
|
473,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accipiter Capital Management, LLC
|
|
|
1,534,711
|
|
|
|
|
|
Accipiter Life Sciences Fund (Offshore), Ltd.
|
|
|
712,137
|
|
|
|
|
|
Accipiter Life Science Fund II (Offshore), Ltd.
|
|
|
822,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Laurie A. Miller, Esquire (16)
3542 Oak Knoll Drive
Redwood City, CA 94062
|
|
|
3,949,264
|
|
|
|
6.7
|
|
|
|
|
|
|
|
|
|
|
Pequot Capital Management, Inc. (17)
|
|
|
6,330,300
|
|
|
|
10.7
|
|
|
|
|
|
|
|
|
|
|
Wellington Management Company, LLP (18)
|
|
|
7,967,761
|
|
|
|
13.5
|
|
|
|
|
*
|
|
Less than one percent
|
|
(1)
|
|
Beneficial ownership is determined in accordance with the rules of the SEC and includes
voting or investment power with respect to shares of our common stock. Shares of common stock
currently exercisable or exercisable within 60 days of June 17, 2008 are deemed to be
outstanding for computing the beneficial ownership and percentage of beneficial ownership of
the person holding such securities, but are not deemed to be outstanding for computing the
percentage of beneficial ownership of any other person. The address for all our directors and
executive officers is c/o Impax Laboratories, Inc., 30831 Huntwood Avenue, Hayward, CA 94544.
|
|
(2)
|
|
Represents 3,000 shares of common stock held by Mr. Benet directly, 600 shares of common
stock held by The Benet Family Trust, as to which Mr. Benet has sole voting and investment
power, and options to purchase 27,000 shares of common stock, which may be exercised within 60
days of June 17, 2008.
|
|
(3)
|
|
Represents 29,150 shares of common stock held by Mr. Burr directly, 6,057 shares of common
stock held by Robert L. Burr IRA account, as to which Mr. Burr has sole voting and investment
power, and options to purchase 17,000 shares of common stock, which may be exercised within 60
days of June 17, 2008.
|
|
(4)
|
|
Represents 2,279 shares of common stock held by Mr. Doll directly and options to purchase
172,500 of common stock, which may be exercised within 60 days of June 17, 2008. Mr. Doll
resigned as our Executive Vice President, Commercial Operations in August 2008, and his
options to purchase 172,500 shares of common stock were terminated in connection with his
resignation.
|
|
(5)
|
|
Represents 12,000 shares of common stock held by Mr. Fleming directly and options to purchase
27,000 shares of common stock, which may be exercised within 60 days of June 17, 2008.
|
|
(6)
|
|
Represents options to purchase 61,459 shares of common stock, which may be exercised within
60 days of June 17, 2008.
|
|
(7)
|
|
Dr. Hsiao died in August 2008. As of the date of this table, represents 3,471 shares of
common stock held by Dr. Hsiao directly, 3,531,605 shares of common stock held by Charles &
Pamela Hsiao TTEES 2004 Hsiao Family Trust, as to which Dr. Hsiao has sole voting and
investment power, and options to purchase 569,380 shares of common stock, which may be
exercised within 60 days of June 17, 2008. Excludes 2,601,924 shares of common stock held by
Chiin Hsiao Children Irrevocable Trust, as to which Dr. Hsiao does not have voting or
investment power.
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51
|
|
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(8)
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|
Represents 2,383,771 shares of common stock held by Mr. Hsu directly, options to purchase
225,000 shares of common stock held by Mr. Hsu and options to purchase 102,500 shares of
common stock held by Mr. Hsus spouse, which may be exercised within 60 days of June 17, 2008.
Excludes 1,254,320 shares of common stock held by Hsu Children Irrevocable Trust, as to which
Mr. Hsu does not have voting or investment power.
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(9)
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|
Represents options to purchase 50,000 shares of common stock, which may be exercised within
60 days of June 17, 2008.
|
|
(10)
|
|
Represents options to purchase 31,500 shares of common stock, which may be exercised within
60 days of June 17, 2008.
|
|
(11)
|
|
Represents 16,679 shares of common stock held by Mr. Oh directly and options to purchase
26,500 shares of common stock, which may be exercised within 60 days of June 17, 2008.
|
|
(12)
|
|
Represents options to purchase 37,000 shares of common stock, which may be exercised within
60 days of June 17, 2008.
|
|
(13)
|
|
Includes options to purchase 1,346,839 shares of common stock, which may be exercised within
60 days of June 17, 2008.
|
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(14)
|
|
Based solely on Schedule 13G/A filed with the SEC on October 23, 2007 by Jacob Gottlieb,
Visium Balanced Fund, LP (referred to as VBF), Visium Long Bias Fund, LP (referred to as
VLBF), Visium Balanced Offshore Fund, Ltd. (referred to as VBFO), Visium Long Bias Offshore
Fund, Ltd. (referred to as VLBFO), Visium Capital Management, LLC (referred to as VCM), Visium
Asset Management, LLC (referred to as VAM) and Atlas Master Fund, Ltd. (referred to as AMF).
Jacob Gottlieb, by virtue of his position as the principal of VAM and the sole managing member
of VCM, may be deemed to beneficially own 5,294,428 shares of common stock. VCM, by virtue of
its position as general partner to each of VBF and VLBF, may be deemed to beneficially own
1,505,027 shares of common stock, over which VCM has shared voting and investment power. VAM,
by virtue of its position as investment advisor to each of VBF, VLBF, VBFO, and VLBFO as well
as managing an account for AMF, may be deemed to beneficially own 5,294,428 shares of common
stock. Each of VBF, VLBF, VBFO, VLBFO and AMF has shared voting and investment power over the
number of shares beneficially owned by it, as indicated in the table. The principle business
address of VBF, VLBF, VCM and VAM is 950 Third Avenue, New York, NY 10022, the principle
business address of VBFO and VLBFO is P.O. Box 2681 GT, Century Yard, 4
th
Floor,
Cricket Square, Hutchins Drive, Grand Cayman, Cayman Islands, British West Indies, and the
principal business address of AMF is Walker House, P.O. Box 908 GT, George Town, Grand Cayman,
Cayman Islands, British West Indies.
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(15)
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|
Based solely on Schedule 13G filed with the SEC on February 1, 2008 by Gabe Hoffman,
Accipiter Life Sciences Fund, LP (referred to as ALSF), Accipiter Life Sciences Fund
(Offshore), Ltd. (referred to as Offshore), Accipiter Life Sciences Fund II, LP (referred to
as ALSF II), Accipiter Life Sciences Fund II (Offshore), Ltd. (referred to as Offshore II),
Accipiter Life Sciences Fund II (QP), LP (referred to as QP II), Accipiter Capital Management,
LLC (referred to as Management), and Candens Capital, LLC (referred to as Candens). Because
Mr. Hoffman is the managing member of Candens, which in turn is the general partner of ALSF,
ALSF II and QP II, and because Mr. Hoffman is the managing member of Management, which in turn
is the investment manager of Offshore and Offshore II, Mr. Hoffman, Candens and Management, as
applicable, may be deemed to be the beneficial owners of all shares of common stock held by
ALSF, ALSF II, Offshore, Offshore II and QP II. Each of Mr. Hoffman, Candens and Management
has shared voting and investment power over the number of shares beneficially owned by such
person, as indicated in the table. The principal business address of the foregoing reporting
persons is 399 Park Avenue, 38
th
Floor, New York, NY 10022.
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(16)
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Represents 2,601,924 shares of common stock held by Chiin Hsiao Children Irrevocable Trust
and 1,254,320 shares of common stock held by Hsu Children Irrevocable Trust, as to which
Laurie A. Miller, Esq., serves as trustee. Also includes options to purchase 10,007 shares of
common stock and an outstanding March 2004 Call Option that is exercisable into 5,000 shares
of common stock, which may be exercised within 60 days of June 17, 2008.
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(17)
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|
Based solely on Schedule 13G/A filed with the SEC on February 12, 2008 by Pequot Capital
Management, Inc. (referred to as Pequot). Pequot, in its capacity as investment advisor, may
be deemed to beneficially own 6,330,300 shares of common stock which are held by clients of
Pequot, of which Pequot has sole voting power over 5,534,300 shares of common stock and sole
investment power over 6,330,300 shares of common stock. The principal business address of
Pequot is 500 Nyala Farm Road, Westport, CT 06880.
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52
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(18)
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|
Based solely on Schedule 13G/A filed with the SEC on February 14, 2008 by Wellington
Management Company, LLP (referred to as Wellington). Wellington, in its capacity as
investment advisor, may be deemed to beneficially own 7,967,761 shares of common stock, which
are held of record by clients of Wellington, of which Wellington has shared voting power over
6,732,046 shares of common stock and shared investment power over 7,863,161 shares of common
stock. The principal business address of Wellington is 75 State Street, Boston, MA 02109.
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53
Item 5. Directors and Executive Officers.
Directors
Our Board of Directors is currently comprised of seven members. Each director holds office
for a term of one year and until his successor has been elected and shall have qualified or until
the directors earlier death, resignation or removal. Dr. Charles Hsiao had been our chairman and
director since December 14, 1999 until his death in August 2008. Dr. Hsiao was a co-founder of our
predecessor, Impax Pharmaceuticals, Inc., in 1994, and served as our Co-Chief Executive Officer
from 1999 to 2003.
The current members of our Board of Directors, their ages as of June 30, 2008, and the year in
which each became a director are as follows:
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Name
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Age
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Director since
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Positions with Impax
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Leslie Z. Benet, Ph.D.
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71
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2001
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Director
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Robert L. Burr
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57
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2001
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Director
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Nigel Ten Fleming, Ph.D.
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54
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1999
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Director
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Larry Hsu, Ph.D.
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59
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1999
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President, Chief Executive Officer and Director
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Michael Markbreiter
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46
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1997
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Director
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Oh Kim Sun
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59
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1999
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Director
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Peter R. Terreri
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50
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2003
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Director
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Set forth below is the business experience of the members of our Board of Directors for the
past five years and the names of other public companies in which such persons hold directorships.
Leslie Z. Benet, Ph.D. has been a Professor since 1969 of, and has also served as Chairman of,
the Department of Biopharmaceutical Sciences, University of California, San Francisco. Dr. Benet
has since 1995 been Chairman, President or Chief Executive Officer of AvMax Inc., a
biopharmaceutical company. He received his A.B. (English), B.S. (Pharmacy), and M.S. from the
University of Michigan, and his Ph.D. from the University of California. Dr. Benet has received
six honorary doctorates: Uppsala University, Sweden (Pharm.D., 1987); Leiden University, The
Netherlands (Ph.D., 1995); University of Illinois at Chicago (D.Sc., 1997); Philadelphia College of
Pharmacy and Science (D.Sc., 1997); Long Island University (D.Sc., 1999); and University of Athens
(Ph.D., 2005). Dr. Benets research interests, more than 470 publications, and 11 patents are in
the areas of pharmacokinetics, biopharmaceutics, drug delivery, and pharmacodynamics. He is listed
among the 250 most highly cited pharmacologists worldwide. In 1985, Dr. Benet served as President
of the APhA Academy of Pharmaceutical Sciences. During 1986, Dr. Benet was a founder and first
President of the American Association of Pharmaceutical Scientists (AAPS). In 1987, Dr. Benet was
elected to membership in the Institute of Medicine (IOM) of the National Academy of Sciences. Dr.
Benet has received the highest scientific awards of AAPS (1989 and 2000), Rho Chi (1990), American
Association of Colleges of Pharmacy (1991), American Society for Clinical Pharmacology and
Therapeutics (1995), American Pharmaceutical Association (2000), International Pharmaceutical
Federation (2001) and in 2004 received the Pharmaceutical Sciences World Congress Research
Achievement Award and the Controlled Release Society Career Achievement in Oral Drug Delivery
Award. Dr. Benet formerly served as Chair of the FDA Expert Panel on Individual Bioequivalence and
the FDA Center for Biologics Peer Review Committee, and as a member of the FDA Science Board and
the Generic Drugs Advisory Committee. Dr. Benet presently serves as a member of the IOM Forum on
Drug Discovery, Development and Translation.
54
Robert L. Burr is a partner of Fleming US Discovery Partners, L.P., a private equity sponsor
affiliated with J.P. Morgan Chase & Co. Mr. Burr was employed by J.P. Morgan Chase & Co. and
associated entities from 1995 to May 2008, at which time he resigned his position as Managing
Partner of the Fleming US Discovery III Funds. From 1992 to 1995, Mr. Burr was head of Private
Equity at the investment banking firm of Kidder, Peabody & Co., Inc. Prior to that time, Mr. Burr
served as the Managing General Partner of Morgan Stanley Ventures and General Partner of Morgan
Stanley Venture Capital Fund I, L.L.P. and was a corporate lending officer with Citibank, N.A. Mr.
Burr received an MBA from Columbia University and a BA from Stanford University.
Nigel Ten Fleming, Ph.D. is Chairman and Chief Executive Officer of Minerva Healthcare, an
emerging specialty pharmaceutical company. He previously founded Athena Diagnostics, a
neurological diagnostics reference laboratory, serving variously as Chairman, CEO and Vice
President of Business Development prior to the companys 1995 sale to Athena Neurosciences /Elan
Pharmaceuticals. Dr. Fleming has also served on the boards of directors of Examplar, a subsidiary
of Transgenic Sciences Inc. that developed the first transgenic Alzheimers mouse model, and
Genmedica, an oral insulin company based in Barcelona. He has also consulted for, and served in
various leadership roles at a number of early-stage biotechnology companies, including Gamera
Biosciences, Neurocal, Nephros, TheraMed Partners and Plant Cell Technologies. Dr. Fleming
obtained his Ph.D. in Clinical Biochemistry from the University of Cambridge in England and was a
lecturer at Harvard Medical School for a number of years.
Larry Hsu, Ph.D. has been our President and Chief Executive Officer since October 1, 2006.
Prior to holding these positions, Dr. Hsu served as President and Chief Operating Officer beginning
in 1999. Dr. Hsu co-founded Impax Pharmaceuticals, Inc. in 1994 and served as its President, Chief
Operating Officer and a member of the Board of Directors from its inception until its merger with
the Company. From 1980 to 1995, Dr. Hsu worked at Abbott Laboratories, where, during his last four
years, he served as Director of Product Development in charge of formulation development, process
engineering, clinical lot manufacturing and production technical support of all dosage forms,
managing a staff of approximately 250 people. Dr. Hsu obtained his Ph.D. in pharmaceutics from the
University of Michigan.
Michael Markbreiter has been a portfolio manager for Sofaer Capital, a global hedge fund,
since December 2000. From August 1995 to December 1998, Mr. Markbreiter was a portfolio manager
for private equity investments for Kingdon Capital Management Corp., a New York hedge fund. In
April 1994 he co-founded Ram Investment Corp., a venture capital company. From March 1993 to
January 1994, Mr. Markbreiter was an analyst at Alliance Capital Management Corp. From July 1983
to September 1989, Mr. Markbreiter was an Executive Editor for Arts of Asia magazine. Mr.
Markbreiter graduated from Cambridge University with a degree in Engineering.
Oh Kim Sun has been employed by the Chemical Company of Malaysia Berhad (CCM), a Malaysian
corporation whose stock is listed on the Bursa Malaysia Berhad, since 1983 and served as Executive
Director from 1983 through October 2003. Currently, Mr. Oh is a member of the Board of Directors
of UEM World Berhad, Nikko Electronics Berhad, Wawasan TKH Holdings Berhad and Pharmaniaga Berhad,
all of which are listed on the Bursa Malaysia Berhad. Mr. Oh is also a director of various other
companies in Kuala Lumpur. In December 2004, Mr. Oh became a director of CI Resources Limited,
which is listed on the Australian Stock Exchange Ltd. Mr. Oh is also a member of The Malaysian
Institute of Certified Public Accountants.
Peter R. Terreri has over 20 years of experience primarily in generic pharmaceuticals with a
specialized expertise in finance. Mr. Terreri is President and Chief Executive Officer of CGM,
Inc., a manufacturing company that he owns and operates. He previously served as Senior Vice
President and Chief Financial Officer of Teva Pharmaceuticals USA from 1985 through 2000, where he
actively participated in the growth of the company from a $ 20 million local generic pharmaceutical
company into a global leader in generic pharmaceuticals. As an active member of senior management,
he was involved in all facets of the decision-making process at Teva Pharmaceuticals USA, including
structuring and negotiating company and product acquisitions, participating in multiple public
financings and securing several licensing deals and a substantial credit line. In addition to his
role as Chief Financial Officer, Mr. Terreri contributed to many areas related to the companys
success outside of finance, including product development selection, facility utilization, business
development, strategic planning, and implementing integration plans for the companys acquisitions.
He also supervised areas such as operations, sales and marketing, and information technology
during his tenure.
55
Executive Officers
Set forth below are the names of our executive officers who are not also directors, their ages
as of June 30, 2008, their offices in Impax and their principal occupations or employment for the
past five years. David S. Doll was our Executive Vice President, Commercial Operations until his
resignation in August 2008.
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Name
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Age
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Positions with Impax
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Arthur A. Koch, Jr.
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55
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Senior Vice President, Finance, and Chief
Financial Officer
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Charles V. Hildenbrand
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56
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Senior Vice President, Operations
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Michael J. Nestor
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55
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President, Impax Pharmaceutical Division
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Arthur A. Koch, Jr. has served as our Senior Vice President, Finance, and Chief Financial
Officer since March 2005. Prior to joining Impax, Mr. Koch was employed by Strategic Diagnostics
Inc., a company which develops, manufactures and markets immunoassay-based diagnostic test kits.
While at Strategic Diagnostics Inc., Mr. Koch served as Chief Operating Officer for six years,
interim Chief Executive Officer for five months and Chief Financial Officer and Vice President for
five years. In addition, Mr. Koch has previously held Chief Financial Officer positions at
Paracelsian Inc., IBAH Inc., Liberty Fish Company, and Premier Solutions Ltd. Mr. Koch holds a
Bachelor of Business Administration from Temple University and has been a Certified Public
Accountant since 1977.
Charles V. Hildenbrand is our Senior Vice President, Operations, a position he has held since
he joined Impax in August 2004. From 1996 until September 2004, Mr. Hildenbrand worked for PF
Laboratories, Inc. as Plant Manager until 2001 and then as Executive Director of Engineering and
Technical Services until his departure from the company. From 1983 until 1996, Mr. Hildenbrand
worked at Lederle Laboratories/Wyeth as Section Head of Biochemical Production, Manager of Filing
and Packaging, and Production Director of Consumer Health Products. Mr. Hildenbrand holds a B.S.
in Chemical Engineering from Villanova University and an MBA from Lehigh University.
Michael J. Nestor joined us in March 2008 as the President of our branded products division,
Impax Division. Before joining us he was Chief Operating Officer of Piedmont Pharmaceuticals a
specialty pharmaceutical company. Prior to Piedmont, Mr. Nestor was CEO of NanoBio, a startup
biopharmaceutical company, prior to which he was employed by Alpharma, initially as President of
its generic pharmaceutical business and later as President of its branded pharmaceutical business.
Before this he was President, International business at Banner Inc, a global contract manufacturing
concern. Mr. Nestor spent 16 years at Lederle Laboratories / Wyeth holding increasing positions of
responsibility including Vice President, Cardiovascular business, Vice President / General Manager
of Lederle-Praxis Biologics, and Vice President of Wyeth-Lederle Vaccines and Pediatrics. Mr.
Nestor has experience in a number of pharmaceutical therapeutic areas including vaccines,
anti-infectives, dermatologics, CNS, generics, and analgesics. Mr. Nestor has a Bachelor of
Business Administration degree from Middle Tennessee State University and a MBA from Pepperdine
University.
56
Item 6. Executive Compensation.
Compensation Discussion and Analysis
The following discussion provides an analysis of our compensation program for the executive
officers named in the Summary Compensation Table beginning on page 70 of this registration
statement and discusses the material factors involved in our decisions regarding the compensation
of our named executive officers. The executive officers named in the table include Charles Hsiao,
Ph.D., who was our Chairman until his death in August 2008, and David S. Doll, who was our
Executive Vice President until his resignation in August 2008. The following discussion
cross-references those specific tabular and narrative disclosures that appear following this
subsection where appropriate. You should read this Compensation Discussion and Analysis in
conjunction with such tabular and narrative disclosures.
Compensation Overview
Compensation Philosophy and Objectives
At its core, our executive compensation program recognizes that our success is dependent upon
our ability to attract, motivate and retain the highly talented individuals we need to achieve our
business results. The program reflects the following key principles:
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We seek to align the interests of our named executive officers and stockholders
. We
believe that equity compensation is an excellent way to encourage our executive officers
to act in the best interests of our stockholders. Historically, we have provided our
named executive officers with equity awards (primarily in the form of stock options) as
part of their overall compensation package to encourage equity ownership and to place
their interests in line with those of our stockholders. We did not use this component
as to any of our named executive officers during 2007, however, as our compensation
committee determined (as it had done in 2006 and, as to certain named executive
officers, in 2005) that our delinquency in filing our periodic reports with the SEC made
it inappropriate to grant equity awards to our named executive officers. Our
compensation committee may consider granting equity awards to our named executive
officers in 2008.
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To attract, motivate and retain the best talent we can obtain, our compensation
should be competitive.
We strongly believe that our future success rests with our
people, including our executive officers. To be successful, we must be able to attract,
motivate and retain quality executive officers. We realize that compensation is a key
tool to achieve this objective; thus, one facet of our compensation program is to
provide our named executive officers pay amounts and components that are competitive
with those of other companies in our industry.
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Our compensation program should encourage and reward positive performance.
Our
executive compensation program is designed to promote and reward positive performance.
In doing so, we consider both the individual performance of each named executive
officer, as well as the overall performance of our business. Positive performance on
the part of our management and our company will permit our named executive officers to
be eligible to receive incentive compensation. On the other hand, when an individual
executive does not meet stated objectives or our business is facing financial or other
challenges, this incentive compensation may be appropriately reduced
or eliminated.
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Compensation should encourage teamwork and executive cohesion.
While individual performance
is carefully reviewed and considered, we have also maintained a philosophy of pay
equity. This means that we aim to provide similar compensation for our named executive
officers who perform similar functions or who are at similar executive levels. We
believe that following a plan of pay equity discourages internal comparison of
compensation packages among executives and fosters teamwork and
cohesion.
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57
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Our compensation program should balance our short- and long-term financial and
operational goals.
We generally strive to achieve a balance between achievement of both
short- and long-term goals through the use of both salary and annual cash incentives and
equity-based incentives. Our management incentive program primarily rewards short-term
performance by paying out base salary and annual cash incentive awards based on
performance over a period of approximately one fiscal year. Equity-based awards are
generally designed to reward long-term financial performance. As noted, although
long-term equity awards were not granted in 2007 (or in 2006 or, as to certain named
executive officers, in 2005), we may consider resumption of equity compensation in 2008.
|
Generally, we do not believe that gains realized from prior compensation, such as stock option
exercises, or compensation to be received upon a future termination of employment or a change in
control, should be considered in setting elements of compensation in any given year. Reducing or
limiting compensation because of prior gains would unfairly penalize the executive for quality past
performance and may ultimately reduce an executives motivation to continue to perform at high
levels. Tying current compensation to past gains may also serve to make the executives
compensation package less competitive. Moreover, severance and change-in-control compensation is
intended to achieve purposes unrelated to rewarding executives for positive performance and
aligning their compensation to increases in stockholder value.
Our Compensation Decision Making Process
In general, as to most items of compensation, the chief executive officer annually evaluates
each named executive officer, other than himself and our chairman, and recommends each component of
compensation for all of those named executive officers. Compensation not covered by the chief
executive officers evaluation includes benefits and other compensation mandated or determined by
reference to an existing employment or similar agreement.
As to the compensation of our chief executive officer and our chairman, the compensation
committee discusses and creates a proposal as to the amount of and changes to their compensation.
The compensation committee also evaluates the proposals provided by the chief executive officer as
to the compensation of our other named executive officers. The compensation committee then submits
its recommendations regarding the compensation of our named executive officers to the board of
directors for final approval.
Role of Compensation Consultants
While we had not historically engaged a compensation consultant to advise us with respect to
our compensation of named executive officers, beginning with our evaluation of the cash incentive
compensation for 2007 we retained the services of Radford Surveys + Consulting, a business unit of
AON, to assist in our evaluation of such compensation. Radford provided us with a survey of
comprehensive executive and director compensation data and related information at over 500
companies operating in the life sciences industry. We believe that these data provide appropriate
guidelines for our compensation committee and chief executive officer to compare proposed pay
levels for our named executive officers against those paid by other companies in the life sciences
industry.
During 2007, our compensation decision makers used a portion of the Radford data as a
yardstick to assess the amount of base salary we proposed to pay our named executive officers,
except as to David S. Doll, who was then our Executive Vice President and whose base salary
increases were established by our employment agreement with him during his employment with us.
Treating those of the 500 surveyed companies with the highest compensation as being in the 99th
percentile, it was the sense of the board of directors and compensation committee during 2007 that
our base salary should be comparable with those of companies between the 25th and 50th percentiles
of the Radford compensation survey data. The purpose of using these data was to assist the
decision makers in assessing whether their proposed compensation was competitive as compared to
other companies in the life sciences industry. The decision makers considered these data only as a
guidepost to their evaluation of proposed compensation amounts, and there was no mandate that any
actual compensation paid must fall within any set range. Thus, the decision makers had discretion
to consider whether compensation paid should fall within or outside this range, and in some
instances they found it appropriate to set compensation at a level lower or higher than this range.
Our board of directors believed that using the Radford data in this manner was essential to
establishing an appropriate but competitive compensation structure, given our overall performance
and the
58
challenges we faced during 2007. Our board of directors reviews this process each year and
in future years may
determine to measure executive compensation by reference to data of companies in a different
percentile range if our performance criteria or results, as viewed by reference to our yearly
budget, change significantly, or it may choose to implement a different process altogether.
In 2007, our compensation committee asked Radford to review the compensation committees
proposed cash incentive payment calculation methodology and payouts, and total cash delivery, to
Dr. Hsu, our President and Chief Executive Officer; Mr. Doll; Mr. Koch, our Senior Vice President,
Finance and Chief Financial Officer; and Mr. Hildenbrand, our Senior Vice President, Operations.
The compensation committee also asked Radford to review the performance evaluations and criteria
established for each of these named executive officers to determine whether they were consistent
with general market practice in content and approach. The compensation committee used the results
of Radfords reviews to confirm its preliminary view that its proposed compensation amounts and
mechanisms were both competitive and consistent with general market practice.
Components of Our Executive Compensation Program
Overview of Elements of Compensation
Total compensation for our named executive officers is comprised of the following elements:
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base salary;
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annual cash incentive awards;
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options and other equity-based awards (although we did not grant any of these awards
to our named executive officers in 2007 or, as to certain of them, in 2005 and 2006);
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non-qualified deferred compensation plan contributions;
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401(k) retirement plan contributions;
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post-employment and change-in-control benefits, including severance protection; and
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other benefits and perquisites.
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With respect to each of these elements, we provide the following discussion and
analysis:
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a description of the element;
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the objectives of each element;
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the specific performance that each element is designed to reward, if any;
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why we choose to pay each element;
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how we determine the amount of each element; and
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how each element and our decisions regarding that element fit into our overall
compensation objectives and affect decisions regarding those elements.
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Base Salary
Base salary is paid to all employees, including our named executive officers, to provide them
with a degree of financial certainty and a source of fixed compensation to meet their day-to-day
living and other needs. We believe that our base salaries are set competitively, as compared to
other companies in our industry, and thus that they also serve to attract and retain talented
executives. In 2007 Radford confirmed this belief with respect to four of our named executive
officers, including our chief executive officer.
59
We generally set an initial base salary range for a particular level of our executives (for
example, all officers with the title of Senior or Executive Vice President) and then apply that
range to all executives who are at that level. In establishing these base salary ranges, we
consider:
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the individual experience, education, skills and value of the position to us and our
operations;
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the particular needs of our company for an executive at the level being considered;
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our desire to promote a cohesive management team among executives of that level by
establishing internal pay equity; and
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proposed salaries for executives in similar positions in other companies in our
industry, as reflected in the Radford compensation survey data, applying the procedure
described above in Compensation Overview Role of Compensation Consultants.
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Once the base salary range is established for a particular executive level, we then determine
the amount of salary that a specific executive officer will receive. For new hires or promotions
to a particular executive level, we consider:
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the individual experience, education and skills of the particular executive;
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for promotion candidates, the executives prior performance and length of service
with us;
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the salaries of other executives at that level, if any; and
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other special circumstances that may apply to the particular executive.
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We believe that, generally, the salary levels we set for our named executive officers are
less, and in some cases significantly less, than competitive compensation for an executive who:
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is fully experienced and educated as required by the position;
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is a strong performer and strong leader who makes solid contributions; and
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possesses a full skill set for his or her position and applies those skills
successfully.
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Increases in base salary are used to reward executives for their positive performance in the
preceding year and to ensure that their salaries remain competitive. In 2007, our compensation
committee used a comprehensive evaluation process to determine increases in the base salary for our
chief executive officer and our chairman. In this process, the compensation committee first
informally evaluates the performance of the chief executive officer and the chairman during the
year based upon their respective periodic reports to and meetings with the board of directors. The
compensation committee also receives periodic reports from other members of management to assist it
in determining the chief executive officers and the chairmans overall effectiveness. The
compensation committee also examines a series of objective criteria tied to our performance, which
includes, among other things:
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the development of company-wide strategies and goals;
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achieving or exceeding revenue and profit goals outlined in our budgets; and
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improvements in employee growth and turnover rates.
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The compensation committee believes that this evaluative process allows it to obtain a
complete and overall picture of the chief executive officers and chairmans effectiveness during
the year. The use of these objective criteria also ensures that salary adjustments reflect
positive performance that can be tied to measurable increases in stockholder value.
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As of September 1, 2006, increases in Mr. Dolls base salary through September 1, 2009 were
fixed by the terms of his employment agreement with us. See Narrative Disclosure to Summary
Compensation and Grants of Plan-Based Awards Tables Agreements with Our Named Executive Officers
Employment Agreement with David S. Doll. Mr. Doll was our only named executive officer whose
base salary increases were fixed in this manner. The principal reason for fixing his increases was
our hope that, because the employment agreement effectively provided Mr. Doll with the security of
guaranteed increases in base salary regardless of company performance or market conditions, we
would be more likely to retain Mr. Dolls services over the full term of his employment agreement.
In return, Mr. Doll gave up the right to receive salary increases that would be directly tied to
his or our performance, which may ultimately have been higher (but could have been lower) than the
guaranteed increases under his employment agreement.
In determining the amount of each annual salary increase to be specified in Mr. Dolls
agreement, we compared proposed increases with the Radford survey data. Based upon information
available when the employment agreement was being prepared, the salary increases incorporated into
the agreement fell between the 50th and 75th percentiles of the Radford data. While these
increases were higher than those given by the companies with which our executive salaries are
generally comparable, the compensation committee believed that a higher compensation level was
warranted in Mr. Dolls case, as pharmaceutical sales and marketing executives with Mr. Dolls
experience are in relatively high demand. The committee also believed that providing Mr. Doll with
a higher relative level of salary increases was warranted because his expected performance in
developing new relationships with alliance agreement partners would significantly enhance our
financial performance and results of operations and, in turn, lead to increases in stockholder
value.
As for our other named executive officers, base salary adjustments are evaluated and proposed
by the chief executive officer, whose proposals are reviewed by the compensation committee. At the
beginning of each year, a set of objectives is prepared for, and discussed with, each such named
executive officer. These objectives are tailored to each individual executive and are based upon
his or her job responsibilities and on certain of our results of business and financial performance
that reflect directly upon the executives duties. These objectives might include, for example:
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achieving objective operating or financial metrics associated with the executives
role, such as sales, product development milestones and activity levels, operating
efficiency and product reliability;
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developing and implementing particular policies, procedures and systems necessary for
the smooth and proper operation or function of the particular business unit; and
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hiring and retaining appropriate personnel to support specific business units.
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The criteria we established to determine the increases in base salary of our named executive
officers are the same as those we use to determine their respective annual cash incentive awards
(for the purposes of the increases in base salary, the compensation committee determined that the
individual goals of Dr. Hsu and Dr. Hsiao were similar). See Annual Cash Incentive Awards
below for a description of the types of individual and corporate performance goals, the achievement
of which we evaluate to determine the named executive officers salary increase.
In addition to the information provided by these evaluations, in an effort to maintain pay
equity, the chief executive officer generally develops base salary increases for these other named
executive officers consistently among executives serving in similar capacities and with similar
levels of responsibility. The amount of a named executive officers base salary may also serve as
a reference point for determining the amount of his or her other compensation elements. For
example, the potential maximum annual cash incentive award for each executive is derived from a
percentage of the executives base salary.
Annual Cash Incentive Awards
Through annual cash incentive awards, we provide our named executive officers with an
increased cash compensation opportunity and reward them for attaining short-term, rather than
long-term, individual and corporate goals. We believe that a meaningful amount of executive
compensation should be variable and contingent on
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individual and corporate performance.
Establishing executive compensation that is rewarded upon the achievement of these
performance-based criteria, discussed in more detail below, supports our goal of providing
incentives to our
executives who dedicate their full efforts toward achieving our performance objectives, which
in turn makes our business successful and contributes to increases in stockholder value in the
short-term. Generally, our named executive officers who have been in their position during the
year are eligible to receive these cash incentive awards. While our 1999 employment agreements
with Drs. Hsiao and Hsu provide that their annual cash incentive payments will be equal, at the
time of Dr. Hsiaos appointment as non-executive Chairman in 2004 his agreement was orally modified
to provide that only his annual cash incentive target would be the same as Dr. Hsus, with any
actual award being based upon his and Dr. Hsus respective individual performance. Because Dr.
Hsiaos role was changing from an executive to a non-executive position, the compensation committee
determined to forego any cash incentive award to Dr. Hsiao for 2006 and 2007 and to consider a
future cash incentive award to him based upon a cumulative three-year review of his performance at
the end of 2008.
Annual cash incentive awards are generally calculated based upon two primary variables: a
percentage of base salary and performance goals that must be achieved to earn the award. In an
effort to maintain pay parity, executives at the same job level and with similar degrees of
responsibility will generally be assigned the same percentage of base salary.
With the exception of Mr. Dolls annual cash incentive award percentage, which beginning in
September 2006 was set at a target of 75% of his annual base salary in his employment agreement,
the compensation committee evaluates and establishes base salary percentages for our named
executive officers as part of the yearly compensation process. Although the compensation committee
employs its discretion in setting these percentages, its decisions are generally guided by the
overall objectives to maintain pay parity among executives with similar titles and responsibilities
and to provide compensation that is generally compatible with that provided by companies between
the 25th and 50th percentiles of Radfords peer group. Thus, the compensation committee sets these
base salary percentages on a position-by-position basis each year. For 2007, the annual award
target percentage for each of our named executive officers (other than Dr. Hsiao) was 75% of base
salary. Once set, the compensation committee has the discretion to pay at above or below these
percentage targets depending on our overall financial and operational performance and individual
performance. The actual payments it established for 2007 were below the percentage targets.
To determine whether or how much cash incentive compensation is to be received, each named
executive officer is also evaluated against specified performance goals that are designed to ensure
that payment of annual incentive compensation is tied to measurable positive performance and
increases in stockholder value.
During the first quarter of 2007, the board of directors and the compensation committee
established individual goals for the chief executive officer. With respect to each other named
executive officer, during the first quarter of 2007 the chief executive officer developed with each
executive specific individual performance goals and a set of corporate or company-wide goals.
Individual goals were customized to the applicable executive and reflected the responsibilities and
duties that we believe the executive should fulfill in connection with his or her particular
position. Corporate goals reflected company performance as a whole and included criteria based on
the companys achievement of particular performance targets, such as revenue and net income.
With the exception of the chief executive officer, in 2007 individual goals comprised
two-thirds of the total possible cash incentive compensation. Our chief executive officers cash
incentive award is generally determined based entirely upon individual goals, as our compensation
committee believes it is important to have our chief executive officers cash compensation be
determined by reference to the special contributions this officer can make to our overall growth
and development. We prefer to emphasize individual goals because we believe it is important to
provide short-term, cash rewards to our named executive officers for performance that meets and
exceeds what is expected of them. Used this way, our cash compensation program rewards
demonstration of the types of performance, and the presence of executive skill sets, that in our
experience are directly attributable to our growth and an increase in value to our stockholders.
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The following table provides examples of the types of individual performance goals used to
determine cash incentive compensation in 2007 for each named executive officer who participated in
the cash incentive program.
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Named Executive Officer
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General Description of Performance Goals
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Larry Hsu
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Regain compliance with SEC reporting obligations
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Meet or exceed revenue and profit targets
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Establish long-term goals, strategy and planning
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Submit a specified number of ANDAs
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Reduce employee turnover
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Respond timely to FDA comments and requests
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Arthur A. Koch, Jr.
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Regain compliance with SEC reporting obligations
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Perform monthly analysis of budget variances
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Develop and support compensation plans
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Enhance unit and function service levels
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Maintain coordination with sales and marketing functions
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Formalize succession plan
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David S. Doll
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Succeed with product launches and achieve budget objectives
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Develop relationships with alliance agreement partners
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Develop new products and product lines
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Develop and implement policies and procedures within
sales and marketing area for Sarbanes-Oxley Act compliance
purposes
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Charles V. Hildenbrand
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Achieve specified operational, manufacturing,
budgetary and quality control objectives
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Meet specific hiring and staffing objectives
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Submit a specified number of ANDAs
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Except with respect to the chairman (who did not receive any cash incentive compensation in
2007) and the chief executive officer, corporate performance goals represented one-third of the
total weight in determining the named executive officers annual cash incentive awards, which we
believe is appropriate to reflect our philosophy that executive performance must benefit our
company in ways that can be objectively measured and quantified.
For 2007, our corporate performance goals were comprised of a revenue-based goal and a
profit-based goal, and we used non-GAAP financial measures in defining these goals. Because we
defer a substantial portion of the revenue realized under our alliance agreements, we do not
believe our results determined in accordance with GAAP provide as accurate a measure of our
executives annual contribution to corporate performance as a non-GAAP financial measure which
reflects the flows of the products subject to these agreements to drug wholesalers and other
ultimate customers as reported to us by our marketing partners. A comparison of these non-GAAP
measures with our results determined in accordance with GAAP is set forth in the discussion of our
2007 results under Item 2. Financial Information Managements Discussion and Analysis of
Financial Condition and Results of Operations.
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All performance goals are disclosed to and discussed with each executive at the beginning of
the year. An executive must generally be actively employed by us on the payment date to receive an
annual cash incentive award. Each set of performance goals counts for a portion of the total
potential bonus that may be received, and items constituting individual performance goals are
individually weighted. The portion of the bonus based on overall corporate performance is earned
in full if the goals are met. Payouts of cash incentive awards are determined in part by the
compensation committees or chief executive officers determination as to whether such goals were
achieved in whole or in part. See Summary Compensation Table and Grants of Plan-Based
Awards During Fiscal Year Ended December 31, 2007 for the amounts related to actual cash incentive
awards paid out by us and the target annual cash incentive awards for 2007 performance.
Equity Awards
We maintain the Impax Laboratories, Inc. 2002 Amended and Restated Equity Incentive Plan for
the purpose of granting stock options and other equity-based awards, such as stock appreciation
rights (commonly known as SARs) and stock bonus awards (commonly known as restricted stock awards),
to our employees, including our named executive officers. We have historically granted to our
named executive officers only stock options, including incentive stock options and non-qualified
stock options, under the 2002 plan. During 2007 (as well as 2006 and 2005 as to certain named
executive officers) we did not grant any equity awards to any of our named executive officers. We
may consider making awards of stock options or other equity incentive awards to our named executive
officers in 2008.
Option awards produce value to our named executive officers only if the price of our stock
appreciates, and then only to the extent of the excess of our stock price over the exercise price
of the option. Our stock options are granted with an exercise price equal to the fair market value
on the date of grant to avoid providing any immediate benefit to the named executive officer upon
grant. Option awards also link the interests of our executives to our stockholders in that the
exercise of an option would result in the executive being issued shares of our common stock.
Because they generally vest incrementally over time, options create an incentive for named
executive officers to continue their employment with us for extended periods after the initial
grant.
We have established procedures for granting equity awards to all of our eligible employees,
including our named executive officers. Each year we establish a stock option or stock bonus award
amount (the equity compensation award) for each level of responsibility within our organization,
subject to approval by the compensation committee. In arriving at the option component of the
equity compensation award, we use a number of factors, including the grant date fair value of the
option as determined by SFAS No. 123R and the percentage of total shares outstanding that each
option would represent if exercised in full. Grants are made in the following three ways:
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New hires and promotions
. During the first week of the third month of each calendar
quarter we grant an equity compensation award to any employee who was hired or promoted
during the preceding quarter (the grant to promoted employees being made only to the
extent necessary to make their equity compensation award comparable to those made to
others at the new level of responsibility).
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Annual grants
. During the second two weeks of each October we make a grant equal to
half the current applicable equity compensation award to each eligible employee.
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Special grants
. During the final week of each June and December, we make special
awards for exemplary individual performance to employees selected by the chief executive
officer from a pool of candidates recommended by senior management.
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The board of directors or compensation committee, however, retains discretion, in appropriate
circumstances, to provide a different amount of equity awards for both the new hire/promotion and
the annual grants. We might, for example, increase the number of options above the specified
amount if needed to retain an executive who would, upon leaving his current position, be required
to forfeit a substantial unvested option or restricted stock position. We have not, and in the
future do not intend to, time the award of any equity-based compensation to coincide with the
release of favorable or unfavorable information about us.
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Our equity awards are issued as long-term compensation that generally vest over a period of
four years. This is consistent with our philosophy of linking the financial interests of our named
executive officers to that of stockholders. The long-term compensation balances the short-term
compensation paid in the form of base salary and
annual incentive awards. We strive to keep option grants at the same level as our cash and
incentive compensation,
i.e.
, between the 25th and 50th percentiles of companies included in the
Radford survey.
For all of our equity awards, we establish the amount to be awarded to each of our named
executive officers based upon the level of each position. As part of our goal of maintaining pay
parity wherever possible, we tend to grant the same or similar amounts of options to executives
with similar titles and levels of responsibility. Grants of awards under the 2002 plan must be
approved by the board of directors or a committee (or subcommittee) consisting of two or more
outside directors. For all named executive officers, except our chief executive officer and
chairman, option amounts and terms are generally proposed by our chief executive officer, subject
to ultimate approval by the board of directors or compensation committee. Option grants to our
chief executive officer and chairman are determined solely by the board of directors or
compensation committee.
In our September 2006 employment agreement with Mr. Doll, we agreed to grant him two awards of
options and stock bonuses, subject in each case to approval by our stockholders of an amendment to
our 2002 plan to provide enough shares of common stock to permit the issuance of these awards. For
a discussion of these provisions, see Narrative Disclosure to Summary Compensation and Grants
of Plan-Based Awards Tables Agreements with Our Named Executive Officers Employment Agreement
with David S. Doll.
Unlike options, stock bonus awards provide value to our named executive officers immediately
upon grant and increase in value based upon increases in the market price for our common stock.
Also, unlike base salary and annual cash incentive awards, stock bonus awards are designed to serve
as compensation to reward long-term performance, as the awards do not fully vest until a period of
seven years has elapsed. The vesting period of these stock bonus awards is substantially longer
than the options we agreed to grant to Mr. Doll, which were subject to a four-year vesting period.
As a result, the equity compensation to be awarded to Mr. Doll would effectively reward him for his
performance over a substantially longer time frame than the option awards.
Prior to agreeing to issue these awards, we had not issued stock bonus awards to any of our
named executive officers, and, while we reserve the right to do so in the future, we presently do
not have any intention to issue other stock bonus awards to our named executive officers. We also
agreed to issue these awards even though we have generally suspended the granting of equity awards
to our executive officers, as discussed above. We decided to take a different approach to equity
awards under Mr. Dolls employment agreement primarily for the following reasons:
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First, we determined that the executive having responsibility for our sales and
marketing functions is a valuable asset to our company. Mr. Dolls overall industry and
sales experience allowed him to take on an increased amount of responsibility in his
position, including business and product development and the growth of vital strategic
relationships and alliance agreements partnerships.
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Second, we recognized that there is significant competition in our industry for
employees with Mr. Dolls experience. We also became aware that many of our competitors
have been increasingly using stock bonuses as an inducement to attract, retain and
motive their key employees. As a result, we believed that stock bonus awards would need
to be a key element in any compensation package we offered Mr. Doll.
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Third, we believed that a central component of our ability to retain Mr. Doll as a
key member of our management team was providing him with direct and tangible equity
ownership in our company, which we could only do through stock bonus awards.
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We agreed with Mr. Doll that if our stockholders did not approve the issuance of the equity
awards contemplated in that agreement, he would be entitled to receive the economic benefits of
such awards, as determined by the compensation committee. In doing so, we wanted to provide Mr.
Doll with the economic equivalent of these awards and not penalize him if for some reason our
stockholders do not approve the amendments to the 2002 plan to permit their issuance. We also
agreed that, upon exercise of his options, we would reimburse Mr. Doll for the difference, if any,
between the exercise price he ultimately pays (which will be equal to the fair market value of
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our common stock on the date the options are deemed granted under SFAS No. 123R) and the exercise price
he would have paid had the options been granted on the date of the employment agreement. We wanted
to prevent Mr. Doll from suffering any economic loss or hardship upon exercising the options
because the 2002 plan did not, on the date of the employment agreement, have sufficient shares to
permit the award of his options.
401(k) Plan and Non-Qualified Deferred Compensation Plan
Contributions
Retirement plans, in general, are designed to provide executives with financial security after
their employment has terminated and, through the incremental vesting of our matching contributions
to such plans over time, provide a retentive element to the overall pay package. Our named
executive officers are eligible to participate in the Impax 401(k) Profit Sharing Plan, which
allows them to contribute a portion of their base salary and bonus to support their financial needs
upon retirement. We also contribute to each participants account an amount equal to 50% of the
amount contributed by the named executive officer, with our contribution not to exceed 6% of the
participants base salary and bonus. Our matching contributions to the 401(k) plan vest depending
on the number of years the named executive officer has worked at our company, with all matching
contributions vesting after the third year of service at the company. Amounts contributed to the
401(k) plan are invested in one or more investment fund options. Participants generally do not pay
U.S. federal income tax on contributions to or earnings in the 401(k) plan until the participant
makes withdrawals from his or her plan account.
Our named executive officers also are eligible to participate in the Impax Laboratories, Inc.
Executive Non-Qualified Deferred Compensation Plan, restated effective January 1, 2005. See
Non-Qualified Deferred Compensation During Fiscal Year Ended December 31, 2007 and Narrative
Disclosure to Non-Qualified Deferred Compensation Table. We make a matching contribution for each
participant equal to 50% of the participants contribution, not to exceed 5% of the participants
base pay and bonus per year. A participants account is notionally invested in one or more
investment funds and the value of the account is determined with respect such investment
allocations. We retain the discretion to reduce the level of matching contributions or eliminate
them altogether, but we have not chosen to do so.
These benefits are offered to provide financial security and peace of mind for our executives.
Because we do not provide either a qualified or a non-qualified defined benefit pension plan
(often referred to as a SERP), we believe that the overall retirement plan benefits for our named
executive officers are modest as compared to other public companies of our size. We also believe
these contributions represent standard benefits that executive-level employees of public companies
commonly receive. For these reasons, we do not take these matching contributions into
consideration when setting other aspects of compensation for our executive officers.
Employment Agreement with David S. Doll
Stemming from the March 2006 decision of Barry R. Edwards to retire as our Chief Executive
Officer, Mr. Edwards and Dr. Hsu decided that Mr. Doll, who was at the time our Senior Vice
President, Sales and Marketing, would continue to play a key role as a part of our senior
management team. Prior to this time, Mr. Doll did not have an employment agreement with us.
As part of the succession-planning process, we believed it was important to retain continuity
in the executive commercial development function, given the importance of that role and its direct
impact upon our future success. To retain Mr. Dolls services and to provide him with a level of
employment security, we offered Mr. Doll the possibility of entering into an employment agreement
with us, which he accepted. In the months that followed, we discussed with Mr. Doll the framework
for an employment agreement, with Mr. Edwards and Dr. Hsu leading these discussions for us. On
September 1, 2006, after discussions between the parties had been successfully concluded, we
entered into a three-year employment agreement with Mr. Doll, pursuant to which he was promoted to
the position of Executive Vice President, Commercial Operations.
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Post-Employment and Change-in-Control Benefits
We entered into employment agreements with each of Dr. Hsiao and Dr. Hsu in 1999 and with Mr.
Doll in 2006. See Narrative Disclosure to Summary Compensation and Grants of Plan-Based Awards
Tables Agreements with Our Named Executive Officers for a summary of certain material terms of
such agreements.
As part of these employment agreements, we provide certain benefits upon:
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a termination of employment due to the executives death or disability;
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a termination of employment by us other than for cause, as defined in the employment
agreement; or
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a termination of employment by the executive for good reason, as defined in the
employment agreement, including upon a change in control.
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In the case of each employment agreement, the terms of these arrangements were set through the
course of arms-length negotiations with each of the named executive officers. As part of these
negotiations, the compensation committee analyzed the terms of the same or similar arrangements for
comparable executives employed by other companies in the Radford survey. This approach was used by
the compensation committee in setting the amounts payable and the triggering events under the
arrangements.
Severance payments include a cash payment that is generally based upon the salary and annual
incentive payment history of the named executive officer at issue. Severance benefits may also
include the accelerated vesting of our matching contributions under the non-qualified deferred
compensation plan, the accelerated vesting of stock options and stock bonus awards, and the
extension of the exercisability of an award. We may also agree to gross up the amount of the
executives severance payment to account for the executives excess parachute payment excise tax
liability. The amount of this gross-up payment may be influenced by the value of options and stock
bonus awards that vest on an accelerated basis.
Generally speaking, we provide severance to our executives to give them financial peace of
mind in the event they suffer an involuntary termination other than for cause. We believe that the
risk or possibility of an involuntary termination or change in control creates uncertainty for
named executive officers regarding their continued employment with us. These scenarios may
include, among other things, a termination of employment or a change in an executives job
location, position or duties, whether on an individual basis or due to an overall reduction in or
change to our workforce, or a change in other members of senior management resulting from a change
in control event. As a result, our severance benefits are intended to encourage the long-term
retention of our executives.
Severance benefits for a change in control are paid pursuant to a single trigger; that is,
they are earned regardless of whether the executive has been terminated or demoted or has otherwise
experienced any diminution in compensation or duties. We believe that a single trigger gives our
executives a modest level of financial security and peace of mind in the event that we experience a
change in control, regardless of whether the executive has suffered or will suffer any specific
adverse employment circumstance.
We believe that all of our severance and termination-related benefits are typical of those
received by other executives in our industry in both structure and amount. See Potential
Payments upon Termination or Change in Control for a summary of these severance and change in
control provisions, the amount of potential payments that our named executive officers might
receive and the method by which these benefit levels were determined.
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Other Benefits and Perquisites
Our named executive officers participate in a wide array of benefit plans that are available
to all of our salaried employees generally, including medical, dental, life and long-term
disability insurance plans. Most of these benefits provide financial security and peace of mind
for employees and executives and are generally viewed as a standard part of basic employee benefits
within our industry. We generally do not provide to our named executive officers any material
compensation in the form of perquisites.
Tax and Accounting Treatment of Compensation
Section 162(m)
Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, currently limits
the deductibility for U.S. federal income tax purposes of certain compensation paid in any year by
a publicly held corporation to its chief executive officer and any other employee whose
compensation is required to be reported to stockholders by reason of being among the three most
highly compensated officers. As a result of Section 162(m), we cannot deduct for U.S. federal
income tax purposes any compensation paid to any of these employees in an amount over $ 1 million
unless the compensation is performance-based compensation as defined under Section 162(m).
Amounts we pay as base salary and annual cash incentive compensation do not qualify for the
performance-based compensation exception. Although we intend that options and other awards
issued under our 2002 plan not be subject to the $ 1 million limitation in reliance upon this
exception, compliance with the performance-based compensation exception is subject to a number of
very technical requirements. Although the deductibility of compensation we have paid to executive
officers has not been impacted by Section 162(m) in 2007, there can be no assurance that we will be
able to comply with all of these requirements in the future.
Section 280G
Under Section 280G of the Code, a 20% excise tax is imposed upon named executive officers and
other executive officers or employees who receive an excess parachute payment upon a change in
control. An excess parachute payment is deemed to be received to the extent that such a
change-in-control payment exceeds an amount approximating three times the employees average annual
compensation, determined by a five-year average. A company also loses its tax deduction for any
excess parachute payments made.
We attempt to structure our severance packages so that they do not trigger an excess parachute
payment (or a corresponding loss of our tax deduction), but there is no guarantee that the
severance arrangements we have entered into will not require such a payment if and when they are
triggered. Our employment agreements typically do not require us to reimburse an executive officer
for the amount of any excise tax owed as a result of an excess parachute payment, although we may
voluntarily agree to provide such a reimbursement to an executive officer in appropriate
circumstances.
Section 409A
Section 409A of the Code provides for the payment of additional taxes by our directors,
officers and employees with respect to various deferred compensation arrangements we maintain,
including:
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employment and severance agreements between us and our officers;
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our non-qualified deferred compensation plan; and
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other compensation arrangements we enter into with our directors, officers and
employees.
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Generally, however, Section 409A of the Code does not apply to incentive stock options and
nonqualified stock options that are granted at fair market value if no deferral is provided beyond
exercise. Section 409A also does
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not apply to our stock bonus awards. In the event that a deferred compensation arrangement
fails to comply with Section 409A in form or operation, an officer, director or employee may become
subject to:
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the imposition of U.S. federal income tax, and potentially state and local income
tax, on all amounts deferred in the tax year in which the amounts are deferred (or, if
later, in the tax year when the receipt of the benefits is no longer subject to a
substantial risk of forfeiture);
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a penalty tax of 20% of the includable amount (in addition to the regular income tax
at ordinary income rates); and
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interest at the underpayment rate plus 1 percent from the time the amount was first
deferred (or, if later, the tax year when the benefits are no longer subject to a
substantial risk of forfeiture) until the time the amount is included in income.
|
Deferred compensation arrangements may, in some cases, be amended to avoid the adverse tax
consequences of Section 409A. Such amendments must be made no later than December 31, 2008. We
are in the process of evaluating our deferred compensation plans, employment and severance
agreements and other compensation arrangements covered by Section 409A. We intend to make
appropriate changes to comply with the requirements of Section 409A and the accompanying
regulations to ensure that there are no adverse tax consequences for our directors, officers and
employees. We may be required to renegotiate some or all of these agreements or arrangements with
our directors and executive officers or to make changes to our deferred compensation plan, to bring
them into compliance with Section 409A.
SFAS No. 123R
Accounting rules and pronouncements govern how we value option and stock bonus awards that we
make and when those awards are to be recognized as compensation expense on our consolidated
financial statements. Under SFAS No. 123R, we calculate the full grant date fair value of awards
using a variety of assumptions. This calculation is performed for accounting purposes, as an
executive officer might never realize any value from the award. This may happen, for example, when
the value of a share of stock on which the executive holds an option falls below the exercise price
of the option and remains below the exercise price, rendering the option worthless to the
executive. SFAS No. 123R also requires that companies recognize the compensation cost of a stock
option or stock bonus award proportionately over the period that an employee is required to render
service in exchange for a share-based payment.
In
the Summary Compensation Table on page 70, the dollar amounts shown in the Option Awards
column represent the compensation expense recognized by us in 2007 for awards made prior to 2007.
These amounts do not necessarily represent the value received by an executive officer during 2007.
To date, the SFAS No. 123R expense has not been a significant factor in setting or changing our
equity compensation grant practices.
69
Summary Compensation Table
The following table sets forth information relating to all compensation awarded to, earned by
or paid to the following individuals for all services rendered in all capacities to us during each
of the fiscal years ended December 31, 2007 and December 31, 2006:
|
|
|
all individuals serving as our principal executive officer;
|
|
|
|
|
our principal financial officer; and
|
|
|
|
|
our two most highly compensated executive officers in the fiscal year ended December
31, 2007 whose total compensation exceeded $ 100,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
Name and
|
|
|
|
|
|
|
|
|
|
Option
|
|
Plan
|
|
All Other
|
|
|
Principal
|
|
|
|
|
|
Salary
|
|
Awards ($)
|
|
Compensation
|
|
Compensation
|
|
Total
|
Position
|
|
Year
|
|
($)
|
|
(1)
|
|
($) (2)
|
|
($) (3)
|
|
($)
|
Charles Hsiao, Ph.D.
|
|
|
2007
|
|
|
$
|
375,000
|
|
|
$
|
6,976
|
|
|
$
|
|
|
|
$
|
37,662
|
(4)
|
|
$
|
419,638
|
|
Chairman (principal executive officer)
|
|
|
2006
|
|
|
|
394,231
|
|
|
|
49,014
|
|
|
|
|
|
|
|
56,325
|
(4)
|
|
|
499,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry Hsu, Ph.D.
|
|
|
2007
|
|
|
|
375,000
|
|
|
|
6,976
|
|
|
|
243,750
|
|
|
|
63,292
|
(5)
|
|
|
689,018
|
|
President and
Chief Executive Officer
|
|
|
2006
|
|
|
|
394,231
|
|
|
|
49,014
|
|
|
|
253,125
|
|
|
|
54,128
|
(5)
|
|
|
750,498
|
|
(principal
executive officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur A. Koch, Jr.
|
|
|
2007
|
|
|
|
243,472
|
|
|
|
|
|
|
|
167,500
|
|
|
|
34,713
|
(6)
|
|
|
445,685
|
|
Senior Vice President,
|
|
|
2006
|
|
|
|
230,937
|
|
|
|
|
|
|
|
143,902
|
|
|
|
27,250
|
(6)
|
|
|
402,089
|
|
Finance
and Chief Financial Officer (principal financial officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Doll
|
|
|
2007
|
|
|
|
324,250
|
|
|
|
2,790
|
|
|
|
216,745
|
|
|
|
38,544
|
(7)
|
|
|
582,239
|
|
Executive Vice
President,
Commercial
Operations
|
|
|
2006
|
|
|
|
288,315
|
|
|
|
18,053
|
|
|
|
197,650
|
|
|
|
28,595
|
(7)
|
|
|
532,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles V. Hildenbrand
|
|
|
2007
|
|
|
|
219,801
|
|
|
|
|
|
|
|
143,430
|
|
|
|
31,483
|
(8)
|
|
|
394,714
|
|
SVP-Operations
|
|
|
2006
|
|
|
|
204,148
|
|
|
|
|
|
|
|
124,189
|
|
|
|
25,943
|
(8)
|
|
|
354,280
|
|
|
|
|
(1)
|
|
Represents the dollar amount of share-based compensation expense recognized for financial
statement reporting purposes for the fiscal years ended December 31, 2007, 2006 and 2005, as
applicable, in accordance with SFAS No. 123R based on assumptions set forth in Note 15 to the
consolidated financial statements included in this registration statement and disregarding the
estimate of forfeitures related to service-based vesting conditions. These dollar amounts
relate to awards granted prior to 2007 and 2006, as applicable.
|
|
(2)
|
|
Represents annual cash incentive awards paid in 2008 for 2007 performance and paid in 2007
for 2006 performance.
|
70
|
|
|
(3)
|
|
In 2007, we paid matching contributions on amounts deferred by our named executive officers
to our non-qualified deferred compensation plan and 401(k) plan from their respective 2007
salaries and cash incentive awards paid in 2007 with respect to 2006 performance. Our
matching contributions for 2006 relate to amounts deferred by our
named executive officers to our qualified deferred compensation plan and 401(k) plan from their
respective 2006 salaries and cash incentive awards paid in 2006 with respect to 2005 and 2004
performance.
|
|
(4)
|
|
Represents the following: (i) our matching contribution of $ 18,750 and $ 41,833 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $ 13,577 and $ 10,211 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $ 5,335 and $ 4,281,
in the aggregate, respectively.
|
|
(5)
|
|
Represents the following: (i) our matching contribution of $ 31,406 and $ 41,350 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $ 10,655 and $ 9,922 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $ 21,231 and $ 2,856
in the aggregate, respectively.
|
|
(6)
|
|
Represents the following: (i) our matching contribution of $ 19,369 and $ 14,371 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $ 7,991 and $ 5,766 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $ 7,353 and $ 7,113,
in the aggregate, respectively.
|
|
(7)
|
|
Represents the following: (i) our matching contribution of $ 26,095 and $ 18,504 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $ 7,518 and $ 7,500 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $ 4,931 and $ 2,591,
in the aggregate, respectively.
|
|
(8)
|
|
Represents the following: (i) our matching contribution of $ 6,880 and $ 3,184 under our
non-qualified deferred compensation plan, with respect to the fiscal years ended December 31,
2007 and 2006, respectively; (ii) our matching contributions of $ 10,235 and $ 8,391 under our
401(k) plan, with respect to the fiscal years ended December 31, 2007 and 2006, respectively;
and (iii) our medical, life insurance and long-term disability insurance premium payments
during the fiscal years ended December 31, 2007 and 2006, respectively, of $ 14,368 and
$ 14,368, in the aggregate, respectively.
|
71
Grants of Plan-Based Awards During Fiscal Year Ended December 31, 2007
The following table sets forth information regarding grants of non-equity incentive plan
awards to our named executive officers during the fiscal year ended December 31, 2007. We did not
grant any equity awards to our named executive officers during 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Possible Payouts
|
|
|
Under Non-Equity Incentive
|
|
|
Plan Awards
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
Name
|
|
($)(1)
|
|
($)(2)
|
|
($)(1)
|
Charles Hsiao, Ph.D.
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Larry Hsu, Ph.D.
|
|
|
|
|
|
|
281,250
|
|
|
|
|
|
Arthur A. Koch, Jr.
|
|
|
|
|
|
|
182,604
|
|
|
|
|
|
David S. Doll
|
|
|
|
|
|
|
243,188
|
|
|
|
|
|
Charles V. Hildenbrand
|
|
|
|
|
|
|
164,851
|
|
|
|
|
|
|
|
|
(1)
|
|
We do not establish threshold or maximum amounts, as such terms are used in this table under
the applicable SEC rules, in connection with our non-equity incentive plan awards.
|
|
(2)
|
|
This amount represents a maximum award of 75% of the named executive officers base salary
earned during the fiscal year ended December 31, 2007. The compensation committee retains its
discretion to establish base salary percentages, which were set at 75% for all named executive
officers for 2007. Once set, the compensation committee has the discretion to pay at above or
below these percentage targets depending on our overall financial and operational performance
and individual performance. See - Compensation Discussion and Analysis Components of Our
Executive Compensation Program Annual Cash Incentive Awards for a discussion of performance
goals that the named executive officers should achieve to earn the awards.
|
72
Narrative Disclosure to Summary Compensation and Grants of Plan-Based Awards Tables
Agreements with Our Named Executive Officers
During the fiscal year ended December 31, 2007, we had employment agreements with Drs. Hsiao
and Hsu and Mr. Doll. The following is the description of certain material terms of these
agreements. This description is intended as a summary only and is qualified in its entirety by
reference to the complete text of the employment agreements, which are filed as exhibits to this
registration statement.
Employment Agreements with Charles Hsiao and Larry Hsu
At the closing of the merger of Global Pharmaceutical Corporation and Impax Pharmaceuticals,
Inc., effective December 14, 1999, we entered into employment agreements with Dr. Hsiao and Dr.
Hsu. In January 2004, we amended Dr. Hsiaos employment agreement.
Each of the employment agreements contains substantially similar terms. The employment
agreements contain initial three-year terms that automatically renew for successive one-year
periods unless terminated by either party at least six months prior to the expiration of the
initial term or any renewal term.
Pursuant to the employment agreements, base salary for each executive was initially set at
$ 175,000 per year, subject to discretionary increases in accordance with our normal procedures and
policies. We also agreed to provide Drs. Hsiao and Hsu with additional compensation, including:
a bonus, based on criteria established by our board of directors;
full health, dental, vision and disability insurance, as well as life
insurance and
any other benefits customarily offered to our senior executive officers;
four weeks of paid vacation time annually; and
the reimbursement of all out-of-pocket expenses related to job performance.
The employment agreements contain customary non-competition, non-interference, non-disclosure
and assignment of inventions provisions.
Each of Drs. Hsiao and Hsus employment agreements contains provisions that provide them with
benefits upon termination or a change in control. See Potential Payments upon Termination or
Change in Control. Dr. Hsiao died in August 2008.
Employment Agreement with David S. Doll
Our September 1, 2006 employment agreement with Mr. Doll, our Executive Vice President,
Commercial Operations, provided for an initial three-year term, which automatically renews for
successive one-year periods unless terminated by either party at least 60 days prior to the
expiration of the initial term or any renewal term. The agreement set Mr. Dolls initial annual
base salary at $ 295,000 and provided for increases to $ 335,000 beginning February 1, 2007 and
$ 395,000 beginning February 1, 2008. The maximum amount of Mr. Dolls cash incentive award was set
at 75% of his base salary. Under the employment agreement, he was to be evaluated for eligibility
to receive this award under the same procedures we have implemented for our other named executive
officers. See Compensation Discussion and Analysis Components of Our Executive Compensation
Program Annual Cash Incentive Awards.
Mr. Doll was entitled to receive a number of paid vacation days in each calendar year as
determined by us from time to time for our senior executive officers. Unused vacation days could
not be accrued, carried over or otherwise converted into compensation. We also agreed to provide
Mr. Doll with any fringe benefits available to our senior executive officers and such other fringe
benefits as our board of directors or the compensation committee may deem appropriate, as well as
to reimburse him for all out-of-pocket expenses related to his job performance.
73
Under his employment agreement, Mr. Doll received, subject to stockholder approval, an option
under our 2002 plan to purchase 30,000 shares of common stock, which option vested in four equal
annual increments beginning on the first anniversary of the date of grant. He was also eligible to
receive on September 1, 2008, subject to stockholder approval, a second option to purchase 30,000
shares of common stock, which option would also vest in four equal annual increments beginning on
the first anniversary of the date of grant. These options were to have an exercise price equal to
the fair market value of our common stock on the date our stockholders approve amendments to our
2002 plan to permit the issuance of the options to Mr. Doll. To the extent that the fair market
value of the common stock on the date the option is approved was higher than the value of our stock
on the date of the employment agreement, we agreed to credit the amount of such excess to Mr. Doll
upon his exercise of the option.
Mr. Doll also received, subject to stockholder approval, a stock bonus award under our 2002
plan of 30,000 shares of common stock, which award vested in seven equal annual increments. He was
also eligible to receive on September 1, 2008, subject to stockholder approval, a second stock
bonus grant of 30,000 shares of common stock also vesting in seven equal annual increments. In
order to enable Mr. Doll to satisfy the minimum withholding tax obligations with respect to the
vesting of the stock bonus awards, we would withhold from the stock bonus awards that vest each
year a number of shares having a fair market value equal to the amount required to be withheld. If
stockholder approval permitting the grant of these options and stock bonuses was not obtained prior
to the expiration or termination of the employment agreement or a change in control, Mr. Doll would
be entitled to receive the economic benefits of all such awards, as reasonably determined by our
compensation committee.
Under the employment agreement, Mr. Doll was subject to non-disclosure, non-disparagement, and
intellectual-property-assignment provisions and was, and for one year after termination of the
agreement would continue to be, prohibited from soliciting our current or former customers,
contractors, subcontractors, vendors or suppliers to cease doing business with us, and from
soliciting our employees to leave their employment with us. In addition, Mr. Doll agreed to
indemnify us from any liability that arises due to his failure to comply with these covenants.
Mr. Dolls employment agreement also contained termination, severance and change in control
provisions. See Potential Payments upon Termination or Change in Control.
We entered into a separation agreement with Mr. Doll, dated July 30, 2008, under which he
resigned his position effective August 1, 2008, the September 1, 2006 employment agreement was
terminated and Mr. Dolls rights with respect to the options to purchase 60,000 shares and the
stock bonus awards granted and to be granted under the employment agreement, as well as his rights
under fully vested options to purchase 172,500 shares of common stock separately held by Mr. Doll,
were terminated. Under the separation agreement we agreed to pay Mr. Doll separation benefits
consisting of $ 620,000 and 94,705 shares of our common stock. The agreement also subjects Mr. Doll
to non-disclosure and non-disparagement provisions and prohibits him from soliciting our employees
to leave their employment with us. We and Mr. Doll also executed mutual releases of any claim each
might have against the other arising out of Mr. Dolls employment.
In addition, we entered into a one-year consulting agreement with Mr. Doll effective September
4, 2008, under which, Mr. Doll agreed to provide us with certain litigation-related services upon
our request. Pursuant to the consulting agreement, Mr. Doll was granted 9,836 shares of our common
stock, and we agreed to compensate Mr. Doll at the rate of $ 275 per hour for his services. The
consulting agreement also subjects Mr. Doll to certain disclosure, assignment of intellectual
property, and confidentiality requirements. We may terminate the consulting agreement for no
reason upon 45-days written notice to Mr. Doll. Mr. Doll may terminate the consulting agreement
only in the event of our material breach of the agreement which has not been cured within 45 days
notice of such breach.
74
Comparison of Salary and Bonus to Total Compensation Paid
The table below sets forth the amount of salary and annual cash incentive award for each named
executive officer as a percentage of total compensation paid with respect to 2006 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
|
|
|
|
Salary as
|
|
Payments as
|
|
|
|
|
|
|
Percentage of
|
|
Percentage of
|
|
|
|
|
|
|
Total
|
|
Total
|
|
|
|
|
|
|
Compensation
|
|
Compensation
|
Name
|
|
Year
|
|
(%)
|
|
(%)
|
Charles Hsiao, Ph.D.
|
|
|
2007
|
|
|
|
89
|
|
|
|
|
(1)
|
|
|
|
2006
|
|
|
|
79
|
|
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry Hsu, Ph.D.
|
|
|
2007
|
|
|
|
54
|
|
|
|
35
|
|
|
|
|
2006
|
|
|
|
53
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur A. Koch, Jr.
|
|
|
2007
|
|
|
|
55
|
|
|
|
38
|
|
|
|
|
2006
|
|
|
|
57
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Doll
|
|
|
2007
|
|
|
|
56
|
|
|
|
37
|
|
|
|
|
2006
|
|
|
|
54
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles V. Hildenbrand
|
|
|
2007
|
|
|
|
56
|
|
|
|
36
|
|
|
|
|
2006
|
|
|
|
58
|
|
|
|
35
|
|
|
|
|
(1)
|
|
Because Dr. Hsiaos role was changing from an executive to a non-executive position,
the compensation committee determined to forego any cash incentive award to Dr. Hsiao for
2006 and 2007 and to consider a future cash incentive award to him based upon a cumulative
three-year review of his performance at the end of 2008.
|
75
Outstanding Equity Awards at December 31, 2007
The following table sets forth the information regarding the outstanding option awards for our
named executive officers at December 31, 2007. There were no outstanding stock awards at December
31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number
|
|
|
|
|
|
|
of
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Underlying
|
|
|
|
|
|
|
Unexercised
|
|
Option
|
|
|
|
|
Options
|
|
Exercise
|
|
Option
|
|
|
(#)
|
|
Price
|
|
Expiration
|
Name
|
|
Exercisable (1)
|
|
($)
|
|
Date
|
Charles Hsiao, Ph.D.
|
|
|
333,580
|
|
|
$
|
0.82
|
|
|
|
02/01/2009
|
|
|
|
|
60,800
|
|
|
|
5.00
|
|
|
|
12/22/2010
|
|
|
|
|
100,000
|
|
|
|
6.72
|
|
|
|
03/08/2012
|
|
|
|
|
75,000
|
|
|
|
3.04
|
|
|
|
03/10/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Larry Hsu, Ph.D.
|
|
|
50,000
|
|
|
|
5.00
|
|
|
|
12/22/2010
|
|
|
|
|
100,000
|
|
|
|
6.72
|
|
|
|
03/08/2012
|
|
|
|
|
75,000
|
|
|
|
3.04
|
|
|
|
03/10/2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur A. Koch, Jr.
|
|
|
50,000
|
|
|
|
17.13
|
|
|
|
02/22/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Doll
|
|
|
45,000
|
|
|
|
6.81
|
|
|
|
01/19/2011
|
|
|
|
|
40,000
|
|
|
|
11.11
|
|
|
|
09/24/2011
|
|
|
|
|
30,000
|
|
|
|
6.72
|
|
|
|
03/08/2012
|
|
|
|
|
30,000
|
|
|
|
3.04
|
|
|
|
03/10/2013
|
|
|
|
|
27,500
|
|
|
|
9.85
|
|
|
|
09/21/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles V. Hildenbrand
|
|
|
50,000
|
|
|
|
14.55
|
|
|
|
08/30/2014
|
|
|
|
|
11,459
|
|
|
|
9.85
|
|
|
|
09/21/2015
|
|
|
|
|
(1)
|
|
All options vest in four equal annual installments beginning on the first anniversary of the
date of grant.
|
76
Non-Qualified Deferred Compensation During Fiscal Year Ended December 31, 2007
The following table sets forth the benefits received by our named executive officers under our
non-qualified deferred compensation plan during the fiscal year ended December 31, 2007 as well as
the aggregate non-qualified deferred compensation balances at December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate
|
|
|
Executive
|
|
Registrant
|
|
Aggregate
|
|
Aggregate
|
|
Balance at
|
|
|
Contributions
|
|
Contributions
|
|
Earnings in
|
|
Withdrawals/
|
|
December
|
|
|
in 2007
|
|
in 2007
|
|
2007
|
|
Distributions
|
|
31, 2007
|
Name
|
|
($) (1)
|
|
($) (2)
|
|
($)
|
|
($)
|
|
($) (3)
|
Charles Hsiao, Ph.D.
|
|
$
|
37,500
|
|
|
$
|
18,750
|
|
|
$
|
21,956
|
|
|
|
|
|
|
$
|
470,082
|
|
|
Larry Hsu, Ph.D.
|
|
|
62,813
|
|
|
|
31,406
|
|
|
|
11,628
|
|
|
|
|
|
|
|
464,081
|
|
|
Arthur A. Koch, Jr.
|
|
|
38,737
|
|
|
|
19,369
|
|
|
|
4,102
|
|
|
|
|
|
|
|
138,139
|
|
|
David S. Doll
|
|
|
52,190
|
|
|
|
26,095
|
|
|
|
9,179
|
|
|
|
|
|
|
|
329,735
|
|
|
Charles V. Hildenbrand
|
|
|
13,760
|
|
|
|
6,880
|
|
|
|
(3,772
|
)
|
|
|
|
|
|
|
42,263
|
|
|
|
|
(1)
|
|
Represents amounts deferred by each named executive officer to our non-qualified deferred
compensation plan and reported in the Summary Compensation Table above under Salary for 2007
and Non-Equity Incentive Plan Compensation for 2006, relating to cash incentive awards paid
in 2007 for 2006 performance, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity Incentive
|
|
|
2007 Salary
|
|
Plan Contributions for
|
Name
|
|
Contributions ($)
|
|
2006 Performance ($)
|
Charles Hsiao, Ph.D.
|
|
$
|
37,500
|
|
|
$
|
|
(1)
|
|
Larry Hsu, Ph.D.
|
|
|
37,500
|
|
|
|
25,313
|
|
|
Arthur A. Koch, Jr.
|
|
|
24,347
|
|
|
|
14,390
|
|
|
David S. Doll
|
|
|
32,425
|
|
|
|
19,765
|
|
|
Charles V. Hildenbrand
|
|
|
8,792
|
|
|
|
4,968
|
|
(1)
|
|
Because Dr. Hsiaos role was changing from an executive to a non-executive
position, the compensation committee determined to forego any cash incentive award to
Dr. Hsiao for 2006 and 2007 and to consider a future cash incentive award to him based
upon a cumulative three-year review of his performance at the end of 2008.
|
|
|
Amounts deferred by named executive officers to our non-qualified deferred compensation plan
from their respective cash incentive awards paid in 2008 for 2007 performance and our
matching contributions related to such deferred compensation made in 2008 will be included in
the next years Non-Qualified Deferred Compensation table. Such amounts deferred by our
named executive officers are included in the cash
incentive awards reported under Non-Equity Incentive Plan Compensation for 2007 in the
Summary Compensation Table above.
|
77
(2)
|
|
These amounts are reported under All Other Compensation in the Summary Compensation Table
above.
|
|
(3)
|
|
Of the amounts shown, the following were included in the Summary Compensation Table for 2006
and represent the amounts deferred by each named executive officer from the salary earned and
paid in 2006: Dr. Hsiao $ 39,423, Dr. Hsu $ 39,423, Mr. Koch $ 23,094, Mr. Doll $ 28,831,
and Mr. Hildenbrand $ 4,777. Our matching contributions relating to 2006 salary payments and
cash incentive awards paid in 2006 for 2005 and 2004 performance were reported in All Other
Compensation for 2006 in the Summary Compensation Table above. For information regarding
named executive officers deferrals from their respective cash incentive awards earned for
2006 performance, see footnote 1 above.
|
Narrative Disclosure to Non-Qualified Deferred Compensation Table
Our non-qualified deferred compensation plan permits highly-compensated individuals to receive
a similar level of benefits (in terms of the overall percentage of their income eligible for tax
deferral and employer matching contributions) as are available to employees with lower levels of
income. Participants in this plan may defer up to 10% of the participants base salary and bonus
payable in a given year. Participants may also credit their plan accounts with any excess
deferrals that are to be returned to the participant from our 401(k) plan due to the application of
the tax codes participation and discrimination standards. We make a matching contribution for
each participant equal to 50% of the participants contribution, not to exceed 5% of the
participants base pay and bonus. A participants account is notionally invested in one or more
investment funds and the value of the account is determined with
respect to such investment
allocations. We have the ability to reduce the level of matching contribution or eliminate it
altogether, but we have not chosen to do so. Participants are fully vested in their contributions
when made. Our matching contributions vest depending on the number of years of service, with
participants being fully vested after five years of service. No contributions are forfeited as a
result of a separation due to death, disability, termination of the plan or a change in control.
Benefits attributable to a participant may be valued as if they were invested in one or more
investment funds (as set forth in the non-qualified deferred compensation plan), as directed by
participants in writing. Participants may change their selection of investment funds from time to
time in writing in accordance with the procedure established by the plan administrator. Changes
will take effect as soon as administratively practicable. If a participant does not select an
investment fund, the participant will be deemed to have selected the Alliance Money Market fund.
The portion of a participants benefit account valued by reference to the investment funds
will be valued daily based upon the performance of the investment funds selected by the
participant. The valuation will reflect the net asset value per share of the designated investment
funds, as determined by the plan administrator. The plan administrator may establish uniform rules
limiting a participants eligibility to allocate contributions to an account based on health,
income, or such other factors as the administrator may deem appropriate. The plan administrator
has not as yet established rules limiting the allocation of plan contributions.
If a participant terminates his or her employment, or an eligible consultant ceases to render
service to us, for any reason, including death, we will pay the participant an amount equal to the
value of the vested balance credited to the participants plan account. If the participant has
died, the balance of that account will be paid to one or more beneficiaries designated by the
participant. See Potential Payments upon Termination or Change in Control Description of
Applicable Termination and Change-in-Control Provisions Non-Qualified Deferred Compensation Plan
for a description of the form of payouts, withdrawals and other distributions under our
non-qualified deferred compensation plan.
A participant must select the form and commencement date of the payment of retirement benefits
prior to the initial allocation of contributions to the participants plan account. The
participant and the plan administrator may, by mutual agreement, change the participants initial
selection of the form of distribution, provided that:
|
|
the election is made at least one year prior to the participants retirement;
|
|
|
|
the election does not have the effect of accelerating any payment; and
|
|
78
if the election delays the commencement date of
any payment, the delayed commencement
date is at least five years after the original commencement date.
Notwithstanding the foregoing limitations, with respect to the balance of a participants plan
account that has vested as of January 1, 2005 (and any earnings attributable to such amounts), and
upon mutual agreement between the participant and the plan administrator, the participant may amend
the form of distribution to be paid in a lump sum or any other form approved by the administrator.
A participant may also request a distribution of the participants account balance prior to
termination of employment if necessary to alleviate an unforeseeable emergency, which is defined
as severe financial hardship resulting from:
an illness or accident of the participant, the participants spouse or a dependent of
the participant;
loss of the participants property due to a casualty; or
any other similar extraordinary and unforeseeable circumstances arising as a result
of events beyond the control of the participant.
The determination of whether a participant qualifies for an unforeseeable emergency
distribution will be subject to Section 409A of the Code and the regulations promulgated
thereunder.
Benefits are payable as they become due, irrespective of any actual investments we may make to
meet our obligations. However, participants will have no greater right to our assets than that of
an unsecured creditor. We must withhold or cause to be withheld all appropriate taxes, to the
extent that a withholding obligation exists, with respect to deferral contributions or benefit
payments under the non-qualified deferred compensation plan. Upon termination from employment, we
will also deduct any amount then owed by a participant to us from the participants benefit
payments.
Director Compensation for Fiscal Year Ended December 31, 2007
The following table sets forth information regarding the compensation of our non-employee
directors during the fiscal year ended December 31, 2007. We did not recognize any dollar amounts
for financial statement reporting purposes for the fiscal year ended December 31, 2007 in
accordance with SFAS No. 123R because all equity awards granted to directors vested prior to 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
All Other
|
|
|
|
|
or Paid in Cash
|
|
Compensation
|
|
Total
|
Name
|
|
($)(
1
)
|
|
($)
|
|
($)
|
Leslie Z. Benet, Ph.D.
|
|
$
|
33,000
|
|
|
|
|
|
|
$
|
33,000
|
|
|
Robert L. Burr
|
|
|
33,000
|
|
|
|
|
|
|
|
33,000
|
|
|
Nigel Ten Fleming, Ph.D.
|
|
|
33,000
|
|
|
|
|
|
|
|
33,000
|
|
|
Michael Markbreiter
|
|
|
33,000
|
|
|
|
|
|
|
|
33,000
|
|
|
Oh Kim Sun
|
|
|
33,000
|
|
|
|
|
|
|
|
33,000
|
|
|
Peter R. Terreri
|
|
|
43,000
|
|
|
|
|
|
|
|
43,000
|
|
|
|
|
(1)
|
|
Represents $ 25,000 annual retainer fee and $ 8,000 fee for the attendance of the board
meetings. In addition, fees paid to Mr. Terreri include $ 10,000 payable to him in his
capacity as the Chairman of the Audit Committee of our board of directors. Each of our
non-employee directors attended 100% of the meetings.
|
79
Narrative Disclosure to Director Compensation Table
Members of our board of directors who are our employees, including Dr. Hsiao, do not receive
any compensation for their services as our directors. In the fiscal year ended December 31, 2007,
each of our non-employee directors received an annual retainer of $ 25,000, payable in quarterly
installments, and a $ 2,000 fee for each regularly scheduled board meeting that such director
attended. During the fiscal year ended December 31, 2007, non-employee directors were reimbursed
for out-of-pocket expenses incurred in attending board and committee meetings.
In addition to the foregoing, we paid the following additional director fees in the fiscal
year ended December 31, 2007: (i) an annual retainer of $ 10,000 per year, payable in quarterly
installments, to the Chairman of the Audit Committee.
No equity awards were granted to our directors during the fiscal year ended December 31, 2007.
Description of Equity Compensation Plans
The following description of the material terms of the 2002 and 1999 plans is intended as a
summary only and is qualified in its entirety by reference to the complete text of the 2002 and
1999 plans, which are filed as exhibits to this registration statement.
Our stockholders originally approved the 2002 plan in May 2002, and our board of directors
approved the amended and restated 2002 plan on August 23, 2007. Among other changes, the board of
directors increased the maximum number of shares of common stock issuable under the 2002 plan from
4,000,000 to 6,500,000. Also, the board of directors increased the maximum number of shares
issuable under the 2002 plan to any single participant from 300,000 shares to 50% of the total
shares authorized for issuance under the 2002 plan. Because our stockholders will not be able to
approve these changes to the 2002 plan by August 23, 2008, we will not be able to continue to make
grants of incentive stock options, known as ISOs, under the 2002 plan absent further amendment of
the plan by the board and stockholder approval of such amendments within one year.
Our stockholders adopted the 1999 plan in connection with the merger of Global Pharmaceutical
Corporation with Impax Pharmaceuticals, Inc. effective December 14, 1999. In October 2000, our
stockholders approved an increase in the number of shares of common stock authorized for issuance
under the plan from 2,400,000 to 5,000,000. Except for the differences noted below in the summary
of the 1999 plan, the material terms of the 1999 plan are substantially similar to those of the
2002 plan.
2002 Plan
General Information
The 2002 plan authorizes the grant of ISOs, non-statutory stock options, SARs, and stock bonus
awards, to our officers, employees, directors and consultants, or those of our affiliates. We may
also, from time to time, assume outstanding awards granted by another company by either granting an
award under the 2002 plan in replacement of the award we assumed or by treating the assumed award
as if it had been granted under the 2002 plan.
Under the 2002 plan as initially adopted we could issue up to 4,000,000 shares of our common
stock. Because we had reached that limit, on August 23, 2007, our board of directors approved an
amendment to the 2002 plan to increase the limit to 6,500,000 shares, all of which potentially may
be issued pursuant to the grant of ISOs. In order for options covered by the additional 2,500,000
shares to qualify as ISOs, our stockholders would have been required to approve this change by
August 23, 2008. As we were unable to obtain stockholder approval by that date, the options we
have granted since August 23, 2007 do not qualify as ISOs, and options we may grant in the future
will also not qualify as ISOs unless our board of directors further amends the plan and our
stockholders approve such amendments within one year thereafter.
80
Adjustments
Our board of directors may adjust the maximum number of shares available under the plan
without stockholder approval to give effect to any stock split, stock dividend, combination,
recapitalization, or similar
transaction with respect to our common stock. Shares subject to awards under the 2002 plan
that are cancelled, expired, terminated, forfeited or withheld to satisfy the applicable purchase
price or tax withholding obligations are again available for issuance under the 2002 plan.
Under the 2002 plan as presently in effect, and subject to adjustments to reflect stock
dividends and other changes in our common stock, the maximum number of shares of common stock with
respect to which stock options or SARs may be granted during any calendar year to any employee may
not exceed 300,000 shares. Our board of directors has approved an amendment to the 2002 plan to
increase this limit to 50% of the total number of shares of common stock authorized for issuance
under the 2002 plan with respect to grants to any director, officer, employee or consultant.
Shares of common stock available for issuance under the 2002 plan may be authorized and
unissued, held by us in our treasury or otherwise acquired for the purposes of the 2002 plan.
Administration
Except for awards granted to our non-employee directors and the power to amend or terminate
the plan, our board of directors may delegate its authority under the 2002 plan to a committee.
This committee must consist of at least two directors who are non-employee directors under
Exchange Act Rule 16b-3 and outside directors under Section 162(m) of the Code. However, if the
committee does not meet either of these requirements, the validity of awards granted or actions
taken under the 2002 plan will not be affected. The board of directors may also delegate
nondiscretionary administrative duties to one or more of our employees. We have chosen to exercise
this delegation of authority to the fullest extent permitted by the plan.
Subject to the terms of the 2002 plan, the board of directors and, except for awards granted
to our non-employee directors, the committee, can grant awards under the 2002 plan and determine
the recipients and terms of those awards. They can accelerate or amend the terms of the 2002 plan
or any award issued under the 2002 plan. They also can interpret the provisions of the 2002 plan
and related award agreements, and generally otherwise administer the 2002 plan.
Options
Terms and Conditions of Options.
Under the 2002 plan, the board of directors or the committee
can grant stock options that are intended to qualify as ISOs. To be an ISO, the option must meet,
and continue to meet, all of the requirements of the Code with respect to ISOs. Any other stock
options granted under the 2002 plan are non-statutory stock options. ISOs may only be granted to
our employees or to employees of our 50%-or-greater-owned subsidiaries. Also, under the Code, the
fair market value (as of the date of grant) of the shares underlying ISOs exercisable by a single
holder for the first time during any calendar year may not exceed $ 100,000.
When we grant an ISO under the 2002 plan, the exercise price must be at least equal to the
fair market value of a share of our common stock on the date of grant. For a grant of an ISO to an
employee who owns more than 10% of the total combined voting power of all classes of our stock or
stock of any of our subsidiaries, the exercise price must be at least 110% of the fair market value
of a share of the common stock on the date of grant. When we grant a non-statutory stock option
under the 2002 plan, it must have an exercise price of at least $.01 per share.
All options will expire no later than ten years after the date of grant, unless terminated
earlier, except that an ISO granted to a 10% or greater stockholder must expire no later than five
years after the date of grant.
Vesting and Exercise of Options.
The board of directors or the committee may establish
conditions and restrictions on the vesting or exercise of an option, or on the issuance of common
stock in connection with the exercise of an option. Once a holder of a vested and exercisable
option has satisfied any applicable tax withholding requirements, the option may be exercised by
sending us a notice specifying the number of shares to be purchased
81
and payment of the exercise
price for those shares. The holder must pay the exercise price in cash, unless we have agreed to
accept another form of payment.
Rights as a Stockholder.
The holder of an option does not have any rights as a stockholder
with respect to shares covered by an option until the shares are issued upon the exercise of the
option.
Transferability of Options.
Holders may not generally transfer or assign options granted
under the 2002 plan, except for transfers by will or the laws of descent and distribution. Options
cannot be levied against, attached or taken by similar process. Further, the option holder is the
only person who can exercise the option during the holders lifetime. On or after the time of
grant, the board of directors or committee may permit transfers of a non-statutory stock option in
whole or in part and may determine the recipients, circumstances and conditions of the transfer.
However, these conditions must be consistent with the limitations on the transferability of options
imposed by a Form S-8 registration statement, or any successor form.
Option Repurchases
. The board of directors may offer to repurchase any option from a holder
on terms determined by the board.
Stock Appreciation Rights
The board of directors or committee may award SARs. A SAR entitles the holder to receive,
upon exercise of the award, an amount equal to the appreciation in the fair market value of our
common stock between the date of grant and the date of exercise. We may agree to pay this
appreciation in cash, our common stock or a combination of both.
We may award SARs under the 2002 plan in conjunction with an option, creating a tandem SAR,
or award a SAR that is independent of any option. We may award a tandem SAR that includes a
non-statutory stock option at or after the time we grant the non-statutory stock option. If we
wish to award a tandem SAR that includes an ISO, we can only do so at the time the ISO is granted.
A holder of a tandem SAR can only exercise the SAR when the related option may be exercised.
If a holder exercises a tandem SAR, that exercise serves to cancel the related option to the extent
the SAR is exercised. Likewise, if a holder exercises the related option, the exercise will cancel
the same portion of the SAR. A holder may exercise a tandem SAR only when the fair market value of
our common stock exceeds the exercise price of the option. The board of directors or committee may
impose additional service or vesting conditions, or any other rules or procedures, in connection
with the exercise of a SAR.
When a holder exercises a SAR, the holder will receive cash or shares of our common stock, as
specified in the SAR award agreement, equal to the product of:
the number of shares covered by the exercise; and
the difference between:
|
○
|
|
the fair market value of a share of our common stock on the date of exercise; and
|
|
|
○
|
|
the fair market value of a share of our common stock on the date of grant.
|
A holder cannot transfer a SAR during the holders lifetime. Upon death of a holder, a SAR
may be transferred to a beneficiary designated by the holder. If no designated beneficiary exists,
the SAR may be transferred under the holders will or by the laws of descent and distribution. A
tandem SAR must be transferred with the underlying option.
Stock Bonus Awards
The board of directors or the committee may grant stock bonus awards in consideration for past
or future services rendered to us or our affiliates. Shares subject to stock bonus awards may, but
need not, be subject to a
82
vesting schedule. The holder may transfer these shares only to the
extent described in the award agreement, so long as shares remain subject to the terms of that
agreement.
Effect of Termination of Employment or Service
For the description of the effect of termination of employment or service on options and SARs
issued under the 2002 plan, see Potential Payments Upon Termination or Change in Control.
Generally, a holder must forfeit any unvested shares of common stock covered by a stock bonus award
upon his or her termination of employment or
service with us or our affiliates. An award agreement may provide for different effects upon
termination of employment or service. We may make changes to these provisions after the date of
grant if the change does not reduce any rights of a holder.
Adjustments Upon Changes in Our Common Stock
We will make adjustments to options granted under the 2002 plan as described below.
Capitalization.
If we make any change in our common stock without receiving payment for the
change, we will adjust appropriately the terms of the 2002 plan and each award issued under the
2002 plan. These adjustments may affect:
the class of securities subject to the 2002 plan or any award;
the maximum number of securities subject to the 2002 plan;
the maximum number of securities that may be awarded to any employee under the 2002
plan; and
the number of securities and exercise price of any award granted under the 2002 plan.
Examples of events that may require us to make these changes include:
mergers and consolidations;
reincorporations and reorganizations;
recapitalizations;
dividends in stock or other property (other than cash), including liquidating
dividends;
stock splits or divisions;
reverse stock splits or combinations;
exchanges of shares;
changes in our corporate structure; and
other changes to our common stock in which we do not receive payment for the change.
Dissolution or Liquidation.
If we dissolve or liquidate, awards outstanding under the 2002
plan will terminate if not exercised immediately prior to or at the same time as the dissolution or
liquidation.
Amendment and Termination of 2002 Plan
The board of directors may generally amend or terminate the 2002 plan or any related award
agreement at any time, although a holder must consent to any amendment or termination that
adversely affects his or her rights. Our stockholders must approve any amendment that would
increase the number of shares of common stock for which awards may be granted under the 2002 plan
(in the aggregate or on an individual basis) or modify the class of
83
employees eligible to receive awards under the 2002 plan. We may make amendments in
connection with any of the events described in Adjustments Upon Changes in Our Common Stock
without stockholder approval.
Effective Date of 2002 Plan
The 2002 plan originally took effect in May 2002. Our board of directors adopted the amended
and restated 2002 plan effective August 23, 2007. However, certain proposed amendments to the 2002
plan are subject to stockholder approval. To the extent our stockholders do not approve these
amendments by August 23, 2008, we will be unable to continue to grant ISOs under the 2002 plan.
1999 Plan
Number of Shares and Adjustments
Under the 1999 plan, we may issue up to 5,000,000 shares of our common stock. Our board of
directors may adjust this maximum number without stockholder approval to give effect to any stock
split, stock dividend, combination, recapitalization, or similar transaction with respect to our
common stock. Shares subject to awards under the 1999 plan that are cancelled, expired,
terminated, forfeited or withheld to satisfy the applicable purchase price or tax withholding
obligations shall again be available for issuance under the 1999 plan.
Under the 1999 plan, and subject to adjustments to reflect stock dividends and other changes
in our common stock, the maximum number of shares of common stock with respect to which stock
options or SARs may be granted during any calendar year to any employee may not exceed 300,000
shares.
Non-Employee Director Automatic Stock Option Awards
While the 1999 plan provides for the annual grant of options to purchase 2,000 shares of
common stock to each of our non-employee directors, we have not granted options to our non-employee
directors during 2005, 2006 or 2007. (Nor have we granted options to our non-employee directors
during those years under our 2002 plan, under which we had until 2005 granted each of them options
to purchase 5,500 shares annually). Non-employee directors become eligible for such options after
one year of service in that capacity. The options authorized are exercisable for 10 years, have an
exercise price equal to the fair market value of the common stock on the date of grant, and
generally vest in three equal increments over the three years following the grant. Upon
termination of service, unvested options expire and vested options may be exercised for 90 days
thereafter, except when termination is the result of death or disability, in which case the vested
options may be exercised within one year.
Potential Payments upon Termination or Change in Control
Description of Applicable Termination and Change-in-Control Provisions
Upon termination of his employment or upon a change in control, each of our named executive
officers may be entitled to receive from us payments and benefits under the following agreements
and plans:
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employment agreements with Dr. Hsiao, Dr. Hsu and Mr. Doll;
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our 1999 Equity Incentive Plan and the 2002 plan; and
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our deferred compensation plan.
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Employment Agreements with Drs. Hsiao and Hsu
We have entered into employment agreements with each of Drs. Hsiao and Hsu. Dr. Hsiao died in
August 2008.
Each employment agreement specifies our obligations to such executive officer upon termination
of his employment under various circumstances. With respect to the termination of the employment
of Drs. Hsiao and Hsu,
84
each executives employment agreement may be terminated by either party on 30 days written
notice, and by us at any time, for cause.
Under the terms of the employment agreements, cause means:
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a material breach of a provision relating to proprietary information, assignment of
inventions, non-interference, non-disclosure and non-competition;
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a material breach of any other provision not remedied within 30 days of such breach;
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any act of fraud or embezzlement against us; or
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any indictment for a felony or other crime that would cause injury to our reputation.
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Under the terms of these employment agreements, good reason means:
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the assignment of duties or reduction in duties inconsistent with Dr. Hsiaos or Dr.
Hsus employment position;
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the material reduction in salary or benefits not agreed to by Dr. Hsiao or Dr. Hsu;
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a relocation requiring Dr. Hsiao or Dr. Hsu to commute more than 50 miles; or
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a change in control.
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Under the terms of these employment agreements, a change in control is defined as:
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the acquisition by any person or entity of ownership or control of more than 50% of
our voting power;
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a sale or disposition of assets totaling more than 50% of our value;
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a merger or reorganization in which our stockholders, immediately prior to the
merger, do not own a least 51% of our voting power after the merger;
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any transaction where our stockholders, immediately prior to the transaction, do not
own at least 51% of our voting power after the transaction; or
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any other transaction that our board of directors determines would materially alter
our structure, ownership or control.
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85
The table below sets forth the benefits that each of Drs. Hsiao and Hsu would be entitled to
receive under his employment agreement should his employment terminate under the following
specified circumstances.
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Termination Circumstance
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Employment Agreement Benefit
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Death or disability
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Lump sum cash payment by us of
accrued and unpaid salary and benefits
through date of termination, including
accrued but unused vacation time
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Payment by us, in accordance
with our payment policy, of the lesser
of:
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o an amount in cash equal to the
executives salary and benefits for
six months after the date of death or
disability; or
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o the entire amount in cash of
remaining salary due and payable, from
the date of death or disability to the
scheduled expiration of the employment
agreement
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Payment of a portion of any
quarterly or annual bonus otherwise
payable to the executive, prorated to
reflect any early termination of the
employment agreement relative to the
performance period of the bonus
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Maintenance of the executives
health, dental, vision and disability
insurance at our cost for 18 months
after the date of disability or until
the executive accepts other employment
that provides health insurance
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In the case of death, payment
by the life insurance carrier of a
death benefit of $ 1,000,000 to the
executives beneficiary under a policy
selected by the executive
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In the case of disability,
payment by the disability insurance
carrier of up to $ 250,000 in salary
replacement benefits
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Termination by us for cause or by
the executive without good reason
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Wages and benefits accrued to date or
as provided by applicable law
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Termination by us without cause or
by the executive for good reason
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Lump sum cash payment by us of
accrued and unpaid base salary and
benefits through date of termination,
including accrued but unused vacation
time
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Payment by us, in accordance
with our payment policy, of the lesser
of:
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o an amount in cash equal to the
executives salary and benefits for
six months after the date of
termination; or
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o the entire amount in cash of
remaining salary due and payable, from
the date of termination to the
scheduled expiration of the employment
agreement
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Maintenance of the executives
health, dental, vision and disability
insurance at our cost for 18 months
after the date of termination or until
the executive accepts other employment
that provides health insurance
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In general, disability means any physical or mental illness that renders the executive
incapable of substantially performing his duties under the agreement for a period of three
consecutive months or six months in any 12-month period, as determined by a physician or
psychiatrist, as applicable, selected by us.
86
Employment Agreement with Mr. Doll
Our employment agreement with Mr. Doll, until its termination on August 1, 2008, could have been terminated:
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by either party upon 30 days written notice;
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by us, at any time, for cause or upon Mr. Dolls death or disability; and
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by Mr. Doll, upon 30 days written notice, for good reason.
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Under the terms of Mr. Dolls employment agreement, cause meant:
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any act of fraud or theft against us, or any indictment for, conviction for, guilty
plea to, or plea of nolo contendere to, a felony or misdemeanor;
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while carrying out his duties under the employment agreement, any act constituting
gross neglect or willful misconduct that results, in either case, in material economic
harm to us;
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a material breach of the provisions of the employment agreement or any fiduciary duty
or duty of loyalty owed to us;
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any conduct, which in our sole discretion, tends to bring us public disgrace or
disrepute;
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any act of neglect or refusal to perform duties or responsibilities as properly
directed by our President, Chief Executive Officer or board of directors;
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any act or omission resulting in or intended to result in direct personal gain to Mr.
Doll at our expense; or
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any disclosure of our trade secrets or other confidential and proprietary
information.
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Under the terms of Mr. Dolls employment agreement, disability meant any physical or mental
illness, disability or incapacity which prevented Mr. Doll from performing the essential functions
of his job, with or without reasonable accommodations, for a period of 150 consecutive days or more
or for an aggregate of 180 days during any period of 12 consecutive months. Under the terms of Mr.
Dolls employment agreement, good reason meant:
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the assignment of duties inconsistent with his employment position;
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a relocation to an office located more than 25 miles from his current place of
employment;
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any material breach by us of a material term or provision contained in the employee
agreement, which breach is not cured within 30 days following our receipt of written
notice of such breach; or
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a change in control.
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Under the terms of Mr. Dolls employment agreement, a change in control was defined as:
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the occurrence of any actual or potential change in control that would, if known to
our management, be required to be reported by us on Form 8-K;
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the acquisition or receipt, in any manner, by any person or any group of persons
acting in concert, of direct or indirect beneficial ownership of 51% or more of all
securities having the right to vote for the election of our directors, except for
acquisitions by us, our affiliates or any of our or our affiliates employee benefit
plans;
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87
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a change in the constituency of our board of directors with the result that its
members prior to the change no longer constitute at least a majority of our board of
directors;
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a merger or reorganization in which our stockholders, immediately prior to the
merger, do not own a least 51% of our voting power after the merger;
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our complete liquidation or dissolution;
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a sale, exchange or other disposition or transfer of all or substantially all of our
business or assets, other than pursuant to a spin-off, or comparable transaction, to an
entity controlled by us or our existing stockholders immediately prior to such transfer;
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any event that would constitute a change in control under our non-qualified
deferred compensation plan.
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88
The table below sets forth the benefits that Mr. Doll would have been entitled to receive
under his employment agreement if his employment had terminated under the following specified
circumstances.
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Termination Circumstance
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Employment Agreement Benefit
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Death or disability
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Payment by us in cash of
earned and unpaid base salary and
accrued benefits up to the date of
death or disability, less deductions
and amounts owed to us
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All unvested stock options
awarded under the agreement will fully
vest
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All unvested stock bonus
awards under the agreement will fully
vest
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Termination by us for cause or by
Mr. Doll without good reason,
other than within 18 months of a
change in his director reporting)
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Payment by us in cash of earned and
unpaid base salary and accrued
benefits up to the date of
termination, less deductions and
amounts owed to us
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Termination by Mr. Doll without
good reason within 18 months of a
change in his direct reporting
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Payment by us in cash of
earned and unpaid base salary and
accrued benefits up to the date of
termination, less deductions and
amounts owed to us
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All unvested stock option and
stock bonus awards, whether or not
granted under the agreement, will
fully vest
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Termination by us without cause or
by Mr. Doll for good reason
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A lump sum cash payment by us
equal to the greater of:
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o one year of base salary then in
effect plus the average of Mr. Dolls
bonus for the previous two years; or
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o base salary then in effect for the
remainder of the initial term
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All unvested stock options
awarded under the agreement will fully
vest
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All unvested stock bonus
awards under the agreement will fully
vest
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89
Stock Incentive Plans and Award Agreements
The table below sets forth the benefits that each executive holding awards granted under our
1999 and 2002 plans would be entitled to receive should his employment terminate under the
following specified circumstances. These rights and benefits may be amended or modified as
otherwise determined by our board of directors at the time that a grant or award is made or, if the
executives rights are not reduced, thereafter.
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Termination Circumstance
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Stock Incentive Plan Benefit
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Death or disability
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The vested portion of any stock option
as of the date of death or disability
may be exercised within one year from
the date of death or disability, but
in no event after the stated
expiration of the option.
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Termination other than death,
disability or for cause (1)
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The vested portion of any stock option
as of the date of termination may be
exercised within 30 days from the date
of termination, but in no event after
the stated expiration of the option.
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(1)
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Under the 1999 and 2002 plans, cause is defined as under an applicable employment or
consulting agreement. If there is no such agreement or no such definition in an agreement,
cause is defined to mean dishonesty, fraud, insubordination, willful misconduct, refusal to
perform services or materially unsatisfactory performance of duties.
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Under each of our 1999 and 2002 plans, if, in the event of a change in control, the
surviving corporation refuses to assume or to substitute with similar awards the outstanding awards
granted under these plans, then all such outstanding awards will become immediately exercisable.
The award will terminate if it is not exercised at or prior to the event constituting the change in
control.
For these purposes, a change in control means:
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a sale of all or substantially all of our assets;
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a merger or consolidation in which we are not the surviving corporation; or
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a reverse merger in which we are the surviving corporation but the shares of our
common stock outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or otherwise.
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90
The table below sets forth the benefits that each executive holding awards granted under our
1999 and 2002 plans would receive under the terms of our standard agreements we have entered into
in connection with respect to awards granted under these plans.
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Termination Circumstance
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Award Agreement Benefit
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Death
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If the executive dies while
employed with us or within three
months after termination of
employment, the options may be
exercised within one year after
date of death, but in no event
after the stated expiration of the
option.
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Disability
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The vested portion of an option as
of the date of disability may be
exercised within one year, but in
no event after the stated
expiration of the option.
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Termination other than death,
disability or for cause (1)
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The vested portion of any stock
option as of the date of
termination may be exercised within
three months after the date of
termination, but in no event after
the stated expiration of the
option.
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(1)
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Under the 1999 and 2002 award agreements, cause is defined as under an applicable
employment or consulting agreement. If there is no such agreement or no such definition in an
agreement, cause is defined to mean dishonesty, fraud, insubordination, willful misconduct,
refusal to perform services or materially unsatisfactory performance of duties.
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Non-Qualified Deferred Compensation Plan
Under our non-qualified deferred compensation plan, in the event of the termination of an
executives employment with us, our board of directors may determine to cause the benefits
attributable to our matching contributions in the executives plan account to be fully vested. In
addition, matching contribution benefits may not be forfeited in the event of the termination of
the deferred compensation plan, the executives death or disability, or a change in control.
Payment of benefits under the deferred compensation plan to our named executive officers will
be made:
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upon disability, in monthly installments payable over a fixed period of five, ten or
15 years, as selected by the executive;
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upon retirement, not earlier than the sixth month following the named executive
officers retirement;
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for any other reason, as follows:
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o
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unless the named executive officer selects otherwise, the vested
balance of the executives account as of January 1, 2005, and any earnings
attributable thereto, would be paid in a lump sum within 90 days of attaining age
65; and
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o
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the remaining balance of the executives account would be paid no
earlier than the sixth month following the executives separation from service.
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In general, disability is defined as an illness or injury which completely prevents the
executive from performing his or her occupation or which otherwise entitles the executive to
receive long-term disability benefits under a plan or program for such benefits sponsored by us,
and the participant is expected to be separated from service for a period of at least twelve months
as a direct result of such illness or injury and has no reasonable
91
prospect of returning to service with us, all as determined by the plan administrator.
Retirement means any termination of employment, other than for death or disability, after
attaining age 65, or attaining age 55 if the executive has been credited with five years of service
under the deferred compensation plan.
In general, a change in control means:
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a change in ownership in which a person, group or entity acquires more than 50% of
the total fair market value or total voting power of our stock;
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a change in effective control in which:
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o
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|
a person, group or entity acquires (in a 12-month period) ownership
of stock with 35% or more of the total voting power of our stock or
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o
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|
a majority of our board of directors is replaced in a 12-month
period by directors whose appointment or election was not endorsed by a majority
of our board of directors before their appointment or election; or
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a change in ownership of a substantial portion of our assets in which a person group
or entity acquires 40% or more of the gross fair market value of our assets.
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Potential Payment and Benefits to be Received Upon a Change-in-Control
92
Employment Agreements
The receipt of payments and benefits by Drs. Hsiao and Hsu under their employment agreements
is conditioned upon their complying with customary non-competition, non-interference,
non-disclosure and assignment of inventions provisions. The non-competition provisions expire 12
months after the termination of each employment agreement. The non-interference provisions expire
two years after the termination of each employment agreement. The non-disclosure provisions are of
infinite duration. Each of Drs. Hsiao and Hsu is required to assign to us any ideas, inventions or
other proprietary information (and related intellectual property rights) he creates or develops
during the term of his employment.
The table below includes a description and the amount of estimated payments and benefits that
would be provided by us (or our successor) to Drs. Hsiao and Hsu under each employment agreement,
assuming that a termination circumstance occurred as of December 31, 2007.
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Estimated Amount of
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Termination Payment/Benefit to
|
Potential Termination Payment or
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Termination
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Charles Hsiao,
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Larry Hsu,
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Benefit
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Circumstance
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Ph.D.
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Ph.D.
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Payment of all accrued and unpaid salary
through the termination date (1)
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All
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$
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7,212
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$
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7,212
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|
|
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|
|
|
|
|
|
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Payment of all accrued and unpaid benefits
(including accrued but unused vacation
time) through the termination date (2)
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All
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28,846
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28,846
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Cash severance payment (3)
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Death, disability,
termination by us
without cause or
termination by the
executive for good
reason
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187,500
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|
|
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187,500
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Continued participation in our health,
dental, vision and disability insurance (4)
|
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Disability,
termination by us
without cause or
termination by the
executive for good
reason
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2,164
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2,164
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Prorated portion of any quarterly or annual
bonus otherwise payable (5)
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Death or disability
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|
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121,875
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|
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|
|
|
|
|
|
|
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|
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Proceeds from required life insurance policy
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|
Death
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1,000,000
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|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
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Payment of salary replacement benefits from
required disability insurance policy
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Disability
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250,000
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|
|
|
250,000
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|
|
|
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(1)
|
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Because our executives are paid weekly, we have assumed that the amount of accrued but unpaid
salary is equal to one weeks worth of 2007 salary.
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(2)
|
|
Vacation time accrued but not taken for each executive was assumed to equal four weeks, which
is the maximum amount of vacation time available to each executive as of December 31, 2007.
|
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(3)
|
|
We have assumed this amount to be equal to the value of each executives salary and the cost
of each executives benefits for a period of six months.
|
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(4)
|
|
This amount represents the cost to us to provide the executive with the same coverage he
would have had on a non-employee basis on December 31, 2007 under all of the referenced plans
as they existed on that date, for a period of 18 months. We have assumed that the executive
does not obtain other employment during this time period.
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93
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|
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(5)
|
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We have assumed that the executive earned in full his annual cash incentive award for 2007
performance paid in 2008. In view of his change to a non-executive position, Dr. Hsiao did
not receive an annual cash incentive award in 2007.
|
The receipt of payments and benefits to Mr. Doll under his employment agreement was
conditioned upon his compliance with customary non-solicitation, non-disparagement, non-disclosure
and assignment of inventions provisions. The non-solicitation provisions expired one year after
the termination of the employment agreement. The non-disparagement and non-disclosure provisions
were of infinite duration. Mr. Doll was required to execute any documentation necessary to confirm
our ownership of any ideas or creations he conceives or develops during his employment with us,
could not be in breach of any other provision in the employment agreement and was required to
provide a general release of all claims relating to his employment and termination.
Mr. Doll did not hold any unvested options at December 31, 2007, and thus the potential
benefit of accelerating the vesting of the unvested portion of stock options was not applicable to
Mr. Doll at December 31, 2007. The table below includes a description and the amount of estimated
payments and benefits that would have been provided by us (or our successor) to Mr. Doll assuming
that a termination circumstance occurred as of December 31, 2007.
|
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|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Amount of
|
|
|
|
|
Termination
|
|
|
Termination
|
|
Payment/Benefit to
|
Potential Termination Payment or Benefit
|
|
Circumstance
|
|
David Doll
|
Payment of all accrued and unpaid
salary through the termination date (1)
|
|
All, except
termination by us
without cause or by
Mr. Doll for good
reason
|
|
$
|
6,236
|
|
Payment of all accrued and unpaid
benefits through the termination date
(2)
|
|
All, except
termination by us
without cause or by
Mr. Doll for good
reason
|
|
|
1,871
|
|
Lump sum cash severance payment (3)
|
|
Termination by us
without cause or
termination by Mr.
Doll for good
reason
|
|
|
558,333
|
|
|
|
|
(1)
|
|
Because our executives are paid weekly, we have assumed that the amount of
accrued but unpaid salary is equal to one weeks worth of salary, and that there are no
deductions for amounts owed to us.
|
|
(2)
|
|
Represents health plan payments.
|
|
(3)
|
|
This amount equals the total amount of salary that Mr. Doll would have received
from January 1, 2008 to August 31, 2009, the end of the initial term of the employment
agreement, at a base salary of $ 335,000 for the entirety of such period.
|
Stock Incentive Plans
None of our named executive officers held any unvested options at December 31, 2007, and thus
the potential benefit of accelerating the vesting of the unvested portion of stock options was not
applicable to them at December 31, 2007. In addition, the extension of the exercise period of
options held by our named executive officers would not provide them with any potential benefit
because the closing price per share of our common stock after December 31, 2007 did not exceed the
exercise price per share of $ 11.10 on December 31, 2007. As a result, our named executive officers
would not realize the value of any potential benefits that each executive might be entitled to
receive from us (or our successor) under the 1999 and 2002 plans (and related award agreements)
assuming the change of control or termination of employment occurred as of December 31, 2007.
94
Non-Qualified Deferred Compensation Plan
The table below provides an estimate of the value of the potential benefits attributable to
the unvested portion of the matching contributions made by us pursuant to the deferred compensation
plan that each executive might be entitled to receive upon the termination of the executives
employment, assuming that termination occurred on December 31, 2007.
|
|
|
Arthur A. Koch, Jr.
|
|
Charles V.
Hildenbrand
|
|
|
|
$ 25,321 (1)
|
|
$ 5,409 (1)
|
|
|
|
(1)
|
|
Assumes that our board of directors approves the immediate vesting of 100% of the
benefits attributable to the matching contributions made by us pursuant to the
non-qualified deferred compensation plan upon a termination of the executives employment
with us.
|
Compensation Committee Interlocks and Insider Participation
Drs. Benet and Fleming and Mr. Burr served as members of our compensation committee during the
fiscal year ended December 31, 2007, Mr. Burr serving as chairman. None of them was a current or
former officer or employee or engaged in certain related transactions with us required to be
disclosed by SEC regulations. Additionally, there were no compensation committee interlocks
during the fiscal year ended December 31, 2007, which generally means that none of our executive
officers served as a director or member of the compensation committee of any other entity that had
an executive officer serving as a member of our board of directors or compensation committee.
95
Item 7. Certain Relationships and Related Transactions, and Director Independence.
Transactions with Related Persons
Ann Hsu, Ph.D., wife of Larry Hsu, is employed as our Vice President of Clinical Affairs at an
annual salary of $ 284,524.
Review, Approval or Ratification of Transactions with Related Persons
We have adopted written policies and procedures regarding related-party transactions. Our
policy covers any transaction, arrangement or relationship or any series of similar transactions,
arrangements or relationships in which we or any of our subsidiaries was, is or will be a
participant and the amount involved exceeds $ 120,000, and in which any related party had, has or
will have a direct or indirect interest. Under this policy, the Audit Committee must approve all
related party transactions between us or one of our subsidiaries and a director, nominee for
director, executive officer, five percent shareholder, certain related entities or immediate family
members of a director, executive officer or five percent shareholder that would be required to be
disclosed in our proxy statements. The policy also authorizes the Chairperson of the Audit
Committee to approve, or reject, proposed related party transactions in those instances in which it
is not practicable or desirable for us to wait until the next Audit Committee meeting.
Director Independence
Board of Directors
Our Board of Directors has determined that the following directors, constituting a majority of
the members of our Board of Directors, are independent based on the independence criteria contained
in the listing requirements of The NASDAQ Stock Market: Leslie Z. Benet, Ph.D., Robert L. Burr,
Nigel Fleming, Ph.D., Michael Markbreiter, Oh Kim Sun and Peter R. Terreri. However, we are not
currently subject to these listing requirements.
Committees of the Board
Our Board of Directors has established an Audit Committee, a Compensation Committee and a
Nominating Committee.
Audit Committee
. Our Board of Directors has appointed a standing Audit Committee consisting
of Peter R. Terreri, Chairman, and Messrs. Robert L. Burr, Michael Markbreiter and Oh Kim Sun. Our
Board of Directors and the Nominating Committee have determined that each member of the Audit
Committee is independent, as defined in the Marketplace Rules of The NASDAQ Stock Market and Rule
10A-3 of the Exchange Act. In addition, our Board of Directors and the Nominating Committee have
determined that Peter R. Terreri, Audit Committee Chairman, qualifies as an audit committee
financial expert as defined under Item 407 of Regulation S-K.
The Audit Committee is governed by a written charter approved by our Board of Directors, which
is posted on our website (www.impaxlabs.com) and accessible via the Investor Relations page. The
principal purpose of the Audit Committee is to oversee our accounting and financial reporting
processes and the audit of our financial statements. The Audit Committee is directly responsible
for the appointment, compensation, retention and oversight of the firm selected to be engaged as
our independent public accountants, and pre-approves the engagement of the independent public
accountants for all non-audit activities permitted under the Sarbanes-Oxley Act of 2002. In
addition, the Audit Committee establishes procedures for the receipt, retention and treatment of
complaints we receive regarding accounting, internal accounting controls or auditing matters, and
the confidential, anonymous submissions by our employees of concerns regarding questionable
accounting or auditing matters.
Compensation Committee
. Our Board of Directors has appointed a standing Compensation
Committee currently consisting of Robert L. Burr, Chairman, and Messrs. Leslie Z. Benet, Ph.D. and
Nigel Fleming, Ph.D. Our Board of Directors has determined that each member of the Compensation
Committee is independent, as defined in the Marketplace Rules of The NASDAQ Stock Market. Our
Board of Directors has adopted a written Compensation Committee Charter, which is posted on our Web
site (www.impaxlabs.com) and accessible via the Investor Relations
96
page. The principal duties of the Compensation Committee are to formulate, evaluate and
approve the compensation of our executive officers and the oversight of all compensation programs
involving the issuance of our stock and other equity securities. The Chief Executive Officer make
recommendations concerning executive compensation to the Committee, and the Committee has used the
consulting services of Radford in arriving at executive compensation. The Committee does not
address director compensation, which is set by the Board of Directors.
Nominating Committee
. Our Board of Directors has appointed a standing Nominating Committee
currently consisting of Nigel Fleming, Ph.D., Chairman, and Messrs. Leslie Z. Benet, Ph.D. and
Robert L. Burr. Our Board of Directors and Nominating Committee have determined that each member
of the Nominating Committee is independent, as defined in the Marketplace Rules of The NASDAQ Stock
Market.
The Nominating Committee is governed by a written charter approved by our Board of Directors,
which is posted on our website (www.impaxlabs.com) and accessible via the Investor Relations page.
The principal purposes of the Nominating Committee are to develop and recommend to our Board of
Directors certain corporate governance policies, establish criteria for selecting new directors and
identify, screen and recruit new directors. The Nominating Committee is also responsible for
selecting and recommending individuals to serve as members of our Board of Directors and
recommending directors for committee membership to our Board of Directors.
97
Item 8. Legal Proceedings.
Patent-Infringement Litigation
AstraZeneca AB et al. v. Impax Laboratories (Omeprazole)
In litigation commenced against us in the U.S. District Court for the District of Delaware in
May 2000, AstraZeneca AB alleged that our submission of an ANDA seeking FDA permission to market
Omeprazole Delayed Release Capsules, 10mg, 20mg and 40mg, constituted infringement of AstraZenecas
U.S. patents relating to its Prilosec
®
product and sought an order enjoining us from
marketing our product until expiration of its patents. The case, along with several similar suits
against other manufacturers of generic versions of Prilosec
®
, was subsequently
transferred to the U.S. District Court for the Southern District of New York.
In September 2004 , following expiration of the 30-month stay, the FDA approved our ANDA and
we and our alliance agreement partner, Teva, commenced commercial sales of our product. In January
2005, AstraZeneca added claims of willful infringement, for damages, and for enhanced damages on
the basis of this commercial launch. Claims for damages were subsequently dropped from the suit
against the Company, but were included in a separate suit filed against Teva. In May 2007, the
court found that our product infringed two of AstraZenecas patents and that these patents were not
invalid. The court ordered that FDA approval of our ANDA be converted to a tentative approval,
with a final approval date not before October 20, 2007, the expiration date of the relevant
pediatric exclusivity period. In August 2008 the U.S. Court of Appeals for the Federal Circuit
affirmed the lower courts decision of infringement and validity. In September 2008, we filed a
petition for rehearing en banc with the Federal Circuit following this decision. If we or Teva are
not ultimately successful in establishing invalidity or non-infringement in this suit or in the
separate suit against Teva, the court may also award monetary damages associated with Tevas
commercial sale of our omeprazole products. Under our Teva Agreement, we would be responsible for
monetary damages awarded against Teva up to a specified level, beyond which, monetary damages would
be Tevas responsibility.
Aventis Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc.
(Fexofenadine/Pseudoephedrine)
We are a defendant in an action brought in March 2002 by Aventis Pharmaceuticals Inc. and
others in the U.S. District Court for the District of New Jersey alleging that our proposed
Fexofenadine and Pseudoephedrine hydrochloride tablets, generic to Allegra-D
®
,
infringe
seven Aventis patents and seeking an injunction preventing us from marketing the products until
expiration of the patents. The case has since been consolidated with similar actions brought by
Aventis against five other manufacturers (including generics to both Allegra
®
and
Allegra-D
®
). In March 2004, Aventis and AMR Technology, Inc. filed a complaint and
first amended complaint against us and one of the other defendants alleging infringement of two
additional patents, owned by AMR and licensed to Aventis, relating to a synthetic process for
making the active pharmaceutical ingredient, Fexofenadine hydrochloride and intermediates in that
synthetic process. We believe that we have defenses to the claims based on non-infringement and
invalidity.
In June 2004, the court granted our motion for summary judgment of non-infringement with
respect to two of the patents and, in May 2005, granted summary judgment of invalidity with respect
to a third patent. We will have the opportunity to file additional summary judgment motions in the
future and to assert both non-infringement and invalidity of the remaining patents (if necessary)
at trial. No trial date has yet been set.
In September 2005, Teva launched its Fexofenadine tablet products (generic to
Allegra
®
), and Aventis and AMR moved for a preliminary injunction to bar Tevas sales
based on four of the patents in suit, which patents are common to the Allegra
®
and
Allegra-D
®
litigations. The district court denied Aventiss motion in January 2006,
finding that Aventis did not establish a likelihood of success on the merits, which decision was
affirmed on appeal.
98
Impax Laboratories, Inc. v. Aventis Pharmaceuticals, Inc. (Riluzole)
In June 2002, we filed a suit against Aventis Pharmaceuticals, Inc. in the U.S. District Court
for the District of Delaware, seeking a declaration that our filing of an ANDA for Riluzole 50mg
tablets, generic to Rilutek
®
, for treatment of patients with amyotrophic lateral
scleroses (ALS) did not infringe claims of Aventiss patent relating to the drug and a declaration
that its patent is invalid. Aventis filed counterclaims for infringement, and, in December 2002,
the district court granted Aventis motion for a preliminary injunction enjoining us from marketing
any pharmaceutical product or compound containing Riluzole for the treatment of ALS.
In September 2004, the district court found Aventiss patent not invalid and infringed by our
proposed product. In November 2006, the Court of Appeals for the Federal Circuit vacated the
district courts finding that the patent was not invalid and remanded for further findings on that
issue, and, in June 2007, the district court again found that Aventiss patent is not invalid. In
October 2008, the Court of Appeals for the Federal Circuit affirmed the district court decision.
We are evaluating our options following this appellate decision. There is a substantial likelihood
the court may enter a permanent injunction enjoining us from marketing Riluzole 50mg tablets for
the treatment of ALS until the expiration of Aventiss patent in June 2013.
Abbott Laboratories v. Impax Laboratories, Inc. (Fenofibrate)
We were a defendant in patent-infringement litigation commenced in January 2003 by Abbott
Laboratories and Fournier Industrie et Sante in the U.S. District Court for the District of
Delaware relating to our ANDAs for Fenofibrate Tablets, 160mg and 54mg, generic to
TriCor
®
. In March 2005, we asserted antitrust counterclaims. By agreement between the
parties, in July 2005, the court entered an order dismissing the patent-infringement claims,
leaving our antitrust counterclaim intact, and in May 2006 the court denied Abbotts and Fourniers
motion to dismiss the counterclaim.
On July 27, 2005, the court held a status conference with all counsel involved in the
antitrust litigations, and indicated the courts intention to put these matters on a complex
litigation track. On April 3, 2008, the Court issued an order bifurcating and staying damages
issues, and setting a schedule for trial of liability issues. A jury trial is scheduled to begin
the week of November 10, 2008.
Endo Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc. (Oxymorphone
)
In November 2007, Endo Pharmaceuticals Inc. and Penwest Pharmaceuticals Co. (collectively,
Endo) filed suit against us in the U.S. District Court for the District of Delaware, requesting a
declaration that our Paragraph IV Notices with respect to our ANDA for Oxymorphone HCl Extended
Release Tablets, generic to Opana ER
®
, are null and void and, in the alternative,
alleging patent infringement in connection with the filing of that ANDA. Endo subsequently
dismissed its request for declaratory relief and in December 2007 filed another patent infringement
suit relating to the same ANDA. In July 2008, the plaintiffs asserted additional infringement
claims with respect to our amended ANDA, which added 7.5mg, 15mg and 30mg strengths of the product.
We have filed an answer and counterclaims. Discovery is in the early stages, and no trial date
has been set.
Impax Laboratories, Inc. v. Medicis Pharmaceutical Corp. (Minocycline)
In January 2008, we filed a complaint against Medicis Pharmaceutical Corp. in the U.S.
District Court for the Northern District of California, seeking a declaratory judgment that our
filing of an ANDA relating to minocycline hydrochloride extended release tablets, a generic version
of Medicis Solodyn
®
product, did not infringe any valid claim of U.S. Patent No.
5,908,838. Medicis filed a motion to dismiss the complaint for lack of subject matter
jurisdiction. On April 16, 2008, the District Court granted Medicis motion to dismiss, and
judgment was entered on April 22, 2008. We have filed a notice of appeal to the United States
Court of Appeals for the Federal Circuit. Briefing for the appeal is currently scheduled for the
third and fourth quarter of 2008.
99
Pfizer Inc., et al. v. Impax Laboratories, Inc. (Tolterodine)
In March 2008, Pfizer Inc., Pharmacia & Upjohn Company LLC and Pfizer Health AB (collectively
Pfizer) filed a complaint against us in the U.S. District Court for the Southern District of New
York, alleging that our filing of an ANDA relating to tolterodine tartrate extended released
capsules, 4 mg, generic to Detrol LA
®
, infringes three Pfizer patents. We have filed an
answer and counterclaims seeking declaratory judgment of non-infringement, invalidity or
unenforceability with respect to the patents at suit. In April 2008, the case was transferred to
the U.S. District Court for the District of New Jersey. On September 3, 2008 an amended complaint
was filed alleging infringement based on our ANDA amendment adding a 2mg strength. Discovery is in
the early stages, and no trial date has been set.
Boehringer Ingelheim Pharmaceuticals, et al. v. Impax Laboratories (Tamsulosin)
In
July 2008, Boehringer Ingelheim Pharmaceuticals Inc. and Astellas Pharma Inc. filed a
complaint against us in the U.S. District Court for the Northern District of California, alleging
that our filing of an ANDA relating to tamsulosin hydrochloride capsules, 0.4 mg, generic to
Flomax
®
, infringes plaintiffs patent. After filing our answer and counterclaim, we
filed a motion for summary judgment of patent invalidity, which is scheduled to be heard in
November 2008.
Purdue Pharma Products L.P., et al. v. Impax Laboratories, Inc. (Tramadol)
In August 2008, Purdue Pharma Products L.P., Napp Pharmaceutical Group LTD., Biovail
Laboratories International, SRL, and Ortho-McNeil-Janssen Pharmaceuticals, Inc. filed suit against
us in the U.S. District Court for the District of Delaware, alleging patent infringement for the
filing our ANDA relating to tramadol hydrochloride extended-release tablets, generic to 100mg
Ultram
®
ER.
Other Litigation Related to Our Business
Axcan Scandipharm Inc. v. Ethex Corp, et al.(Lipram UL).
In May 2007, Axcan Scandipharm Inc., a manufacturer of the Ultrase
®
line of pancreatic enzyme products, brought suit against us in the U.S. District Court for the District of
Minnesota, alleging that we engaged in false advertising, unfair competition, and unfair trade
practices under federal and Minnesota law in connection with the marketing and sale of our
now-discontinued Lipram-UL products. The suit seeks actual and consequential damages, including
lost profits, treble damages, attorneys fees, injunctive relief and declaratory judgments that
would prohibit the substitution of Lipram-UL for prescriptions of Ultrase
®
. The Court
granted in part and denied in part our motion to dismiss the complaint, as well as that of
co-defendants Ethex Corp. and KV Pharmaceutical Co., holding that any claim of false advertising
pre-dating June 1, 2001, is barred by the statute of limitations. We have answered the complaint,
and discovery is proceeding.
Securities Litigation
We, our CEO and several former officers and directors are also defendants in several class
actions filed in the United States District Court for the Northern District of California, all of
which have since been consolidated into a single action. These actions, brought on behalf of all
purchasers of our stock between May 5 and November 3, 2004, seek unspecified damages and allege
that Impax and the individual defendants, in violation of the antifraud provisions of the federal
securities laws, artificially inflated the market price of the stock during this period by filing
false financial statements for the first and second quarters of 2004, based upon Impax subsequent
restatement of its results for those periods. The court twice granted our motions to dismiss the
complaint, both times with leave to amend, but denied our motion to dismiss the fourth amended
complaint as well as two motions for reconsideration. The case is now in the discovery phase. In
August 2008, we filed with the U.S. Court of Appeals for the Ninth Circuit a petition for a writ of
mandamus directing the district court to dismiss the complaint.
100
Insurance
Product liability claims by customers constitute a risk to all pharmaceutical manufacturers.
At March 31, 2008, we carried $ 80 million of product liability insurance for our own manufactured
products. This insurance may not be adequate to cover any product liability claims to which we may
become subject.
101
|
|
|
Item 9.
|
|
Market Price of and Dividends on the Registrants Common Equity and Related Stockholder Matters.
|
Stock Price
Our common stock was traded on The NASDAQ Stock Market under the symbol IPXL until August 8,
2005, when it was delisted due to our failure to file our Annual Report on Form 10-K for the fiscal
year ended December 31, 2004 and Quarterly Report on Form 10-Q for the quarter ended March 31,
2005. Our failure to file these periodic reports violated NASDAQ Marketplace Rule 4310(c)(14),
compliance with which was required for continued listing on The NASDAQ Stock Market.
From August 8, 2005 until December 29, 2006, our common stock was quoted on the Pink
Sheets
®
operated by Pink OTC Markets Inc. under the symbol IPXL.PK. On December 29,
2006, the SEC suspended all trading in the stock through January 16, 2007 and instituted an
administrative proceeding to determine whether, in light of our reporting delinquency, to suspend
or revoke the registration of our common stock under Section 12 of the Exchange Act. Beginning
January 17, 2007, our stock was again quoted in the Pink Sheets
®
, but from that time
forward dealers were permitted to publish quotations only on behalf of customers that represent
such customers indications of interest and do not involve dealers solicitation of such interest.
On May 23, 2008, our registration of the stock under Section 12 of the Exchange Act was revoked and
brokers and dealers since that date have been prohibited from effecting transactions in our stock.
The following table sets forth the high and low sales prices for the common stock as reported
by Pink OTC Markets Inc. for the periods indicated below. These prices reflect inter-dealer
quotations, without retail mark-up, mark-down or commission.
|
|
|
|
|
|
|
|
|
|
|
Price Range Per Share
|
|
|
High
|
|
Low
|
Year
Ending December 31, 2008
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
11.40
|
|
|
$
|
6.50
|
|
Second Quarter
(through May 23, 2008)
|
|
$
|
9.55
|
|
|
$
|
8.00
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
10.76
|
|
|
$
|
8.30
|
|
Second Quarter
|
|
$
|
12.00
|
|
|
$
|
4.55
|
|
Third Quarter
|
|
$
|
12.40
|
|
|
$
|
8.00
|
|
Fourth Quarter
|
|
$
|
12.15
|
|
|
$
|
9.45
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
11.75
|
|
|
$
|
8.76
|
|
Second Quarter
|
|
$
|
10.50
|
|
|
$
|
6.25
|
|
Third Quarter
|
|
$
|
7.20
|
|
|
$
|
4.25
|
|
Fourth Quarter
|
|
$
|
9.90
|
|
|
$
|
5.90
|
|
102
Holders
As of June 30, 2008, there were approximately 121 holders of record of our common stock,
solely based upon the count our transfer agent provided us as of that date and this number does not
include:
|
|
|
any beneficial owners of common stock whose shares are held in the names of various
dealers, clearing agencies, banks, brokers and other fiduciaries, or
|
|
|
|
|
broker-dealers or other participants who hold or clear shares directly or indirectly
through the Depository Trust Company, or its nominee, Cede & Co.
|
As of June 17, 2008, 9,133,285 shares of our common stock were subject to outstanding options
to purchase our common stock, and 3,624,116 shares of common stock were issuable upon the
conversion of our 3.5% debentures.
Generally, securities acquired from us or from our affiliates pursuant to exemptions from
registration under the Securities Act of 1933 (the Securities Act) are deemed to be restricted
securities, as such term is defined in Rule 144 promulgated under the Securities Act. Such
restricted securities can only be sold or otherwise transferred pursuant to an effective
registration statement or pursuant to an available exemption from registration under the Securities
Act or under Rule 144 when such rule becomes available to our security holders.
We have agreed to register under the Securities Act shares of common stock issuable upon the
conversion of our 3.5% debentures for resale by certain of our security holders. However, at
present we are not publicly offering, and we do not presently propose to publicly offer, any shares
of common stock, except for shares that may in the future be offered pursuant to an employee
benefit plan.
Dividends
We have never paid cash dividends on our common stock and have no present plans to do so in
the foreseeable future. Our current policy is to retain all earnings, if any, for use in the
operation of our business. The payment of future cash dividends, if any, will be at the discretion
of the Board of Directors and will be dependent upon the Companys earnings, financial condition,
capital requirements and other factors as the Board of Directors may deem relevant. Our loan
agreements prohibit the payment of dividends without the consent of the other party to the
agreements.
103
Equity Compensation Plans
The following table details information regarding our existing equity compensation plans as of
December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
|
remaining available for
|
|
|
|
|
|
|
|
|
|
|
future issuance under
|
|
|
Number of Securities to
|
|
Weighted average
|
|
equity compensation
|
|
|
be issued upon exercise
|
|
exercise price of
|
|
plans (excluding
|
|
|
of outstanding options,
|
|
outstanding options,
|
|
securities reflected in
|
|
|
warrants and rights
|
|
warrants and rights
|
|
column (a))
|
Plan Category
|
|
(a)
|
|
(b)
|
|
(c)
|
Equity compensation
plans approved by
security holders
|
|
|
6,697,761
|
|
|
$
|
9.90
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders
|
|
|
2,350,000
|
(1)
|
|
$
|
9.90
|
|
|
|
135,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
9,047,761
|
|
|
|
|
|
|
|
135,000
|
|
|
|
|
(1)
|
|
Represents options issued pursuant to equity compensation plans approved by
security holders, but in excess of the number of shares authorized by such approval. See Note 15
to our consolidated audited financial statements for information concerning our equity compensation
plans.
|
104
Item 10. Recent Sales of Unregistered Securities.
On June 27, 2005, we issued $ 75.0 million principal amount of 3.5% debentures to a qualified
institutional buyer. The 3.5% debentures were issued pursuant to the exemption from registration
provided by Section 4(2) of the Securities Act. The 3.5% debentures are convertible into our
common stock at an initial conversion price of $ 20.69 per share. They are not convertible prior to
June 15, 2011, however, unless certain contingencies occur, including the closing price of the
common stock having exceeded 120% of the conversion price for at least 20 trading days during the
30 consecutive trading days ending on the last trading day of the immediately preceding fiscal
quarter. Upon conversion, the value (the conversion value) of the cash and shares of common
stock, if any, to be received by a holder converting $ 1,000 principal amount of the 3.5% debentures
will be determined by multiplying the applicable conversion rate by the 20-day average closing
price of the common stock beginning on the second trading day immediately following the day on
which the 3.5% debentures are submitted for conversion. The conversion value will be payable as
follows: (1) an amount in cash (the principal return) equal to the lesser of (a) the conversion
value and (b) $ 1,000, and (2) to the extent the conversion value exceeds $ 1,000, a number of shares
of common stock with a value equal to the difference between the conversion value and the principal
return or a cash payment, at our option. In addition, if a holder elects to convert the 3.5%
debentures within a period of 30 trading days after the effective date of a fundamental change
transactiongenerally a transaction constituting a change of control of Impax, as defined by the
Indenturethe holder will be entitled to receive a make-whole premium consisting of additional
shares of common stock (or, if we so elect, the same consideration offered in connection with the
fundamental change).
Since January 1, 2005, we sold an aggregate of 24,398 shares of our common stock to 51 persons
pursuant to our Employee Stock Purchase Plan and pursuant to the exercise of stock options. In
connection with David Dolls resignation, we issued 94,705 shares of our common stock, in the
aggregate, to David and Kathrine Doll. In addition, we issued 9,836 shares of our common stock to
David Doll pursuant to the consulting agreement between our company and David Doll. With respect
to the foregoing, we relied upon the exemption provided by Section 4(2) of the Securities Act.
105
Item 11. Description of Registrants Securities to be Registered.
This section of the registration statement provides a description of the material terms of our
certificate of incorporation and by-laws. The following description is intended as a summary only
and is qualified in its entirety by reference to the complete text of our certificate of
incorporation and our bylaws, which are filed as exhibits to this registration statement. We urge
you to read the full text of these documents.
Capital Stock
Pursuant to our certificate of incorporation, we are authorized to issue up to 90,000,000
shares of common stock, $ 0.01 par value per share, and 2,000,000 shares of preferred stock, $ 0.01
par value per share. As of June 17, 2008, there were outstanding 59,019,743 shares of common
stock, $ 75.0 million of senior subordinated debentures convertible into 3,624,116 shares of common
stock, options to purchase 9,133,285 shares of common stock, 384,843 unvested restricted shares of
common stock, and no shares of preferred stock. All shares of common stock are nonassessable.
The rights, preferences and privileges of holders of common stock will be subject to, and may
be adversely affected by, the rights of the holders of a series of preferred stock to be issued in
the future. Further, the rights, preferences and privileges of the holders of common stock may be
diluted to the extent holders of options or convertible debentures exercise their respective rights
to exercise options or convert debentures into shares of our common stock.
Common Stock
Voting Rights
Holders of common stock are entitled to one vote for each share held on all matters submitted
to a vote of stockholders and do not have cumulative voting rights. Except as otherwise required
by applicable law and subject to the voting rights of the holders of any outstanding shares of
preferred stock, the approval of all matters brought before our stockholders, except the election
of directors, requires the affirmative vote of the holders of a majority of the voting power of the
shares of common stock that are present in person or represented by proxy. The election of
directors is decided by plurality vote.
Dividend Rights
Subject to any preferential or other rights of holders of preferred stock then outstanding,
the board of directors may declare and pay a dividend on outstanding shares of common stock out of
the funds legally available for the payment of dividends. Our stockholders are entitled to share
equally, in accordance with the number of shares of common stock held by each holder, in any
dividend declared by our board of directors, whether payable in cash, property, or securities of
the company.
Right to Receive Liquidation Distributions
Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of our
company, after payment to all our creditors of the full amounts to which they are entitled and
subject to any preferential or other rights of the holders of preferred stock, the holders of
common stock are entitled to share ratably, in accordance with the number of shares of common stock
held by each holder, in our remaining assets available for distribution among our stockholders,
whether capital, surplus or earnings. For this purpose, neither a consolidation or a merger of our
company with or into any other corporation, nor the sale, lease, exchange or transfer by our
company of all or any part of our assets, nor the reduction of our capital stock, constitutes a
liquidation, dissolution or winding-up of our company.
Preemptive, Redemption and Other Rights
Holders of our common stock generally have no preemptive, subscription, redemption or
conversion rights and no sinking fund provisions are applicable to the outstanding shares of our
common stock.
106
Preferred Stock
Pursuant to the terms of our certificate of incorporation, our board of directors is
authorized to issue, without stockholder approval, up to 2,000,000 shares of preferred stock in one
or more series. Our board of directors may from time to time authorize the issuance of one or more
series of preferred stock without stockholder approval. Subject to the provisions of our
certificate of incorporation and limitations prescribed by law, our board of directors is
authorized to adopt resolutions to, among other things, issue shares of preferred stock in one or
more series, establish the number of shares constituting a series, and provide designations,
preferences, and relative, participating, optional or other special rights, and any qualifications,
limitation or restrictions on shares of our preferred stock, including, but not limited to, voting
rights, dividend rights, terms of redemption, conversion rights and liquidation preferences, in
each case without any action or vote by our stockholders. The board of directors is authorized to
increase (but not above the total number of authorized shares of preferred stock) or decrease (but
not below the number of shares then outstanding) the number of shares of capital stock of any
series of preferred stock.
Amendment of By-laws
Pursuant to Article VII of our bylaws, our bylaws may be amended or repealed or new bylaws may
be adopted by the affirmative vote of a majority of the board of directors at any regular or
special meeting of the board of directors. If any bylaw regulating an impending election of
directors is adopted, amended or repealed by the board of directors, the notice of the next meeting
of the stockholders to elect the directors shall set forth the bylaw so adopted, amended, or
repealed, together with a precise statement of the changes made. Bylaws adopted by the board of
directors may be amended or repealed by our stockholders.
Anti-Takeover Provisions
Our certificate of incorporation and bylaws contain certain provisions, as described below,
that may discourage potential acquisition proposals and could delay or prevent a change in control.
These provisions are intended to enhance the likelihood of continuity and stability in the
composition of the board of directors and in the policies formulated by the board of directors and
to discourage certain types of transactions that may involve an actual or threatened change of
control. In addition, these provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal and discourage certain tactics that may be used in proxy fights. The
protective nature of these provisions, however, may also delay, deter or prevent a tender offer or
takeover attempt that a stockholder might consider to be in its best interest. Such provisions
also may have the effect of preventing changes in our management.
Preferred Stock
Our future issuance of preferred stock could adversely affect the rights of our common
stockholders by, among other things:
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restricting the payment of dividends on our common stock;
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diluting the voting power of our common stock;
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reducing the amount of assets remaining for payment to holders of shares in the
event of a liquidation of assets; or
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delaying or preventing a change in control without further action by the
stockholders.
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Calling of Special Meeting of Stockholders
Our bylaws provide that, unless otherwise prescribed by statute, special meetings of
stockholders may be called by the chairman of the board, the Chief Executive Officer or by
resolution of the board of directors. Our Chief Executive Officer or Secretary upon the written
request of not less than 10% in interest of the stockholder entitled to vote must call the special
meeting of our stockholders.
No Cumulative Voting
Our certificate of incorporation and bylaws do not grant stockholders the right to cumulate
votes in the election of directors.
107
Removal of Directors; Vacancies
Pursuant to our bylaws and subject to any written agreement among all of the stockholders, any
director or the entire board of directors may be removed either for or without cause at any time by
the affirmative vote of the holders of a majority of the shares entitled to vote for the election
of directors at any annual or special meeting called for that purpose. Subject to any written
agreement among all of the stockholders, any vacancies thus created may be filled at such meeting
by an affirmative vote of a majority of the stockholders entitled to vote or, if such vacancies are
not so filled, by the directors pursuant to a majority vote of such directors, provided that they
do not attempt to fill such vacancy by re-electing the director whose removal created such vacancy.
Limitations of Liability and Indemnification of Officers and Directors
Our certificate of incorporation and bylaws eliminate the personal liability of our directors
to the fullest extent permitted by section 102(b)(7) of the Delaware General Corporation Law
(DGCL) and require us to indemnify all persons whom we have the power to indemnify to the fullest
extent permitted under Section 145 of the DGCL. See Item 12. Indemnification of Directors and
Officers for a detailed description of the limitations of liability and indemnification of our
officers and directors.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is StockTrans Inc., 44 W. Lancaster
Avenue, Ardmore, PA 19003.
Item 12. Indemnification of Directors and Officers.
This section of the registration statement provides a description of the material terms of
Sections 145 and 102(b)(7) of the DGCL, our certificate of incorporation and our bylaws related to
the indemnification of our directors and officers and the limitation of personal liability of our
directors. The following description is intended as a summary only and is qualified in its
entirety by reference to the complete text of the foregoing sections of the DGCL as well as our
certificate of incorporation and bylaws. We urge you to read the full text of these documents.
Indemnification Provisions
Section 145 of DGCL
Section 145(a) of the DGCL provides that a Delaware corporation may indemnify any person who
was or is, or is threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding, referred to as the action, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation described below) by
reason of the fact that such person:
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is or was a director, officer, employee or agent of such corporation; or
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is or was serving at the request of such corporation as a director, officer, employee
or agent of another corporation or other enterprise.
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A corporation may indemnify such person against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in
connection with such action if the person:
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acted in good faith and in a manner such person reasonably believed to be in, or not
opposed to, the best interests of the corporation; and
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with respect to any criminal action or proceeding, had no reasonable cause to believe
the persons conduct was unlawful.
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Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who
was or is, or is threatened to be made, a party to any action by or in the right of the corporation
to procure a judgment in its favor
108
due to the fact that such person acted in any of the capacities
set forth above against expenses (including attorneys fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action if the person acted in good
faith and in a manner such person reasonably believed to be in, or not opposed to, the best
interests of the corporation. However, a corporation may not indemnify such person in respect
of any claim, issue or matter as to which such person is adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the court in which such action
was brought determines that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to indemnity for such
expenses the Court of Chancery or such other court deems proper.
Section 145(c) of the DGCL further provides that, to the extent that an officer or director of
a Delaware corporation has been successful on the merits or otherwise in the defense of any action
referred to above, or in the defense of any claim, issue or matter related to such action, the
corporation must indemnify such person against the expenses (including attorneys fees) actually
and reasonably incurred by such person in connection with such defense.
Pursuant to Section 145(e), a Delaware corporation may, in advance of the final disposition of
any civil, criminal, administrative or investigative action, pay the expenses (including attorneys
fees) incurred by any officer or director in defending any such action, provided that the officer
or director undertakes to repay such amount if it is ultimately determined that such person is not
entitled to the corporations indemnification.
The indemnification and advancement of expenses provided by Section 145 of the DGCL is not
exclusive of any other rights to which a person may be entitled under any corporations bylaw,
agreement, vote of stockholders or disinterested directors or otherwise. Furthermore, Section
145(g) of the DGCL authorizes a Delaware corporation to purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of such corporation as a director, officer, employee or agent of another
corporation or other enterprise against any liability asserted against such person and incurred by
such person in any such capacity or arising out of such persons status as such, whether or not the
corporation would have the power to indemnify such person against such liability under Section 145
of the DGCL.
Certificate of Incorporation and Bylaws
Our certificate of incorporation provides that we shall, to the fullest extent permitted by
Section 145 of the DGCL, indemnify all persons who we have the power to indemnify under Section 145
of DGCL against all expenses, liabilities or other matters covered by such Section 145.
In addition, subject to certain conditions described below, our bylaws require us to indemnify
any person entitled to indemnification under Section 145 of the DGCL to the fullest extent
permitted by applicable law against all liability and loss suffered and expenses (including
attorneys fees) reasonably incurred by such person. We are required to indemnify a person in
connection with a proceeding initiated by that person only if our board of directors authorized
such proceeding.
Our bylaws provide that any amount that a person who was or is serving at our request as a
director, officer, employee or agent of another corporation or other entity may collect as
indemnification from such other entity reduces our obligation to indemnify such person.
Our bylaws require us to pay expenses (including attorneys fees) incurred in defending any
proceeding in advance of the final disposition of such proceeding upon receipt of an undertaking by
the director or officer to repay all amounts advanced if it is ultimately determined that such
person is not entitled to our indemnification.
Our bylaws provide that our board of directors may authorize us to maintain insurance on
behalf of any person entitled to indemnification under Section 145 of the DGCL against any
liability incurred by such person, whether or not we would have the power to indemnify such person
against such liability under the provisions of Article IX of the bylaws or the DGCL. Consistent
with the provisions of Section 145 of the DGCL and our bylaws, we maintain directors and officers
liability insurance for the benefit of our company and our stockholders in the amount of
$ 10,000,000.
109
The indemnification rights provided by our certificate of incorporation and bylaws are not
exclusive of any other rights to which those indemnified may have under any statute, certificate of
incorporation, bylaws, agreement, vote of stockholders or disinterested directors or otherwise, as
applicable.
Any repeal or modification of the foregoing provisions of Article IX of our bylaws will not
adversely affect any right or protection under such Article IX of any person in respect of any
matters occurring prior to the time of such repeal or modification.
Limitation of Personal Liability
Section 102(b)(7) of the DGCL provides that a Delaware corporation may include in its
certificate of incorporation a provision eliminating or limiting personal liability of its
directors to the corporation or its stockholders for monetary damages for breach of a directors
fiduciary duty. However, no such provision may eliminate or limit the liability of a director for:
(i) any breach of the directors duty of loyalty to the corporation or its stockholders; (ii) acts
or omissions not in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) unlawful payment of a dividend or unlawful stock purchase or redemption as set forth in
Section 174 of the DGCL; or (iv) any transaction from which the director derived an improper
personal benefit.
Our certificate of incorporation eliminates the personal liability of our directors to the
fullest extent permitted by section 102(b)(7) of the DGCL and provides that no amendment or repeal
of Section ELEVENTH applies to the liability of any of our directors for any acts or omissions of
such director occurring prior to the effective date of such amendment or repeal. In addition, our
bylaws provide that no director will be personally liable to us or our stockholders for monetary
damages for breach of the directors fiduciary duty consistent with Section 102(b)(7) of the DGCL.
110
Item 13. Financial Statements and Supplementary Data.
The financial statements required to be included in this Registration Statement appear at the
end of the Registration Statement beginning on page F-1.
Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
On November 9, 2006, we engaged Grant Thornton LLP (Grant Thornton) as our independent
accountant. The decision to engage Grant Thornton as our independent accountant was made and
approved by our Audit Committee.
During the fiscal years ended December 31, 2003 and 2004 and through November 9, 2006, we had
not consulted with Grant Thornton regarding (i) either the application of accounting principles to
a specified transaction, either completed or proposed, or the type of audit opinion that might be
rendered on our financial statements; or (ii) any matter that was either the subject of a
disagreement (as that term is described in Item 304 (a)(1)(iv) of Regulation S-K and the related
instructions to Item 304 of Regulation S-K), or a reportable event (as that term is described in
Item 304(a)(1)(v) of Regulation S-K).
111
Item 15. Financial Statements and Exhibits.
(a) Financial Statements
The
financial statements required to be included in this Registration
Statement appear beginning on page F-1 below.
112
(b)
Exhibits
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Exhibit No.
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Description of Document
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3.1
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Restated Certificate of Incorporation, dated August 30, 2004.
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3.2
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By-Laws.
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4.1
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Specimen of Common Stock Certificate.
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4.2
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Form of Debenture ( incorporated by reference to Exhibit A to the
Indenture, dated as of June 27, 2005, between the Company and HSBC Bank
USA, National Association, as Trustee, listed on Exhibit 4.3).
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4.3
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Indenture, dated as of June 27, 2005, between the Company and HSBC Bank
USA, National Association, as Trustee.
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4.4
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Supplemental Indenture, dated as of July 6, 2005, between the Company
and HSBC Bank USA, National Association, as Trustee.
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4.5
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Registration Rights Agreement, dated as of June 27, 2005, between the
Company and the Initial Purchasers named therein.
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4.6
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Promissory Note dated June 7, 2006, issued by the Company to Solvay
Pharmaceuticals, Inc.
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10.1
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Amended and Restated Loan and Security Agreement, dated as of December
15, 2005, between the Company and Wachovia Bank, National Association.
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10.2
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Purchase Agreement, dated June 26, 2005, between the Company and the
Purchasers named therein.
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10.3
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1995 Stock Incentive Plan.*
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10.4
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1999 Equity Incentive Plan.*
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10.5
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2001 Non-Qualified Employee Stock Purchase Plan.*
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10.6
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Amended and Restated 2002 Equity Incentive Plan(Corrected).*
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10.7
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Executive Non-Qualified Deferred Compensation Plan, restated effective
January 1, 2005.*
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10.8
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Employment Agreement, dated as of December 14, 1999, between the Company
and Charles Hsiao, Ph.D.*
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10.9
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Employment Agreement, dated as of December 14, 1999, between the Company
and Larry Hsu, Ph.D.*
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10.10
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Employment Agreement, dated as of September 1, 2006, between the Company
and David S. Doll.*
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10.11
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Separation Agreement and General Release, dated July 30, 2008, between
the Company and David S. Doll.*
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10.12
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Consulting Agreement, effective as of September 4, 2008, between the
Company and David S. Doll.*
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10.13
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Strategic Alliance Agreement, dated June 27, 2001, between the Company
and Teva Pharmaceuticals Curacao N.V.**
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10.13.1
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Letter Amendment, dated October 8, 2003, to Strategic Alliance
Agreement, dated June 27, 2001, between the Company and Teva
Pharmaceuticals Curacao N.V.**
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10.13.2
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Letter Agreement, dated March 24, 2005, between the Company and Teva
Pharmaceuticals Curacao N.V.**
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10.13.3
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Letter Amendment, dated March 24, 2005 and effective January 1, 2005, to
Strategic Alliance Agreement, dated June 27, 2001, between the Company
and Teva Pharmaceuticals Curacao N.V.**
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10.13.4
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Amendment, dated January 24, 2006, to Strategic Alliance Agreement,
dated June 27, 2001, between the Company and Teva Pharmaceuticals
Curacao N.V.**
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10.14
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Master 300mg Agreement, dated as of January 24, 2006, among the Company,
Teva Pharmaceuticals Curacao N.V., and Anchen Pharmaceuticals, Inc.**
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10.15
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Development, License and Supply Agreement, dated as of June 18, 2002,
between the Company and Wyeth , acting through its Wyeth Consumer
Healthcare Division.**
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10.15.1
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Amendment, dated as of July 9, 2004, to Development, License and Supply
Agreement, dated as of June 18, 2002, between the Company and Wyeth,
acting through its Wyeth Consumer Healthcare Division.**
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10.15.2
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Amendment, dated as of February 14, 2005, to Development, License and
Supply Agreement, dated as of June 18, 2002, between the Company and
Wyeth, acting through its Wyeth Consumer Healthcare Division.**
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113
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Exhibit No.
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Description of Document
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10.16
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Licensing, Contract Manufacturing and Supply Agreement, dated as of June
18, 2002, between the Company and Schering Corporation.**
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10.16.1
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Amendment No. 3, effective as of July 23, 2004, to Licensing, Contract
Manufacturing and Supply Agreement, dated as of June 18, 2002, between
the Company and Schering Corporation.**
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10.16.2
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Amendment No. 4, effective as of December 15, 2006, to Licensing,
Contract Manufacturing and Supply Agreement, dated as of June 18, 2002,
between the Company and Schering Corporation.**
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10.17
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Supply and Distribution Agreement, dated as of November 3, 2005, between
the Company and DAVA Pharmaceuticals, Inc.**
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10.17.1
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Amendment No. 2, dated February 6, 2007, to Supply and Distribution
Agreement, dated November 3, 2005, between the Company and DAVA
Pharmaceuticals, Inc.**
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10.18
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Patent License Agreement, dated as of March 30, 2007, by and among
Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals
L.P. and the Company.**
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10.19
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Supplemental License Agreement, dated as of March 30, 2007, by and among
Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals
L.P. and the Company.**
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10.20
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Sublicense Agreement, effective as of March 30, 2007, between the
Company and DAVA Pharmaceuticals, Inc.**
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10.21
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Promotional Services Agreement, dated as of January 19, 2006, between
the Company and Shire US Inc.**
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10.22
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Co-promotion Agreement, dated as of July 16, 2008, between the Company
and Wyeth, acting through its Wyeth Pharmaceuticals Division.**
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11.1
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Statement re computation of per share earnings (incorporated by
reference to Note 17 to the Notes to the Consolidated Financial
Statements and Note 10 to (Unaudited) Interim Consolidated Financial
Statements included in this registration statement).
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21.1
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Subsidiaries of the registrant.
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*
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Management contract, compensatory plan or arrangement.
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**
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To be filed by amendment.
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114
Impax Laboratories, Inc.
INDEX TO FINANCIAL STATEMENTS
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F-2
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F-3
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F-4
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F-5
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F-6
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F-8 to F-64
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F-66
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F-67
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F-68
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F-69
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F-71 to F-86
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S-1
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Page F-1 of F-86
Impax Laboratories, Inc.
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Impax Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of Impax Laboratories, Inc. and
Subsidiaries (a California corporation), (the Company) as of December 31, 2007, 2006 and 2005 and
the related consolidated statements of operations, changes in stockholders equity (deficit),
comprehensive income (loss) and cash flows for each of the three years in the period ended December
31, 2007. Our audits of the basic consolidated financial statements included the financial
statement schedule listed in the index appearing under Item 15. These financial statements and
financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Impax Laboratories, Inc. and Subsidiaries as of
December 31, 2007, 2006 and 2005, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated financial statements
taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Notes 2, 10 and 15 to the consolidated financial statements, the Company has
adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for
Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
in 2007 and FASB No.
123(R),
Share-Based Payment
in 2006.
/s/ Grant Thornton LLP
Philadelphia, Pennsylvania
October 10, 2008
Page F-2 of F-86
Impax Laboratories, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
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December 31,
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2007
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2006
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2005
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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37,462
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$
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6,399
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$
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55,877
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Short-term investments
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106,034
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23,435
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204
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Accounts receivable, net
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51,503
|
|
|
|
61,921
|
|
|
|
30,528
|
|
Inventory, net
|
|
|
27,568
|
|
|
|
34,111
|
|
|
|
33,265
|
|
Current portion of deferred product
manufacturing costs-alliance agreements
|
|
|
11,923
|
|
|
|
14,378
|
|
|
|
6,511
|
|
Current portion of deferred income taxes
|
|
|
27,376
|
|
|
|
409
|
|
|
|
918
|
|
Deferred charge-exclusivity period fee
|
|
|
|
|
|
|
38,133
|
|
|
|
|
|
Prepaid expenses and other assets
|
|
|
8,592
|
|
|
|
1,888
|
|
|
|
1,578
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
270,458
|
|
|
|
180,674
|
|
|
|
128,881
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
81,223
|
|
|
|
69,402
|
|
|
|
55,251
|
|
Deferred product manufacturing costs-alliance agreements
|
|
|
82,474
|
|
|
|
58,587
|
|
|
|
38,772
|
|
Deferred income taxes, net
|
|
|
47,937
|
|
|
|
425
|
|
|
|
|
|
Other assets
|
|
|
6,793
|
|
|
|
7,226
|
|
|
|
9,807
|
|
Goodwill
|
|
|
27,574
|
|
|
|
27,574
|
|
|
|
27,574
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
516,459
|
|
|
$
|
343,888
|
|
|
$
|
260,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY/ (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
69,234
|
|
|
$
|
1,827
|
|
|
$
|
111
|
|
Accounts payable
|
|
|
16,898
|
|
|
|
14,550
|
|
|
|
12,643
|
|
Accrued expenses
|
|
|
35,838
|
|
|
|
30,213
|
|
|
|
48,289
|
|
Current portion of deferred revenue-alliance agreements
|
|
|
26,381
|
|
|
|
33,965
|
|
|
|
12,042
|
|
Current portion of accrued exclusivity period fee payments due
|
|
|
12,000
|
|
|
|
18,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
160,351
|
|
|
|
98,755
|
|
|
|
73,085
|
|
|
|
|
|
|
|
|
|
|
|
3.5% Convertible senior subordinated debentures
|
|
|
12,750
|
|
|
|
75,000
|
|
|
|
75,000
|
|
Long-term debt
|
|
|
7,760
|
|
|
|
14,603
|
|
|
|
5,285
|
|
Fair value of common stock purchase warrants
|
|
|
2,285
|
|
|
|
2,313
|
|
|
|
3,977
|
|
Deferred revenue-alliance agreements
|
|
|
181,720
|
|
|
|
144,086
|
|
|
|
91,292
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
|
|
454
|
|
Accrued exclusivity period fee payments due
|
|
|
6,000
|
|
|
|
9,000
|
|
|
|
|
|
Other liabilities
|
|
|
11,426
|
|
|
|
4,107
|
|
|
|
2,306
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
382,292
|
|
|
$
|
347,864
|
|
|
$
|
251,399
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 19 and 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity/ (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock, $ 0.01 par value, 2,000,000 shares authorized,
none outstanding at December 31, 2007, 2006, and 2005
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Common stock, $ 0.01 par value, 90,000,000 shares authorized
and 58,822,548, 58,785,199, and 58,976,992 issued and outstanding
at December 31, 2007, 2006, and 2005, respectively
|
|
|
591
|
|
|
|
590
|
|
|
|
590
|
|
Additional paid-in capital
|
|
|
196,049
|
|
|
|
183,809
|
|
|
|
182,467
|
|
Treasury stock-acquired as a result of achievement
of milestone under the Teva Agreement, 243,729 shares at
December 31, 2007 and 2006
|
|
|
(2,157
|
)
|
|
|
(2,157
|
)
|
|
|
|
|
Accumulated other comprehensive (loss)
|
|
|
(26
|
)
|
|
|
(3
|
)
|
|
|
|
|
Accumulated deficit
|
|
|
(60,290
|
)
|
|
|
(186,215
|
)
|
|
|
(174,171
|
)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
$
|
134,167
|
|
|
$
|
(3,976
|
)
|
|
$
|
8,886
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
516,459
|
|
|
$
|
343,888
|
|
|
$
|
260,285
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-3 of F-86
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
$
|
87,978
|
|
|
$
|
78,201
|
|
|
$
|
89,291
|
|
Rx Partner
|
|
|
161,114
|
|
|
|
36,809
|
|
|
|
12,630
|
|
OTC Partner
|
|
|
11,866
|
|
|
|
13,782
|
|
|
|
10,451
|
|
Promotional Partner
|
|
|
12,759
|
|
|
|
6,434
|
|
|
|
|
|
Other
|
|
|
36
|
|
|
|
20
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
273,753
|
|
|
|
135,246
|
|
|
|
112,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
107,656
|
|
|
|
72,248
|
|
|
|
58,435
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
166,097
|
|
|
|
62,998
|
|
|
|
53,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
39,992
|
|
|
|
29,635
|
|
|
|
26,095
|
|
Patent litigation
|
|
|
10,025
|
|
|
|
9,693
|
|
|
|
7,734
|
|
Litigation settlement
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
Selling, general and administrative
|
|
|
39,573
|
|
|
|
32,361
|
|
|
|
25,759
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
89,590
|
|
|
|
74,245
|
|
|
|
59,588
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
76,507
|
|
|
|
(11,247
|
)
|
|
|
(5,623
|
)
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of common stock purchase warrants
|
|
|
(110
|
)
|
|
|
1,098
|
|
|
|
4,502
|
|
Other income (expense), net
|
|
|
73
|
|
|
|
(192
|
)
|
|
|
(149
|
)
|
Interest income
|
|
|
4,751
|
|
|
|
2,233
|
|
|
|
1,993
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(4,113
|
)
|
|
|
(3,796
|
)
|
|
|
(6,314
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
77,108
|
|
|
|
(11,904
|
)
|
|
|
(5,591
|
)
|
Benefit (provision) for income taxes
|
|
|
48,817
|
|
|
|
(140
|
)
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
$
|
(5,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.14
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
2.06
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,810,452
|
|
|
|
58,996,365
|
|
|
|
58,955,664
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
61,217,470
|
|
|
|
58,996,365
|
|
|
|
58,955,664
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-4 of F-86
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY/ (DEFICIT)
AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/ (LOSS)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2007
(dollars and shares in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
Stockholders Equity (Deficit)
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
Balance at December 31, 2004
|
|
|
58,898
|
|
|
$
|
589
|
|
|
$
|
182,048
|
|
|
$
|
|
|
|
$
|
(168,391
|
)
|
|
$
|
|
|
|
$
|
14,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and sale of
common stock under ESPP
|
|
|
79
|
|
|
|
1
|
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,780
|
)
|
|
|
|
|
|
|
(5,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
58,977
|
|
|
$
|
590
|
|
|
$
|
182,467
|
|
|
$
|
|
|
|
$
|
(174,171
|
)
|
|
$
|
|
|
|
$
|
8,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock purchase
warrants, stock options, and sale of
common stock under ESPP
|
|
|
52
|
|
|
|
|
|
|
|
659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
659
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
683
|
|
Achievement of milestone under the
Teva Agreement
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,157
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,157
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,044
|
)
|
|
|
|
|
|
|
(12,044
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
58,785
|
|
|
$
|
590
|
|
|
$
|
183,809
|
|
|
$
|
(2,157
|
)
|
|
$
|
(186,215
|
)
|
|
$
|
(3
|
)
|
|
$
|
(3,976
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock purchase
warrants, stock options, and sale of
common stock under ESPP
|
|
|
37
|
|
|
|
1
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
1,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,513
|
|
Tax benefit related to
exercise of employee stock options
|
|
|
|
|
|
|
|
|
|
|
10,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,477
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23
|
)
|
|
|
(23
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,925
|
|
|
|
|
|
|
|
125,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
58,822
|
|
|
$
|
591
|
|
|
$
|
196,049
|
|
|
$
|
(2,157
|
)
|
|
$
|
(60,290
|
)
|
|
$
|
(26
|
)
|
|
$
|
134,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income/ (Loss)
|
|
Year Ended December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Net income (loss)
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
$
|
(5,780
|
)
|
Cumulative translation adjustments
|
|
|
(23
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
125,902
|
|
|
$
|
(12,047
|
)
|
|
$
|
(5,780
|
)
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-5 of F-86
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
$
|
(5,780
|
)
|
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,612
|
|
|
|
7,307
|
|
|
|
5,416
|
|
Bad debt expense
|
|
|
550
|
|
|
|
|
|
|
|
|
|
Tax benefit on reversal of valuation allowance on deferred tax asset
|
|
|
(81,485
|
)
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
17,483
|
|
|
|
|
|
|
|
|
|
Tax benefit related to exercise of employee stock options
|
|
|
(10,477
|
)
|
|
|
|
|
|
|
|
|
Provision for uncertain tax positions
|
|
|
6,118
|
|
|
|
|
|
|
|
|
|
Deferred revenue Rx Partners
|
|
|
234,816
|
|
|
|
115,391
|
|
|
|
40,550
|
|
Deferred product manufacturing costs Rx Partners
|
|
|
(64,681
|
)
|
|
|
(42,431
|
)
|
|
|
(10,139
|
)
|
Deferred revenue recognized Rx Partners
|
|
|
(161,114
|
)
|
|
|
(36,809
|
)
|
|
|
(12,630
|
)
|
Amortization deferred product manufacturing costs Rx Partners
|
|
|
46,363
|
|
|
|
14,006
|
|
|
|
3,372
|
|
Deferred revenue OTC Partners
|
|
|
15,359
|
|
|
|
11,215
|
|
|
|
8,039
|
|
Deferred product manufacturing costs OTC Partners
|
|
|
(13,014
|
)
|
|
|
(11,678
|
)
|
|
|
(6,560
|
)
|
Deferred revenue recognized OTC Partners
|
|
|
(11,866
|
)
|
|
|
(13,782
|
)
|
|
|
(10,451
|
)
|
Amortization deferred product manufacturing costs OTC Partners
|
|
|
9,900
|
|
|
|
12,421
|
|
|
|
7,293
|
|
Payments on exclusivity period fee
|
|
|
(18,200
|
)
|
|
|
(14,400
|
)
|
|
|
|
|
Payments on accrued litigation settlements
|
|
|
(2,573
|
)
|
|
|
(12,000
|
)
|
|
|
|
|
Accrued litigation settlement expense
|
|
|
|
|
|
|
2,556
|
|
|
|
|
|
Share-based compensation expense
|
|
|
1,514
|
|
|
|
683
|
|
|
|
|
|
Accretion of interest income on short-term investments
|
|
|
(3,147
|
)
|
|
|
(1,004
|
)
|
|
|
(363
|
)
|
Change in fair value of common stock purchase warrants
|
|
|
110
|
|
|
|
(1,098
|
)
|
|
|
(4,502
|
)
|
Write-off remaining balance of unamortized deferred financing fees
|
|
|
|
|
|
|
|
|
|
|
2,835
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
9,868
|
|
|
|
(31,393
|
)
|
|
|
(6,677
|
)
|
Inventory
|
|
|
6,543
|
|
|
|
(846
|
)
|
|
|
(3,043
|
)
|
Prepaid expenses and other assets
|
|
|
(6,325
|
)
|
|
|
1,960
|
|
|
|
1,115
|
|
Accounts payable and accrued expenses
|
|
|
7,546
|
|
|
|
4,372
|
|
|
|
11,768
|
|
Other liabilities
|
|
|
1,189
|
|
|
|
1,814
|
|
|
|
909
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
119,014
|
|
|
$
|
(5,760
|
)
|
|
$
|
21,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
$
|
(244,119
|
)
|
|
$
|
(57,530
|
)
|
|
$
|
(7,086
|
)
|
Maturities of short-term investments
|
|
|
164,667
|
|
|
|
35,302
|
|
|
|
57,217
|
|
Purchases of property, plant and equipment
|
|
|
(18,836
|
)
|
|
|
(21,475
|
)
|
|
|
(14,764
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
$
|
(98,288
|
)
|
|
$
|
(43,703
|
)
|
|
$
|
35,367
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Repayments) under revolving line of credit, net
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(5,000
|
)
|
Repayment of long-term debt
|
|
|
(253
|
)
|
|
|
(108
|
)
|
|
|
(2,570
|
)
|
Proceeds from issuance of 3.5% convertible debentures
|
|
|
|
|
|
|
|
|
|
|
74,900
|
|
Repayment of 1.25% convertible debentures
|
|
|
|
|
|
|
|
|
|
|
(95,000
|
)
|
Payment of deferred financing fees
|
|
|
|
|
|
|
|
|
|
|
(2,461
|
)
|
Tax benefit related to exercise of employee stock options
|
|
|
10,477
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises and purchases under ESPP
|
|
|
113
|
|
|
|
93
|
|
|
|
421
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
$
|
10,337
|
|
|
$
|
(15
|
)
|
|
$
|
(29,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
31,063
|
|
|
$
|
(49,478
|
)
|
|
$
|
26,809
|
|
Cash and cash equivalents, beginning of the year
|
|
$
|
6,399
|
|
|
$
|
55,877
|
|
|
$
|
29,068
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
37,462
|
|
|
$
|
6,399
|
|
|
$
|
55,877
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-6 of F-86
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
(in $000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash paid for interest
|
|
$
|
4,556
|
|
|
$
|
3,409
|
|
|
$
|
2,544
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
14,106
|
|
|
$
|
500
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2007, the Company issued 9,388 shares of common stock as the result of a cashless
exercise of common stock purchase warrants.
In February 2006, the Company issued 35,243 shares of common stock as the result of a cashless
exercise of common stock purchase warrants.
Unpaid vendor invoices of approximately $ 2,150,000, $ 722,000 and $ 1,189,000 as of December 31,
2007, 2006 and 2005, respectively, are excluded from the purchase of property, plant, and equipment
and the change in accounts payable and accrued expenses.
The accompanying notes are an integral part of these consolidated financial statements.
Page F-7 of F-86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006, 2005
1. THE COMPANY
Impax Laboratories, Inc. (Impax or the Company) is a technology-based, specialty pharmaceutical
company. The Company has two reportable segments, referred to as the Global Pharmaceuticals
Division (Global Division) and the Impax Pharmaceutical Division (Impax Division) . The
Global Division develops, manufactures, sells, and distributes generic pharmaceutical products.
The Impax Division is engaged in the process of developing branded pharmaceutical products.
The Companys Global Division develops, formulates, manufactures, and sells controlled-release and
specialty generic pharmaceutical products, through three sales channels, including: Global, which
includes direct sales of generic prescription (Rx) products to wholesalers, large retail drug
chains, and others; Rx Partners, which include the sale of generic prescription (Rx) products
through unrelated third-party pharmaceutical entities pursuant to alliance agreements; and, OTC
Partners, which include the sale of generic over-the-counter (OTC) products through unrelated
third-party pharmaceutical entities pursuant to alliance agreements.
The Company marketed a total of sixty-five generic pharmaceutical products as of June 30, 2008,
which represented dosage variations of twenty-four different pharmaceutical compounds marketed
under the Companys own Global label; plus a total of twelve generic prescription
pharmaceuticals, representing dosage variations of three different pharmaceutical compounds sold to
other unrelated third-party pharmaceutical entities pursuant to the Rx Partner Alliance Agreements;
and two generic over-the-counter (OTC) products of a single compound sold to other unrelated
third-party pharmaceutical entities pursuant to the OTC Partner Alliance Agreements.
The Company has nineteen applications for approval of new generic products under review by the U.S.
Food and Drug Administration (FDA), four of which have been tentatively approved, and
approximately fifty additional generic products in various stages of research and development, for
which applications have not yet been filed.
The Companys Impax Division is engaged in the development of proprietary brand pharmaceutical
products through improvements to already approved pharmaceutical products to address central
nervous system (CNS) disorders. The IMPAX Division is also engaged in the co-promotion through a
direct sales force focused on marketing to physicians, primarily in the CNS community,
pharmaceutical products developed by other unrelated third-party pharmaceutical entities
In the State of California (CA), the Company utilizes a combination of owned and leased
facilities located in Hayward, CA, including a research and development center, a manufacturing
facility, an office building used as the Companys corporate headquarters for management,
manufacturing support staff, and administrative personnel. Additionally, the Company leases four
other facilities in Hayward, CA, Pleasanton, CA, and Fremont, CA utilized for additional research
and development, administrative services, and equipment storage. In the Commonwealth of
Pennsylvania (PA), the Company owns a packaging, warehousing, and distribution center located in
Philadelphia, PA, as well as a leased facility in New Britain, PA used for sales and marketing,
finance, and administration personnel, as well as providing additional warehouse space. Outside
the Unites States of America (USA), in Taiwan, R.O.C., the Company currently has under
construction a facility to eventually be utilized for manufacturing, research and development,
warehouse, and administrative space, which is expected to be operational in 2010.
The Company was formerly known as Global Pharmaceutical Corporation until December 14, 1999, when
Impax Pharmaceuticals, Inc., a privately held drug delivery company, was merged into the Company
and its name was changed to Impax Laboratories, Inc. The merger was treated as the
recapitalization of Impax Pharmaceuticals, Inc., with Impax Pharmaceuticals, Inc. deemed the
acquirer of Global Pharmaceutical Corporation, with such transaction deemed a reverse acquisition
for accounting purposes.
Page F-8 of F-86
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America (GAAP) requires the use of estimates and assumptions, based on
complex judgments considered reasonable, affect the reported amounts of assets and liabilities and
disclosure of contingent assets and contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. The most significant
judgments are employed in estimates used in determining values of tangible and intangible assets,
legal contingencies, tax assets and tax liabilities, fair value of stock purchase warrants, fair
value of share-based compensation awards issued to employees, and estimates used in applying the
Companys revenue recognition policy including those related to sales rebates, chargebacks and
shelf stock adjustments, Medicare and Medicaid, and sales returns accruals, and recognition periods
related to alliance agreements. Actual results may differ from estimated results.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the operating parent
company, Impax Laboratories, Inc., its wholly-owned subsidiary, Impax Laboratories (Taiwan) Inc.,
and an equity investment in Prohealth Biotech, Inc. (Prohealth), of which the Company holds a 60%
majority ownership interest. All significant intercompany accounts and transactions have been
eliminated.
On July 1, 2006, the Company acquired 150,000 shares of the outstanding common stock, representing
60% of total shares outstanding, of Prohealth, a privately-held company organized under the laws of
Taiwan, R.O.C., for cash consideration of $ 599,000. The Company acquired Prohealth to provide
additional research and development capacity. The results of Prohealths operations have been
included in the consolidated financial statements since the date of acquisition.
Cash and Cash Equivalents
The Company considers all short-term investments with maturity of three months or less at the date
of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which
approximates fair value. The Company is potentially subject to financial instrument concentration
of credit risk through its cash and cash equivalents. The Company maintains cash and cash
equivalents with several major financial institutions. Such amounts frequently exceed Federal
Deposit Insurance Corporation (FDIC) limits.
Short-Term Investments
Short-term investments represent investments in fixed rate financial instruments with maturities of
greater than three months but less than twelve months at the time of purchase. The Companys
short-term investments are held in U.S. Treasury securities and high grade commercial paper, which
are not insured by the FDIC. They are stated at amortized cost, which approximates fair value.
Fair Value of Financial Instruments
The carrying values of the Companys cash and cash equivalents, short-term investments, accounts
receivable, accounts payable and accrued expenses approximate their fair values due to their
short-term nature. The Company estimates the fair value of its fixed-rate long-term debt to be
$ 69,938,000, $ 73,313,000 and $ 72,375,000 at December 31, 2007, 2006 and 2005, respectively.
Contingencies
In the normal course of business, the Company is subject to loss contingencies, such as legal
proceedings and claims arising out of its business, covering a wide range of matters, including,
among others, patent litigation, shareholder lawsuits, and product liability. In accordance with
SFAS No. 5, Accounting for Contingencies, the Company records accruals for such loss contingencies
when it is probable a liability will be incurred and the amount of loss can be reasonably
estimated. The Company, in accordance with SFAS No. 5, does not recognize gain contingencies until
realized. A discussion of contingencies is included in Note 13, Commitments and Contingencies
and Note 14, Legal and Regulatory Matters.
Page F-9 of F-86
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts for estimated losses resulting from amounts
deemed to be uncollectible from its customers; these allowances are for specific amounts on certain
accounts.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are
cash, cash equivalents, short-term investments, and accounts receivable. The Company limits its
credit risk associated with cash, cash equivalents and short-term investments by placing its
investments with high quality money market funds, corporate debt, short-term commercial paper and
in securities backed by the U.S. Government. The Company limits its credit risk with respect to
accounts receivable by performing credit evaluations when deemed necessary. The Company does not
require collateral to secure amounts owed to it by its customers.
The following tables present the percentage of total accounts receivable and gross sales
represented by the Companys five largest customers as of and for the years ended December 31,
2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Total Accounts Receivable
|
|
2007
|
|
2006
|
|
2005
|
Customer #1
|
|
|
26.1
|
%
|
|
|
45.5
|
%
|
|
|
15.1
|
%
|
Customer #2
|
|
|
15.8
|
%
|
|
|
11.2
|
%
|
|
|
29.4
|
%
|
Customer #3
|
|
|
19.1
|
%
|
|
|
13.5
|
%
|
|
|
19.2
|
%
|
Customer #4
|
|
|
8.7
|
%
|
|
|
7.1
|
%
|
|
|
9.2
|
%
|
Customer #5
|
|
|
8.4
|
%
|
|
|
5.0
|
%
|
|
|
11.3
|
%
|
|
|
|
|
|
|
|
Total-Five largest customers
|
|
|
78.1
|
%
|
|
|
82.3
|
%
|
|
|
84.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of Gross Sales
|
|
2007
|
|
2006
|
|
2005
|
Customer #1
|
|
|
13.2
|
%
|
|
|
19.0
|
%
|
|
|
7.4
|
%
|
Customer #2
|
|
|
10.7
|
%
|
|
|
18.5
|
%
|
|
|
28.1
|
%
|
Customer #3
|
|
|
13.7
|
%
|
|
|
17.9
|
%
|
|
|
15.9
|
%
|
Customer #4
|
|
|
5.7
|
%
|
|
|
8.7
|
%
|
|
|
7.8
|
%
|
Customer #5
|
|
|
36.9
|
%
|
|
|
|
|
|
|
|
|
Customer #6
|
|
|
|
|
|
|
5.7
|
%
|
|
|
|
|
Customer #7
|
|
|
|
|
|
|
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
Total-Five largest customers
|
|
|
80.2
|
%
|
|
|
69.8
|
%
|
|
|
65.3
|
%
|
|
|
|
|
|
|
|
During the years ended December 31, 2007, 2006 and 2005, the Companys top ten products accounted
for 68%, 67% and 74%, respectively, of Global product sales, net.
Page F-10 of F-86
Inventory
Inventory is stated at the lower of cost or market. Cost is determined using a standard cost
method, and the cost flow assumption is first-in, first-out (FIFO) flow of goods. Standard costs
are revised annually, and significant variances between actual costs and standard costs are
apportioned to inventory and cost of goods sold based upon inventory turnover. Costs include
materials, labor, quality control, and production overhead. Inventory is adjusted for short-dated,
unmarketable inventory equal to the difference between the cost of inventory and the estimated
value based upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by the Company, additional inventory write-downs
may be required. Consistent with industry practice, the Company may build pre-launch inventories
of certain ANDA related products which are pending required FDA approval and/or resolution of
patent infringement litigation, when, in the Companys assessment, such action is appropriate to
increase the commercial opportunity, and FDA approval is expected in the near term, and /or the
litigation will be resolved in the Companys favor.
In November 2004, the FASB issued SFAS No. 151 (SFAS 151), Inventory Costs, an amendment of ARB
No. 43, Chapter 4. SFAS No. 151 clarifies abnormal inventory costs, such as costs of idle
facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be
recognized as current period costs. The provisions of SFAS No. 151 were effective for the fiscal
year ended December 31, 2006. The adoption of SFAS 151 did not have an impact on the Companys
financial position, results of operations or cash flows, as the Company already accounted for
abnormal inventory costs as a current period charge.
The Company is dependent on a small number of suppliers for its raw materials, and any delay or
unavailability of raw materials can materially adversely affect its ability to produce products.
The Company believes it has, and will continue to have, adequate and dependable sources for the
supply of raw materials and components for its manufacturing requirements. All of the Companys
manufacturing facilities are located in northern California, and significant adverse events
affecting this geographical area could have a material adverse effect on the Companys ability to
produce products.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Maintenance and repairs are charged to expense
as incurred and costs of improvements and renewals are capitalized. Costs incurred in connection
with the construction or major renovation of facilities, including interest directly related to
such projects, are capitalized as construction in progress. Depreciation is recognized using the
straight-line method based on the estimated useful lives of the related assets, which are 40 years
for buildings, 15 years for building improvements, 7-10 years for equipment, and 3-5 years for
office furniture and equipment. Land and construction-in-progress are not depreciated.
Page F-11 of F-86
Goodwill
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS No. 142), rather
than recording periodic amortization, goodwill is subject to an annual assessment for impairment by
applying a fair-value-based test. According to SFAS No. 142, if the fair value of the reporting
unit exceeds the reporting units carrying value, including goodwill, then goodwill is considered
not impaired, making further analysis not required.
The Company considers the Global Division and the Impax Division operating segments to each be a
reporting unit as this is the lowest level for which discrete financial information is available.
The Company attributes the entire carrying amount of goodwill to the Global Division.
The Company concluded the carrying value of goodwill was not impaired as of December 31, 2007,
2006, and 2005. The Company performs its annual goodwill impairment test in the fourth quarter of
each year. In addition, on a quarterly basis, the Company performs a review of its business
operations to determine if events or changes in circumstances have occurred which could have a
material adverse effect on the estimated fair value of the reporting unit, and thus indicate a
potential impairment of the goodwill carrying value. If such events or changes in circumstances
were deemed to have occurred, the Company would perform an interim impairment analysis, which may
include the preparation of a discounted cash flow model, or consultation with one or more valuation
specialists, to analyze the impact, if any, in the Companys assessment of the reporting units
fair value. The Company has not to-date deemed there to be any significant adverse changes in the
legal, regulatory, or general economic environment in which the Company conducts its business
operations.
Page F-12 of F-86
Revenue Recognition
The Company recognizes revenue when the earnings process is complete, which under SEC Staff
Accounting Bulletin No. 104, Topic No. 13,
Revenue Recognition
, is when revenue is realized or
realizable and earned and there is persuasive evidence a revenue arrangement exists; delivery of
goods or services has occurred; the sales price is fixed or determinable; and, collectibility is
reasonably assured.
The Company accounts for revenue arrangements with multiple deliverables in accordance with
Emerging Issues Task Force Issue No. 00-21,
Accounting for Revenue Arrangements with Multiple
Elements
(EITF 00-21), which addresses the determination of whether an arrangement involving
multiple deliverables contains more than one unit of accounting. A delivered item within an
arrangement is considered a separate unit of accounting only if all of the following criteria are
met:
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-
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the delivered item has value to the customer on a stand-alone basis;
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|
|
-
|
|
there is objective and reliable evidence of the fair value of the undelivered item; and
|
|
|
-
|
|
if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the
undelivered item is considered probable and substantially in the control of the vendor.
|
Under EITF 00-21, if the fair value of any undelivered element cannot be objectively or reliably
determined, then separate accounting for the individual deliverables is not appropriate. Revenue
recognition for arrangements with multiple deliverables constituting a single unit of accounting is
recognizable generally over the greater of the term of the arrangement or the expected period of
performance, on a straight-line basis or on a modified proportional performance method.
Page F-13 of F-86
Global product sales, net:
The Global product sales, net line item of the statement of operations, includes revenue
recognized related to shipments of pharmaceutical products to the Companys customers, primarily
drug wholesalers and retail chains. Gross sales revenue is recognized at the time title and risk
of loss passes to the customer generally when product is received by the customer. Included in
Global product revenue are deductions from the gross sales price, including deductions related to
estimates for chargebacks, rebates, returns, shelf-stock, and other pricing adjustments. The
Company records an estimate for these deductions in the same period when revenue is recognized. A
summary of each of these deductions is as follows:
Returns
The Company allows its customers to return product (i) if approved by authorized personnel in
writing or by telephone with the lot number and expiration date accompanying any request and (ii)
if such products are returned within six months prior to or until 12 months following, the
products expiration date.
The Company estimates a provision for product returns as a percentage of gross sales based upon
historical experience of Global product sales. The sales return reserve is estimated using an
historical lag period which is the time between when the product is sold and when it is
ultimately returned, as determined from the Companys system generated lag period report and
return rates, adjusted by estimates of the future return rates based on various assumptions,
which may include changes to internal policies and procedures, changes in business practices, and
commercial terms with customers, competitive position of each product, amount of inventory in the
wholesaler supply chain, the introduction of new products, and changes in market sales
information. The Company considers other factors when estimating its current period return
provision, including levels of inventory in the distribution channel, significant market changes
which may impact future expected returns, and actual product returns. The Company monitors
actual returns on a quarterly basis and may record specific provisions for returns it believes
are not covered by historical percentages.
Rebates and Chargebacks
The Company maintains various rebate programs with its Global customers. The rebate programs are
integral to the Companys effort to maintain a competitive position in its marketplace, as well
as to promote greater product sales along with customer loyalty. The rebates generally take the
form of a credit against the invoiced gross sales amount charged to a customer for products
shipped. A provision for rebate deductions is estimated and recorded in the same period when
revenue is recognized based upon the terms of the various rebate programs in effect at the time
of product shipment. The Company monitors actual rebates granted and compares them to the
estimated provision for rebates to assess the reasonableness of the rebates reserve at each
balance sheet date on a quarterly basis.
The Companys chargeback is the difference between the Companys invoice price to a wholesaler
and the final price paid by the wholesaler. The final price paid by the wholesaler can be lower
than the Companys invoice price based upon the customer to whom the wholesaler sells the
Companys products. The chargeback generally takes the form of a credit against the invoiced
gross sales amount charged to the wholesaler. A provision for chargeback deductions is estimated
and recorded in the same period the revenue is recognized based upon the terms of the various
chargeback arrangements in effect at the time of product shipment. The Company monitors actual
chargebacks granted and compares them to the estimated provision for chargebacks to assess the
reasonableness of the chargebacks reserve at each balance sheet date on a quarterly basis.
Page F-14 of F-86
Shelf-Stock Adjustments
The Company will occasionally reduce the selling price of certain products. The Company may
issue a credit against the sales amount to customers based upon their remaining inventory of the
product in question, provided the customer continues to make future purchases of product from the
Company. This type of customer credit is referred to as a shelf-stock adjustment, which is the
difference between the sales price and the revised lower sales price, multiplied by an estimate
of the number of product units on-hand at a given date. Decreases in selling prices are
discretionary decisions made by the Company in response to market conditions, including estimated
launch dates of competing products and estimated declines in market price.
Medicaid
As required by law, the Company provides a rebate on drugs dispensed under the Medicaid
program. The Company determines its estimate of Medicaid rebate accrual primarily based on
historical experience of claims submitted by the various states and any new information
regarding changes in the Medicaid program which may impact the Companys estimate of
Medicaid rebates. In determining the appropriate accrual amount, the Company considers
historical payment rates and processing lag for outstanding claims and payments. The
Company records estimates for Medicaid rebates as a deduction from gross sales, with
corresponding adjustments to accrued liabilities.
Cash Discounts
The Company offers cash discounts to its customers, generally 2% of the sales price, as an
incentive for paying within invoice terms, which generally range from 30 to 90 days. An estimate
of cash discounts is recorded in the same period when revenue is recognized.
Page F-15 of F-86
RX Partner and OTC Partner
The Rx Partner and OTC Partner line items of the statement of operations include revenue
recognized under alliance agreements between the Company and other pharmaceutical companies. The
Company has entered into these alliance agreements to develop marketing and /or distribution
relationships with its partners to fully leverage its technology platform.
The Rx Partner and OTC Partner alliance agreements obligate the Company to deliver multiple goods
and /or services over extended periods. Such deliverables include manufactured pharmaceutical
products, exclusive and semi-exclusive marketing rights, distribution licenses, and research and
development services. In exchange for these deliverables, the Company receives payments from its
alliance agreement partners for product shipments, and may also receive royalty, profit-sharing,
and /or upfront or periodic milestone payments. Revenue received from the alliance agreement
partners under these agreements are not subject to deductions for chargebacks, rebates, returns,
shelf-stock adjustments, and other pricing adjustments.
The Company initially defers all revenue earned under its Rx Partners and OTC Partners alliance
agreements. The deferred revenue is recorded as a liability captioned Deferred revenue alliance
agreements. The Company also defers its direct product manufacturing costs to the extent such
costs are reimbursable by the Rx Partners and OTC Partners. These deferred product manufacturing
costs are recorded as an asset captioned Deferred product manufacturing costs alliance
agreements. The product manufacturing costs in excess of amounts reimbursable by the Rx Partners
or OTC Partners are recognized as current period cost of revenue.
The Company recognizes such deferred revenue as either Rx Partner revenue or OTC Partner revenue
under the respective alliance agreement, and amortizes deferred product manufacturing costs as cost
of revenues as the Company fulfills its contractual obligations. Revenue is recognized over the
respective alliance agreements term of the arrangement or the Companys expected period of
performance, using a modified proportional performance method, which results in a greater portion
of the revenue being recognized in the period of initial recognition and the remaining balance
being recognized ratably over either the remaining life of the arrangement or the Companys
expected period of performance of each respective alliance agreements.
Under the modified proportional performance method of revenue recognition utilized by the Company,
the amount recognized in the period of initial recognition is based upon the number of years
elapsed under the respective alliance agreement relative to the estimated total length of the
recognition period. Under this method, the amount of revenue recognized in the year of initial
recognition is determined by multiplying the total amount realized by a fraction, the numerator of
which is the then-current year of the alliance agreement and the denominator of which is the total
estimated life of the alliance agreement. The amount recognized during each remaining year is an
equal pro rata amount. Finally, cumulative revenue is recognized only to the extent of cash
collected and /or the fair value received. The Companys judgment is this modified proportional
performance method better aligns revenue recognition with performance under a long-term arrangement
as compared to a straight-line method.
Page F-16 of F-86
Promotional Partner:
The Promotional Partner revenues line item of the statement of operations includes revenue
recognized under promotional services agreement with another pharmaceutical company. The
promotional services agreement obligates the Company to provide physician detailing sales calls to
promote its partners branded drug product over multiple periods. In exchange for this service,
the Company receives a fixed fee based on the number of sales force representatives utilized in
providing the services (up to a maximum number of sales force representatives and an annual maximum
payment amount per sales force representative). The Company is also eligible to receive contingent
payments based upon the number of prescriptions filled for its partners product above a
contractual minimum threshold. Additionally, the Company may be required to refund portions of the
sales force fees, if it fails to perform a minimum number of physician detail calls during
specified periods.
The Company recognizes revenue from sales force fees as the services are provided and the
performance obligations are met, and contingent payments at the time when they are earned. The
Company would record a charge, as a reduction to Promotional Partner revenue, for periods in which
a refund liability had been incurred. The Company determined this agreement does not include
multiple deliverables under EITF No. 00-21.
Page F-17 of F-86
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are recorded as selling expense.
Research and Development
Research and development activities are expensed as incurred and consist of self-funded research
and development costs and costs associated with work performed by other participants under
collaborative research and development agreements.
Derivatives
The Company does not engage in hedging transactions for trading or speculative purposes or to hedge
exposure to currency or interest rate fluctuations. From time to time, the Company does engage in
transactions that result in embedded derivatives (e.g. Convertible Debt). In accordance with SFAS
No. 133 (SFAS 133) and related pronouncements, the Company records the embedded derivative at
fair value on the balance sheet and records any related gains or losses in current earnings in the
statement of operations.
Income Taxes
The Company provides for income taxes using the asset and liability method as required by SFAS No.
109, Accounting for Income Taxes (SFAS 109)
.
This approach recognizes the amount of federal,
state, and local taxes payable or refundable for the current year, as well as deferred tax assets
and liabilities for the future tax consequences of events recognized in the consolidated financial
statements and income tax returns. Deferred income tax assets and liabilities are adjusted to
recognize the effects of changes in tax laws or enacted tax rates in the period during which they
are signed into law. Under SFAS 109, a valuation allowance is required when it is
more-likely-than-not all or some portion of the deferred tax assets will not be realized through
generating sufficient future taxable income.
The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements in accordance with SFAS 109. In this regard, SFAS
109 does not prescribe a recognition threshold or measurement attribute for the financial statement
recognition and measurement of a tax position taken in a tax return. FIN 48 clarifies the
application of SFAS 109 by defining the criterion an individual tax position must meet for any part
of the benefit of the tax position to be recognized in financial statements prepared in conformity
with generally accepted accounting principles. Under FIN 48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more-likely-than-not the tax position will be
sustained on examination by the taxing authorities, based solely on the technical merits of the tax
position. The tax benefits recognized in the financial statements from such a tax position should
be measured based on the largest benefit having a greater than fifty percent likelihood of being
realized upon ultimate settlement with the tax authority. Additionally, FIN 48 also provides
guidance on measurement, de-recognition, classification, interest and penalties, accounting in
interim periods, disclosure, and transition. In accordance with the disclosure requirements of FIN
48, the Companys policy on income statement classification of interest and penalties related to
income tax obligations is to include such items as part of total interest expense and other
expense, respectively.
Share-Based Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with
provisions of SFAS 123(R), Share-Based Payment, which it adopted on January 1, 2006 using the
modified prospective method. Under this method, compensation expense is recognized on a
straight-line basis over the remaining vesting period of any outstanding unvested options at the
adoption date and any new options granted after the adoption date. Prior periods are not restated
under this method. Prior to adoption of SFAS 123(R), the Company recognized compensation expense
related to its stock options in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Under APB 25, compensation cost for stock options, if
any, was measured as the excess of the quoted market price of the common stock at the date of grant
over the amount an employee must pay to acquire the stock.
Page F-18 of F-86
Earnings (loss) per Share
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average
number of common shares outstanding for the period. Diluted earnings (loss) per share is computed
by dividing net income (loss) by the weighted-average number of common shares adjusted for the
dilutive effect of common stock equivalents outstanding during the period.
Other Comprehensive Income (Loss)
The Company follows the provisions of SFAS No. 130, Reporting Comprehensive Income. This
Statement establishes standards for the reporting and display of comprehensive income and its
components. Comprehensive income is defined to include all changes in equity during a period
except those resulting from investments by owners and distributions to owners. From inception
through June 30, 2006, the Company has not had transactions that are required to be reported in
other comprehensive income. Effective with the acquisition of Prohealth Biotech Inc. (see Note 2),
the Company recorded foreign currency translation gains/losses, which are reported as other
comprehensive income (loss). Foreign currency translation losses for 2007 and 2006 were $ 23,000 and
$ 3,000, respectively.
Deferred Financing Costs
The Company capitalizes direct costs incurred with obtaining debt financing, which are included in
Other assets on the balance sheet. Deferred financing costs, including costs incurred in obtaining
debt financing, are amortized over the term of the underlying debt on a straight-line basis, which
approximates the effective interest method. For the years ended December 31, 2007, 2006 and 2005,
the Company charged $ 468,000, $ 466,000 and $ 693,000, respectively, to interest expense as
amortization of deferred financing costs.
Page F-19 of F-86
3. RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Securities and Exchange Commission (the SEC) Staff issued Staff Accounting
Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108 was issued in order to eliminate the
diversity of practice surrounding how public companies quantify financial statement misstatements.
Traditionally, there have been two widely-recognized methods for quantifying the effects of
financial statement misstatements: the rollover method and the iron curtain method. The
rollover method focuses primarily on the impact of a misstatement on the income statementincluding
the reversing effect of prior year misstatementsbut its use can lead to the accumulation of
misstatements in the balance sheet. The iron curtain method, on the other hand, focuses primarily
on the effect of correcting the period-end balance sheet with less emphasis on the reversing
effects of prior year errors on the income statement. The staff believes registrants must quantify
the impact of correcting all misstatements, including both the carryover and reversing effects of
prior year misstatements, on the current year financial statements. The staff believes that this
can be accomplished by quantifying an error under both the rollover and iron curtain approaches as
described above and by evaluating the error measured under each approach. Thus, a registrants
financial statements would require adjustment when either approach results in quantifying a
misstatement that is material, after considering all relevant quantitative and qualitative factors.
SAB 108 is effective for any report for an interim period of the first fiscal year ending after
November 15, 2006. The Companys SAB 108 analysis did not result in an adjustment to its
consolidated financial statements for the effective periods.
In September 2006, the FASB issued SFAS No. 157 (SFAS 157) Fair Value Measurements, which
defines fair value, establishes a framework for measuring fair value and expands disclosures about
fair value measurements. With respect to financial assets and liabilities SFAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The effective date of SFAS 157, with respect to non-financial
assets and liabilities, was deferred by FASB Staff Position FAS 157-2 and is effective for
financial statements issued for fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. The adoption of SFAS 157 did not have a significant impact on the
Companys consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159 (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities
Including an amendment of FASB Statement No. 115, providing
companies with an option to choose, at specific election dates, to measure eligible financial
assets and liabilities at fair value that are not otherwise required to be measured at fair value.
SFAS 159 is effective for fiscal years beginning after November 15, 2007, early adoption is
allowed. The Company has not elected to use the fair value option of SFAS 159, and does not expect
SFAS 159 to have an impact on its consolidated financial statements.
In June 2007, the EITF reached a final consensus on EITF Issue No. 07-3 (EITF 07-3), Accounting
for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and
Development Activities. EITF 07-3, which is effective for fiscal years beginning after December
15, 2007, requires non-refundable advance payments for future research and development activities
to be capitalized until the goods have been delivered or related services have been performed.
Adoption is on a prospective basis and could impact the timing of expense recognition for
agreements entered into after December 31, 2007. The adoption of EITF 07-3 did not have a
significant impact on the Companys consolidated financial statements.
In November 2007, the EITF reached a final consensus on EITF Issue No. 07-1 (EITF 07-1)
Accounting for Collaborative Arrangements Related to the Development and Commercialization of
Intellectual Property. EITF 07-1 is focused on how the parties to a collaborative agreement should
account for costs incurred and revenue generated on sales to third parties, how sharing payments
pursuant to a collaborative agreement should be presented in the income statement and certain
related disclosure questions. EITF 07-1 is effective for fiscal years beginning after December 15,
2008 and interim periods within those fiscal years. Adoption is on a retrospective basis to all
prior periods presented for all collaborative arrangements existing as of the effective date. The
Company is currently evaluating the impact of EITF 07-1 adoption on the Companys consolidated
financial statements.
Page F-20 of F-86
In December 2007, the FASB issued SFAS 141 (Revised 2007) (SFAS 141(R)), Business Combinations,
which replaces SFAS No 141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way assets and liabilities
are recognized in purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of in-process research
and development at fair value, and requires the expensing of acquisition-related costs as incurred.
SFAS No. 141R is effective for the Company beginning January 1, 2009 and will apply prospectively
to business combinations completed on or after this date. The effect of SFAS 141 (R) on the
Companys consolidated financial statements will be dependent on the nature and terms of any
business combinations to occur after the effective date.
In December 2007, the FASB issued SFAS No. 160 (SFAS 160), Non-controlling Interests in
Consolidated Financial Statements. SFAS 160 clarifies that a non-controlling (minority) interest
in a subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements, and establishes a single method of accounting for
changes in a parents ownership interest in a subsidiary that do not result in deconsolidation.
SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing
minority interests. All other requirements of SFAS 160 shall be applied prospectively. SFAS 160 is
effective for fiscal years beginning on or after December 15, 2008. The Company does not expect
the adoption of SFAS 160 to have a significant impact on the Companys consolidated financial
statements unless a future transaction results in a non-controlling interest in a subsidiary.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities (SFAS 161). The new standard is intended to help investors better understand how
derivative instruments and hedging activities affect an entitys financial position, financial
performance and cash flows through enhanced disclosure requirements. The new standard is effective
for financial statements issued for fiscal years and interim periods beginning after November 15,
2008, with early adoption encouraged. The Company does not expect the adoption of SFAS 161 to have
a significant impact on the Companys consolidated financial statements as the Company does not
currently have any derivatives within the scope of SFAS 161.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, Determination of the Useful Life
of Intangible Assets (FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the useful life of a
recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The FSP is
intended to improve the consistency between the useful life of a recognized intangible asset under
Statement 142 and the period of expected cash flows used to measure the fair value of the asset
under SFAS 141(R) and other U.S. generally accepted accounting principles. The new standard is
effective for financial statements issued for fiscal years and interim periods beginning after
December 15, 2008. The Company is currently evaluating the impact of FSP FAS 142-3 adoption on the
Companys consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162 (SFAS No. 162), The Hierarchy of Generally Accepted
Accounting Principles. This statement identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements of
nongovernmental entities in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). The effective date of SFAS No. 162 is November 15, 2008,
which is 60 days following the SECs approval on September 16, 2008 of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411, The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.
In May 2008, the FASB issued FASB Staff Position APB 14-1 (FSP APB 14-1), Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement). FSP APB 14-1 specifies that issuers of such instruments should separately account
for the liability and equity components in a manner that will reflect the entitys nonconvertible
debt borrowing rate when interest cost is recognized in subsequent periods. This FASB staff
position is effective for financial statements issued for fiscal years beginning after December 31,
2008. The Company is currently evaluating the impact of FSP APB 14-1 on the Companys consolidated
financial statements.
Page F-21 of F-86
4. INVESTMENTS
Investments consist of commercial paper, corporate bonds and medium-term notes, government agency
obligations and certificates of deposit. The Companys policy is to invest in only high quality
AAA-rated or investment-grade securities. Investments in debt securities are accounted for as
held-to-maturity and are recorded at amortized cost. The Company has historically held all
investments in debt securities until maturity, and the Company has the ability and intent to
continue to hold all investments in debt securities until maturity. All of the Companys
investments have remaining contractual maturities of less than twelve months and are classified as
short-term. Upon sale the Company uses a specific identification method.
A summary of Short-term investments as of December 31, 2007, 2006 and 2005 is as follows:
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|
|
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|
|
|
|
|
|
|
|
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|
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Gross
|
|
|
Gross
|
|
|
|
|
(in $ 000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
December 31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
94,107
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
94,107
|
|
Government agency obligations
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Corporate bonds
|
|
|
3,202
|
|
|
|
5
|
|
|
|
(8
|
)
|
|
|
3,199
|
|
Asset-backed securities
|
|
|
1,503
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
1,439
|
|
Certificates of deposit
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
106,034
|
|
|
$
|
5
|
|
|
$
|
(72
|
)
|
|
$
|
105,967
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $ 000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
December 31, 2006
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
14,611
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,611
|
|
Corporate bonds
|
|
|
6,535
|
|
|
|
2
|
|
|
|
(10
|
)
|
|
|
6,527
|
|
Certificates of deposit
|
|
|
2,289
|
|
|
|
|
|
|
|
|
|
|
|
2,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
23,435
|
|
|
$
|
2
|
|
|
$
|
(10
|
)
|
|
$
|
23,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $ 000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
December 31, 2005
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Certificate of deposit
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
204
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page F-22 of F-86
5. ACCOUNTS RECEIVABLE
The details of accounts receivable, net are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Gross accounts receivable
|
|
$
|
60,272
|
|
|
$
|
70,975
|
|
|
$
|
41,922
|
|
Less: Rebate reserve
|
|
|
(3,603
|
)
|
|
|
(3,124
|
)
|
|
|
(5,391
|
)
|
Less: Chargeback reserve
|
|
|
(2,977
|
)
|
|
|
(4,401
|
)
|
|
|
(4,438
|
)
|
Less: Other deductions
|
|
|
(2,189
|
)
|
|
|
(1,529
|
)
|
|
|
(1,565
|
)
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
51,503
|
|
|
$
|
61,921
|
|
|
$
|
30,528
|
|
|
|
|
|
|
|
|
|
|
|
Other deductions include allowance for disputed items, doubtful accounts, and cash discounts.
A roll forward of the chargeback and rebate reserve activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $ 000s)
|
|
For the Year Ended December 31,
|
|
Chargeback reserve
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
4,401
|
|
|
$
|
4,438
|
|
|
$
|
2,933
|
|
Provision recorded during the period
|
|
|
33,972
|
|
|
|
26,664
|
|
|
|
24,439
|
|
Credits issued during the period
|
|
|
(35,396
|
)
|
|
|
(26,701
|
)
|
|
|
(22,934
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
|
$
|
4,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( in $ 000s)
|
|
For the Year Ended December 31,
|
|
Rebate reserve
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
3,124
|
|
|
$
|
5,391
|
|
|
$
|
3,382
|
|
Provision recorded during the period
|
|
|
15,968
|
|
|
|
13,856
|
|
|
|
14,679
|
|
Credits issued during the period
|
|
|
(15,489
|
)
|
|
|
(16,123
|
)
|
|
|
(12,670
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
|
$
|
5,391
|
|
|
|
|
|
|
|
|
|
|
|
Page F-23 of F-86
6. INVENTORY
At December 31, 2007, 2006 and 2005, inventory, net of carrying value reserves, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Raw materials
|
|
$
|
15,005
|
|
|
$
|
21,228
|
|
|
$
|
24,359
|
|
Work in process
|
|
|
1,827
|
|
|
|
1,922
|
|
|
|
2,092
|
|
Finished goods
|
|
|
11,373
|
|
|
|
11,692
|
|
|
|
9,017
|
|
|
|
|
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
28,205
|
|
|
$
|
34,842
|
|
|
$
|
35,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Non-current inventory, net
|
|
|
(637
|
)
|
|
|
(731
|
)
|
|
|
(2,203
|
)
|
|
|
|
|
|
|
|
|
|
|
Total inventory-current, net
|
|
$
|
27,568
|
|
|
$
|
34,111
|
|
|
$
|
33,265
|
|
|
|
|
|
|
|
|
|
|
|
The Company had recorded inventory reserves of $ 3,148,000, $ 2,919,000 and $ 5,776,000; as of
December 31, 2007, 2006 and 2005 respectively.
To the extent inventory is not scheduled to be utilized in the manufacturing process and /or sold
within twelve months of the balance sheet date, it is included as a component of other non-current
assets. Amounts classified as non-current inventory consist of raw materials, net of valuation
reserves. Raw materials generally have a shelf life of approximately three to five years, while
finished goods products generally have a shelf life of approximately twenty-four months.
When the Company concludes FDA approval is expected within approximately six months, the Company
will generally begin to schedule process validation studies as required by the FDA to demonstrate
the production process can be scaled up to manufacture commercial batches. Consistent with
industry practice, the Company may build pre-launch inventories of certain ANDA related products
which are pending required FDA approval and /or resolution of patent infringement litigation when,
in the Companys assessment, such action is appropriate to increase the commercial opportunity, FDA
approval is expected in the near term, and /or the litigation will be resolved in the Companys
favor.
The Company recognizes pre-launch inventories at the lower of its cost or the amount expected to be
probable of recovery through sale. Cost is determined using a standard cost method, and assumes a
first-in, first-out (FIFO) flow of goods. Costs of unapproved products are similar to the approved
products and include materials, labor, quality control, and production overhead. The net carrying
value of unapproved inventory is approximately $ 63,000, $ 521,000, and $ 549,000 at December 31,
2007, 2006, and 2005.
The capitalization of unapproved pre-launch inventory involve risks, including: (i) FDA approval of
product may not occur; (ii) approvals may require additional or different testing / specifications
than what was used for unapproved inventory, and (iii) in cases where the unapproved inventory is
for a product subject to litigation, the litigation may not be resolved or settled in favor of the
Company. If any of these risks were to materialize and the launch of the unapproved product is
delayed or prevented, then the net carrying value of unapproved inventory may be partially or fully
reserved.
Generally, the selling price of a generic pharmaceutical product is at discount from the
corresponding brand product selling price which is currently marketed. Typically, a generic drug
is easily substituted for the corresponding brand product and, once a generic product is approved,
the pre-launch inventory is typically sold within the first three months. If the market prices
become lower than the historical product costs, then the pre-launch inventory value is reduced to
such lower market prices. If the inventory produced exceeds the estimated market acceptance of the
generic product and becomes short-dated, a carrying value reserve will be recorded. In all cases,
the pre-launch products have inventory costs lower than their related net selling prices.
Page F-24 of F-86
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Land
|
|
$
|
2,270
|
|
|
$
|
2,270
|
|
|
$
|
2,270
|
|
Buildings and improvements
|
|
|
51,287
|
|
|
|
38,828
|
|
|
|
27,190
|
|
Equipment
|
|
|
44,001
|
|
|
|
39,819
|
|
|
|
28,413
|
|
Office furniture and equipment
|
|
|
5,332
|
|
|
|
4,855
|
|
|
|
3,004
|
|
Construction-in-progress
|
|
|
10,323
|
|
|
|
8,170
|
|
|
|
12,129
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, gross
|
|
|
113,213
|
|
|
|
93,942
|
|
|
|
73,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(31,990
|
)
|
|
|
(24,540
|
)
|
|
|
(17,755
|
)
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
81,223
|
|
|
$
|
69,402
|
|
|
$
|
55,251
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $ 8,144,000, $ 6,841,000 and $ 4,723, 000 for the years ended December 31,
2007, 2006 and 2005, respectively.
Page F-25 of F-86
8. ACCRUED EXPENSES
The following table sets forth the Companys Accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Accrued payroll-related expenses
|
|
$
|
9,983
|
|
|
$
|
6,560
|
|
|
$
|
4,366
|
|
Accrued product returns
|
|
|
14,261
|
|
|
|
12,903
|
|
|
|
10,625
|
|
Legal and professional fees
|
|
|
3,382
|
|
|
|
2,781
|
|
|
|
3,619
|
|
Accrued shelf stock price protection
|
|
|
384
|
|
|
|
382
|
|
|
|
544
|
|
Other accruals
|
|
|
5,156
|
|
|
|
3,510
|
|
|
|
1,370
|
|
Accrued litigation settlements
|
|
|
1,555
|
|
|
|
3,083
|
|
|
|
24,251
|
|
Accrued Medicaid rebates
|
|
|
566
|
|
|
|
421
|
|
|
|
2,862
|
|
Accrued royalty expense
|
|
|
551
|
|
|
|
573
|
|
|
|
652
|
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
35,838
|
|
|
$
|
30,213
|
|
|
$
|
48,289
|
|
|
|
|
|
|
|
|
|
|
|
Included in accrued payroll-related expenses is $ 26,000, $ 495,000 and $ 0 at December 31, 2007, 2006
and 2005, respectively, related to post-employment severance-related charges. Included in other
accruals at December 31, 2007, 2006 and 2005 are state income taxes payable amounting to
$ 1,638,000, $ 377,000 and $ 248,000, respectively.
As described more fully in Note 2, the Company maintains a return policy that allows customers to
return product within specified guidelines. The Company estimates a provision for product returns
as a percentage of gross sales based upon historical experience for sales made through its Global
sales channel. Sales of product under the OTC Partner and RX Partner alliance agreements generally
are not subject to returns.
A reconciliation of the Companys product returns reserve activity is as follows for the year
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
12,903
|
|
|
$
|
10,625
|
|
|
$
|
6,939
|
|
Provision related to
sales recorded in the period
|
|
|
5,459
|
|
|
|
7,220
|
|
|
|
5,534
|
|
Credits recorded in the period
|
|
|
(4,101
|
)
|
|
|
(4,942
|
)
|
|
|
(1,848
|
)
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
|
$
|
10,625
|
|
|
|
|
|
|
|
|
|
|
|
Page F-26 of F-86
9. FAIR VALUE OF COMMON STOCK PURCHASE WARRANTS
Common Stock Purchase Warrants
In connection with a 2003 private financing, the Company issued 878,815 common stock purchase
warrants, which entitled the owner to purchase one share of the Companys common stock at an
exercise price of $ 7.41 per share.
During 2007, 2006, and 2005, common stock purchase warrants for 36,616, 100,000, and 0 shares of
the Companys common stock, respectively, were exercised. At December 31, 2007, the 604,887 common
stock purchase warrants outstanding were fully exercised in 2008 prior to their expiration date of
May 7, 2008, or five years from the date of their initial issuance.
Consistent with the guidance in Emerging Issues Task Force Issue No. 00-19,
Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock
,
(EITF 00-19), the common stock purchase warrants were classified as liabilities, as there were
certain conditions attached to the warrants which may require cash settlement. Accordingly, the
common stock purchase warrants were accounted for at fair value and changes in fair value were
recognized as a component of other income at each quarter-end period over the life of the
respective common stock purchase warrants. The common stock purchase warrants are also considered
derivatives consistent with the guidance in SFAS No. 133,
Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133).
The Company used a Black-Scholes pricing model to value the common stock purchase warrants, with
the key valuation assumptions being the terms of the common stock purchase warrant and the actual
price of the Companys common stock at each quarter-end period, as well as, a volatility rate
calculated based on changes in the price of the Companys common stock and a risk-free interest
rate corresponding to the rate on Treasury securities with a time-frame approximately the same as
the common stock purchase warrants remaining time to expiration as of each valuation date. During
the three years ended December 31, 2007, the estimated fair value of the common stock purchase
warrants ranged from a high of $ 11.45 per share on March 31, 2005 to a low of $ 1.62 on June 30,
2006. At December 31, 2007, each common stock purchase warrant was valued at $ 3.78 and the total
value of the common stock purchase warrant liability was approximately $ 2.3 million. The following
table summarizes the number of outstanding common stock purchase warrants and the corresponding
estimated fair value of the common stock purchase warrant liability at each December 31, year-end:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Total
|
|
|
|
Purchase
|
|
|
Purchase
|
|
|
Reported
|
|
|
|
Warrants
|
|
|
Warrants
|
|
|
Liability
|
|
|
|
Outstanding
|
|
|
Value
|
|
|
Liability Value
|
|
Ending balance December 31, 2004
|
|
|
741,503
|
|
|
$
|
11.43
|
|
|
$
|
8,479,000
|
|
Warrants exercised in 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2005
|
|
|
741,503
|
|
|
$
|
5.36
|
|
|
$
|
3,977,000
|
|
Warrants exercised in 2006
|
|
|
(100,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2006
|
|
|
641,503
|
|
|
$
|
3.60
|
|
|
$
|
2,313,000
|
|
Warrants exercised in 2007
|
|
|
(36,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2007
|
|
|
604,887
|
|
|
$
|
3.78
|
|
|
$
|
2,285,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As noted above, the estimated fair value of the common stock purchase warrants at each balance
sheet date was determined using a Black-Scholes pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Volatility (range)
|
|
|
24.2 46.4
|
%
|
|
|
48.7 57.6
|
%
|
|
|
58.3 80.0
|
%
|
Risk-free interest rate (range)
|
|
|
3.4 4.9
|
%
|
|
|
4.7 5.2
|
%
|
|
|
3.6 4.4
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The expected life of the common stock purchase warrants was estimated as the time-to-expiration at
each balance sheet date.
Page F-27 of F-86
10. INCOME TAXES
The Company is subject to U.S. federal, state and local income taxes. The provision for (benefit
from) income taxes on earnings is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal taxes
|
|
$
|
8,383
|
|
|
$
|
320
|
|
|
$
|
405
|
|
State taxes
|
|
|
6,802
|
|
|
|
190
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision
|
|
|
15,185
|
|
|
|
510
|
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal taxes
|
|
$
|
17,830
|
|
|
$
|
(4,971
|
)
|
|
$
|
(5,309
|
)
|
Federal taxes-change in valuation allowance
|
|
|
(66,783
|
)
|
|
|
4,651
|
|
|
|
4,904
|
|
State taxes
|
|
|
(347
|
)
|
|
|
(2,391
|
)
|
|
|
480
|
|
State taxes-change in valuation allowance
|
|
|
(14,702
|
)
|
|
|
2,341
|
|
|
|
(539
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax (benefit)
|
|
|
(64,002
|
)
|
|
|
(370
|
)
|
|
|
(464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
$
|
(48,817
|
)
|
|
$
|
140
|
|
|
$
|
189
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the difference between the federal income taxes at federal statutory rates and
actual income taxes on income from (loss) before income taxes, which includes federal, state, and
other income taxes, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
77,108
|
|
|
|
|
|
|
$
|
(11,904
|
)
|
|
|
|
|
|
$
|
(5,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax provision (benefit) at
federal statutory rate
|
|
|
26,988
|
|
|
|
35.0
|
%
|
|
|
(4,047
|
)
|
|
|
34.0
|
%
|
|
|
(1,901
|
)
|
|
|
34.0
|
%
|
|
Increase (decrease) in tax rate resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local taxes
(net of federal benefit)
|
|
|
2,886
|
|
|
|
3.8
|
%
|
|
|
(1,699
|
)
|
|
|
(14.3
|
)%
|
|
|
245
|
|
|
|
4.4
|
%
|
Effect of increase in federal statutory tax rate
on deferred tax accounts
|
|
|
(1,993
|
)
|
|
|
(2.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of research and development credits
|
|
|
(1,306
|
)
|
|
|
(1.7
|
)%
|
|
|
(996
|
)
|
|
|
(8.4
|
)%
|
|
|
(897
|
)
|
|
|
(16.0
|
)%
|
Change in warrant fair value
|
|
|
38
|
|
|
|
0.1
|
%
|
|
|
(373
|
)
|
|
|
(3.1
|
)%
|
|
|
(1,531
|
)
|
|
|
(27.4
|
)%
|
Provision for uncertain tax positions
|
|
|
6,118
|
|
|
|
7.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
|
(63
|
)
|
|
|
(0.1
|
)%
|
|
|
263
|
|
|
|
2.2
|
%
|
|
|
(92
|
)
|
|
|
(1.6
|
)%
|
Change in valuation allowance
|
|
|
(81,485
|
)
|
|
|
(105.7
|
)%
|
|
|
6,992
|
|
|
|
58.7
|
%
|
|
|
4,365
|
|
|
|
78.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit from) provision for income taxes
|
|
$
|
(48,817
|
)
|
|
|
(63.3
|
)%
|
|
$
|
140
|
|
|
|
1.2
|
%
|
|
$
|
189
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are provided for temporary differences between the financial statement
carrying values and the tax bases of the Companys assets and liabilities. Deferred tax assets
result principally from deferred revenue related to the Rx Partners and OTC Partners alliance
agreements and the recording of certain accruals and reserves currently not deductible for tax
purposes, as well as from net operating loss carryforwards, and from tax credit carryforwards.
Deferred tax liabilities principally result from deferred product manufacturing costs related to
the Rx Partners and OTC Partners alliance agreements and the use of accelerated depreciation and
amortization methods for tax reporting purposes.
Page F-28 of F-86
The components of the Companys deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,024
|
|
|
$
|
26,989
|
|
|
$
|
33,328
|
|
Research and development credits
|
|
|
6,118
|
|
|
|
10,221
|
|
|
|
7,966
|
|
Inventory reserves
|
|
|
1,249
|
|
|
|
1,132
|
|
|
|
2,217
|
|
Accrued expenses
|
|
|
10,230
|
|
|
|
11,357
|
|
|
|
10,553
|
|
Deferred revenues
|
|
|
81,654
|
|
|
|
68,161
|
|
|
|
40,136
|
|
Accrued exclusivity period fee payments
|
|
|
7,145
|
|
|
|
|
|
|
|
|
|
Litigation settlements
|
|
|
3,345
|
|
|
|
4,368
|
|
|
|
8,932
|
|
Other
|
|
|
3,752
|
|
|
|
4,500
|
|
|
|
1,970
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
$
|
114,517
|
|
|
$
|
126,728
|
|
|
$
|
105,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax depreciation and amortization
in excess of book amounts
|
|
$
|
1,508
|
|
|
$
|
1,188
|
|
|
$
|
1,744
|
|
Deferred manufacturing costs
|
|
|
37,468
|
|
|
|
28,284
|
|
|
|
17,384
|
|
Accrued exclusivity period fee payments
|
|
|
|
|
|
|
4,238
|
|
|
|
|
|
Other
|
|
|
228
|
|
|
|
222
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
$
|
39,204
|
|
|
$
|
33,932
|
|
|
$
|
19,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net
|
|
$
|
75,313
|
|
|
$
|
92,796
|
|
|
$
|
85,434
|
|
Valuation allowance
|
|
|
|
|
|
|
(91,962
|
)
|
|
|
(84,970
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
$
|
75,313
|
|
|
$
|
834
|
|
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
|
The breakdown between current and long-term deferred tax assets and tax liabilities is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current deferred tax assets
|
|
$
|
32,336
|
|
|
$
|
21,272
|
|
|
$
|
19,100
|
|
Current deferred tax liability
|
|
|
(4,960
|
)
|
|
|
(5,426
|
)
|
|
|
(2,740
|
)
|
Valuation Allowance
|
|
|
|
|
|
|
(15,437
|
)
|
|
|
(15,442
|
)
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax asset, net
|
|
|
27,376
|
|
|
|
409
|
|
|
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax assets
|
|
|
82,181
|
|
|
|
105,456
|
|
|
|
86,002
|
|
Non-current deferred tax liability
|
|
|
(34,244
|
)
|
|
|
(28,506
|
)
|
|
|
(16,928
|
)
|
Valuation Allowance
|
|
|
|
|
|
|
(76,525
|
)
|
|
|
(69.528
|
)
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax asset (liability), net
|
|
|
47,937
|
|
|
|
425
|
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
$
|
75,313
|
|
|
$
|
834
|
|
|
$
|
464
|
|
|
|
|
|
|
|
|
|
|
|
Page F-29 of F-86
The Company historically recorded a deferred tax asset valuation allowance, based upon its history
of generating net operating losses (NOLs), and therefore not having regular income tax
obligations. The Company did however, make payments for federal and state alternative minimum
taxes (AMT) in years 2006 and 2005, and while these AMT payments were recorded as deferred tax
assets, they did not have a valuation reserve, as such AMT payments have no expiration date.
During the second quarter of 2007 as a result of significant revenue earned under one of the
alliance agreements, the Company determined it was more likely-than-not its deferred tax assets
would be realized as an offset against current income tax obligations. Accordingly, at June 30,
2007, the Company reversed the deferred tax asset valuation allowance in the amount of
approximately $ 91,962,000, of which $ 10,477,000 was credited to additional paid-in capital, as the
tax benefit resulted from employee stock options which were exercised prior to January 01, 2006.
The Company had federal NOL carryforwards of $ 0, $ 75,369,000, and $ 92,048,000 as of December 31,
2007, 2006 and 2005, respectively. The Company also had state and local NOL carryforwards of
$ 15,773,000, $ 21,493,000 and $ 33,127,000 as of December 31, 2007, 2006 and 2005, respectively. The
state NOLs as of December 31, 2007 have a twenty year carryforward period, and expire between the
years 2019 and 2023, as follows:
|
|
|
|
|
(in $000s)
|
|
|
|
Year
|
|
Amount
|
|
2019
|
|
$
|
137
|
|
2020
|
|
|
4,938
|
|
2021
|
|
|
4,968
|
|
2022
|
|
|
1,955
|
|
2023
|
|
|
3,775
|
|
|
|
|
|
Total
|
|
$
|
15,773
|
|
|
|
|
|
The Company had state AMT deferred tax asset at December 31, 2007, with an indefinite carryforward
until used against regular state income taxes.
Page F-30 of F-86
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109 (FIN 48), which sets out the use of a single
comprehensive model to address uncertainty in tax positions and clarifies the accounting for income
taxes by establishing the minimum recognition threshold and a measurement attribute for the
financial statement benefit of tax positions taken or expected to be taken in a tax return.
The Company adopted FIN 48 on its effective date of January 01, 2007. As of the date of adoption,
the Company had no unrecognized tax benefits for uncertain tax positions. However, during 2007,
the Company recognized a provision for an uncertain tax position related to research and
development credits reported on its 2007 federal income tax return. The uncertain tax benefit
results from the lack of documentation which existed at the time the return was filed. The Company
expects to complete the appropriate analysis and will reassess the uncertain tax position when new
information becomes available. A reconciliation of the beginning and ending amount of unrecognized
tax benefits is as follows:
|
|
|
|
|
(in $000s)
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
|
|
Additions based on tax positions related to the current year
|
|
|
6,118
|
|
Settlements
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
6,118
|
|
|
|
|
|
The balance of unrecognized tax benefits at December 31, 2007, if ultimately recognized, will
reduce the Companys annual effective tax rate. The Company is not able to determine if there will
be any significant increase or decrease in the unrecognized tax benefits over the next 12 months.
The Company recognizes interest and penalties related to income tax matters as a part of total
interest expense and other expense, respectively. At December 31, 2007, the Company does not have
any amounts accrued for interest and penalties for uncertain tax positions as 2007 was the first
year for which the Company had an uncertain tax position.
The tax years ended December 31, 2007, 2006, 2005 and 2004 remain open to examination by the
Internal Revenue Service and Pennsylvania Department of Revenue. The tax years ended December 31,
2007, 2006, 2005, 2004 and 2003 remain open for examination by the California Franchise Tax Board.
The Company is currently under audit by the California Franchise Tax Board for the tax years ended
December 31, 2006 and 2005. The Company is currently undergoing a sales and use tax audit by the
California State Board of Equalization for the period from July 1, 2005 through June 30, 2008.
Page F-31 of F-86
11. REVOLVING LINE OF CREDIT
On October 23, 2002 the Company signed a three year, $ 25 million Loan and Security Agreement (Loan
Agreement) with Congress Financial Corporation (Congress). In December 2003, this loan
agreement was transferred from Congress to Wachovia Bank, N. A. (Wachovia).
The Loan Agreement was comprised of a revolving credit facility of up to $ 20.5 million, and a term
loan of up to $ 4.5 million. The revolving credit facility was collateralized by eligible accounts
receivable and inventory, subject to limitations and other terms. The term loan was collateralized
by machinery and equipment. In addition, a $ 10 million restricted cash account initially
established as collateral for the revolving credit facility was removed in June 2004.
The interest rate for the revolving credit facility was prime rate plus 0.75%, or Eurodollar rate
plus 2.75%, at the Companys option. The term loan had an interest rate of prime rate plus 1.5%,
or Eurodollar rate plus 4%, at the Companys option.
In June 2005, the Company repaid in full, without penalty, the remaining balances then outstanding
under the Loan Agreement with Wachovia Bank, including $ 5.0 million of the revolving credit
facility and $ 2.1 million of term loans.
In December 2005, the Company and Wachovia and Wachovia Capital Markets, LLC (together Wachovia)
entered into a new three year credit agreement (Credit Agreement), replacing the previous Loan
Agreement, to provide up to $ 35 million of borrowings under a revolving credit facility. The
purpose of the credit arrangement is to provide debt financing for ongoing working capital
requirements and other general corporate purposes.
The Credit Agreement is collateralized by eligible accounts receivable, inventory and machinery
and equipment, subject to limitations and other terms. The interest rate for the revolving credit
facility is either the prime rate, or LIBOR plus a margin ranging from 1.50% to 2.25% based upon
terms and conditions, at the Companys option.
The Credit Agreement provides for certain financial and information reporting covenants, including
a requirement to file all required reports with the SEC. Additionally, the Credit Agreement
contains various other covenants, the most significant of which include a fixed charge coverage
ratio and a capital expenditure limitation. The fixed charge coverage ratio requires EBITDA less
cash paid for taxes, dividends, and certain capital expenditures, to be not less than 1.25 to 1.00
as compared to scheduled principal payments coming due in the next 12 months plus cash interest
paid during the applicable period. The Company was limited to capital expenditures of no more than
$ 50,000,000 for the period from January 1, 2005 through December 31, 2007 and is limited to
$ 25,000,000 for each calendar year thereafter. Wachovia agreed to waive the reporting requirements
through the filing of this registration statement on Form 10 with the SEC. At December 31, 2007,
the Company was in compliance with all other covenants contained in the Credit Agreement. As of
December 31, 2007, there were no amounts outstanding under the Credit Agreement and, accordingly,
including the effect of the waiver, the full $ 35 million of borrowing capacity was available to the
Company.
Page F-32 of F-86
12. LONG-TERM DEBT
3.5% Convertible Senior Subordinated Debentures
On June 26, 2005, the Company sold $ 75 million of 3.5% convertible senior subordinated debentures
due 2012 (3.5% Debentures) to a qualified institutional buyer. The net proceeds from the sale of
the Debentures, together with additional funds, were used to repay the Companys $ 95.0 million in
aggregate principal amount of its 1.25% convertible senior subordinated debentures due 2024 (the
1.25% Debentures). The Company was required to repay the 1.25% Debentures, which had been issued
in April 2004, because of its failure to file its 2004 annual report on Form 10-K with the
Securities and Exchange Commission, which failure constituted a default under the indenture
governing the 1.25% Debentures.
The 3.5% Debentures are senior subordinated, unsecured obligations of the Company and rank pari
passu with the Companys accounts payable and other liabilities, and are subordinate to certain
senior indebtedness, including the Companys credit agreement with Wachovia. The Indenture
governing the 3.5% Debentures limits the aggregate amount of the Companys indebtedness ranking
senior to or pari passu with the 3.5% Debentures to the greater of (i) $ 50 million or (ii) as of
any date, four times the Companys EBITDA for the immediately preceding twelve-month period for
which public financial information is available. The 3.5% Debentures bear interest at the rate of
3.5% per annum. Interest on the Debentures is payable on June 15 and December 15 of each year,
beginning on December 15, 2005.
The 3.5% Debentures mature on June 15, 2012 and may not be redeemed by the Company prior to
maturity. Holders also have the right to require the Company to repurchase all or any part of their
3.5% Debentures on June 15, 2009 at a repurchase price equal to 100% of the principal amount of the
3.5% Debentures, plus accrued and unpaid interest and liquidated damages, if any, up to but
excluding the repurchase date.
Each 3.5% Debenture was issued at a price of $ 1,000 and is convertible into Company common stock at
an initial conversion price of $ 20.69 per share.
Under a related Registration Rights Agreement, the Company agreed to file a registration statement
covering the 3.5% Debentures no later than March 24, 2006 and to have the registration statement
declared effective by the SEC no later than June 22, 2006. As those deadlines were not met, the
Company was required to pay the holders of the 3.5% Debentures liquidated damages, initially at the
annual rate of 0.25% of the aggregate principal amount of the Debentures, and then escalating to
0.5% of such amount until the registration statement becomes effective. The Company has not
complied with these registration statement obligations and has paid $ 601,000 in liquidated damages
through December 15, 2007. Additionally, $ 15,625 was accrued at December 31, 2007 for liquidated
damages.
Prior to June 15, 2011, the 3.5% Debentures will not be convertible unless certain contingencies
occur, including the closing price of the common stock having exceeded 120% of the conversion price
for at least 20 trading days during the 30 consecutive trading days ending on the last trading day
of the immediately preceding fiscal quarter. Upon conversion, the value (the conversion value) of
the cash and shares of common stock, if any, to be received by a holder converting $ 1,000 principal
amount of the 3.5% Debentures will be determined by multiplying the applicable conversion rate by
the 20-day average closing price of the common stock beginning on the second trading day
immediately following the day on which the debentures are submitted for conversion. The conversion
value will be payable as follows: (1) an amount in cash (the principal return) equal to the
lesser of (a) the conversion value and (b) $ 1,000, and (2) to the extent the conversion value
exceeds $ 1,000, a number of shares of common stock with a value equal to the difference between the
conversion value and the principal return or cash, at the Companys option.
In addition, if a holder elects to convert 3.5% Debentures within a period of 30 trading days after
the effective date of a fundamental change transactionconsisting generally of a transaction
constituting a change of control of the Company, as defined by the Indenturethe holder will be
entitled to receive a make-whole premium consisting of additional shares of the Companys common
stock (or, if the Company so elects, the same consideration offered in connection with the
fundamental change).
Page F-33 of F-86
The following table summarizes the Companys long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in $ 000s)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
3.5% Convertible senior subordinated
debentures due on June 15, 2012
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
8.17% Term loan Cathay Bank
(1)
|
|
|
2,215
|
|
|
|
2,264
|
|
|
|
2,309
|
|
7.5% Term loan Cathay Bank
(2)
|
|
|
2,957
|
|
|
|
3,025
|
|
|
|
3,087
|
|
Subordinated promissory note
(3)
|
|
|
9,428
|
|
|
|
11,000
|
|
|
|
|
|
Vendor financing agreement
(4)
|
|
|
144
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
$
|
89,744
|
|
|
$
|
91,430
|
|
|
$
|
80,396
|
|
Less: Current portion
|
|
|
(69,234
|
)
|
|
|
(1,827
|
)
|
|
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
20,510
|
|
|
$
|
89,603
|
|
|
$
|
80,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Term loan payable at 8.17% to Cathay Bank in 83 monthly installments of $ 19,540
commencing June 28, 2001 through May 27, 2008 with a balance of $ 2,208,843 due on June 28,
2008. The 8.17% Cathay Bank loan is collateralized by land, building and building
improvements in the Companys 35,000 square foot research facility in Hayward, California .
|
|
(2)
|
|
Term loan payable at 7.5% to Cathay Bank in 83 monthly installments of $ 24,629
commencing November 14, 2001 through October 13, 2008 with a balance of $ 2,917,598 due on
November 14, 2008. The 7.5% Cathay Bank loan is collateralized by land, building and
building improvements in the Companys 50,000 square foot manufacturing facility in Hayward,
California.
|
|
|
|
In May 2008, the Company prepaid, without penalty, all of its indebtedness under both Cathay
Bank term loans in an aggregate amount of approximately $ 5,159,000, including accrued
interest.
|
|
(3)
|
|
Subordinated promissory note in the amount of $ 11.0 million related to the June
2006 settlement of litigation brought by Solvay Pharmaceuticals, Inc.(Solvay), manufacturer
of the Creon line pancreatic enzyme products. In its lawsuit, Solvay claimed the Company
engaged in false advertising, unfair competition, and unfair trade practices in connection
with the Companys marketing and sale of its now discontinued line of Lipram-CR products.
With respect to the settlement of the Solvay litigation, the Company agreed to pay $ 23
million to Solvay, with such amount recorded as litigation settlement expense in the
Companys 2004 financial statements. The settlement with Solvay included a $ 12 million
payment upon signing of the settlement agreement with the remaining $ 11 million to be paid
under the terms of the subordinated promissory note between the Company and Solvay. The
subordinated promissory note interest rate is 6.0% per annum, and requires the Company to pay
24 quarterly installments of $ 549,165, commencing in March 2007 through December 2012.
Additionally, the subordinated promissory note becomes immediately due and payable upon the
occurrence of a default in any payment due, a change in control of the Company, voluntary or
involuntary bankruptcy proceeding by or against the Company, and working capital less than
150% of the remaining unpaid balance of the subordinated promissory note. At December 31,
2007, none of these events has occurred to-date.
|
|
(4)
|
|
Vendor financing agreement related to software licenses, with interest at 3.1%
annum, and 2 monthly installments of $ 0 and 34 monthly installments of $ 12,871, commencing
December 2006 through November 2009.
|
Page F-34 of F-86
Scheduled maturities and repurchases of long-term debt as of December 31, 2007 are as follows:
|
|
|
|
|
(in $ 000s)
|
|
|
|
|
2008 (includes repurchases in the principal amount of $ 62,250, see Note 21)
|
|
$
|
69,234
|
|
2009
|
|
|
1,770
|
|
2010
|
|
|
1,879
|
|
2011
|
|
|
1,994
|
|
2012
|
|
|
14,867
|
|
Thereafter
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,744
|
|
|
|
|
|
Page F-35 of F-86
13. ALLIANCE AGREEMENTS
Strategic Alliance Agreement with Teva (Teva Agreement)
The Company entered into a Strategic Alliance Agreement with Teva in June 2001 (the Teva
Agreement). The Teva Agreement commits the Company to develop and manufacture, and Teva to
distribute, 12 specified controlled-release generic pharmaceutical products, each for a 10-year
period. The significant rights and obligations under the Teva Agreement are as follows:
Product Development, Manufacture and Sales.
The Company is required to develop the products,
obtain FDA approval to market the products, and manufacture and deliver the products to Teva.
The product-linked revenue the Company earns under the Teva Agreement consists of Tevas
reimbursement of all of the Companys manufacturing costs plus a fixed percentage of defined
profits on Tevas sales to its customers. Manufacturing costs are direct cost of materials plus
actual direct manufacturing costs, including packaging material, not to exceed specified limits.
The Company invoices Teva for the manufacturing costs when products are shipped to Teva, and Teva
is required to pay the invoiced amount within 30 days. Teva has the exclusive right to determine
all terms and conditions of the product sales to its customers. Within 30 days of the end of
each calendar quarter, Teva is required to provide the Company with a report of its net sales and
profits during the quarter and to pay the Company its share of the profits resulting from those
sales on a quarterly basis. Net sales are Tevas gross sales less discounts, rebates,
chargebacks, returns, and other adjustments, all of which are based upon of fixed percentages,
except chargebacks, which are estimated by Teva and subject to quarterly true-up reconciliation.
Cost-Sharing:
The Teva Agreement required Teva to pay the Company $ 300,000 at the inception of
the Teva Agreement for reimbursement of regulatory expenses previously incurred, and thereafter,
to pay specified percentages of ongoing regulatory costs incurred in connection with obtaining
and maintaining FDA approval, patent infringement litigation costs, and regulatory litigation
costs.
Advance Deposit.
Teva agreed to provide the Company with a $ 22.0 million advance deposit payable
for the contingent purchase of exclusive marketing rights for the 12 products. The advance
deposit included debt-like terms to facilitate repayment to Teva to the extent the contingencies
did not occur. Specifically, the advance deposit payable accrued interest at an 8% annual rate
from the June 2001 Teva Agreement inception date, and required the Company to repay the advance
deposit payable no later than January 15, 2004. In addition, the advance deposit included the
following provisions:
|
-
|
|
Contingent Sale of Market Exclusivity
The Teva Agreement obligated
the Company to deliver and Teva to purchase the exclusive marketing
rights for four of the 12 covered products for $ 22.0 million to the
extent the Company achieved specified product-development milestones
relating to four products (the advance deposit payable). Portions of
this $ 22.0 million purchase price were assigned to milestones based on
their negotiated values at the inception of the Teva Agreement. If
some, but not all of the milestones were achieved, then exclusive
marketing rights would transfer only for those products for which the
related milestones were met. To the extent the milestones were not
achieved by January 15, 2004 and Teva had not exercised the contingent
option to purchase market exclusivity described below, the related
exclusive marketing rights would not be transferred to Teva, the
Company would be required to repay the corresponding portions of the
$ 22.0 million advance deposit payable, and Teva would retain
non-exclusive marketing rights with respect to the related products.
The milestones and related portions to be repaid were: $ 2.0 million if
tentative FDA approval for one specified product was not obtained by
June 15, 2002; $ 5.0 million if the same product was not launched by
February 15, 2003; $ 5.0 million and $ 4.0 million, respectively, if two
additional products were not launched by December 15, 2003; $ 1.0
million if tentative FDA approval of a fourth product was not received
by January 15, 2003; and $ 5.0 million if the same product was not
launched by December 15, 2003.
|
|
|
-
|
|
Contingent Option to Purchase Market Exclusivity
The Company also
granted Teva an option to purchase the exclusive marketing rights to
the four specified products to the extent the product-development
milestones were not met. Teva could exercise this right by forgiving
repayment of half of the foregoing portions of the $ 22.0 million
advance deposit payable as assigned in the Teva Agreement to the
specified product.
|
Page F-36 of F-86
|
-
|
|
The Companys Share Settlement Option
To the extent the Company
failed to achieve the milestones and Teva failed to exercise its
option to purchase market exclusivity for the four specified products
and the Company was thus required to repay the advance deposit, the
Company had the option to settle, or repay, the applicable portion of
the advance deposit either in cash or with shares of its common stock
valued at the average closing price of the stock during the 10 trading
days ending two days prior to the date of Tevas receipt of the shares
(the Designated Share Price).
|
|
|
-
|
|
Interest Forgiveness /FDA Approval Provision
Under the terms of the
Teva Agreement, when the Company received FDA approval for any three
of the 12 covered products, the entire amount of interest payable
under the advance deposit would be forgiven. The nominal amount of
the accrued interest expected to be incurred over the life of the
advance deposit was estimated not to exceed approximately $ 4.4
million.
|
Sale of Common Stock:
The Teva Agreement required Teva to purchase $ 15 million of the Companys
common stock in four equal quarterly installments beginning September 15, 2001. The number of shares purchased in each installment was determined by dividing $ 3.75 million by the Designated
Share Price. Pursuant to these provisions, the Company sold a total of 1,462,083 shares of
common stock to Teva, with the last sale occurring on June 15, 2002. The stock purchase
agreement included the following terms:
|
-
|
|
Contingent Stock Repurchase Option
. The Teva Agreement divided 11 of the
products into three categories, referred to as product tiers. The Tier 1 products were
those pending FDA approval when the Teva Agreement was entered into, whereas Tier 2 and Tier
3 products were those for which applications to FDA had not as yet been filed at the
inception of the Teva Agreement. The Teva Agreement gave the Company the option to
repurchase from Teva 243,729 shares of its common stock (one-sixth of the shares initially
sold to Teva) for $ 1.00 contingent upon Teva achieving a commercial sale of either a Tier
2 or Tier 3 product.
|
Other Provisions:
The Teva Agreement also provides for other deliverables by the Company,
consisting of research and development activities, including regulatory services.
Revenue Recognition under the Teva Agreement
:
The Company applied its accounting policy to
determine whether the multiple deliverables within the Teva Agreement should be accounted for as
separate units of accounting or as a single unit of accounting. The Company identified the
following deliverables under the Teva Agreement, including: manufacture and delivery of 12
products; research and development activities (including regulatory services) related to each
product; and market exclusivity associated with respect to the products.
The Company determined no single deliverable represented a separate unit of accounting as there
was not sufficient objective and reliable evidence of the fair value of any single deliverable.
When the fair value of a deliverable can not be determined, it is not possible for the Company to
determine whether consideration provided by Teva under the Teva Agreement is in exchange for a
given deliverable. The Company thus concluded the multiple deliverables under the Teva Agreement
represents a single unit of accounting.
The Company initially defers all revenue earned under the Teva Agreement and then recognizes such
deferred revenue over the life of the Teva Agreement, estimated to be 18 years, measured from the
June 2001 inception of the Teva Agreement through 10 years following the estimated time of the last
product FDA approval. The deferred portion of the revenue is recorded as a liability captioned
Deferred revenue alliance agreements. Revenue is recognized using a modified proportional
performance method, which results in a greater portion of the revenue being recognized in the
period of initial recognition and the balance recognized ratably over the remaining life of the
agreement. This modified proportional performance method better aligns revenue recognition with
performance under a long-term arrangement as compared to a straight-line method.
The Company also defers its direct manufacturing costs reimbursable by Teva and recognizes them in
the same manner as it recognizes the related product revenue. These deferred direct manufacturing
costs are recorded as an asset captioned Deferred product manufacturing costs alliance
agreements. Manufacturing costs in excess of amounts reimbursable under the terms of the Teva
Agreement are not deferred.
Page F-37 of F-86
The elements of revenue under the Teva Agreement are summarized as follows:
|
-
|
|
Teva reimbursement of manufacturing costs;
|
|
|
-
|
|
The Companys pro rata profit share associated with Tevas sales of products to its customers;
|
|
|
-
|
|
The sale of market exclusivity for certain products;
|
|
|
-
|
|
The estimated fair value received upon the Companys exercise of the contingent stock
repurchase option upon achieving the commercial sale of a Tier 2 or 3 product;
|
|
|
-
|
|
Teva reimbursement of regulatory and litigation costs; and
|
|
|
-
|
|
The value received as a result of the forgiveness of interest on the advance deposit upon
receipt of the third FDA approval to market a product.
|
Recognition of each of the revenue elements while spread over the estimated life of the agreement,
begins upon occurrence of the following events:
|
-
|
|
Teva reimbursement of manufacturing costs at the time the Company delivers the product to Teva;
|
|
|
-
|
|
The Companys pro rata profit share at the time Teva reports the Companys respective pro rata profit share to the
Company;
|
|
|
-
|
|
The sale of market exclusivity at the time market exclusivity was delivered by Tevas exercise of its contingent option
to purchase market exclusivity;
|
|
|
-
|
|
The milestone associated with the first commercial sale of a Tier 2 or 3 product and concurrent exercise of the contingent
stock repurchase option at the time the right to exercise the option accrued;
|
|
|
-
|
|
Cost-sharing payments at the time the related costs are incurred (except for the $ 300,000 cost reimbursement payable upon
inception of the Teva Agreement, recognition of which began at such inception); and,
|
|
|
-
|
|
Forgiveness of interest at the time the Company received its third FDA approval to market a product covered by the
agreement.
|
Revenue is recognized only to the extent of cumulative cash collected from product sales and
cost-sharing payments and, with respect to forgiveness of the advance deposit and interest thereon
and exercise of the contingent stock repurchase option, the fair value received upon such
forgiveness and exercise, being greater than cumulative revenue recognized.
Under the modified proportional performance method utilized by the Company, the amounts recognized
for a given element in the period of initial recognition is based upon the number of years elapsed
prior to the respective elements event occurring under the Teva Agreement relative to the
estimated life of the Teva Agreement. Under this method the amount of revenue recognized in the
year of initial recognition is determined by multiplying the total amount realized by a fraction,
the numerator of which is the then-current year of the agreement and the denominator of which is
eighteen years i.e. the estimated life of the Teva Agreement. The amount recognized during each
remaining year is 1/18 of such amount. Thus, for example, with respect to profit share reported by
Teva during 2005 (the fourth year of the agreement), 4/18 of the amount reported is recognized
during 2005 and 1/18 of the amount is recognized during each of the remaining 14 years of the
estimated life of the Teva Agreement.
Page F-38 of F-86
Transactions Prior To 2005
The Advance Deposit
- the $ 22.0 million advance deposit relating to the Companys sale of market
exclusivity to Teva (in certain circumstances) and Tevas contingent option to purchase market
exclusivity from the Company (in other circumstances),represents Tevas prepayment of the market
exclusivity purchase price associated with these two features. The Company recorded the $ 22.0
million advance deposit as an advance deposit payable liability and accounted for at its face
amount through its ultimate settlement in January 2004.
The milestones potentially triggering Tevas purchase of market exclusivity for the $ 22.0 million
advance deposit were not met. Teva exercised its contingent option to purchase market
exclusivity for two products, including: one for $ 3.5 million in December 2003, and the other for
$ 2.5 million in January 2004. The corresponding amounts of the $ 22.0 million advance deposit
were thus extinguished at those times. Given the advance deposit was within 30 days of maturity
when Teva exercised its contingent purchase options, the fair value of the forgiven portion of
the advance deposit approximated book value and any gain or loss on the extinguishment of the
liability was immaterial. Accordingly, on the dates of exercise, the Company reclassified the
$ 3.5 million and $ 2.5 million principal amounts of the advance deposit associated with the
exercised options to deferred revenue under the Teva Agreement and such amounts are being
recognized as revenue over the life of the Teva Agreement in accordance with the modified
proportional performance method.
Share-Settlement Option
: The Company repaid the remaining $ 16.0 million of the advance deposit
payable through issuance of shares of the Companys common stock. Specifically, $ 13.5 million
was repaid, through the issuance of 888,918 shares, on September 26, 2003 and the remaining $ 2.5
million was repaid through the issuance of 160,751 shares, on January 14, 2004. The provision
enabling the Company to repay the advance deposit with shares of common stock was embedded in the
Teva Agreement.
Interest Forgiveness and FDA Approval Provision
: The Company achieved the milestone triggering
forgiveness of interest on November 21, 2002. In accordance with the Teva Agreement, the
Companys obligation to pay interest on the $ 22.0 million advance payable, including the amount
previously accrued of approximately $ 2.5 million and an imputed discount of approximately $ 1.9
million, was forgiven and the resulting $ 4.4 million was recorded as deferred revenue under the
Teva Agreement and such amounts are being recognized as revenue over the life of the Teva
Agreement in accordance with the modified proportional performance method.
Sale of Common Stock
: Under the terms of the Teva Agreement, the Company sold 1,462,083 shares
to Teva in four consecutive quarterly installments beginning in June 2001. The number of shares
sold in each quarterly installment was determined by dividing $ 3.75 million by the Designated
Share Price. The Company determined this provision met the SFAS 133 definition of an embedded
derivative. However, its value was less than $ 50,000, which the Company deemed immaterial, and
this feature of the agreement was therefore not accounted for separately as a derivative.
Page F-39 of F-86
Transactions from 2005 to 2007
Contingent Stock Repurchase Option
: The Companys option to repurchase one-sixth of the shares
it sold Teva is embedded in the agreement. When evaluated on an as if freestanding basis, the
option qualifies for a scope exception under SFAS 133 because, as a freestanding instrument, it
would be indexed to the Companys own stock and classified as equity. As a result, the
contingent stock repurchase option did not require bifurcation and separate accounting as a
derivative instrument pursuant to the provisions of SFAS 133. Rather, consistent with its
revenue-recognition policy, the Company did not begin recognizing any revenue associated with the
value received upon exercise of the contingent stock repurchase option until Teva achieved the
first commercial sale of a Tier 2 or Tier 3 product, which occurred on December 15, 2006. The
Company determined the fair value of this provision was approximately $ 2.2 million (based upon
the fair value of the Companys common stock on the date the milestone was met and the right to
exercise the option accrued), with such amount being recognize as revenue over the life of the
Teva Agreement in accordance with the modified proportional performance method.
Arrangement with Anchen:
Anchen Pharmaceuticals, Inc. received the first approval for its
generic Wellbutrin 300mg XL product in 2006. The Company entered into an agreement with Anchen
and Teva whereby Anchen selectively waived its 180 day market exclusivity in favor of the Company
and transferred to Teva, all of its rights to market the product, all in return for certain
payments by Teva (for which the Company is responsible for its proportionate share under the
profit sharing provisions of the Teva Agreement, as amended). The Company received final
approval for the product and Teva launched the product in December 2006. In February 2007,
on-going patent litigation with Biovail Laboratories International, SRL, concerning the product,
was resolved and the agreement with Anchen and Teva was amended to include, among other things,
certain additional payments to Anchen by Teva (for which the Company is responsible for its
proportionate share). The Company recorded its proportionate share of its obligations to Anchen
as an Accrued exclusivity period fee payments due and a corresponding Deferred
charge-exclusivity period fee on its balance sheet, initially at $ 41.6 million and then
increased to $ 50.6 million upon the February 2007 amendment. The deferred charge-exclusivity
period fee was amortized over the six-month exclusivity period commencing in December 2006, as a
reduction in the gross amount of revenue to be deferred for each monthly period and the accrued
exclusivity period fee payments due obligation is reduced as the Company reimburses Teva for the
Companys proportionate share of the payments made to Anchen.
Page F-40 of F-86
The following tables show the additions to and deductions from the deferred revenue and deferred
product manufacturing costs under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
(in $000s)
|
|
For the Year Ended December 31,
|
|
|
Through
|
|
Deferred revenue
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dec 31, 2004
|
|
Beginning balance
|
|
$
|
136,157
|
|
|
$
|
78,014
|
|
|
$
|
55,749
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost-sharing
|
|
|
732
|
|
|
|
861
|
|
|
|
803
|
|
|
|
2,857
|
|
Product-related deferrals
|
|
|
133,873
|
|
|
|
92,502
|
|
|
|
34,009
|
|
|
|
55,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
134,605
|
|
|
|
93,363
|
|
|
|
34,812
|
|
|
|
58,838
|
|
Exclusivity charges
|
|
|
(47,133
|
)
|
|
|
(3,467
|
)
|
|
|
|
|
|
|
|
|
Forgiveness of advance deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,000
|
|
Forgiveness of interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,370
|
|
Stock repurchase
|
|
|
|
|
|
|
2,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
87,472
|
|
|
$
|
92,053
|
|
|
$
|
34,812
|
|
|
$
|
69,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of advance deposit
|
|
$
|
(333
|
)
|
|
$
|
(333
|
)
|
|
$
|
(333
|
)
|
|
$
|
(1,167
|
)
|
Forgiveness of interest
|
|
|
(243
|
)
|
|
|
(243
|
)
|
|
|
(243
|
)
|
|
|
(851
|
)
|
Stock repurchase
|
|
|
(120
|
)
|
|
|
(659
|
)
|
|
|
|
|
|
|
|
|
Cost-sharing
|
|
|
(516
|
)
|
|
|
(466
|
)
|
|
|
(360
|
)
|
|
|
(556
|
)
|
Product-related revenue
|
|
|
(41,268
|
)
|
|
|
(32,209
|
)
|
|
|
(11,611
|
)
|
|
|
(10,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(42,480
|
)
|
|
|
(33,910
|
)
|
|
|
(12,547
|
)
|
|
|
(13,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
181,149
|
|
|
$
|
136,157
|
|
|
$
|
78,014
|
|
|
$
|
55,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
Deferred product
|
|
For the Year Ended December 31,
|
|
|
Through
|
|
manufacturing costs
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dec 31, 2004
|
|
Beginning balance
|
|
$
|
49,728
|
|
|
$
|
27,059
|
|
|
$
|
23,636
|
|
|
$
|
|
|
Additions:
|
|
|
46,246
|
|
|
|
35,530
|
|
|
|
6,738
|
|
|
|
29,341
|
|
Less amounts amortized:
|
|
|
(20,678
|
)
|
|
|
(12,861
|
)
|
|
|
(3,315
|
)
|
|
|
(5,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
75,296
|
|
|
$
|
49,728
|
|
|
$
|
27,059
|
|
|
$
|
23,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization of
deferred product manufacturing costs (for transactions recorded through December 31, 2007) for the
next five years and thereafter under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Deferred
|
|
|
Product
|
|
|
|
Revenue
|
|
|
Manufacturing Costs
|
|
(in $000s)
|
|
Recognition
|
|
|
Amortization
|
|
2008
|
|
$
|
15,753
|
|
|
$
|
6,548
|
|
2009
|
|
|
15,753
|
|
|
|
6,548
|
|
2010
|
|
|
15,753
|
|
|
|
6,548
|
|
2011
|
|
|
15,753
|
|
|
|
6,548
|
|
2012
|
|
|
15,753
|
|
|
|
6,548
|
|
Thereafter
|
|
|
102,384
|
|
|
|
42,556
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
181,149
|
|
|
$
|
75,296
|
|
|
|
|
|
|
|
|
Page F-41 of F-86
OTC Partners Alliance Agreements (OTC Agreements)
The Company is party to five OTC Partner alliance agreements with four different unrelated
third-party pharmaceutical entities marketing partners (OTC Agreements), related to the
manufacture, distribution, and marketing of an over-the-counter (OTC) pharmaceutical product.
The five OTC Agreements, whose terms range from three to fifteen years, each commit the Company to
manufacture, and the OTC Agreements marketing partner to distribute, a single specified generic
pharmaceutical product. All of the OTC Agreements obligate the Company to grant of a license to
the respective OTC Partner to market the product, and three of the OTC Agreements require the
Company to provide research and development services to complete the development of the covered
product. Revenue under these OTC Agreements consists of up-front payments upon contract signing,
reimbursement of product manufacturing costs or other agreed upon amounts when the Company delivers
the product, profit-share or royalty payments based upon the OTC Partners product sales, and, with
respect to three of the OTC Agreements, specified milestone payments are tied to further
product-development services.
As each of these OTC Agreements contain multiple deliverables the Company applied its accounting
policy to determine whether the multiple deliverables within each of the OTC Partners alliance
agreements should be accounting for as separate units of accounting or as a single unit of
accounting. The Company determined no single deliverable represented a separate unit of accounting
given there was not sufficient objective and reliable evidence of the fair value of any single
deliverable. When the fair value of a deliverable cannot be determined, it is not possible for the
Company to determine whether consideration given by an OTC Partner is in exchange for a given
deliverable. The Company concluded the multiple deliverables under each of the OTC Partner
alliance agreements represents a single unit of accounting for each agreement.
Consistent with how revenue is recognized under the Teva Agreement, all revenue under the OTC
Agreements is deferred and subsequently recognized over the life of the respective OTC Agreements
under the modified proportional performance method. Deferred revenue is recorded as a liability
captioned deferred revenue-alliance agreement. The modified proportional performance method
better aligns revenue recognition with performance under a long-term arrangement as compared to a
straight-line method. Revenue is recognized only to the extent of cumulative cash collected being
greater than cumulative revenue recognized.
The Company begins to recognize up-front payments at the inception of the respective OTC Agreement,
milestone payments at the time they are earned, reimbursement of product manufacturing costs at the
time of product shipment to the respective OTC Partners, and profit-share and royalty payments at
the time they are reported to the Company.
The Company also defers its product manufacturing costs to the extent reimbursable by the
respective OTC Partner and recognizes them in the same manner as it recognizes the related product
revenue. Additionally, under the Teva Agreement, the Company is obligated to share with Teva the
profits from the sale of the over-the-counter products sold under the OTC Agreements up to a
maximum of 50%. These deferred direct product manufacturing costs are recorded as an asset
captioned deferred product manufacturing costs-alliance agreements.
Page F-42 of F-86
A summary description of each of the OTC Partners Alliance Agreements noted above is as follows:
In December 2001, the Company entered into a License and Supply Agreement granting to Novartis
exclusive rights to market the Companys over-the-counter (OTC) Loratadine Orally Disintegrating
Tablets (generic Claritin Reditabs) for the pediatric market. Under the terms of the Novartis
agreement, the Company is responsible for developing and manufacturing the product, while Novartis
is responsible for product marketing and sale. The structure of the Novartis agreement includes
payment upon achievement of milestones and royalties paid to the Company on a quarterly basis based
on Novartis sales. Novartis launched this product in February 2004 as Triaminic AllerChews. This
agreement was terminated in May 2005 due to lower than planned sales volume.
In June 2002, the Company signed a semi-exclusive Development, License and Supply Agreement with
Wyeth relating to the Companys Loratadine and Pseudoephedrine Sulfate 5 mg/120 mg 12-hour Extended
Release Tablets and Loratadine and Pseudoephedrine Sulfate 10 mg/240 mg 24-hour Extended Release
Tablets for the OTC market under the Alavert brand. The Company is responsible for developing and
manufacturing the products, while Wyeth is responsible for product marketing and sale. The
structure of the Wyeth agreement includes payment upon achievement of milestones and royalties paid
to the Company on Wyeths sales on a quarterly basis. Wyeth launched this product in May 2003 as
Alavert D-12 Hour. In February 2005, the Wyeth agreement was partially cancelled with respect to
only the 24-hour Extended Release Product due to lower than planned sales volume.
In June 2002, the Company signed a non-exclusive Licensing, Contract Manufacturing and Supply
Agreement with Schering-Plough relating to the Companys Loratadine and Pseudoephedrine Sulfate 5
mg/120 mg 12-hour Extended Release Tablets for the OTC market under the Claritin-D 12-hour brand.
The structure of the Schering-Plough agreement included milestone payments by Schering-Plough and
an agreed upon transfer price. Shipments to Schering-Plough commenced at the end of January 2003,
and Schering-Plough launched the product as its OTC Claritin-D 12-hour in March 2003. Through a
series of amendments, the Schering-Plough agreements original three year term has been extended
to a February 2011 contract end date.
In July 2004, the Company finalized a series of two agreements with Leiner Health Products, LLC for
(1) the supply and distribution of the Loratadine Orally Disintegrating Tablets (ODT) and (2)
Loratadine and Pseudoephedrine Sulfate Extended Release Tablets 24 hour products. These products
were manufactured by the Company and marketed by Leiner as OTC store brand generic equivalents to
the branded products. Leiner commenced sale of the ODT product in November 2004. In November
2006, the Leiner agreement for the Loratadine and Pseudoephedrine Sulfate Extended Release Tablets
24 Hour product was terminated due to lower than planned sales volume.
Page F-43 of F-86
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the OTC Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
(in $000s)
|
|
For the Year Ended December 31,
|
|
|
Through
|
|
Deferred revenue
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dec 31, 2004
|
|
Beginning balance
|
|
$
|
17,098
|
|
|
$
|
19,665
|
|
|
$
|
22,077
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
84
|
|
|
|
42
|
|
|
|
442
|
|
|
|
7,868
|
|
Cost-sharing and other
|
|
|
424
|
|
|
|
158
|
|
|
|
463
|
|
|
|
597
|
|
Product-related deferrals
|
|
|
14,851
|
|
|
|
11,015
|
|
|
|
7,134
|
|
|
|
32,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
15,359
|
|
|
$
|
11,215
|
|
|
$
|
8,039
|
|
|
$
|
40,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(315
|
)
|
|
|
(786
|
)
|
|
|
(2,379
|
)
|
|
|
(3,692
|
)
|
Cost-sharing and other
|
|
|
(312
|
)
|
|
|
(221
|
)
|
|
|
(515
|
)
|
|
|
(278
|
)
|
Product-related revenue
|
|
|
(11,239
|
)
|
|
|
(12,775
|
)
|
|
|
(7,557
|
)
|
|
|
(14,885
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(11,866
|
)
|
|
|
(13,782
|
)
|
|
|
(10,451
|
)
|
|
|
(18,855
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
20,591
|
|
|
$
|
17,098
|
|
|
$
|
19,665
|
|
|
$
|
22,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception
|
|
Deferred product
|
|
For the Year Ended December 31,
|
|
|
Through
|
|
manufacturing costs
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dec 31, 2004
|
|
Beginning balance
|
|
$
|
14,137
|
|
|
$
|
14,880
|
|
|
$
|
15,613
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product-related deferrals
|
|
|
12,172
|
|
|
|
11,727
|
|
|
|
5,756
|
|
|
|
24,225
|
|
Cost-sharing and other
|
|
|
842
|
|
|
|
(49
|
)
|
|
|
804
|
|
|
|
4,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
13,014
|
|
|
$
|
11,678
|
|
|
$
|
6,560
|
|
|
$
|
28,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount amortized:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product-related cost
|
|
|
(9,201
|
)
|
|
|
(12,024
|
)
|
|
|
(5,980
|
)
|
|
|
(11,280
|
)
|
Cost-sharing and other
|
|
|
(699
|
)
|
|
|
(397
|
)
|
|
|
(1,313
|
)
|
|
|
(1,709
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount amortized
|
|
|
(9,900
|
)
|
|
|
(12,421
|
)
|
|
|
(7,293
|
)
|
|
|
(12,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
17,251
|
|
|
$
|
14,137
|
|
|
$
|
14,880
|
|
|
$
|
15,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization deferred
product manufacturing costs (for transactions recorded through December 31, 2007) for the next five
years and thereafter under the OTC Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Deferred
|
|
|
Product
|
|
|
|
Revenue
|
|
|
Manufacturing Costs
|
|
(in $000s)
|
|
Recognition
|
|
|
Amortization
|
|
2008
|
|
$
|
4,267
|
|
|
$
|
3,525
|
|
2009
|
|
|
4,129
|
|
|
|
3,423
|
|
2010
|
|
|
4,129
|
|
|
|
3,423
|
|
2011
|
|
|
1,550
|
|
|
|
1,311
|
|
2012
|
|
|
1,034
|
|
|
|
888
|
|
Thereafter
|
|
|
5,482
|
|
|
|
4,681
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,591
|
|
|
$
|
17,251
|
|
|
|
|
|
|
|
|
Page F-44 of F-86
Supply & Distribution Agreement with DAVA Pharmaceuticals, Inc. (DAVA Agreement)
On November 3, 2005, the Company entered into a ten-year Supply and Distribution Agreement with
DAVA Pharmaceuticals, Inc. (the DAVA Agreement) under which the Company appointed DAVA the
exclusive U.S. distributor of its generic version of OxyContin
®
tablets in 80mg, 40mg, 20mg, and
10mg strengths and agreed to be DAVAs exclusive supplier of the product. DAVA agreed to pay the
Company an aggregate appointment fee of $ 60.0 million and to pay the Company a mark-up on of its
fully burdened cost of manufacture for the product plus a share of the gross profits of DAVAs
sales of the product.
The DAVA Agreement required DAVA to provide the Company with monthly purchase orders covering the
succeeding three months, and the Company was required to manufacture and fulfill at least 95% of
DAVAs monthly requirements. If the Company were unable to deliver at least 90% of the monthly
requirements, and such delay continues for more than 45 days, the Company could have been liable to
DAVA for delay payments up to $ 10.0 million.
The appointment fee payment schedule was as follows: (i) $ 1.0 million upon the signing of the
agreement, (ii) $ 9.0 million paid by DAVA pro rata upon the Companys delivery of the product as
required by DAVAs initial purchase order and (iii) $ 10.0 million payable on December 31, 2006 and
on each of the succeeding four years. DAVA had the right to suspend appointment fee payments in
the event the Company was unable to meet DAVAs product requirements or satisfy other obligations
under the DAVA Agreement.
As the DAVA Agreement involved two deliverables (the product and market exclusivity), the Company
reviewed the DAVA Agreement under the provisions of EITF 00-21 and determined, because it did not
have objective and reliable evidence of the fair value of either deliverable, no single deliverable
represented a separate unit of accounting. The Company thus concluded the arrangement represents a
single unit of accounting, and it therefore accounts for all deliverables as a single unit of
accounting in accordance with EITF 00-21. As with the Teva Agreement and the OTC Agreements, the
Company initially defers all revenue under the DAVA Agreement and then recognizes revenue over the
estimated life of the DAVA Agreement. The deferred portion of the revenue is recorded as a
liability captioned Deferred revenue alliance agreements. Revenue under the DAVA Agreement is
recognized using the same modified proportional performance method used for the Teva Agreement.
The Company also defers its direct manufacturing costs to the extent reimbursable by DAVA and
recognizes them in the same manner as it recognizes the related product revenue. These deferred
direct product manufacturing costs are recorded as an asset captioned Deferred product
manufacturing costs alliance agreements.
Recognition of revenues related to the manufacturing costs begins at the time the related product
is delivered to DAVA, and recognition of the Companys pro rata profit share begins at the time
DAVA reports to the Company such amount. The Company begins to recognize appointment fee
installments when earned as the Companys related product-delivery obligation has been met and
DAVAs obligation to pay the installment becomes fixed. In this regard, the Company began
recognizing the initial $ 1.0 million appointment fee installment when paid in 2005 and the $ 9.0
million installment in 2006, as earned when the Companys related product-delivery obligations were
met. Product shipments under the agreement commenced in 2005, and the Company began recognizing
its share of the profits in the first quarter of 2006. Revenue is recognized only to the extent of
cumulative cash collected being greater than cumulative revenue recognized.
Page F-45 of F-86
During the second half of 2006, the Companys two principal competitors for sales of generic
OxyContin announced they would, as part of the settlement of patent infringement litigation with
Purdue Pharma LP (Purdue), leave the market by December 31, 2006 and some later undisclosed date,
respectively, which would result in the Companys product being the only remaining generic product
on the market and thereby substantially increasing the Companys exposure to potential liability in
a pending patent infringement suit brought against the Company by Purdue. This change in market
dynamics led to an amendment to the agreement with DAVA whereby the parties agreed to rebalancing
the risks between the parties, providing the Company certain additional flexibility with respect to
product supply, and providing the Company with a larger share of the profits. As a result, on
February 6, 2007, the parties amended the DAVA Agreement, effective November 29, 2006. The DAVA
Agreement amendment resulted in the Company receiving a greater portion of the pro rata profit
share (once a prescribed bottle delivery target was met); eliminated the remaining $ 50.0 million of
the appointment fee potentially payable by DAVA; and, reduced the price paid by DAVA for the
product to the amount of the Companys manufacturing cost. The DAVA Agreement amendment also
permits the Company to unilaterally suspend shipment of product to DAVA in exchange for a one-time
payment equal to DAVAs share of the profits for the quarterly reporting period immediately
preceding such product shipment suspension. After such product shipment suspension, DAVA has the
right to purchase a competing equivalent product from an alternative supplier.
On March 30, 2007, the Company entered into an agreement settling Purdues patent infringement suit
against the Company. Under this Purdue settlement agreement, the Company agreed to the validity of
the Purdue patents and agreed to withdraw its generic product from the market by January 2008, and
Purdue granted the Company a license permitting it to manufacture and sell its product during
specified periods between March 2007 and January 2008, and, additionally, authorized the Company to
grant a sublicense to DAVA allowing DAVA to distribute the product during the same periods. While
the Company continued to manufacture and sell the product during the authorized periods, the Purdue
settlement agreement precludes the Company from re-entering the market after January 2008 until
expiration of the last Purdue patents in 2013, or earlier under certain circumstances.
While the amended DAVA Agreement will remain effective through November 3, 2015, the Company
concluded if any of the contingent events occur to permit the Company to resume sales of the
generic product under the Purdue settlement agreement, the same events will result in such a highly
competitive generic market to make it unlikely the Company will find it economically favorable to
devote manufacturing resources to the resumption of sales of this product. As a result, the
Company concluded the economic life of the DAVA Agreement, and therefore the Companys expected
period of performance, ended in January 2008. Accordingly, on the March 30, 2007 effective date of
the Purdue settlement agreement, the Company adjusted the period of revenue recognition and product
manufacturing costs amortization under the DAVA Agreement from 10 years to 27 months (i.e. November
2005 through January 2008). As the terms of the Purdue settlement did not exist and could not have
been known when the life of the DAVA Agreement was originally estimated, the change in the
recognition period has been applied prospectively as an adjustment in the period of change. The
change in the revenue recognition period had the effect of increasing income from operations for
the year ended December 31, 2007 by $ 73,226,000 and basic earnings per share by $ 1.25.
Page F-46 of F-86
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the DAVA Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
For the Year Ended December 31,
|
|
Deferred revenue
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
24,784
|
|
|
$
|
5,655
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
|
|
|
|
9,000
|
|
|
|
1,000
|
|
Product-related deferrals
|
|
|
100,211
|
|
|
|
13,028
|
|
|
|
4,738
|
|
|
|
|
|
|
|
|
|
|
|
Total additions
|
|
|
100,211
|
|
|
|
22,028
|
|
|
|
5,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(7,975
|
)
|
|
|
(1,150
|
)
|
|
|
(17
|
)
|
Product-related revenue
|
|
|
(110,659
|
)
|
|
|
(1,749
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(118,634
|
)
|
|
|
(2,899
|
)
|
|
|
(83
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
6,361
|
|
|
$
|
24,784
|
|
|
$
|
5,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
|
|
Deferred product
|
|
For the Year Ended December 31,
|
|
manufacturing costs
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Beginning balance
|
|
$
|
9,100
|
|
|
$
|
3,344
|
|
|
$
|
|
|
Additions:
|
|
|
18,435
|
|
|
|
6,901
|
|
|
|
3,401
|
|
Less: amount recognized:
|
|
|
(25,685
|
)
|
|
|
(1,145
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
1,850
|
|
|
$
|
9,100
|
|
|
$
|
3,344
|
|
|
|
|
|
|
|
|
|
|
|
The following schedule shows the expected recognition of deferred revenue and amortization deferred
product manufacturing costs (for transactions recorded through December 31, 2007) for the next five
years and thereafter under the DAVA Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
Deferred
|
|
|
Product
|
|
|
|
Revenue
|
|
|
Manufacturing Costs
|
|
(in $000s)
|
|
Recognition
|
|
|
Amortization
|
|
2008
|
|
$
|
6,361
|
|
|
$
|
1,850
|
|
2009
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,361
|
|
|
$
|
1,850
|
|
|
|
|
|
|
|
|
Page F-47 of F-86
Shire Laboratories Promotional Services Agreement (Shire Agreement)
On January 19, 2006, the Company entered into a five year Promotional Services Agreement with an
affiliate of Shire Laboratories, Inc. (the Shire Agreement), under which the Company was engaged
to perform physician-detailing sales calls in support of Shires Carbatrol product. The Shire
Agreement requires Shire to pay the Company a fixed sales-force fee of up to $ 200,000 annually for
each of as many as 66 sales force members, a gain share fee for each prescription filled in
excess of a stated minimum during each quarter, and, if filled prescriptions exceed a specified
target during the first six months of 2009, a $ 5 million bonus. In addition, if the Company fails
to perform a minimum number of sales calls during any quarter and fails to make up the shortfall by
the end of the following quarter, Shire has the right to a refund of a fixed amount per remaining
shortfall.
The Company recognizes the fixed sales force fees as the related services are performed and the
performance obligations are met, and for gain-share fees, if and when such fees are earned. The
Company recognized $ 12,759,000 and $ 6,434,000 in sales force fee revenue for the years ended
December 31, 2007 and 2006, respectively, under the Shire Agreement, with such amounts presented
in the captioned line item Promotional Partner under revenues on the statement of operations.
The Company has not earned any gain-share fees or been required to make any shortfall
reimbursements under the Shire Agreement. Any such reimbursements in the future will be recognized
as a reduction to Promotional Partner revenue during the period in which such reimbursement
liability is incurred.
Page F-48 of F-86
14. EMPLOYEE BENEFIT PLANS
4
01(k)
Defined Contribution Plan
The Company sponsors a 401(k) defined contribution plan covering all employees. Participants are
permitted to contribute up to 25% of their eligible annual pre-tax compensation up to established
federal limits on aggregate participant contributions. The Company matches 50% of the employee
contributions up to a maximum of 3% of employee compensation. Discretionary profit-sharing
contributions made by the Company, if any, are determined annually by the Board of Directors.
Participants are 100% vested in discretionary profit-sharing and matching contributions made by the
company after 3 years of service, and are 25% and 50% vested after 1 and 2 years of service,
respectively. There were approximately $ 707,000, $ 681,000 and $ 537,000 in matching contributions
and no discretionary profit-sharing contributions made under this plan for the years ended December
31, 2007, 2006 and 2005 respectively.
Employee Stock Purchase Plan
In February 2001, the Board of Directors of the Company approved the 2001 Non-Qualified Employee
Stock Purchase Plan (ESPP). Under the ESPP, the Company registered 500,000 shares of common
stock under a Form S-8 Registration Statement. The purpose of the ESPP is to enhance employee
interest in the success and progress of the Company by encouraging employee ownership of common
stock of the Company. The ESPP provides the opportunity to purchase the Companys common stock at
a 15% discount to the market price through payroll deductions or lump-sum cash investments. During
2007, 2006 and 2005, 27,961, 8,080 and 5,723 shares of common stock were sold by the Company to its
employees under this Plan for net proceeds of approximately $ 112,000, $ 56,000 and $ 67,000
respectively.
Deferred Compensation Plan
In February 2002, the Board of Directors of the Company approved the Executive Non-Qualified
Deferred Compensation Plan (the Plan) effective August 15, 2002 covering any executive-level
employee of the Company as designated by the Board of Directors. Participants can defer up to 75%
of their base salary and quarterly sales bonus and up to 100% of their annual performance-based
bonus. The Company matches 50% of employee deferrals up to 10% of base salary and bonus
compensation. The maximum total match by the company cannot exceed 5% of total base and bonus
compensation. Participants are vested 20% each year, with 100% vesting after 5 years of service.
There were approximately $ 332,000, $ 417,000 and $ 311,000 in matching contributions under the Plan
for the years ended December 31, 2007, 2006 and 2005 respectively.
The deferred compensation liability is a non-current liability recorded at the fair value of the
amount owed to the deferred compensation plan participants, with changes in the fair value of such
amounts recognized as a compensation expense in the statement of operations. The Company invests
amounts contributed by the deferred compensation plan participants and the associated Company
matching contributions in company-owned life insurance (COLI) policies, of which the cash
surrender value is included in the caption line item Other assets on the consolidated balance
sheet.
The Plan has a cash surrender value of $ 3,482,000 and a deferred compensation liability of
$ 5,162,000 as of December 31, 2007.
Page F-49 of F-86
15. SHARE-BASED COMPENSATION:
Prior to January 1, 2006, the Company recognized stock-based compensation expense in accordance
with the provisions of APB 25 and related interpretations. Under APB 25, if the exercise price of
options granted was equal to the fair value of the underlying shares of common stock on the date of
grant, compensation expense was not recognized.
On January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective method.
Under this method, the Company recognizes share-based compensation expense for all outstanding
options not fully vested as of the adoption date and for all share-based compensations awards,
classified as equity, granted or modified after the adoption date based on the fair value of the
awards on the grant date, net of estimated forfeitures. Accordingly, prior periods have not been
restated.
1995 Stock Incentive Plan
In 1995, the Companys Board of Directors adopted the 1995 Stock Incentive Plan (the 1995 Plan).
Under the 1995 Plan, 61,100, 66,100, and 66,250 stock options were outstanding at December 31,
2007, 2006 and 2005, respectively.
1996 Stock Option Plan
In September 1996, the Company adopted the 1996 Stock Option Plan (the 1996 Plan). The 1996 Plan
provides for the granting of stock options to employees and consultants of the Company. Stock
options granted under the 1996 Plan may be either incentive stock options or non-qualified stock
options. Incentive stock options may be granted only to Company employees (including officers and
directors who are also employees). Non-qualified stock options may be granted to Company employees
and consultants. The Company has reserved 500,000 shares of Common Stock for issuance under the
1996 Plan. Under the 1996 Plan, 196,166, 206,173, and 206,173 stock options were outstanding at
December 31, 2007, 2006 and 2005, respectively.
1999 Pre-Merger Plan
In April 1999, the Company adopted the 1999 Equity Incentive Plan (the 1999 Pre-Merger Plan).
The 1999 Pre-Merger Plan reserves for issuance of 1,000,000 shares of common stock for issuance
pursuant to stock option grants and stock grants. Under the 1999 Pre-Merger Plan, 412,488 stock
options were outstanding at December 31, 2007, 2006 and 2005, respectively.
Impax Laboratories, Inc. 1999 Equity Incentive Plan
The Companys 1999 Equity Incentive Plan was adopted by the Companys Board of Directors in
December 1999. In October 2000, the Companys stockholders approved an increase in the aggregate
number of shares of common stock to be issued pursuant to the Companys 1999 Equity Incentive Plan
from 2,400,000 to 5,000,000 shares. Under the 1999 Equity Incentive Plan, 2,724,229, 2,623,388,
and 2,616,951 stock options were outstanding at December 31, 2007, 2006 and 2005, respectively.
Impax Laboratories, Inc. 2002 Equity Incentive Plan
The 2002 Equity Incentive Plan was adopted by the Companys Stockholders in May 2002. The
aggregate number of shares of common stock for issuance pursuant to stock option grants and
restricted stock awards was increased by the Companys Board of Directors from 4,000,000 shares to
6,500,000 shares during 2007. Under the 2002 Equity Incentive Plan, stock options outstanding were
5,653,778, and 3,830,022 and 3,850,439 at December 31, 2007, 2006 and 2005, respectively, and
restricted stock awards outstanding were 270,341 at December 31, 2007 and 0 at December 31, 2006
and 2005.
Page F-50 of F-86
The stock option activity for all of the Companys equity compensation plans noted above, is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
Number of Shares
|
|
Price
|
Stock Options
|
|
Under Option
|
|
per Share
|
Outstanding at December 31, 2004
|
|
|
6,017,394
|
|
|
$
|
9.94
|
|
Options granted
|
|
|
1,508,543
|
|
|
$
|
11.20
|
|
Options exercised
|
|
|
(74,449
|
)
|
|
$
|
5.08
|
|
Options forfeited
|
|
|
(299,187
|
)
|
|
$
|
14.72
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005
|
|
|
7,152,301
|
|
|
$
|
10.06
|
|
Options granted
|
|
|
291,000
|
|
|
$
|
6.85
|
|
Options exercised
|
|
|
(8,613
|
)
|
|
$
|
4.21
|
|
Options forfeited
|
|
|
(296,517
|
)
|
|
$
|
21.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006
|
|
|
7,138,171
|
|
|
$
|
9.46
|
|
Options granted
|
|
|
1,991,678
|
|
|
$
|
11.34
|
|
Options exercised
|
|
|
(20,719
|
)
|
|
$
|
2.28
|
|
Options forfeited
|
|
|
(61,369
|
)
|
|
$
|
8.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
9,047,761
|
|
|
$
|
9.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2007
|
|
|
8,862,927
|
|
|
$
|
9.87
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2007
|
|
|
6,884,983
|
|
|
$
|
9.57
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, stock options outstanding, vested and expected to vest, and exercisable
had average remaining contractual lives of 6.98 years, 6.92 years, and 5.99 years, respectively.
Also, as of December 31, 2007, stock options outstanding, vested and expected to vest, and
exercisable each had aggregate intrinsic values of $ 25,994,000, $ 25,991,000, and $ 25,028,000,
respectively.
The Company grants restricted stock to certain eligible employees as a component of its long-term
incentive compensation program. The restricted stock award grants are made in accordance with the
Companys 2002 Equity Incentive Plan, as amended and restated, and typically specify, shares of
restricted stock are not issued until they vest. The restricted stock awards vest ratably over a
four year period from the date of grant. A summary of the non-vested restricted stock awards is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Non-Vested
|
|
Weighted
|
|
|
Restricted
|
|
Average
|
|
|
Stock
|
|
Grant Date
|
Restricted Stock Awards
|
|
Awards
|
|
Fair Value
|
Non-vested at December 31, 2006
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
272,678
|
|
|
$
|
11.45
|
|
Vested
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
(2,337
|
)
|
|
$
|
11.48
|
|
Non-vested at December 31, 2007
|
|
|
270,341
|
|
|
$
|
11.45
|
|
As of December 31, 2007, the Company had 442,074 shares available for issuance of either stock
options or restricted stock awards, including 422,939 shares from the 2002 Equity Incentive Plan
and 19,135 from the 1999 Equity Incentive Plan.
Page F-51 of F-86
As of December 31, 2007, the Company had total unrecognized share-based compensation expense, net
of estimated forfeitures, of $ 15,751,000 related to all of its share-based awards, which will be
recognized over a weighted average period of 3.5 years. The intrinsic value of options exercised
during the years ended December 31, 2007 and 2006 was $ 178,000 and $ 42,000, respectively. The
total fair value of restricted shares which vested during the years ended December 31, 2007 and
2006 was $ 0.
The Company estimated the fair value of each stock option award on the grant date using the
Black-Scholes Merton option-pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Volatility (range)
|
|
|
67.7%-75.2
|
%
|
|
|
76.2%-76.3
|
%
|
|
|
74.9%-78.2
|
%
|
Volatility (weighted average)
|
|
|
69.9
|
%
|
|
|
76.3
|
%
|
|
|
75.7
|
%
|
Risk-free interest rate (weighted average)
|
|
|
4.0
|
%
|
|
|
4.7
|
%
|
|
|
4.1
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected life (years)
|
|
|
6.07
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Weighted average grant date fair value per option
|
|
$
|
7.43
|
|
|
$
|
4.91
|
|
|
$
|
7.83
|
|
Expected volatility is based solely on historical volatility of the Companys common stock over the
period commensurate with the expected term of the stock options. The expected term calculation is
based on the simplified method described in SAB No. 107, Share-Based Payment and SAB No. 110,
Share-Based Payment. The risk-free interest rate is based on the U.S. Treasury yield in effect at
the time of grant for an instrument with a maturity that is commensurate with the expected term of
the stock options. The dividend yield of zero is based on the fact that we have never paid cash
dividends on our common stock, and we have no present intention to pay cash dividends. Options
granted under each of the above plans vest from three to five years and have a term of ten years.
The Companys shares of common stock traded on the Pink Sheets beginning in August 2005 through
December 31, 2007. The Companys assessment is there was sufficient trading volume and liquidity
in the Companys shares to support the calculation of a reasonable estimate of the fair value of
employee stock options granted during this period.
As a result of the adoption of SFAS 123(R), the amount of share-based compensation expense
recognized by the Company is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
(in $000s)
|
|
2007
|
|
|
2006
|
|
Cost of revenues
|
|
$
|
418
|
|
|
$
|
168
|
|
Research and development
|
|
|
563
|
|
|
|
236
|
|
Selling, general and administrative
|
|
|
532
|
|
|
|
279
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,513
|
|
|
$
|
683
|
|
|
|
|
|
|
|
|
The after tax impact of recognizing the share-based compensation expense related to SFAS 123R on
basic and diluted earnings per common share was $ 0.02 and $ 0.01 for the years ended December 31,
2007 and 2006, respectively. The adoption of SFAS No. 123(R) had no effect on our cash flows from
operations or cash flows from financing activities. The Company has not recognized any tax
benefits during 2007, 2006 or 2005 related to share-based compensation costs because options issued
by the Company have been designated incentive stock options and there have been no disqualifying
dispositions of options exercised.
The Companys policy is to issue new shares to satisfy stock option exercises and share unit
conversions pursuant to restricted share awards. There were no modifications to any stock options
during the years ended December 31, 2007, 2006 or 2005.
Page F-52 of F-86
The pro forma effect of recognizing the estimated fair value of share-based employee compensation
for the year ended December 31, 2005, had the Company applied the fair value provisions of SFAS No.
123(R) is as follows:
|
|
|
|
|
(in $000s, except per share amounts)
|
|
2005
|
|
Net loss as reported
|
|
$
|
(5,780
|
)
|
Add: Stock-based employee compensation included
in reported net loss net of related tax effects
|
|
|
|
|
|
|
|
|
|
Deduct: Total share-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
|
|
|
(36,271
|
)
|
|
|
|
|
|
|
|
|
|
Net loss pro forma
|
|
$
|
(42,051
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
Basic as reported
|
|
$
|
(0.10
|
)
|
|
|
|
|
Basic pro forma
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
(0.10
|
)
|
|
|
|
|
Diluted pro forma
|
|
$
|
(0.71
|
)
|
|
|
|
|
On December 1, 2005, the Company accelerated the vesting of all outstanding employee stock options
having an exercise price less than the closing market price of the Companys common stock on this
date. The acceleration resulted in the vesting of 2,672,980 employee stock options having an
estimated fair value of $ 25,306,000 which would have been recognized as share-based compensation
expense in future periods under the provisions of SFAS No. 123(R).
Page F-53 of F-86
16. STOCKHOLDERS EQUITY/ (DEFICIT)
Preferred Stock
Pursuant to its certificate of incorporation, the Company is authorized to issue 2,000,000 shares,
$ 0.01 par value per share, blank check preferred stock, which enables the Board of Directors of
the Company, from time to time, to create one or more new series of preferred stock. Each series
of preferred stock issued can have the rights, preferences, privileges and restrictions designated
by the Companys Board of Directors. The issuance of any new series of preferred stock could
affect, among other things, the dividend, voting, and liquidation rights of the Companys common
stock. During 2007, 2006 and 2005, the Company did not issue any preferred stock.
Common Stock
The Companys Certificate of Incorporation, as amended, authorizes the Company to issue 90,000,000
shares of common stock with $ 0.01 par value.
Page F-54 of F-86
17. EARNINGS PER SHARE
Basic earnings per common share is computed by dividing net earnings by the weighted average common
shares outstanding for the period. Diluted earnings per share is computed by dividing net income
(loss) by the weighted average common shares outstanding adjusted for the dilutive effect of stock
options, restricted stock awards, stock purchase warrants, and convertible debt, excluding
anti-dilutive shares.
A reconciliation of basic and diluted earnings per common share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(in $000s except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
$
|
125,925
|
|
|
$
|
(12,044
|
)
|
|
$
|
(5,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding
|
|
|
58,810,452
|
|
|
|
58,996,365
|
|
|
|
58,955,664
|
|
Effect of dilutive options and
and common stock purchase warrants
|
|
|
2,407,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
common shares outstanding
|
|
|
61,217,470
|
|
|
|
58,996,365
|
|
|
|
58,955,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
2.14
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
2.06
|
|
|
$
|
(0.20
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
The following stock options and convertible debt were excluded from the computation of diluted net
income (loss) per common share as their effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
(in $000s except per share amounts)
|
|
2007
|
|
2006
|
|
2005
|
Stock options
|
|
|
1,986,978
|
|
|
|
3,601,285
|
|
|
|
1,887,025
|
|
Assumed conversion of 1.25% debentures
|
|
|
|
|
|
|
|
|
|
|
1,691,594
|
|
In November 2004, the EITF reached consensus on Issue 04-8, The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share (EITF 04-08) This Issue requires the inclusion of
convertible shares for contingently convertible instruments in the calculation of diluted EPS
regardless of whether the market price contingency has been met, if the effect is dilutive. The
Issue is effective for periods ending after December 15, 2004 and requires the restatement of
previously reported EPS. The Company followed the guidance in EITF 04-08, however, the 3.5%
Debentures have nonetheless not been included in diluted EPS because the principal amount of the
debentures must be settled in cash, and since the Companys share price is less than the conversion
price for all periods presented, there is no dilutive impact of a conversion premium. The 1.25%
Debentures are included in diluted EPS, because of a share-settlement requirement, for periods in
which their inclusion would be dilutive.
Page F-55 of F-86
18. SEGMENT INFORMATION
The Company has two reportable segments, referred to as the Global Pharmaceuticals Division
(Global Division) and the Impax Pharmaceutical Division (Impax Division). The Company
currently markets and sells product within the continental United States and the Commonwealth of
Puerto Rico
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical products,
through three sales channels, including: the Global sales channel, for sales of generic
prescription (Rx) products, directly to wholesalers, large retail drug chains, and others; the
RX Partner sales channel, for generic prescription (Rx) products sold through unrelated
third-party pharmaceutical entities pursuant to alliance agreements; and, the OTC Partner sales
channel, for over-the-counter (OTC) products sold through unrelated third-party pharmaceutical
entities pursuant to alliance agreements.
The Companys Impax Division is engaged in the development of proprietary brand pharmaceutical
products through improvements to already approved pharmaceutical products to address central
nervous system (CNS) disorders. The IMPAX Division is also engaged in the co-promotion through a
direct sales force focused on marketing to physicians, primarily in the CNS community,
pharmaceutical products developed by other unrelated third-party pharmaceutical entities
The Companys chief operating decision maker evaluates the financial performance of the Companys
segments based upon segment income or (loss) before income taxes. Items below income from
operations are not reported by segment, except litigation settlements, since they are excluded from
the measure of segment profitability reviewed by the Companys chief operating decision maker.
Additionally, general and administrative expenses, certain selling expenses, certain litigation
settlements, and non-operating income and expenses are included in Corporate and Other. The
Company does not report balance sheet information by segment since it is not reviewed by the
Companys chief operating decision maker. Accounting policies for the Companys segments are the
same as those described above in the Summary of Significant Accounting Policies. The Company has
no inter-segment revenue.
The tables below present segment information reconciled to total Company financial results, with
segment operating income or (loss) including gross profit less direct research and development
expenses, and direct selling expenses as well as any litigation settlements, to the extent
specifically identified by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
Global
|
|
Impax
|
|
Corporate
|
|
Total
|
Year Ended December 31, 2007
|
|
Division
|
|
Division
|
|
and Other
|
|
Company
|
Revenues, net
|
|
$
|
260,994
|
|
|
$
|
12,759
|
|
|
$
|
|
|
|
$
|
273,753
|
|
Cost of revenues
|
|
|
96,829
|
|
|
|
10,827
|
|
|
|
|
|
|
|
107,656
|
|
Research and development
|
|
|
31,170
|
|
|
|
8,822
|
|
|
|
|
|
|
|
39,992
|
|
Patent Litigation
|
|
|
10,025
|
|
|
|
|
|
|
|
|
|
|
|
10,025
|
|
Income (loss) before income taxes
|
|
$
|
118,964
|
|
|
$
|
(8,585
|
)
|
|
$
|
(33,271
|
)
|
|
$
|
77,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
Impax
|
|
Corporate
|
|
Total
|
Year Ended December 31, 2006
|
|
Division
|
|
Division
|
|
and Other
|
|
Company
|
Revenues, net
|
|
$
|
128,812
|
|
|
$
|
6,434
|
|
|
$
|
|
|
|
$
|
135,246
|
|
Cost of revenues
|
|
|
66,675
|
|
|
|
5,573
|
|
|
|
|
|
|
|
72,248
|
|
Research and development
|
|
|
24,362
|
|
|
|
5,273
|
|
|
|
|
|
|
|
29,635
|
|
Patent Litigation
|
|
|
9,693
|
|
|
|
|
|
|
|
|
|
|
|
9,693
|
|
Income (loss) before income taxes
|
|
$
|
25,781
|
|
|
$
|
(6,208
|
)
|
|
$
|
(31,477
|
)
|
|
$
|
(11,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
|
|
Impax
|
|
Corporate
|
|
Total
|
Year Ended December 31, 2005
|
|
Division
|
|
Division
|
|
and Other
|
|
Company
|
Revenues, net
|
|
$
|
112,400
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
112,400
|
|
Cost of revenues
|
|
|
58,435
|
|
|
|
|
|
|
|
|
|
|
|
58,435
|
|
Research and development
|
|
|
22,384
|
|
|
|
3,711
|
|
|
|
|
|
|
|
26,095
|
|
Patent Litigation
|
|
|
7,734
|
|
|
|
|
|
|
|
|
|
|
|
7,734
|
|
Income (loss) before income taxes
|
|
$
|
19,992
|
|
|
$
|
(3,711
|
)
|
|
$
|
(21,872
|
)
|
|
$
|
(5,591
|
)
|
Page F-56 of F-86
19. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office, warehouse and laboratory facilities under non-cancelable operating
leases through January 2015. Rent expense for the years ended December 31, 2007, 2006 and 2005 was
$ 1,251,000, $ 970,000 and $ 927,000, respectively. The Company recognizes rent expense on a
straight-line basis over the lease period.
The Company also leases certain equipment under various non-cancelable operating leases with
various expiration dates through 2012. Future minimum lease payments under the non-cancelable
operating leases are as follows:
|
|
|
|
|
|
|
Year Ended
|
|
(in $000s)
|
|
December 31,
|
|
2008
|
|
$
|
1,278
|
|
2009
|
|
|
1,091
|
|
2010
|
|
|
866
|
|
2011
|
|
|
657
|
|
2012
|
|
|
617
|
|
Thereafter
|
|
|
1,478
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
5,987
|
|
|
|
|
|
Purchase Order Commitments
The Company had approximately $ 12,013,000 of open purchase order commitments, primarily for raw
materials, as of December 31, 2007.
Taiwan Facility Construction
The Company currently has under construction a facility in Taiwan, R.O.C., which is intended to be
utilized for manufacturing, research and development, warehouse, and administrative space, and to
be operational in 2010.
In conjunction with the construction of this facility, the Company has entered into several
contracts, amounting to an aggregate of approximately $ 853,000 as of December 31, 2007 and
$ 16,519,000 as of June 30, 2008. As of December 31, 2007 and June 30, 2008, the Company had
remaining commitments under these contracts of approximately $ 422,000 and $ 8,552,000, respectively.
Page F-57 of F-86
20. LEGAL AND REGULATORY MATTERS
Patent Litigation
There is substantial litigation in the pharmaceutical, biological, and biotechnology industries
with respect to the manufacture, use, and sale of new products which are the subject of conflicting
patent and intellectual property rights. One or more patents typically cover most of the
brand-name controlled-release products for which the Company is developing generic versions.
Under federal law, when a drug developer files an ANDA for a generic drug, seeking approval before
expiration of a patent, which has been listed with the FDA as covering the brand-name product, the
developer must certify its product will not infringe the listed patent(s) and /or the listed patent
is invalid or unenforceable (commonly referred to as a Paragraph IV certification). Notices of
such certification must be provided to the patent holder, who may file a suit for patent
infringement within 45 days of the patent holders receipt of such notice. If the patent holder
files suit within the 45 day period, the FDA can review and approve the ANDA, but is prevented from
granting final marketing approval of the product until a final judgment in the action has been
rendered in favor of the generic, or 30 months from the date the notice was received, whichever is
sooner. Lawsuits have been filed against the Company in connection the Companys Paragraph IV
filings.
Should a patent holder commence a lawsuit with respect to an alleged patent infringement by the
Company, the uncertainties inherent in patent litigation make the outcome of such litigation
difficult to predict. The delay in obtaining FDA approval to market the Companys product
candidates as a result of litigation, as well as the expense of such litigation, whether or not the
Company is ultimately successful, could have a material adverse effect on the Companys results of
operations and financial position. In addition, there can be no assurance any patent litigation
will be resolved prior to the end of the 30-month period. As a result, even if FDA were to approve
a product upon expiration of the 30-month period, the Company may elect to not commence marketing
the product if patent litigation is still pending.
Further, under the Teva Agreement, the Company and Teva have agreed to share in fees and costs
related to patent infringement litigation associated with the twelve products covered by the Teva
Agreement, including: (i) for the six products with ANDAs already filed with the FDA at the time
the Teva Agreement was signed, Teva will pay 50% of the fees and costs in excess of $ 7.0 million;
(ii) for three of the products with ANDAs filed since the Teva Agreement was signed, Teva will pay
45% of the fees and costs; and, (iii) for the remaining three products, Teva will pay 50% of the
fees and costs. The Company is responsible for the remaining fees and costs for these twelve
products not otherwise the responsibility of Teva.
The Company is responsible for all of the patent litigation fees and costs associated with current
and future products not otherwise under the Teva Agreement. The Company records as expense the
costs of patent litigation as incurred.
Although the outcome and costs of the asserted and unasserted claims is difficult to predict
because of the uncertainties inherent in patent litigation, the Company does not expect the
ultimate liability, if any, for such matters to have a material adverse effect on its financial
condition, results of operations, or cash flows.
Page F-58 of F-86
AstraZeneca AB et al. v. Impax Laboratories (Omeprazole)
In litigation commenced against the Company in the U.S. District Court for the District of Delaware
in May 2000, AstraZeneca AB alleged the Companys submission of an ANDA seeking FDA permission to
market Omeprazole Delayed Release Capsules, 10mg, 20mg and 40mg, constituted infringement of
AstraZenecas U.S. patents relating to its Prilosec® product and sought an order enjoining the
Company from marketing the Companys product until expiration of its patents. The case, along with
several similar suits against other manufacturers of generic versions of Prilosec®, was
subsequently transferred to the U.S. District Court for the Southern District of New York.
In September 2004, following expiration of the 30-month stay, the FDA approved the Companys ANDA
and the Company commenced commercial sales of the product under the terms and conditions of the
Teva Agreement. In January 2005, AstraZeneca added claims of willful infringement, for damages,
and for enhanced damages on the basis of this commercial launch. Claims for damages were
subsequently dropped from the suit against the Company, but were included in a separate suit filed
against Teva. On May 30, 2007, the court found the Companys product infringed two of
AstraZenecas patents and these patents were not invalid. The court ordered FDA approval of the
Companys ANDA be converted to a tentative approval, with a final approval date not before October
20, 2007, the expiration date of the relevant pediatric exclusivity period. On August 20, 2008,
the U.S. Court of Appeals for the Federal Circuit affirmed the lower court decision of infringement
and validity. The Company has filed a petition for rehearing en banc with the Federal Circuit. If
the Company or Teva are not ultimately successful in establishing invalidity or non-infringement,
either in the present suit or the separate suit against Teva, the court may also award monetary
damages associated with Tevas commercial sale of the Companys omeprazole products. Under the
Teva Agreement, the Company would be responsible for monetary damages awarded against Teva up to a
specified level, beyond which, monetary damages would be Tevas responsibility.
Aventis Pharmaceuticals Inc., et al. v. Impax Laboratories, Inc. (Fexofenadine/Pseudoephedrine)
The Company is a defendant in an action brought in March 2002 by Aventis Pharmaceuticals Inc. and
others in the U.S. District Court for the District of New Jersey (No. 02-CV-1322) alleging the
Companys proposed Fexofenadine and Pseudoephedrine hydrochloride tablets, generic to Allegra-D®,
infringe seven Aventis patents and seeking an injunction preventing the Company from marketing the
products until expiration of the patents. The case has since been consolidated with similar
actions brought by Aventis against five other manufacturers (including generics to both Allegra®
and Allegra-D®). In March 2004, Aventis and AMR Technology, Inc. filed a complaint and first
amended complaint against the Company and one of the other defendants alleging infringement of two
additional patents, owned by AMR and licensed to Aventis, relating to a synthetic process for
making the active pharmaceutical ingredient, Fexofenadine hydrochloride and intermediates in the
synthetic process. The Company asserts defenses to the claims based on non-infringement and
invalidity. In June 2004, the court granted the Company motion for summary judgment of
non-infringement with respect to two of the patents and, in May 2005, granted summary judgment of
invalidity with respect to a third patent. The Company will have the opportunity to file
additional summary judgment motions in the future and to assert both non-infringement and
invalidity of the remaining patents (if necessary) at trial. No trial date has yet been set. In
September 2005, Teva launched its Fexofenadine tablet products (generic to Allegra®), and Aventis
and AMR moved for a preliminary injunction to bar Tevas sales based on four of the patents in
suit, which patents are common to the Allegra® and Allegra-D® litigations. The district court
denied Aventiss motion in January 2006, finding Aventis did not establish a likelihood of success
on the merits, which decision was affirmed on appeal.
Page F-59 of F-86
Impax Laboratories, Inc. v. Aventis Pharmaceuticals, Inc. (Riluzole)
In June 2002, the Company filed a suit against Aventis Pharmaceuticals, Inc. in the U.S. District
Court for the District of Delaware, seeking a declaration the Companys filing of an ANDA for
Riluzole 50mg tablets, generic to Rilutek®, for treatment of patients with amyotrophic lateral
scleroses (ALS) did not infringe claims of Aventiss patent relating to the drug and a declaration
Aventis patent is invalid. Aventis filed counterclaims for infringement, and, in December 2002,
the district court granted Aventis motion for a preliminary injunction enjoining the Company from
marketing any pharmaceutical product or compound containing Riluzole for the treatment of ALS. In
September 2004, the district court found Aventis patent not invalid and infringed by the Companys
proposed product. In November 2006 the Court of Appeals for the Federal Circuit vacated the
district courts finding Aventis patent was not invalid and remanded for further findings on this
issue, and, in June 2007, the district court again found Aventis patent is not invalid. In
October 2008, the Court of Appeals for the Federal Circuit affirmed the district court decision.
The Company is evaluating its options following this appellate decision. There is a substantial
likelihood the court will enter a permanent injunction enjoining the Company from marketing
Riluzole 50mg tablets for the treatment of ALS until the expiration of Aventis patent in June
2013.
Abbott Laboratories v. Impax Laboratories, Inc. (Fenofibrate)
The Company was a defendant in patent-infringement litigation commenced in January 2003 by Abbott
Laboratories (Abbott) and Fournier Industrie et Sante (Fournier) in the U.S. District Court
for the District of Delaware relating to Company ANDAs for Fenofibrate Tablets, 160mg and 54mg,
generic to TriCor®. In March 2005 the Company asserted antitrust counterclaims. By agreement
between the parties, in July 2005 the court entered an order dismissing the patent-infringement
claims, under which Abbott and Fournier agreed to reimburse the Company for legal fee expense, and
leaving the Companys antitrust counterclaim intact.
On July 27, 2005, the court held a status conference with all counsel involved in the antitrust
litigations, and indicated the courts intention to put these matters on a complex litigation
track. On May 26, 2006, the court denied Abbott and Fourniers motion to dismiss the antitrust
counterclaims. On April 3, 2008, the Court issued an order bifurcating and staying damages issues,
and setting a schedule for trial of liability issues. A jury trial is scheduled to begin the week
of November 10, 2008.
Endo Pharm. Inc. and Penwest Pharm. Co. v. Impax Laboratories, Inc. (Oxymorphone)
In November 2007, Endo Pharmaceuticals Inc. and Penwest Pharmaceuticals Co. (collectively, Endo)
filed suit against the Company in the U.S. District Court for the District of Delaware, requesting
a declaration the Companys Paragraph IV Notices with respect to the Companys ANDA for Oxymorphone
HCl Extended Release Tablets, generic to Opana ER®, are null and void and, in the alternative,
alleging patent infringement in connection with the filing of that ANDA. Endo subsequently
dismissed its request for declaratory relief and in December 2007 filed another patent infringement
suit relating to the same ANDA. In July 2008 the plaintiffs asserted additional infringement
claims with respect to the Companys amended ANDA, which added 7.5mg, 15mg and 30mg strengths of
the product. The Company has filed an answer and counterclaims. Discovery is in the early stages,
and no trial date has been set.
Impax Laboratories, Inc. v. Medicis Pharmaceutical Corp. (Minocycline)
In January 2008, the Company filed a complaint against Medicis Pharmaceutical Corp. in the U.S.
District Court for the Northern District of California, seeking a declaratory judgment the
Companys filing of its ANDA relating to minocycline hydrochloride extended release tablets, a
generic version of Medicis Solodyn® product, did not infringe any valid claim of U.S. Patent No.
5,908,838... Medicis filed a motion to dismiss the complaint for lack of subject matter
jurisdiction. On April 16, 2008, the District Court granted Medicis motion to dismiss, and
judgment was entered on April 22, 2008. The Company has filed a notice of appeal to the United
States Court of Appeals for the Federal Circuit. Briefing for the appeal is currently scheduled
for the third and fourth quarter of 2008.
Page F-60 of F-86
Pfizer Inc., et al. v. Impax Laboratories, Inc. (Tolterodine)
In March 2008, Pfizer Inc. Pharmacia & Upjohn Company LLC and Pfizer Health AB (collectively
Pfizer) filed a complaint against the Company in the U.S. District Court for the Southern
District of New York, alleging the Companys filing of an ANDA relating to tolterodine tartrate
extended released capsules, 4 mg, generic to Detrol LA®, infringes three Pfizer patents. The
Company has filed an answer and counterclaims seeking declaratory judgment of non-infringement,
invalidity and/or unenforceability with respect to the patents at suit. In April 2008, the case
was transferred to the U.S. District Court for the District of New Jersey. On September 3, 2008, a
second complaint was filed alleging infringement based on the Companys ANDA amendment adding the
2mg strength. Discovery is in the early stages, and no trial date has been set
Boehringer Ingelheim Pharmaceuticals, et al. v. Impax Laboratories (Tamsulosin)
In July 2008 Boehringer Ingelheim Pharmaceuticals Inc. and Astellas Pharma Inc. filed a complaint
against the Company in the U.S. District Court for the Northern District of California, alleging
the Companys filing of its ANDA relating to tamsulosin hydrochloride capsules, 0.4 mg, generic to
Flomax®, infringes plaintiffs patent. After filing its answer and counterclaim, the Company filed
a summary judgment motion for patent invalidity. The summary judgment hearing is scheduled for
November 2008.
Purdue Pharma Products L.P, et al. v. Impax Laboratories (Tramadol)
In August 2008, Purdue Pharma Products L.P., Napp Pharmaceutical Group LTD., Biovail Laboratories
International, SRL, and Ortho-McNeil-Janssen-Pharmaceuticals, Inc., filed suit against the Company
in the U.S. District Court for the District of Delaware, alleging patent infringement for the
filing of its ANDA relating to tramadol hydrochloride extended-release tablets, 100 mg, generic to
Ultram® ER.
Other Litigation Related to the Companys Business
Axcan Scandipharm Inc. v. Ethex Corp, et al. (Lipram UL)
In May 2007, Axcan Scandipharm Inc., a manufacturer of the Ultrase line of pancreatic enzyme
products, brought suit against the Company in the U.S. District Court for the District of
Minnesota, alleging the Company engaged in false advertising, unfair competition, and unfair trade
practices under federal and Minnesota law in connection with the marketing and sale of the
Companys now-discontinued Lipram-UL products. The suit seeks actual and consequential damages,
including lost profits, treble damages, attorneys fees, injunctive relief, and declaratory
judgments to prohibit the substitution of Lipram-UL for prescriptions of Ultrase. The Court
granted in part and denied in part a Company motion to dismiss the complaint, as well as the
co-defendants Ethex Corp. and KV Pharmaceutical Co., holding any claim of false advertising
pre-dating June 1, 2001, is barred by the statute of limitations. The Company has answered the
complaint, and discovery is proceeding.
Securities Litigation
The Company, four of its Directors, and two former officers, are defendants in several class
actions filed in the United States District Court for the Northern District of California, all of
which have since been consolidated as case No. 04- 4808-JW. These actions, brought on behalf of
all purchasers of shares of Company common stock between May 5 and November 3, 2004, allege the
Company and the individual defendants, in violation of the antifraud provisions of the federal
securities laws, artificially inflated the market price of the stock during this period by filing
false financial statements for the first and second quarters of 2004, based upon the Companys
subsequent restatement of its results for those periods. The court twice granted the Company
motions to dismiss the complaint, both times with leave to amend, but denied the Companys motion
to dismiss a fourth amended complaint as well as two motions for reconsideration. The case is now
in discovery phase. In August 2008, the Company filed a petition for a writ of mandamus asking the
U.S. Court of Appeals for the Ninth Circuit to direct the district court to dismiss the complaint.
Page F-61 of F-86
21. SUBSEQUENT EVENTS
The following events occurred after December 31, 2007:
|
|
In January 2008, the Company announced it received a non-approvable letter from the U.S.
Food and Drug Administration (FDA) concerning its new drug application (NDA) and subsequent
submissions for Vadova(R) (carbidopa /levodopa extended release) tablets. The FDAs action was
primarily based on unresolved issues relating to product nomenclature and its belief of a
likelihood of medication errors resulting from confusion of Vadova with other marketed forms
of carbidopa /levodopa. On April 14, 2008, the Company announced it would cease work on the
current formulation of this product.
|
|
|
|
On May 23, 2008, the Securities and Exchange Commission issued an order to revoke the
registration statement covering the Companys common shares and, accordingly, public trading
in such common shares ceased immediately. It is the Companys intention to effect the
registration of the shares of the Companys common stock by filing this Form 10.
|
|
|
|
During the period January 2008 to their expiration date in May 2008, all remaining
outstanding common stock purchase warrants were exercised in several cashless exercise
transactions, resulting in the issuance of 106,642 shares of the Companys common stock. The
Company has no other common stock purchase warrants outstanding.
|
|
|
|
In July 2008, the Company entered into an employment separation agreement with a former
employee, which provided for the following: the former employee resigned from the Company
effective August 1, 2008; the former employees September 1, 2006 employment agreement between
the Company and the former employee was terminated; and, the former employees rights with
respect to employee stock options to purchase 60,000 shares of Company common stock and the
60,000 restricted shares of Company common stock granted and to be granted under the former
employees employment agreement, as well as the rights under fully vested options to purchase
172,500 shares of the Companys common stock separately held by the former employee, were
terminated. Under the separation agreement, the Company agreed to make separation payments to
the former employee consisting of a single $ 620,000 cash payment and 94,705 shares of the
Companys common stock. The separation agreement also subjects the former employee to
non-disclosure and non-disparagement provisions and prohibits the former employee from
soliciting Company employees to leave the Companys employment. The Company and the former
employee also executed mutual releases of any claim each might have against the other arising
out of the former employees employment.
|
|
|
|
In August and September 2008, the Company repurchased at a discount an aggregate of
$ 62,250,000 face-value principal amount of its 3.5% Convertible Senior Subordinated Debentures
at the request of the holders. The Company paid $ 59,916,000 , plus accrued interest of
$ 433,000 , for the repurchased 3.5% Debentures. Proceeds to fund the repurchase of the
debentures were generated from the liquidation of the Companys short-term investments. The
remaining $ 12,750,000 principal amount of the 3.5% Debentures is subject to repurchase by the
Company at 100% of the principal amount on June 15, 2009, at the option of the debenture
holders.
|
|
|
|
In June 2008, the Company entered into an agreement with Wyeth settling a lawsuit alleging
patent infringement related to a Company ANDA for generic versions of Effexor XR 37.5mg and
75mg and 150mg capsules. Under the terms of the settlement, Wyeth granted to the Company a
license permitting the Company to launch its generic capsule formulation of the Effexor XR
products on or after June 1, 2011, subject to earlier launch in limited circumstances, but in
no event earlier than January 1, 2011. The Company will pay Wyeth a royalty on sales of this
generic product. The parties have also entered into a co-promotion agreement under which the
Company will provide physician detailing services, for a product to be named by Wyeth, in
exchange for a fee for each physician detail service performed.
|
Page F-62 of F-86
22. SUPPLEMENTARY FINANCIAL INFORMATION
(unaudited)
Selected (unaudited) quarterly financial information for the year 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended:
|
|
(in $000s except per share amounts)
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
32,478
|
|
|
$
|
33,880
|
|
|
$
|
42,288
|
|
|
$
|
39,853
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
7,202
|
|
|
|
7,419
|
|
|
|
10,559
|
|
|
|
8,792
|
|
Rebates
|
|
|
3,375
|
|
|
|
3,520
|
|
|
|
4,306
|
|
|
|
4,767
|
|
Returns
|
|
|
968
|
|
|
|
1,291
|
|
|
|
1,639
|
|
|
|
1,565
|
|
Other credits
|
|
|
1,174
|
|
|
|
1,336
|
|
|
|
1,191
|
|
|
|
1,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
19,759
|
|
|
|
20,314
|
|
|
|
24,593
|
|
|
|
23,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RX Partner
|
|
|
8,278
|
|
|
|
33,295
|
|
|
|
81,634
|
|
|
|
37,907
|
|
OTC Partner
|
|
|
2,408
|
|
|
|
2,305
|
|
|
|
4,082
|
|
|
|
3,071
|
|
Promotional Partner
|
|
|
3,201
|
|
|
|
3,279
|
|
|
|
3,105
|
|
|
|
3,174
|
|
Other
|
|
|
17
|
|
|
|
9
|
|
|
|
7
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
33,663
|
|
|
|
59,202
|
|
|
|
113,421
|
|
|
|
67,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,677
|
|
|
|
30,902
|
|
|
|
87,428
|
|
|
|
34,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,770
|
)
|
|
$
|
83,792
|
|
|
$
|
43,402
|
|
|
$
|
6,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
(0.13
|
)
|
|
$
|
1.42
|
|
|
$
|
0.74
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$
|
(0.13
|
)
|
|
$
|
1.37
|
|
|
$
|
0.71
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,794,020
|
|
|
|
58,807,656
|
|
|
|
58,818,971
|
|
|
|
58,821,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,794,020
|
|
|
|
61,193,296
|
|
|
|
61,293,615
|
|
|
|
61,301,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net income (loss) per share amounts are made independently
for each quarterly reporting period, and the sum of the per share amounts for the quarterly
reporting periods may not equal the per share amounts for the full year.
Included in the (unaudited) quarterly financial information shown above are the following
transactions, summarized as follows:
-
|
|
As more fully discussed elsewhere in this registration statement, the
settlement of a patent infringement lawsuit resulted in the Company
being granted a license permitting it to manufacture and sell its
oxycodone product (under the terms of the DAVA Agreement), resulting
in the Companys determination to shorten the revenue recognition
time-period of the DAVA Agreement. The license authorized the Company
to sell a fixed amount of its product (under a sub-license granted to
DAVA) through June 2007. The increased amount of revenue recognized
in the third quarter of 2007, resulted from these product sales over
the resulting revised shorter recognition period.
|
|
-
|
|
As more fully discussed elsewhere in this registration statement, at
June 30, 2007, the Company reversed the valuation allowance on the
deferred tax asset, resulting in a significant tax benefit for the
second quarter of 2007.
|
Page F-63 of F-86
22. SUPPLEMENTARY FINANCIAL INFORMATION (
unaudited
), continued
Selected (unaudited) quarterly financial information for the year 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Quarter Ended:
|
|
(in $000s except per share amounts)
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
25,949
|
|
|
$
|
35,449
|
|
|
$
|
32,308
|
|
|
$
|
34,287
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
3,955
|
|
|
|
7,844
|
|
|
|
6,691
|
|
|
|
8,174
|
|
Rebates
|
|
|
2,806
|
|
|
|
3,834
|
|
|
|
3,494
|
|
|
|
3,722
|
|
Returns
|
|
|
3,115
|
|
|
|
1,436
|
|
|
|
1,613
|
|
|
|
1,056
|
|
Other credits
|
|
|
1,459
|
|
|
|
1,247
|
|
|
|
1,565
|
|
|
|
(2,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
14,614
|
|
|
|
21,088
|
|
|
|
18,945
|
|
|
|
23,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RX Partner
|
|
|
5,059
|
|
|
|
5,631
|
|
|
|
5,990
|
|
|
|
20,129
|
|
OTC Partner
|
|
|
2,632
|
|
|
|
3,025
|
|
|
|
3,389
|
|
|
|
4,736
|
|
Promotional Partner
|
|
|
|
|
|
|
|
|
|
|
3,207
|
|
|
|
3,227
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
15
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
22,305
|
|
|
|
29,744
|
|
|
|
31,546
|
|
|
|
51,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,985
|
|
|
|
10,545
|
|
|
|
14,536
|
|
|
|
31,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(10,468
|
)
|
|
$
|
(9,722
|
)
|
|
$
|
(3,259
|
)
|
|
$
|
11,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$
|
(0.18
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,996,087
|
|
|
|
59,022,528
|
|
|
|
59,024,504
|
|
|
|
58,972,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,996,087
|
|
|
|
59,022,528
|
|
|
|
59,024,504
|
|
|
|
60,369,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly computations of net income (loss) per share amounts are made independently for each
quarterly reporting period, and the sum of the per share amounts for the quarterly reporting
periods may not equal the per share amounts for the full year.
Included in the (unaudited) quarterly financial information shown above is the following
transaction, summarized as follows:
-
|
|
The Company launched its bupropion 300mg extended release product upon
FDA approval of the Companys ANDA in December 2006. The Companys
launch and sales of this product (under the terms of the Teva
Agreement) were made pursuant to an exclusivity transfer and selective
waiver agreement, resulting in the Company being entitled to a six
month period of market exclusivity through June 2008 (see Agreement
with Anchen above).
|
Page F-64 of F-86
This Page Intentionally Left Blank
Page F-65 of F-86
Impax Laboratories, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
49,744
|
|
|
$
|
37,462
|
|
Short-term investments
|
|
|
105,059
|
|
|
|
106,034
|
|
Accounts receivable, net
|
|
|
44,014
|
|
|
|
51,503
|
|
Inventory, net
|
|
|
29,434
|
|
|
|
27,568
|
|
Current portion of deferred product manufacturing costs-alliance agreements
|
|
|
12,140
|
|
|
|
11,923
|
|
Current portion of deferred income taxes
|
|
|
17,681
|
|
|
|
27,376
|
|
Prepaid expenses and other assets
|
|
|
6,540
|
|
|
|
8,592
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
264,612
|
|
|
|
270,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
92,796
|
|
|
|
81,223
|
|
Deferred product manufacturing costs-alliance agreements
|
|
|
89,648
|
|
|
|
82,474
|
|
Deferred income taxes, net
|
|
|
50,264
|
|
|
|
47,937
|
|
Other assets
|
|
|
9,417
|
|
|
|
6,793
|
|
Goodwill
|
|
|
27,574
|
|
|
|
27,574
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
534,311
|
|
|
$
|
516,459
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
63,981
|
|
|
$
|
69,234
|
|
Accounts payable
|
|
|
17,947
|
|
|
|
16,898
|
|
Accrued expenses
|
|
|
32,441
|
|
|
|
35,838
|
|
Current portion of deferred revenue-alliance agreements
|
|
|
23,104
|
|
|
|
26,381
|
|
Current portion of accrued exclusivity period fee payments due
|
|
|
12,000
|
|
|
|
12,000
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
149,473
|
|
|
|
160,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5% Convertible senior subordinated debentures
|
|
|
12,750
|
|
|
|
12,750
|
|
Long-term debt
|
|
|
6,948
|
|
|
|
7,760
|
|
Fair value of common stock purchase warrants
|
|
|
|
|
|
|
2,285
|
|
Deferred revenue-alliance agreements
|
|
|
194,245
|
|
|
|
181,720
|
|
Accrued exclusivity period fee payments due
|
|
|
|
|
|
|
6,000
|
|
Other liabilities
|
|
|
12,465
|
|
|
|
11,426
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
375,881
|
|
|
$
|
382,292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred Stock, $ 0.01 par value, 2,000,000 shares authorized,
none outstanding at June 30, 2008 and December 31, 2007
|
|
$
|
|
|
|
$
|
|
|
Common stock, $ 0.01 par value, 90,000,000 shares authorized,
59,019,742 and 58,822,548 shares issued and outstanding
at March 31, 2008 and December 31, 2007, respectively
|
|
|
593
|
|
|
|
591
|
|
Additional paid-in capital
|
|
|
201,508
|
|
|
|
196,049
|
|
Treasury stock-acquired resulting from achievement of milestone under
the Teva Agreement, 243,729 shares at June 30, 2008
and December 31, 2007
|
|
|
(2,157
|
)
|
|
|
(2,157
|
)
|
Accumulated other comprehensive income /(loss)
|
|
|
220
|
|
|
|
(26
|
)
|
Accumulated deficit
|
|
|
(41,734
|
)
|
|
|
(60,290
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
$
|
158,430
|
|
|
$
|
134,167
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
534,311
|
|
|
$
|
516,459
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-66 of F-86
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
$
|
50,082
|
|
|
$
|
40,073
|
|
Rx Partner
|
|
|
62,675
|
|
|
|
41,573
|
|
OTC Partner
|
|
|
9,341
|
|
|
|
4,713
|
|
Promotional Partner
|
|
|
6,490
|
|
|
|
6,480
|
|
Other
|
|
|
14
|
|
|
|
26
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
128,602
|
|
|
|
92,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
44,082
|
|
|
|
48,286
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
84,520
|
|
|
|
44,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
27,563
|
|
|
|
16,496
|
|
Patent litigation
|
|
|
2,951
|
|
|
|
6,328
|
|
Selling, general and administrative
|
|
|
22,028
|
|
|
|
18,737
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
52,542
|
|
|
|
41,561
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
31,978
|
|
|
|
3,018
|
|
|
|
|
|
|
|
|
Change in fair value of common stock purchase warrants
|
|
|
59
|
|
|
|
(800
|
)
|
Other income (expense), net
|
|
|
40
|
|
|
|
(1,356
|
)
|
Interest income
|
|
|
2,559
|
|
|
|
1,236
|
|
Interest expense
|
|
|
(1,918
|
)
|
|
|
(2,078
|
)
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
32,718
|
|
|
|
20
|
|
Benefit/ (provision) for income taxes
|
|
|
(14,162
|
)
|
|
|
76,002
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,556
|
|
|
$
|
76,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.32
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.30
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,906,341
|
|
|
|
58,800,876
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
60,870,589
|
|
|
|
61,113,634
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-67 of F-86
Impax Laboratories, Inc.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
AND CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE, 2008
(dollars and shares in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Accum-
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Treasury
|
|
|
ulated
|
|
|
Comprehensive
|
|
|
|
|
Stockholders Equity
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Stock
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Total
|
|
Balance at December 31, 2007
|
|
|
58,822
|
|
|
$
|
591
|
|
|
$
|
196,049
|
|
|
$
|
(2,157
|
)
|
|
$
|
(60,290
|
)
|
|
$
|
(26
|
)
|
|
$
|
134,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common stock
purchase warrants, stock options,
and sale of stock under ESPP
|
|
|
198
|
|
|
|
2
|
|
|
|
2,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,381
|
|
Share-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
3,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,080
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
246
|
|
|
|
246
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,556
|
|
|
|
|
|
|
|
18,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2008
|
|
|
59,020
|
|
|
$
|
593
|
|
|
$
|
201,508
|
|
|
$
|
(2,157
|
)
|
|
$
|
(41,734
|
)
|
|
$
|
220
|
|
|
$
|
158,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
Six months ended June 30,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
Net income
|
|
$
|
18,556
|
|
|
$
|
76,022
|
|
Cumulative translation adjustments
|
|
|
246
|
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
18,802
|
|
|
$
|
76,003
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page F-68 of F-86
Impax Laboratories, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,556
|
|
|
$
|
76,022
|
|
Adjustments to reconcile net income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,675
|
|
|
|
3,937
|
|
Tax benefit on reversal of valuation allowance on deferred tax asset
|
|
|
|
|
|
|
(81,485
|
)
|
Deferred income taxes
|
|
|
7,368
|
|
|
|
|
|
Tax benefit related to exercise of employee stock options
|
|
|
|
|
|
|
(10,477
|
)
|
Provision for uncertain tax positions
|
|
|
|
|
|
|
5,808
|
|
Deferred revenue Rx Partners
|
|
|
70,386
|
|
|
|
168,666
|
|
Deferred product manufacturing costs Rx Partners
|
|
|
(17,608
|
)
|
|
|
(35,758
|
)
|
Deferred revenue recognized Rx Partners
|
|
|
(62,675
|
)
|
|
|
(44,574
|
)
|
Amortization deferred product manufacturing costs Rx Partners
|
|
|
12,139
|
|
|
|
20,243
|
|
Deferred revenue OTC Partners
|
|
|
10,878
|
|
|
|
6,510
|
|
Deferred product manufacturing costs OTC Partners
|
|
|
(10,860
|
)
|
|
|
(5,249
|
)
|
Deferred revenue recognized OTC Partners
|
|
|
(9,341
|
)
|
|
|
(4,935
|
)
|
Amortization deferred product manufacturing costs OTC Partners
|
|
|
8,938
|
|
|
|
3,861
|
|
Payments on exclusivity period fee
|
|
|
(6,000
|
)
|
|
|
(13,000
|
)
|
Payments on accrued litigation settlements
|
|
|
(1,098
|
)
|
|
|
(1,474
|
)
|
Share-based compensation expense
|
|
|
3,080
|
|
|
|
226
|
|
Accretion of interest income on short-term investments
|
|
|
(1,749
|
)
|
|
|
(762
|
)
|
Change in fair value of stock purchase warrants
|
|
|
(59
|
)
|
|
|
800
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
7,490
|
|
|
|
(64,273
|
)
|
Inventory
|
|
|
(1,866
|
)
|
|
|
5,330
|
|
Prepaid expenses and other assets
|
|
|
(653
|
)
|
|
|
682
|
|
Accounts payable and accrued expenses
|
|
|
(5,218
|
)
|
|
|
1,134
|
|
Other liabilities
|
|
|
1,039
|
|
|
|
678
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
27,422
|
|
|
$
|
31,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
|
$
|
(162,693
|
)
|
|
$
|
(59,021
|
)
|
Maturities of short-term investments
|
|
|
165,418
|
|
|
|
39,753
|
|
Purchases of property, plant and equipment
|
|
|
(12,776
|
)
|
|
|
(10,346
|
)
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
$
|
(10,051
|
)
|
|
$
|
(29,614
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(5,244
|
)
|
|
|
(120
|
)
|
Tax benefit related to exercise of employee stock options
|
|
|
|
|
|
|
10,477
|
|
Proceeds from exercise of stock options and
purchases under the ESPP
|
|
|
155
|
|
|
|
69
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
$
|
(5,089
|
)
|
|
$
|
10,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
$
|
12,282
|
|
|
$
|
12,722
|
|
Cash and cash equivalents, beginning of period
|
|
$
|
37,462
|
|
|
$
|
6,399
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
49,744
|
|
|
$
|
19,121
|
|
|
|
|
|
|
|
|
Page F-69 of F-86
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
Cash paid for interest
|
|
$
|
1,973
|
|
|
$
|
2,459
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
4,656
|
|
|
$
|
248
|
|
|
|
|
|
|
|
|
In January 2007 and May 2008, the Company issued 9,388 and 106,642, shares of common stock,
respectively, as the result of a cashless exercise of common stock purchase warrants.
Unpaid vendor invoices of approximately $ 5,296,000 and $ 955,000 as of June 30, 2008 and 2007,
respectively, are excluded from the purchase of property, plant, and equipment and the change in
accounts payable and accrued expenses.
The accompanying notes are an integral part of these consolidated financial statements.
Page F-70 of F-86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2008 AND 2007
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnote disclosures required by
accounting principles generally accepted in the United States of America for complete financial
statements. In the opinion of management, the accompanying interim financial statements include all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
of the Companys financial position, results of operations, and cash flows for the periods
presented.
The unaudited interim consolidated financial statements include the accounts of the operating
parent company, Impax Laboratories, Inc., its wholly-owned subsidiary, Impax Laboratories (Taiwan)
Inc., and a 60%-owned equity investment, Prohealth Biotech, Inc. All significant intercompany
accounts and transactions have been eliminated.
These (unaudited) interim consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto included herein, as of December 31,
2007, 2006 and 2005 and for each of the three years ended December 31, 2007, 2006 and 2005. The
results of operations for the six month period ended June 30, 2008 are not necessarily indicative
of the results of the Companys operations for any other interim period or for the entire year
ending December 31, 2008.
Page F-71 of F-86
2. INVESTMENTS
Investments consist of commercial paper, corporate bonds and medium-term notes, government agency
obligations and certificates of deposit. The Companys policy is to invest in only high quality
AAA-rate or investment-grade securities. Investments in debt securities are accounted for as
held-to-maturity and are recorded at amortized cost. The Company has historically held all
investments in debt securities until maturity, and the Company has the ability and intent to
continue to hold all investments in debt securities until maturity. All of the Companys
investments have remaining contractual maturities of less than twelve months and are classified as
short-term. Upon sale the Company uses a specific identification method.
A summary of Short-term investments as of June 30, 2008 and December 31, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
June 30, 2008
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
61,902
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
61,902
|
|
Government agency obligations
|
|
|
29,150
|
|
|
|
10
|
|
|
|
(14
|
)
|
|
|
29,146
|
|
Corporate bonds
|
|
|
12,960
|
|
|
|
8
|
|
|
|
(26
|
)
|
|
|
12,942
|
|
Asset-backed securities
|
|
|
819
|
|
|
|
|
|
|
|
(19
|
)
|
|
|
800
|
|
Certificates of deposit
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
105,059
|
|
|
$
|
18
|
|
|
|
(59
|
)
|
|
$
|
105,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
(in $000s)
|
|
Amortized
|
|
|
Unrecognized
|
|
|
Unrecognized
|
|
|
Fair
|
|
December 31, 2007
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Commercial paper
|
|
$
|
94,107
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
94,107
|
|
Government agency obligations
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Corporate bonds
|
|
|
3,202
|
|
|
|
5
|
|
|
|
(8
|
)
|
|
|
3,199
|
|
Asset-backed securities
|
|
|
1,503
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
1,439
|
|
Certificates of deposit
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
106,034
|
|
|
$
|
5
|
|
|
$
|
(72
|
)
|
|
$
|
105,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page F-72 of F-86
3. ACCOUNTS RECEIVABLE
The details of Accounts receivable, net are set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
Gross accounts receivable
|
|
$
|
53,587
|
|
|
$
|
60,272
|
|
Less: Rebate reserve
|
|
|
(3,929
|
)
|
|
|
(3,603
|
)
|
Less: Chargeback reserve
|
|
|
(3,526
|
)
|
|
|
(2,977
|
)
|
Less: Other deductions
|
|
|
(2,118
|
)
|
|
|
(2,189
|
)
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
44,014
|
|
|
$
|
51,503
|
|
|
|
|
|
|
|
|
Other deductions include allowance for disputed items, doubtful accounts, and cash discounts.
A roll forward of the chargeback and rebate reserve activity for the six months ended June 30, 2008
and the year ended December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
June 30,
|
|
|
December 31
|
|
Chargeback reserve
|
|
2008
|
|
|
2007
|
|
Beginning balance
|
|
$
|
2,977
|
|
|
$
|
4,401
|
|
Provision recorded during the period
|
|
|
20,181
|
|
|
|
33,972
|
|
Credits issued during the period
|
|
|
(19,632
|
)
|
|
|
(35,396
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,526
|
|
|
$
|
2,977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
June 30,
|
|
|
December 31
|
|
Rebate reserve
|
|
2008
|
|
|
2007
|
|
Beginning balance
|
|
$
|
3,603
|
|
|
$
|
3,124
|
|
Provision recorded during the period
|
|
|
9,381
|
|
|
|
15,968
|
|
Credits issued during the period
|
|
|
(9,055
|
)
|
|
|
(15,489
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
3,929
|
|
|
$
|
3,603
|
|
|
|
|
|
|
|
|
Page F-73 of F-86
4. INVENTORY
Inventory, net at June 30, 2008 and December 31, 2007 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
Raw materials
|
|
$
|
14,197
|
|
|
$
|
15,005
|
|
Work in process
|
|
|
1,319
|
|
|
|
1,827
|
|
Finished goods
|
|
|
15,442
|
|
|
|
11,373
|
|
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
30,958
|
|
|
$
|
28,205
|
|
|
|
|
|
|
|
|
|
|
Less: Non-current inventory, net
|
|
|
(1,524
|
)
|
|
|
(637
|
)
|
|
|
|
|
|
|
|
Total inventory-current, net
|
|
$
|
29,434
|
|
|
$
|
27,568
|
|
|
|
|
|
|
|
|
The preceding current inventory amounts are net of inventory reserves of $ 3,051,000 and $ 3,148,000
at June 30, 2008 and December 31, 2007, respectively.
Page F-74 of F-86
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
Land
|
|
$
|
2,270
|
|
|
$
|
2,270
|
|
Buildings and improvements
|
|
|
52,853
|
|
|
|
51,287
|
|
Equipment
|
|
|
46,048
|
|
|
|
44,001
|
|
Office furniture and equipment
|
|
|
6,492
|
|
|
|
5,332
|
|
Construction-in-progress
|
|
|
20,972
|
|
|
|
10,323
|
|
|
|
|
|
|
|
|
Property, plant and equipment, gross
|
|
$
|
128,635
|
|
|
$
|
113,213
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(35,839
|
)
|
|
|
(31,990
|
)
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
92,796
|
|
|
$
|
81,223
|
|
|
|
|
|
|
|
|
Depreciation expense was $ 4,441,000 and $ 3,703,000 for the six months ended June 30, 2008 and 2007,
respectively.
Page F-75 of F-86
6. ACCRUED EXPENSES
The following table sets forth the Companys accrued expenses:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
Accrued payroll-related expenses
|
|
$
|
10,332
|
|
|
$
|
9,983
|
|
Accrued product returns
|
|
|
12,911
|
|
|
|
14,261
|
|
Legal and professional fees
|
|
|
2,990
|
|
|
|
3,382
|
|
Accrued shelf stock price protection
|
|
|
360
|
|
|
|
384
|
|
Other accruals
|
|
|
3,677
|
|
|
|
5,156
|
|
Accrued litigation settlements
|
|
|
1,278
|
|
|
|
1,555
|
|
Accrued Medicaid rebates
|
|
|
769
|
|
|
|
566
|
|
Accrued royalty expense
|
|
|
124
|
|
|
|
551
|
|
|
|
|
|
|
|
|
Total accrued expenses
|
|
$
|
32,441
|
|
|
$
|
35,838
|
|
|
|
|
|
|
|
|
Included in accrued payroll-related expenses is $ 19,000 and $ 26,000 June 30, 2008 and December 31,
2007, respectively, related to post-employment severance-related charges. Included in other
accruals at June 30, 2008 and December 31, 2007 are state income taxes payable amounting to
$ 1,575,000 and $ 1,638,000, respectively.
A roll forward of the return reserve activity for the six months ended June 30, 2008 and the year
ended December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
Beginning balance
|
|
$
|
14,261
|
|
|
$
|
12,903
|
|
Provision related to
sales recorded in the period
|
|
|
2,327
|
|
|
|
5,459
|
|
Credits issued during the period
|
|
|
(3,677
|
)
|
|
|
(4,101
|
)
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
12,911
|
|
|
$
|
14,261
|
|
|
|
|
|
|
|
|
Page F-76 of F-86
7. INCOME TAXES
The Company calculates its interim income tax provision in accordance with Accounting Principles
Board Opinion No. 28 and FASB Interpretation No. 18. At the end of each interim period, the
Company makes an estimate of the annual expected effective tax rate and applies that rate to its
ordinary year-to-date earnings or loss. In addition, the effect of changes in enacted tax laws,
rates or tax status is recognized in the interim period in which the change occurs.
The computation of the annual expected effective tax rate at each interim period requires certain
estimates and assumptions including, but not limited to, the expected operating income for the
year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions,
permanent and temporary differences, and the likelihood of recovering deferred tax assets generated
in the current year. The accounting estimates used to compute the provision for income taxes may
change as new events occur, more experience is acquired or additional information is obtained. The
computation of the annual effective tax rate includes modifications, which were projected for the
year, for share based compensation, the domestic manufacturing deduction and state research and
development credits among others. The effective tax rate used by the Company does not include a
benefit related to the federal research and development credit as the law related to this credit
expired on December 31, 2007.
For the six months ended June 30, 2008, the Company recorded a tax provision of $ 14,162,000, for
federal and state income taxes. For the six months ended June 30, 2007, the Company recorded a
benefit of $ 76,002,000 which includes the reversal of the deferred tax asset valuation allowance of
$ 81,485,000 offset by an accrual for uncertain tax positions of $ 5,808,000. The total amount of
unrecognized tax benefits was $ 6,118,000 as of June 30, 2008 and December 31, 2007.
Page F-77 of F-86
8. LONG-TERM DEBT
The following table summarizes the Companys long-term debt:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
(in $000s)
|
|
2008
|
|
|
2007
|
|
3.5% Convertible senior subordinated
debentures due on June 15, 2012
|
|
$
|
75,000
|
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
8.17% Term loan Cathay Bank (1)
|
|
|
|
|
|
|
2,215
|
|
7.50% Term loan Cathay Bank (2)
|
|
|
|
|
|
|
2,957
|
|
|
|
|
|
|
|
|
|
|
Subordinated promissory note (3)
|
|
|
8,607
|
|
|
|
9,428
|
|
Software license financing (4)
|
|
|
72
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
|
83,679
|
|
|
|
89,744
|
|
Less: Current portion
|
|
|
(63,981
|
)
|
|
|
(69,234
|
)
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
19,698
|
|
|
$
|
20,510
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Term loan payable at 8.17% to Cathay Bank in 83 monthly installments of $ 19,540
commencing June 28, 2001 through May 27, 2008 with a balance due on June 28, 2008. The 8.17%
Cathay Bank loan was collateralized by land, building and building improvements in the
Companys 35,000 square foot headquarters and research facility in Hayward, California. This
loan was paid in full without penalty in May 2008.
|
|
(2)
|
|
Term loan payable at 7.50% to Cathay Bank in 83 monthly installments of $ 24,629
commencing November 14, 2001 through October 13, 2008 with a balance of $ 2,917,598 due on
November 14, 2008. The 7.50% Cathay Bank loan was collateralized by land, building and
building improvements in the Companys 50,000 square foot manufacturing facility in Hayward,
California. This loan was paid in full without penalty in May 2008.
|
|
(3)
|
|
Subordinated promissory note in the amount of $ 11.0 million related to the June
2006 settlement of litigation brought by Solvay Pharmaceuticals, Inc.(Solvay), manufacturer
of the Creon line pancreatic enzyme products. In its lawsuit, Solvay claimed the Company
engaged in false advertising, unfair competition, and unfair trade practices in connection
with the Companys marketing and sale of its now discontinued line of Lipram-CR products.
With respect to the settlement of the Solvay litigation, the Company agreed to pay $ 23
million to Solvay, with such amount recorded as litigation settlement expense in the
Companys 2004 financial statements. The settlement with Solvay included a $ 12 million
payment upon signing of the settlement agreement with the remaining $ 11 million to be paid
under the terms of the subordinated promissory note between the Company and Solvay. The
subordinated promissory note interest rate is 6.0% per annum, and requires the Company to pay
24 quarterly installments of $ 549,165, commencing in March 2007 through December 2012.
Additionally, the subordinated promissory note becomes immediately due and payable upon the
occurrence of a default in any payment due, a change in control of the Company, voluntary or
involuntary bankruptcy proceeding by or against the Company, and working capital less than
150% of the remaining unpaid balance of the subordinated promissory note. At June 30, 2008,
none of these events has occurred to-date.
|
|
(4)
|
|
Vendor financing agreement at 3.10% in 2 monthly installments of $ 0 and 34 monthly
installments of $ 12,871 commencing December 2006 through November 2009.
|
Page F-78 of F-86
9. ALLIANCE AGREEMENTS
The following tables show the additions to and deductions from the deferred revenue and deferred
product manufacturing costs under the Teva Agreement:
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
Inception
|
|
(in $ 000s)
|
|
June 30,
|
|
|
Through
|
|
Deferred revenue
|
|
2008
|
|
|
Dec 31, 2007
|
|
Beginning balance
|
|
$
|
181,149
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Cost-sharing
|
|
|
350
|
|
|
|
5,253
|
|
Product-related deferrals
|
|
|
35,566
|
|
|
|
316,365
|
|
|
|
|
|
|
|
|
Sub-total
|
|
|
35,916
|
|
|
|
321,618
|
|
Exclusivity charges
|
|
|
|
|
|
|
(50,600
|
)
|
Forgiveness of advance deposit
|
|
|
|
|
|
|
6,000
|
|
Forgiveness of interest
|
|
|
|
|
|
|
4,370
|
|
Stock repurchase
|
|
|
|
|
|
|
2,157
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
35,916
|
|
|
$
|
283,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
Forgiveness of advance deposit
|
|
$
|
(166
|
)
|
|
$
|
(2,166
|
)
|
Forgiveness of interest
|
|
|
(122
|
)
|
|
|
(1,580
|
)
|
Stock repurchase
|
|
|
(60
|
)
|
|
|
(779
|
)
|
Cost-sharing
|
|
|
(282
|
)
|
|
|
(1,898
|
)
|
Product-related revenue
|
|
|
(21,214
|
)
|
|
|
(95,973
|
)
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(21,844
|
)
|
|
|
(102,396
|
)
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
195,221
|
|
|
$
|
181,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
(in $000s)
|
|
Ended
|
|
|
Inception
|
|
Deferred product
|
|
June 30
|
|
|
Through
|
|
manufacturing costs
|
|
2008
|
|
|
Dec 31, 2007
|
|
Beginning balance
|
|
$
|
75,296
|
|
|
$
|
|
|
Additions
|
|
|
17,301
|
|
|
|
117,855
|
|
Less amounts amortized
|
|
|
(9,982
|
)
|
|
|
(42,559
|
)
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
82,615
|
|
|
$
|
75,296
|
|
|
|
|
|
|
|
|
Page F-79 of F-86
9. ALLIANCE AGREEMENTS (continued)
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the OTC Agreements:
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
Inception
|
|
(in $000s)
|
|
June 30
|
|
|
Through
|
|
Deferred revenue
|
|
2008
|
|
|
Dec 31, 2007
|
|
Beginning balance
|
|
$
|
20,591
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
|
|
|
|
8,436
|
|
Cost-sharing and other
|
|
|
|
|
|
|
1,642
|
|
Product-related deferrals
|
|
|
10,878
|
|
|
|
65,467
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
10,878
|
|
|
$
|
75,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount recognized:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(152
|
)
|
|
|
(7,172
|
)
|
Cost-sharing and other
|
|
|
(56
|
)
|
|
|
(1,326
|
)
|
Product-related revenue
|
|
|
(9,133
|
)
|
|
|
(46,456
|
)
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(9,341
|
)
|
|
|
(54,954
|
)
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
22,128
|
|
|
$
|
20,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
(in $000s)
|
|
Ended
|
|
|
Inception
|
|
Deferred product
|
|
June 30,
|
|
|
Through
|
|
manufacturing costs
|
|
2008
|
|
|
Dec 31, 2007
|
|
Beginning balance
|
|
$
|
17,251
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Product-related deferrals
|
|
|
10,883
|
|
|
|
53,880
|
|
Cost-sharing and other
|
|
|
(23
|
)
|
|
|
5,974
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
10,860
|
|
|
$
|
59,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: amount amortized:
|
|
|
|
|
|
|
|
|
Product-related cost
|
|
|
(8,796
|
)
|
|
|
(38,484
|
)
|
Cost-sharing and other
|
|
|
(142
|
)
|
|
|
(4,119
|
)
|
|
|
|
|
|
|
|
Total amount amortized
|
|
|
(8,938
|
)
|
|
|
(42,603
|
)
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
19,173
|
|
|
$
|
17,251
|
|
|
|
|
|
|
|
|
Page F-80 of F-86
9. ALLIANCE AGREEMENTS (continued)
The following table shows the additions to and deductions from deferred revenue and deferred
product manufacturing costs under the DAVA Supply and Distribution Agreement:
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
Months
|
|
|
Inception
|
|
(in $000s)
|
|
June 30,
|
|
|
Through
|
|
Deferred revenue
|
|
2008
|
|
|
Dec 31, 2007
|
|
Beginning balance
|
|
$
|
6,361
|
|
|
$
|
|
|
Additions:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
|
|
|
|
10,000
|
|
Product-related deferrals
|
|
|
34,470
|
|
|
|
117,977
|
|
|
|
|
|
|
|
|
Total additions
|
|
$
|
34,470
|
|
|
$
|
127,977
|
|
|
|
|
|
|
|
|
|
Less: amounts recognized:
|
|
|
|
|
|
|
|
|
Upfront fees and milestone payments
|
|
|
(858
|
)
|
|
|
(9,142
|
)
|
Product-related revenue
|
|
|
(39,973
|
)
|
|
|
(112,474
|
)
|
|
|
|
|
|
|
|
Total amount recognized
|
|
|
(40,831
|
)
|
|
|
(121,616
|
)
|
|
|
|
|
|
|
|
Total deferred revenue
|
|
$
|
|
|
|
$
|
6,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
(in $000s)
|
|
Ended
|
|
|
Inception
|
|
Deferred product
|
|
June 30,
|
|
|
Through
|
|
manufacturing costs
|
|
2008
|
|
|
Dec 31, 2007
|
|
Beginning balance
|
|
$
|
1,850
|
|
|
$
|
|
|
Additions:
|
|
$
|
307
|
|
|
$
|
28,737
|
|
Less: amount amortized:
|
|
|
(2,157
|
)
|
|
|
(26,887
|
)
|
|
|
|
|
|
|
|
Total deferred product
manufacturing costs
|
|
$
|
|
|
|
$
|
1,850
|
|
|
|
|
|
|
|
|
For the six-month period ended June 30, 2008, the increased volume of sales during January 2008,
which were otherwise recognizable under the performance conditions of the Companys revenue
recognition policy, would have resulted in an excess of revenues over the amount of cash collected
through the date thereof, therefore the Company further deferred the recognition of those revenues
until the cash was collected from DAVA in the second quarter of 2008.
During the six months ended June 30, 2008, the Company recognized revenue of $ 40,831,000 and
amortized $ 2,157,000 of manufacturing costs. The revenue recognized by the Company during the six
months ended June 30, 2008 was composed primarily of profit share earned under the agreement with
DAVA.
Page F-81 of F-86
10. EARNINGS PER SHARE
Basic net income per share is computed by dividing net income by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share is computed by dividing net
income by the weighted-average number of common shares adjusted for the dilutive effect of common
stock equivalents outstanding during the period.
A reconciliation of basic and diluted earnings per common share for the six months ended June 30,
2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
Six months ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
(in $ 000s except per share amounts)
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,556
|
|
|
$
|
76,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding
|
|
|
58,906,341
|
|
|
|
58,800,876
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive options and
common stock purchase warrants
|
|
|
1,964,248
|
|
|
|
2,312,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average
common shares outstanding
|
|
|
60,870,589
|
|
|
|
61,113,634
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.32
|
|
|
$
|
1.29
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.30
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
At June 30, 2008 and June 30, 2007, there were 5,518,101 and 2,368,803 stock options, respectively,
excluded from the computation of diluted weighted average common shares outstanding, as their
inclusion would have been anti-dilutive.
Page F-82 of F-86
11. SHARE-BASED COMPENSATION
Total share-based compensation expense recognized in the consolidated statement of operations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
(in $ 000s)
|
|
June 30, 2008
|
|
|
June 30, 2007
|
|
Manufacturing expenses
|
|
$
|
844
|
|
|
$
|
41
|
|
Research and development
|
|
|
1,166
|
|
|
|
92
|
|
Selling, general & administrative
|
|
|
1,070
|
|
|
|
93
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,080
|
|
|
$
|
226
|
|
|
|
|
|
|
|
|
The following table summarizes stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
|
|
Under Option
|
|
|
per Share
|
|
Outstanding at December 31, 2007
|
|
|
9,047,761
|
|
|
$
|
9.90
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
321,650
|
|
|
$
|
9.33
|
|
Options exercised
|
|
|
(106,152
|
)
|
|
$
|
2.79
|
|
Options forfeited
|
|
|
(129,974
|
)
|
|
$
|
10.94
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2008
|
|
|
9,133,285
|
|
|
$
|
9.95
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at June 30, 2008
|
|
|
8,994,089
|
|
|
$
|
9.98
|
|
|
|
|
|
|
|
|
|
Options exercisable at June 30, 2008
|
|
|
6,910,118
|
|
|
$
|
9.71
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of each stock option award on the grant date using the
Black-Scholes Merton option-pricing model, wherein: expected volatility is based solely on
historical volatility of the Companys common stock over the period commensurate with the expected
term of the stock options. The expected term calculation is based on the simplified method
described in SAB No. 107, Share-Based Payment and SAB No. 110, Share-Based Payment. The risk-free
interest rate is based on the U.S. Treasury yield in effect at the time of grant for an instrument
with a maturity that is commensurate with the expected term of the stock options. The dividend
yield of zero is based on the fact that we have never paid cash dividends on our common stock, and
we have no present intention to pay cash dividends. Options granted under each of the above plans
vest from three to five years and have a term of ten years. The Companys shares of common stock
traded on the Pink Sheets beginning in August 2005 through May 2008. The Companys assessment is
there was sufficient trading volume and liquidity in the Companys shares to support the
calculation of a reasonable estimate of the fair value of employee stock options granted during
this period.
A summary of the Companys non-vested restricted stock awards is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
Restricted
|
|
Number of Restricted
|
|
Grant-Date
|
Stock Awards
|
|
Stock Awards
|
|
Fair Value
|
Non-vested at December 31, 2007
|
|
|
270,341
|
|
$
|
11.45
|
Granted
|
|
|
125,700
|
|
$
|
9.33
|
Vested
|
|
|
|
|
$
|
|
Forfeited
|
|
|
(11,198
|
)
|
$
|
11.44
|
|
|
|
|
|
|
|
|
|
Non-vested at June 30, 2008
|
|
|
384,843
|
|
$
|
10.78
|
|
|
|
|
|
|
|
|
|
The Company grants restricted stock to certain eligible employees as a component of its long-term
incentive compensation program. The restricted stock award grants are made in accordance with the
Companys 2002 Equity Incentive Plan, as amended and restated, and typically specify, shares of
restricted stock are not issued until they vest. The restricted stock awards vest ratably over a
four year period from the date of grant. As of June 30, 2008, the Company had 135,896 shares
available for issuance of stock options and restricted stock awards.
As of June 30, 2008, the Company had total unrecognized share-based compensation expense, net of
estimated forfeitures, of $ 15,220,000 related to all of its share-based awards, which will be
recognized over a weighted average period of 3.07 years. The intrinsic value of options exercised
during the six months ended June 30, 2008 and 2007 was $ 687,000 and $ 178,000, respectively. The
total fair value of restricted shares which vested during the six months ended June 30, 2008 and
2007 was $ 0.
Page F-83 of F-86
12. SEGMENT INFORMATION
The Company has two reportable segments, referred to as the Global Pharmaceuticals Division
(Global Division) and the Impax Pharmaceutical Division (Impax Division). The Company
currently markets and sells product within the continental United States and the Commonwealth of
Puerto Rico
The Global Division develops, manufactures, sells, and distributes generic pharmaceutical products,
through three sales channels, including: the Global sales channel, for sales of generic
prescription (Rx) products, directly to wholesalers, large retail drug chains, and others; the
RX Partner sales channel, for generic prescription (Rx) products sold through unrelated
third-party pharmaceutical entities pursuant to alliance agreements; and, the OTC Partner sales
channel, for over-the-counter (OTC) products sold through unrelated third-party pharmaceutical
entities pursuant to alliance agreements.
The Impax Division is engaged in the process of developing branded pharmaceutical products.
The Companys chief operating decision maker evaluates the financial performance of the Companys
segments based upon segment income or (loss) before the provision for income taxes. Items below
income from operations are not reported by segment, except litigation settlements, since they are
excluded from the measure of segment profitability reviewed by the Companys chief operating
decision maker. Additionally, general and administrative expenses, certain selling expenses,
certain litigation settlements, and non-operating income and expenses are included in Corporate
and Other. The Company does not report balance sheet information by segment since it is not
reviewed by the Companys chief operating decision maker. Accounting policies for the Companys
segments are the same as those described above in the Summary of Significant Accounting Policies.
The Company has no inter-segment revenue.
The tables below present segment information reconciled to total Company financial results, with
segment operating income or (loss) including gross profit less direct research and development
expenses, and direct selling expenses as well as any litigation settlements, to the extent
specifically identified by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
Global
|
|
|
Impax
|
|
|
Corporate
|
|
|
Total
|
|
Six Months Ended June 30, 2008
|
|
Division
|
|
|
Division
|
|
|
and Other
|
|
|
Company
|
|
Revenue, net
|
|
$
|
122,112
|
|
|
$
|
6,490
|
|
|
$
|
|
|
|
$
|
128,602
|
|
Cost of revenue
|
|
|
38,750
|
|
|
|
5,332
|
|
|
|
|
|
|
|
44,082
|
|
Research and development
|
|
|
19,968
|
|
|
|
7,595
|
|
|
|
|
|
|
|
27,563
|
|
Patent Litigation
|
|
|
2,951
|
|
|
|
|
|
|
|
|
|
|
|
2,951
|
|
Income (loss) before provision for income taxes
|
|
$
|
57,720
|
|
|
$
|
(7,778
|
)
|
|
$
|
(17,224
|
)
|
|
$
|
32,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in $000s)
|
|
Global
|
|
|
Impax
|
|
|
Corporate
|
|
|
Total
|
|
Six Months Ended June 30, 2007
|
|
Division
|
|
|
Division
|
|
|
and Other
|
|
|
Company
|
|
Revenue, net
|
|
$
|
86,385
|
|
|
$
|
6,480
|
|
|
$
|
|
|
|
$
|
92,865
|
|
Cost of revenue
|
|
|
43,148
|
|
|
|
5,138
|
|
|
|
|
|
|
|
48,286
|
|
Research and development
|
|
|
12,862
|
|
|
|
3,634
|
|
|
|
|
|
|
|
16,496
|
|
Patent Litigation
|
|
|
6,328
|
|
|
|
|
|
|
|
|
|
|
|
6,328
|
|
Income (loss) before provision for income taxes
|
|
$
|
22,730
|
|
|
$
|
(3,076
|
)
|
|
$
|
(19,634
|
)
|
|
$
|
20
|
|
Page F-84 of F-86
13. SUPPLEMENTARY FINANCIAL INFORMATION
(unaudited)
Selected (unaudited) quarterly financial information for the three months ended March 31, 2008 and
June 30, 2008 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2008 Quarter Ended:
|
|
(in $000s except per share amounts)
|
|
March 31
|
|
|
June 30
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
38,990
|
|
|
$
|
45,703
|
|
Less:
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
9,233
|
|
|
|
11,033
|
|
Rebates
|
|
|
4,191
|
|
|
|
5,190
|
|
Returns
|
|
|
946
|
|
|
|
1,381
|
|
Other credits
|
|
|
1,163
|
|
|
|
1,474
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
23,457
|
|
|
|
26,625
|
|
|
|
|
|
|
|
|
RX Partner
|
|
|
18,805
|
|
|
|
43,870
|
|
OTC Partner
|
|
|
4,409
|
|
|
|
4,932
|
|
Promotional Partner
|
|
|
3,252
|
|
|
|
3,238
|
|
Other
|
|
|
7
|
|
|
|
7
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
49,930
|
|
|
|
78,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
26,551
|
|
|
|
57,969
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
959
|
|
|
$
|
17,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share (basic)
|
|
$
|
0.02
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
Net income per share (diluted)
|
|
$
|
0.02
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
Weighted Average:
|
|
|
|
|
|
|
|
|
common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,833,979
|
|
|
|
58,978,703
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
61,126,768
|
|
|
|
60,584,709
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net income per share amounts are made independently for each
quarterly reporting period, and the sum of the per share amounts for the quarterly reporting
periods may not equal the per share amounts for the year-to-date reporting period.
Page F-85 of F-86
13. SUPPLEMENTARY FINANCIAL INFORMATION
(unaudited) (continued)
Selected (unaudited) quarterly financial information for the three months ended March 31, 2007 and
June 30, 2007 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended:
|
|
(in $000s except per share amounts)
|
|
March 31
|
|
|
June 30
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Global product sales, gross
|
|
$
|
32,478
|
|
|
$
|
33,880
|
|
Less:
|
|
|
|
|
|
|
|
|
Chargebacks
|
|
|
7,202
|
|
|
|
7,419
|
|
Rebates
|
|
|
3,375
|
|
|
|
3,520
|
|
Returns
|
|
|
968
|
|
|
|
1,291
|
|
Other credits
|
|
|
1,174
|
|
|
|
1,336
|
|
|
|
|
|
|
|
|
Global product sales, net
|
|
|
19,759
|
|
|
|
20,314
|
|
|
|
|
|
|
|
|
RX Partner
|
|
|
8,278
|
|
|
|
33,295
|
|
OTC Partner
|
|
|
2,408
|
|
|
|
2,305
|
|
Promotional Partner
|
|
|
3,201
|
|
|
|
3,279
|
|
Other
|
|
|
17
|
|
|
|
9
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
33,663
|
|
|
|
59,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
13,677
|
|
|
|
30,902
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(7,770
|
)
|
|
$
|
83,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share (basic)
|
|
$
|
(0.13
|
)
|
|
$
|
1.42
|
|
|
|
|
|
|
|
|
Net income (loss) per share (diluted)
|
|
$
|
(0.13
|
)
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
58,794,020
|
|
|
|
58,807,656
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
58,794,020
|
|
|
|
61,193,296
|
|
|
|
|
|
|
|
|
Quarterly computations of (unaudited) net income (loss) per share amounts are made independently
for each quarterly reporting period, and the sum of the per share amounts for the quarterly
reporting periods may not equal the per share amounts for the year-to-date reporting period.
Page F-86 of F-86
Impax Laboratories, Inc.
Schedule II, Valuation and Qualifying Accounts
For the Year Ended December 31, 2005
(in $ 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Balance at
|
|
Charge to
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Other
|
|
|
|
|
|
End of
|
Description
|
|
Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
Period
|
Deferred tax asset valuation allowance
|
|
$
|
80,605
|
|
|
$
|
4,365
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
84,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
|
5,260
|
|
|
|
516
|
|
|
|
|
|
|
|
|
|
|
|
5,776
|
|
For the Year Ended December 31, 2006
(in $ 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Balance at
|
|
Charge to
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Other
|
|
|
|
|
|
End of
|
Description
|
|
Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
Period
|
Deferred tax asset valuation allowance
|
|
$
|
84,970
|
|
|
$
|
6,992
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
91,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
|
5,776
|
|
|
|
(2,857
|
)
|
|
|
|
|
|
|
|
|
|
|
2,919
|
|
For the Year Ended December 31, 2007
(in $ 000s)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A
|
|
Column B
|
|
Column C
|
|
Column D
|
|
Column E
|
|
|
Balance at
|
|
Charge to
|
|
Charge to
|
|
|
|
|
|
Balance at
|
|
|
Beginning of
|
|
Costs and
|
|
Other
|
|
|
|
|
|
End of
|
Description
|
|
Period
|
|
Expenses
|
|
Accounts
|
|
Deductions
|
|
Period
|
Deferred tax asset valuation allowance
|
|
$
|
91,962
|
|
|
$
|
(81,485
|
)
|
|
$
|
(10,477
|
)
|
|
$
|
|
|
|
$
|
|
|
Inventory reserve
|
|
|
2,919
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
3,148
|
|
Reserve for bad debts
|
|
|
|
|
|
|
550
|
|
|
|
|
|
|
|
|
|
|
|
550
|
|
At June 30, 2007, the Company reversed the deferred tax asset valuation allowance in the amount of
$ 91,962, of which $ 10,477 was credited to additional-paid-in-capital as the tax benefit related to
employee stock options exercised prior to January 01, 2006.
S-1
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the
registrant has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
|
|
Date: October 10, 2008
|
Impax Laboratories, Inc.
|
|
|
By:
|
/s/ Larry Hsu, Ph.D.
|
|
|
|
|
|
|
|
|
Name:
|
Larry Hsu, Ph.D.
|
|
|
|
|
|
|
|
|
Title:
|
President and Chief Executive Officer
|
|
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
3.1
|
|
|
Restated Certificate of Incorporation, dated August 30, 2004.
|
|
|
|
|
|
|
3.2
|
|
|
By-Laws.
|
|
|
|
|
|
|
4.1
|
|
|
Specimen of Common Stock Certificate.
|
|
|
|
|
|
|
4.2
|
|
|
Form of Debenture ( incorporated by reference to Exhibit A to the
Indenture, dated as of June 27, 2005, between the Company and HSBC Bank
USA, National Association, as Trustee, listed on Exhibit 4.3).
|
|
|
|
|
|
|
4.3
|
|
|
Indenture, dated as of June 27, 2005, between the Company and HSBC Bank
USA, National Association, as Trustee.
|
|
|
|
|
|
|
4.4
|
|
|
Supplemental Indenture, dated as of July 6, 2005, between the Company
and HSBC Bank USA, National Association, as Trustee.
|
|
|
|
|
|
|
4.5
|
|
|
Registration Rights Agreement, dated as of June 27, 2005, between the
Company and the Initial Purchasers named therein.
|
|
|
|
|
|
|
4.6
|
|
|
Promissory Note dated June 7, 2006, issued by the Company to Solvay
Pharmaceuticals, Inc.
|
|
|
|
|
|
|
10.1
|
|
|
Amended and Restated Loan and Security Agreement, dated as of December
15, 2005, between the Company and Wachovia Bank, National Association.
|
|
|
|
|
|
|
10.2
|
|
|
Purchase Agreement, dated June 26, 2005, between the Company and the
Purchasers named therein.
|
|
|
|
|
|
|
10.3
|
|
|
1995 Stock Incentive Plan.*
|
|
|
|
|
|
|
10.4
|
|
|
1999 Equity Incentive Plan.*
|
|
|
|
|
|
|
10.5
|
|
|
2001 Non-Qualified Employee Stock Purchase Plan.*
|
|
|
|
|
|
|
10.6
|
|
|
Amended and Restated 2002 Equity Incentive Plan(Corrected).*
|
|
|
|
|
|
|
10.7
|
|
|
Executive Non-Qualified Deferred Compensation Plan, restated effective
January 1, 2005.*
|
|
|
|
|
|
|
10.8
|
|
|
Employment Agreement, dated as of December 14, 1999, between the Company
and Charles Hsiao, Ph.D.*
|
|
|
|
|
|
|
10.9
|
|
|
Employment Agreement, dated as of December 14, 1999, between the Company
and Larry Hsu, Ph.D.*
|
|
|
|
|
|
|
10.10
|
|
|
Employment Agreement, dated as of September 1, 2006, between the Company
and David S. Doll.*
|
|
|
|
|
|
|
10.11
|
|
|
Separation Agreement and General Release, dated July 30, 2008, between
the Company and David S. Doll.*
|
|
|
|
|
|
|
10.12
|
|
|
Consulting Agreement, effective as of September 4, 2008, between the
Company and David S. Doll.*
|
|
|
|
|
|
|
10.13
|
|
|
Strategic Alliance Agreement, dated June 27, 2001, between the Company
and Teva Pharmaceuticals Curacao N.V.**
|
|
|
|
|
|
|
10.13.1
|
|
|
Letter Amendment, dated October 8, 2003, to Strategic Alliance
Agreement, dated June 27, 2001, between the Company and Teva
Pharmaceuticals Curacao N.V.**
|
|
|
|
|
|
|
10.13.2
|
|
|
Letter Agreement, dated March 24, 2005, between the Company and Teva
Pharmaceuticals Curacao N.V.**
|
|
|
|
|
|
|
10.13.3
|
|
|
Letter Amendment, dated March 24, 2005 and effective January 1, 2005, to
Strategic Alliance Agreement, dated June 27, 2001, between the Company
and Teva Pharmaceuticals Curacao N.V.**
|
|
|
|
|
|
|
10.13.4
|
|
|
Amendment, dated January 24, 2006, to Strategic Alliance Agreement,
dated June 27, 2001, between the Company and Teva Pharmaceuticals
Curacao N.V.**
|
|
|
|
|
|
|
10.14
|
|
|
Master 300mg Agreement, dated as of January 24, 2006, among the Company,
Teva Pharmaceuticals Curacao N.V., and Anchen Pharmaceuticals, Inc.**
|
|
|
|
|
|
|
10.15
|
|
|
Development, License and Supply Agreement, dated as of June 18, 2002,
between the Company and Wyeth , acting through its Wyeth Consumer
Healthcare Division.**
|
|
|
|
|
|
|
10.15.1
|
|
|
Amendment, dated as of July 9, 2004, to Development, License and Supply
|
|
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
|
|
|
Agreement, dated as of June 18, 2002, between the Company and Wyeth,
acting through its Wyeth Consumer Healthcare Division.**
|
|
|
|
|
|
|
10.15.2
|
|
|
Amendment, dated as of February 14, 2005, to Development, License and
Supply Agreement, dated as of June 18, 2002, between the Company and
Wyeth, acting through its Wyeth Consumer Healthcare Division.**
|
|
|
|
|
|
|
10.16
|
|
|
Licensing, Contract Manufacturing and Supply Agreement, dated as of June
18, 2002, between the Company and Schering Corporation.**
|
|
|
|
|
|
|
10.16.1
|
|
|
Amendment No. 3, effective as of July 23, 2004, to Licensing, Contract
Manufacturing and Supply Agreement, dated as of June 18, 2002, between
the Company and Schering Corporation.**
|
|
|
|
|
|
|
10.16.2
|
|
|
Amendment No. 4, effective as of December 15, 2006, to Licensing,
Contract Manufacturing and Supply Agreement, dated as of June 18, 2002,
between the Company and Schering Corporation.**
|
|
|
|
|
|
|
10.17
|
|
|
Supply and Distribution Agreement, dated as of November 3, 2005, between
the Company and DAVA Pharmaceuticals, Inc.**
|
|
|
|
|
|
|
10.17.1
|
|
|
Amendment No. 2, dated February 6, 2007, to Supply and Distribution
Agreement, dated November 3, 2005, between the Company and DAVA
Pharmaceuticals, Inc.**
|
|
|
|
|
|
|
10.18
|
|
|
Patent License Agreement, dated as of March 30, 2007, by and among
Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals
L.P. and the Company.**
|
|
|
|
|
|
|
10.19
|
|
|
Supplemental License Agreement, dated as of March 30, 2007, by and among
Purdue Pharma L.P., The P.F. Laboratories, Inc., Purdue Pharmaceuticals
L.P. and the Company.**
|
|
|
|
|
|
|
10.20
|
|
|
Sublicense Agreement, effective as of March 30, 2007, between the
Company and DAVA Pharmaceuticals, Inc.**
|
|
|
|
|
|
|
10.21
|
|
|
Promotional Services Agreement, dated as of January 19, 2006, between
the Company and Shire US Inc.**
|
|
|
|
|
|
|
10.22
|
|
|
Co-promotion Agreement, dated as of July 16, 2008, between the Company
and Wyeth, acting through its Wyeth Pharmaceuticals Division.**
|
|
|
|
|
|
|
11.1
|
|
|
Statement re computation of per share earnings (incorporated by
reference to Note 17 to the Notes to the Consolidated Financial
Statements and Note 10 to (Unaudited) Interim Consolidated Financial
Statements included in this registration statement).
|
|
|
|
|
|
|
21.1
|
|
|
Subsidiaries of the registrant.
|
|
|
|
*
|
|
Management contract, compensatory plan or arrangement.
|
|
**
|
|
To be filed by amendment.
|
EXHIBIT 4.3
EXECUTION COPY
IMPAX LABORATORIES, INC.
To
HSBC BANK USA, NATIONAL ASSOCIATION,
as Trustee
INDENTURE
Dated as of
June 27, 2005
3.5% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2012
TABLE OF CONTENTS
|
|
|
|
|
|
|
PAGE
|
|
ARTICLE 1 Definitions
|
|
|
1
|
|
Section 1.01. Definitions
|
|
|
1
|
|
|
|
|
|
|
ARTICLE 2 Issue, Description, Execution, Registration And Exchange Of Debentures
|
|
|
12
|
|
Section 2.01. Designation Amount And Issue Of Debentures
|
|
|
12
|
|
Section 2.02. Form of Debentures
|
|
|
12
|
|
Section 2.03. Date And Denomination Of Debentures; Payments Of Interest
|
|
|
13
|
|
Section 2.04. Execution of Debentures
|
|
|
14
|
|
Section 2.05. Exchange and Registration of Transfer of Debentures; Restrictions on Transfer
|
|
|
15
|
|
Section 2.06. Mutilated, Destroyed, Lost or Stolen Debentures
|
|
|
21
|
|
Section 2.07. Temporary Debentures
|
|
|
22
|
|
Section 2.08. Cancellation of Debentures
|
|
|
22
|
|
Section 2.09. CUSIP Numbers
|
|
|
23
|
|
Section 2.10. Rank
|
|
|
23
|
|
|
|
|
|
|
ARTICLE 3 Redemption And Repurchase Of Debentures
|
|
|
23
|
|
Section 3.01. Redemption of Debentures
|
|
|
23
|
|
Section 3.02. [Intentionally Omitted.]
|
|
|
23
|
|
Section 3.03. [Intentionally Omitted.]
|
|
|
23
|
|
Section 3.04. [Intentionally Omitted.]
|
|
|
23
|
|
Section 3.05. Repurchase at Option of Holders Upon a Designated Event
|
|
|
23
|
|
Section 3.06. Repurchase of Debentures by the Company at Option of the Holder
|
|
|
28
|
|
Section 3.07. Company Repurchase Notice
|
|
|
29
|
|
Section 3.08. Effect of Designated Event Repurchase Notice or Repurchase Notice
|
|
|
30
|
|
Section 3.09. Deposit of Purchase Price
|
|
|
31
|
|
Section 3.10. Debentures Repurchased in Part
|
|
|
31
|
|
Section 3.11. Repayment to the Company
|
|
|
31
|
|
|
|
|
|
|
ARTICLE 4 Subordination Of Debentures
|
|
|
32
|
|
Section 4.01. Agreement of Subordination
|
|
|
32
|
|
Section 4.02. Payments to Debentureholders
|
|
|
32
|
|
Section 4.03. Subrogation of Debentures
|
|
|
35
|
|
Section 4.04. Authorization to Effect Subordination
|
|
|
36
|
|
Section 4.05. Notice to Trustee
|
|
|
36
|
|
Section 4.06. Trustees Relation to Senior Indebtedness
|
|
|
37
|
|
Section 4.07. No Impairment of Subordination
|
|
|
37
|
|
Section 4.08. Certain Conversions Not Deemed Payment
|
|
|
38
|
|
Section 4.09. Article Applicable to Paying Agents
|
|
|
38
|
|
Section 4.10. Senior Indebtedness Entitled to Rely
|
|
|
38
|
|
Section 4.11. Reliance on Judicial Order or Certificate of Liquidating Agent
|
|
|
38
|
|
|
|
|
|
|
|
|
PAGE
|
|
ARTICLE 5 Make-Whole Premium
|
|
|
39
|
|
Section 5.01. Make-Whole Premium
|
|
|
39
|
|
Section 5.02. Payment Of Make-Whole Premium
|
|
|
41
|
|
Section 5.03. Adjustments Relating To The Make-Whole Premium
|
|
|
41
|
|
|
|
|
|
|
ARTICLE 6 Particular Covenants Of The Company
|
|
|
42
|
|
Section 6.01. Payment of Principal, Premium and Interest
|
|
|
42
|
|
Section 6.02. Maintenance of Office or Agency
|
|
|
42
|
|
Section 6.03. Appointments to Fill Vacancies in Trustees Office
|
|
|
42
|
|
Section 6.04. Provisions as to Paying Agent
|
|
|
42
|
|
Section 6.05. Existence
|
|
|
43
|
|
Section 6.06. Maintenance of Properties
|
|
|
44
|
|
Section 6.07. Payment of Taxes and Other Claims
|
|
|
44
|
|
Section 6.08. Rule 144A Information Requirement
|
|
|
44
|
|
Section 6.09. Extension and Usury Laws
|
|
|
45
|
|
Section 6.10. Compliance Certificate
|
|
|
45
|
|
Section 6.11. Liquidated Damages Notice
|
|
|
45
|
|
Section 6.12. Limitation on Indebtedness
|
|
|
45
|
|
Section 6.13. Prohibition on Certain Issuances and Offers
|
|
|
46
|
|
Section 6.14. Disclosure on Finalization of Make-Whole Premium Table
|
|
|
46
|
|
|
|
|
|
|
ARTICLE 7 Debentureholders Lists And Reports By The Company And The Trustee
|
|
|
47
|
|
Section 7.01. Debentureholders Lists
|
|
|
47
|
|
Section 7.02. Preservation And Disclosure Of Lists
|
|
|
47
|
|
Section 7.03. Reports By Trustee
|
|
|
47
|
|
Section 7.04. Reports by Company
|
|
|
47
|
|
|
|
|
|
|
ARTICLE 8 Remedies Of The Trustee And Debentureholders On An Event Of Default
|
|
|
48
|
|
Section 8.01. Events Of Default
|
|
|
48
|
|
Section 8.02. Payments of Debentures on Default; Suit Therefor
|
|
|
50
|
|
Section 8.03. Application of Monies Collected By Trustee
|
|
|
52
|
|
Section 8.04. Proceedings by Debentureholder
|
|
|
52
|
|
Section 8.05. Proceedings By Trustee
|
|
|
53
|
|
Section 8.06. Remedies Cumulative And Continuing
|
|
|
53
|
|
Section 8.07. Direction of Proceedings and Waiver of Defaults By Majority of Debentureholders
|
|
|
54
|
|
Section 8.08. Notice of Defaults
|
|
|
54
|
|
Section 8.09. Undertaking To Pay Costs
|
|
|
54
|
|
|
|
|
|
|
ARTICLE 9 The Trustee
|
|
|
55
|
|
Section 9.01. Duties and Responsibilities of Trustee
|
|
|
55
|
|
Section 9.02. Reliance on Documents, Opinions, Etc
|
|
|
56
|
|
Section 9.03. No Responsibility For Recitals, Etc
|
|
|
57
|
|
Section 9.04. Trustee, Paying Agents, Conversion Agents or Registrar May Own Debentures
|
|
|
57
|
|
Section 9.05. Monies to Be Held in Trust
|
|
|
58
|
|
Section 9.06. Compensation and Expenses of Trustee
|
|
|
58
|
|
Section 9.07. Officers Certificate As Evidence
|
|
|
58
|
|
ii
|
|
|
|
|
|
|
PAGE
|
|
Section 9.08. Conflicting Interests of Trustee
|
|
|
59
|
|
Section 9.09. Eligibility of Trustee
|
|
|
59
|
|
Section 9.10. Resignation or Removal of Trustee
|
|
|
59
|
|
Section 9.11. Acceptance by Successor Trustee
|
|
|
60
|
|
Section 9.12. Succession By Merger
|
|
|
61
|
|
Section 9.13. Preferential Collection of Claims
|
|
|
61
|
|
|
|
|
|
|
ARTICLE 10 The Debentureholders
|
|
|
61
|
|
Section 10.01. Action By Debentureholders
|
|
|
61
|
|
Section 10.02. Proof of Execution by Debentureholders
|
|
|
62
|
|
Section 10.03. Who Are Deemed Absolute Owners
|
|
|
62
|
|
Section 10.04. Company-owned Debentures Disregarded
|
|
|
62
|
|
Section 10.05. Revocation Of Consents, Future Holders Bound
|
|
|
63
|
|
|
|
|
|
|
ARTICLE 11 Meetings Of Debentureholders
|
|
|
63
|
|
Section 11.01. Purpose Of Meetings
|
|
|
63
|
|
Section 11.02. Call Of Meetings By Trustee
|
|
|
63
|
|
Section 11.03. Call Of Meetings By Company Or Debentureholders
|
|
|
64
|
|
Section 11.04. Qualifications For Voting
|
|
|
64
|
|
Section 11.05. Regulations
|
|
|
64
|
|
Section 11.06. Voting
|
|
|
65
|
|
Section 11.07. No Delay Of Rights By Meeting
|
|
|
65
|
|
|
|
|
|
|
ARTICLE 12 Supplemental Indentures
|
|
|
65
|
|
Section 12.01. Supplemental Indentures Without Consent of Debentureholders
|
|
|
65
|
|
Section 12.02. Supplemental Indenture With Consent Of Debentureholders
|
|
|
67
|
|
Section 12.03. Effect Of Supplemental Indenture
|
|
|
68
|
|
Section 12.04. Notation On Debentures
|
|
|
68
|
|
Section 12.05. Evidence Of Compliance Of Supplemental Indenture To Be Furnished To Trustee
|
|
|
68
|
|
|
|
|
|
|
ARTICLE 13 Consolidation, Merger, Sale, Conveyance And Lease
|
|
|
69
|
|
Section 13.01. Company May Consolidate On Certain Terms
|
|
|
69
|
|
Section 13.02. Successor To Be Substituted
|
|
|
69
|
|
Section 13.03. Opinion Of Counsel To Be Given Trustee
|
|
|
70
|
|
|
|
|
|
|
ARTICLE 14 Satisfaction And Discharge Of Indenture
|
|
|
70
|
|
Section 14.01. Discharge Of Indenture
|
|
|
70
|
|
Section 14.02. Deposited Monies To Be Held In Trust By Trustee
|
|
|
71
|
|
Section 14.03. Paying Agent To Repay Monies Held
|
|
|
71
|
|
Section 14.04. Return Of Unclaimed Monies
|
|
|
71
|
|
Section 14.05. Reinstatement
|
|
|
71
|
|
|
|
|
|
|
ARTICLE 15 Immunity Of Incorporators, Stockholders, Officers And Directors
|
|
|
71
|
|
Section 15.01. Indenture And Debentures Solely Corporate Obligations
|
|
|
71
|
|
iii
|
|
|
|
|
|
|
PAGE
|
|
ARTICLE 16 Conversion Of Debentures
|
|
|
72
|
|
Section 16.01. Right To Convert
|
|
|
72
|
|
Section 16.02. Exercise Of Conversion Privilege; Issuance Of Common Stock On Conversion; No
Adjustment For Interest Or Dividends
|
|
|
74
|
|
Section 16.03. Payment Upon Conversion
|
|
|
77
|
|
Section 16.04. Cash Payments in Lieu of Fractional Shares
|
|
|
79
|
|
Section 16.05. Adjustment Of Conversion Rate
|
|
|
79
|
|
Section 16.06. Effect Of Reclassification, Consolidation, Merger or Sale
|
|
|
87
|
|
Section 16.07. Taxes On Shares Issued
|
|
|
89
|
|
Section 16.08. Reservation of Shares, Shares to Be Fully Paid; Compliance With Governmental
Requirements; Listing of Common Stock
|
|
|
89
|
|
Section 16.09. Responsibility Of Trustee
|
|
|
90
|
|
Section 16.10. Notice To Holders Prior To Certain Actions
|
|
|
90
|
|
Section 16.11. Stockholder Rights Plans
|
|
|
91
|
|
|
|
|
|
|
ARTICLE 17 Miscellaneous Provisions
|
|
|
92
|
|
Section 17.01. Provisions Binding On Companys Successors
|
|
|
92
|
|
Section 17.02. Official Acts By Successor Corporation
|
|
|
92
|
|
Section 17.03. Addresses For Notices, Etc
|
|
|
92
|
|
Section 17.04. Governing Law
|
|
|
92
|
|
Section 17.05. Evidence Of Compliance With Conditions Precedent, Certificates To Trustee
|
|
|
92
|
|
Section 17.06. Legal Holidays
|
|
|
93
|
|
Section 17.07. Trust Indenture Act
|
|
|
93
|
|
Section 17.08. No Security Interest Created
|
|
|
93
|
|
Section 17.09. Benefits Of Indenture
|
|
|
93
|
|
Section 17.10. Table Of Contents, Headings, Etc
|
|
|
94
|
|
Section 17.11. Authenticating Agent
|
|
|
94
|
|
Section 17.12. Execution In Counterparts
|
|
|
95
|
|
Section 17.13. Severability
|
|
|
95
|
|
|
Exhibit A Form of Debenture
|
|
|
A-1
|
|
Exhibit B Examples of Make-Whole Premium Tables
|
|
|
B-1
|
|
iv
INDENTURE
INDENTURE dated as of June 27, 2005 between Impax Laboratories, Inc., a Delaware corporation
(hereinafter called the COMPANY), having its principal office at 3735 Castor Avenue,
Philadelphia, Pennsylvania 19124 and HSBC Bank USA, National Association, a national banking
association, as trustee hereunder (hereinafter called the TRUSTEE).
WITNESSETH:
WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue of its 3.5%
Convertible Senior Subordinated Debentures Due 2012 (hereinafter called the DEBENTURES), in an
aggregate principal amount not to exceed $75,000,000 and, to provide the terms and conditions upon
which the Debentures are to be authenticated, issued and delivered, the Company has duly authorized
the execution and delivery of this Indenture; and
WHEREAS, the Debentures, the certificate of authentication to be borne by the Debentures, a form of
assignment, a form of option to elect repurchase upon a designated event, a form of repurchase
notice and a form of conversion notice to be borne by the Debentures are to be substantially in the
forms hereinafter provided for; and
WHEREAS, all acts and things necessary to make the Debentures, when executed by the Company and
authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this
Indenture provided, the valid, binding and legal obligations of the Company, and to constitute this
Indenture a valid agreement according to its terms, have been done and performed, and the execution
of this Indenture and the issue hereunder of the Debentures have in all respects been duly
authorized,
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
That in order to declare the terms and conditions upon which the Debentures are, and are to be,
authenticated, issued and delivered, and in consideration of the premises and of the purchase and
acceptance of the Debentures by the Holders thereof, the Company covenants and agrees with the
Trustee for the equal and proportionate benefit of the respective Holders from time to time of the
Debentures (except as otherwise provided below), as follows:
ARTICLE 1
DEFINITIONS
Section 1.01. Definitions. The terms defined in this Section
1.01 (except as herein otherwise expressly provided or unless the context otherwise requires) for
all purposes of this Indenture and of any indenture supplemental hereto shall have the respective
meanings specified in this Section
1.01. All other terms used in this Indenture that are defined in the Trust Indenture Act or which
are by reference therein defined in the Securities Act (except as herein otherwise expressly
provided or unless the context otherwise requires) shall have the meanings assigned to such terms
in the Trust Indenture Act and in the Securities Act as in force at the date of the execution of
this Indenture. The words HEREIN, HEREOF, HEREUNDER and words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other Subdivision. The terms
defined in this Article include the plural as well as the singular.
1.250% DEBENTURES means the convertible senior subordinated debentures issued pursuant to the
2004 Indenture.
2004 INDENTURE means the Indenture dated as of April 5, 2004 between the Company and Wachovia
Bank, National Association, as Trustee, under which the Companys 1.250% Convertible Senior
Subordinated Debentures due 2024 are issued and outstanding.
90% CONDITION has the meaning specified in Section 3.05(a).
ADJUSTMENT EVENT has the meaning specified in Section 16.05(i).
AGENT MEMBERS has the meaning specified in Section 2.05(a).
AFFILIATE of any specified Person means any other Person directly or indirectly controlling or
controlled by or under direct or indirect common control with such specified Person. For the
purposes of this definition, CONTROL, when used with respect to any specified Person means the
power to direct or cause the direction of the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or otherwise, and the
terms controlling and controlled have meanings correlative to the foregoing.
APPLICABLE FEDERAL FUNDS RATE shall mean, for any day, the rate per annum (rounded up to the
nearest 1/16th of 1%) equal to weighted average of the rates on overnight federal funds
transactions with members of the Federal Reserve System arranged by federal funds brokers, as
published on the next succeeding Business Day by the Federal Reserve Bank of New York.
AVERAGE CLOSING PRICE means the arithmetic average of the Closing Sale Prices of the Common Stock
for the ten (10) consecutive Trading Days commencing on and including June 20, 2005.
BOARD OF DIRECTORS means the Board of Directors of the Company or a committee of such Board duly
authorized to act for it hereunder.
BUSINESS DAY means any day except a Saturday, Sunday or legal holiday on which banking
institutions in The City of New York are authorized or obligated by law, regulation or executive
order to close.
CALCULATION AGENT has the meaning specified in Section 5.01(d).
CASH AMOUNT has the meaning specified in Section 16.03(a).
CASH SETTLEMENT NOTICE PERIOD has the meaning specified in Section 16.03(a).
CLOSING SALE PRICE of any security on any date means the closing sale price per share (or, if no
closing sale price is reported, the average of the closing bid and ask prices or, if more than one
in either case, the average of the average closing bid and the average closing ask prices) on such
date as reported in composite transactions for the principal United States
2
securities exchange on which such securities are traded or, if such securities are not listed on a
United States national or regional securities exchange, as reported by the Nasdaq National Market
or the Nasdaq Small Cap Market or, if neither, by the National Quotation Bureau Incorporated. In
the absence of such a quotation, the Company shall be entitled to determine the Closing Sale Price
on the basis it considers appropriate. The Closing Sale Price shall be determined without reference
to extended or after hours trading.
COMMISSION means the Securities and Exchange Commission, as from time to time constituted,
created under the Exchange Act, or, if at any time after the execution of this Indenture such
Commission is not existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties at such time.
COMMON STOCK means any stock of any class of the Company which has no preference in respect of
dividends or of amounts payable in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company and which is not subject to redemption by the Company.
Subject to the provisions of Section 16.06, however, shares issuable on conversion of Debentures
shall include only shares of the class designated as common stock of the Company at the date of
this Indenture (namely, the Common Stock, par value $.01) or shares of any class or classes
resulting from any reclassification or reclassifications thereof and which have no preference in
respect of dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Company and which are not subject to redemption by
the Company; provided that if at any time there shall be more than one such resulting class, the
shares of each such class then so issuable on conversion shall be substantially in the proportion
which the total number of shares of such class resulting from all such reclassifications bears to
the total number of shares of all such classes resulting from all such reclassifications.
COMPANY means the corporation named as the COMPANY in the first paragraph of this Indenture,
and, subject to the provisions of Article 13 and Section 16.06, shall include its successors and
assigns.
COMPANY REPURCHASE NOTICE has the meaning specified in Section 3.07(b).
COMPANY REPURCHASE NOTICE DATE has the meaning specified in
Section 3.07(b).
CONTINUING DIRECTORS has the meaning specified in Section 3.05(a).
CONVERSION DATE has the meaning specified in Section 16.02.
CONVERSION LIMITATION has the meaning specified in Section 16.02(b).
CONVERSION OBLIGATION has the meaning specified in Section 16.01.
CONVERSION PRICE means, as of any Conversion Date or other date of determination, the dollar
amount equal to 130% of the Average Closing Price, subject to adjustment as provided herein.
3
CONVERSION RATE for each $1,000 principal amount of Debentures, shall equal the quotient of
$1,000 divided by the applicable Conversion Price.
CONVERSION REFERENCE PERIOD has the meaning specified in
Section 16.03(a).
CONVERSION RETRACTION PERIOD has the meaning specified in
Section 16.03(a).
CONVERSION SETTLEMENT DATE means, with respect to the Conversion Settlement Distribution, the
third Business Day immediately following the date the Conversion Settlement Distribution is
determined.
CONVERSION SETTLEMENT DISTRIBUTION has the meaning specified in Section 16.03(a).
CONVERSION SHARES CAP has the meaning specified in Section 16.02(c).
CONVERSION TRIGGER PRICE has the meaning specified in Section 16.01(a).
CONVERSION VALUE has the meaning specified in Section 16.03(a).
CORPORATE TRUST OFFICE or other similar term, means the designated office of the Trustee at which
at any particular time its corporate trust business as it relates to this Indenture shall be
administered, which office is, at the date as of which this Indenture is dated, located at 452
Fifth Avenue, New York, New York 10018.
COST THRESHOLD means, as of any date of determination, the number of basis points set forth in
the table below for the Applicable Federal Funds Rate on such date.
|
|
|
|
|
APPLICABLE FEDERAL
|
|
|
FUNDS RATE
|
|
COST THRESHOLD
|
> =
|
3
|
%
|
|
300
|
> =
|
4
|
%
|
|
375
|
> =
|
5
|
%
|
|
400
|
> =
|
6
|
%
|
|
425
|
> =
|
7
|
%
|
|
525
|
> =
|
8
|
%
|
|
600
|
> =
|
9
|
%
|
|
700
|
> =
|
10
|
%
|
|
750
|
CURRENT MARKET PRICE has the meaning specified in Section 16.05(f).
CUSTODIAN means HSBC Bank USA, National Association, as custodian with respect to the Debentures
in global form, or any successor entity thereto.
DAILY SHARE AMOUNT has the meaning specified in Section 16.03(a).
4
DEBENTURE or DEBENTURES means any Debenture or Debentures, as the case may be, authenticated
and delivered under this Indenture, including any Global Debenture.
DEBENTURE REGISTER has the meaning specified in Section 2.05.
DEBENTURE REGISTRAR has the meaning specified in Section 2.05.
DEBENTUREHOLDER or HOLDER as applied to any Debenture, or other similar terms (but excluding
the term BENEFICIAL HOLDER), means any Person in whose name at the time a particular Debenture is
registered on the Debenture Registrars books.
DECLARATION DATE has the meaning specified in Section 16.05(i).
DEFAULT means any event that is, or after notice or passage of time, or both, would be, an Event
of Default.
DEFAULTED INTEREST has the meaning specified in Section 2.03.
DEPOSITARY means, the clearing agency registered under the Exchange Act that is designated to act
as the Depositary for the Global Debentures. The Depository Trust Company shall be the initial
Depositary, until a successor shall have been appointed and become such pursuant to the applicable
provisions of this Indenture, and thereafter, DEPOSITARY shall mean or include such successor.
DESIGNATED EVENT means the occurrence of (a) a Fundamental Change or (b) the termination of
trading in the Common Stock (or other securities into which the Debentures are at such time
convertible) on the Nasdaq National Market, The Nasdaq Small Cap Market, any United States national
securities exchange or the OTC Bulletin Board, following which the Common Stock (or other
securities into which the Debentures are at such time convertible) is no longer approved for
trading on the Nasdaq National Market, The Nasdaq Small Cap Market, any United States national
securities exchange or the OTC Bulletin Board; provided, however, that until such time as the
Company files its Annual Report on Form 10-K for the fiscal year ended December 31, 2004,a
termination of trading as a result of the matters set forth in Item 3.01 of each of the Companys
Current Report on Forms 8-K dated March 25, 2005 and filed on March 31, 2005, dated April 5, 2005
and filed April 7, 2005 and dated May 17, 2005 and filed May 23, 2005 shall not be considered a
Designated Event hereunder.
DESIGNATED EVENT CONVERSION/REPURCHASE PERIOD means the period beginning upon receipt of the
Designated Event Notice and ending thirty (30) Trading Days after the Effective Date.
DESIGNATED EVENT EXPIRATION TIME has the meaning specified in
Section 3.05(b).
DESIGNATED EVENT NOTICE has the meaning specified in Section 3.05(b).
DESIGNATED EVENT REPURCHASE DATE means the Effective Date for a Designated Event. With respect to
any repurchase for which a Designated Event Repurchase
5
Notice has been delivered after the Effective Date and during the Designated Event
Conversion/Repurchase Period, the Designated Event Repurchase Date shall mean the date that is
three (3) Business Days following the earlier of (i) the end of the Designated Event
Conversion/Repurchase Period and (ii) the date of delivery of the Designated Event Repurchase
Notice. With respect to any conversion for which a conversion notice is delivered after the
Effective Date and during the Designated Event Conversion/Repurchase Period in accordance with
Section 16.02, the Designated Event Repurchase Date shall mean the date that is three (3) Business
Days following the applicable Conversion Date.
DESIGNATED EVENT REPURCHASE NOTICE has the meaning specified in Section 3.05(c).
DESIGNATED EVENT REPURCHASE PRICE has the meaning specified in Section 3.05(a).
DESIGNATED SENIOR INDEBTEDNESS means all obligations under the Senior Credit Facility which, at
the date of determination, is allowed pursuant to Section 6.12 of this Indenture.
DETERMINATION DATE has the meaning specified in Section 16.05(j).
EFFECTIVE DATE means the date on which the applicable Designated Event occurs.
EVENT OF DEFAULT means any event specified in Section 8.01 as an Event of Default.
EX-DIVIDEND TIME has the meaning specified in Section 16.01(b).
EXCHANGE ACT means the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder, as in effect from time to time.
EXCHANGE PROPERTY has the meaning set forth in Section 16.01(c).
EXPIRATION TIME has the meaning specified in Section 16.05(e).
FAIR MARKET VALUE has the meaning specified in Section 16.05(f).
FISCAL QUARTER means, with respect to the Company, first, second and third quarters ending March
31, June 30 and September 30, respectively. The Company has a 52 or 53 week fiscal year that ends
on the Friday closest to December 31. The Company shall confirm the ending dates of its fiscal
quarters for the current fiscal year to the Trustee upon the Trustees request.
FUNDAMENTAL CHANGE has the meaning specified in Section 3.05(a).
GAAP means United States generally accepted accounting principles, consistently applied. All
accounting and financial terms, unless specifically defined in this Indenture, will be interpreted
in accordance with GAAP.
6
GLOBAL DEBENTURE has the meaning specified in Section 2.02.
INDEBTEDNESS means, with respect to any Person, and without duplication, (a) all indebtedness,
obligations and other liabilities (contingent or otherwise) of such Person for borrowed money
(including obligations of the Person in respect of overdrafts, foreign exchange contracts, currency
exchange agreements, interest rate protection agreements, and any loans or advances from banks,
whether or not evidenced by notes or similar instruments) or evidenced by bonds, debentures, notes
or similar instruments (whether or not the recourse of the lender is to the whole of the assets of
such Person or to only a portion thereof), other than any account payable or other accrued current
liability or obligation incurred in the ordinary course of business in connection with the
obtaining of materials or services; (b) all reimbursement obligations and other liabilities
(contingent or otherwise) of such Person with respect to letters of credit, bank guarantees or
bankers acceptances; (c) all obligations and liabilities (contingent or otherwise) in respect of
leases of such Person required, in conformity with generally accepted accounting principles, to be
accounted for as capitalized lease obligations on the balance sheet of such Person and all
obligations and other liabilities (contingent or otherwise) under any lease or related document
(including a purchase agreement) in connection with the lease of real property which provides that
such Person is contractually obligated to purchase or cause a third party to purchase the leased
property and thereby guarantee a minimum residual value of the leased property to the lessor and
the obligations of such Person under such lease or related document to purchase or to cause a third
party to purchase such leased property; (d) all obligations of such Person (contingent or
otherwise) with respect to an interest rate or other swap, cap or collar agreement or other similar
instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or
agreement; (e) all direct or indirect guaranties or similar agreements by such Person in respect
of, and obligations or liabilities (contingent or otherwise) of such Person to purchase or
otherwise acquire or otherwise assure a creditor against loss in respect of, indebtedness,
obligations or liabilities of another Person of the kind described in clauses (a) through (d); (f)
any indebtedness or other obligations described in clauses (a) through (e) secured by any mortgage,
pledge, lien or other encumbrance existing on property which is owned or held by such Person,
regardless of whether the indebtedness or other obligation secured thereby shall have been assumed
by such Person; and (g) any and all deferrals, renewals, extensions and refundings of, or
amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind
described in clauses (a) through (f).
INDENTURE means this instrument as originally executed or, if amended or supplemented as herein
provided, as so amended or supplemented.
INITIAL PURCHASER means Highbridge International LLC.
INITIAL SUPPLEMENTAL INDENTURE MATTERS has the meaning
specified in Section 5.01(c).
INTEREST means, when used with reference to the Debentures, any interest payable under the terms
of the Debentures, including contingent interest, if any, and Liquidated Damages, if any, payable
under the terms of the Registration Rights Agreement.
7
INTEREST EXPENSE means, with respect to the Company for any applicable period, gross interest
expense of the Company for such period determined in accordance with GAAP, plus any amount of
interest capitalization as an asset during the same period.
LIQUIDATED DAMAGES has the meaning specified for LIQUIDATED DAMAGES AMOUNT in Section 2(e) of
the Registration Rights Agreement.
LIQUIDATED DAMAGES NOTICE has the meaning specified in Section 6.11.
LTM EBITDA means, with respect to the Company as of any date, the Net Income of the Company for
the immediately preceding twelve month period (the LTM PERIOD) for which financials are publicly
available, plus without duplication, the sum of the following amounts to the extent deducted in
determining Net Income of the Company for such period: (1) Interest Expense, (2) income tax
expense, (3) depreciation expense and (4) amortization expense, and minus, onetime or non-cash
gains, including but not limited to (1) gains generated from disposition of assets, (2) gains
resulted from reversal of charges, (3) gains resulted from change of estimates, (4) gains resulted
from change of actuarial assumptions, or (5) extraordinary gains. In connection with acquisitions
consummated subsequent to the commencement of the LTM Period, LTM EBITDA shall be calculated for
any such acquisition on a pro forma basis for the LTM Period.
MAKE-WHOLE PREMIUM has the meaning specified in Section 5.01(c).
MAKE-WHOLE PREMIUM TABLE has the meaning specified in Section 5.01(c).
NET INCOME means, with respect to the Company for any applicable period, the net income (loss) of
the Company for such period, determined on a consolidated basis and in accordance with GAAP.
NON-ELECTING SHARE has the meaning specified in Section 16.06(c).
OFFICERS CERTIFICATE, when used with respect to the Company, means a certificate signed by the
Chairman of the Board, the Chief Executive Officer, the President or any Vice President (whether or
not designated by a number or numbers or word or words added before or after the title VICE
PRESIDENT) and the Treasurer or any Assistant Treasurer, or the Secretary or Assistant Secretary
of the Company.
OPINION OF COUNSEL means an opinion in writing signed by legal counsel, who may be an employee of
or counsel to the Company, and who shall be reasonably acceptable to the Trustee.
OUTSTANDING, when used with reference to Debentures and subject to the provisions of Section
10.04, means, as of any particular time, all Debentures authenticated and delivered by the Trustee
under this Indenture, except:
(a) Debentures theretofore canceled by the Trustee or delivered to the Trustee for cancellation;
8
(b) Debentures, or portions thereof, (i) for the redemption of which monies in the necessary amount
shall have been deposited in trust with the Trustee or with any paying agent (other than the
Company) or (ii) which shall have been otherwise defeased in accordance with Article 14;
(c) Debentures in lieu of which, or in substitution for which, other Debentures shall have been
authenticated and delivered pursuant to the terms of Section 2.06; and
(d) Debentures converted into Common Stock pursuant to Article 16 and Debentures deemed not
outstanding pursuant to Article 3.
PERSON means a corporation, an association, a partnership, a limited liability company, an
individual, a joint venture, a joint stock company, a trust, an unincorporated organization or a
government or an agency or a political subdivision thereof.
PORTAL MARKET means the Private Offerings, Resales and Trading through Automatic Linkages Market,
commonly referred to as the Portal Market, operated by the National Association of Securities
Dealers, Inc. or any successor thereto.
PREDECESSOR DEBENTURE of any particular Debenture means every previous Debenture evidencing all
or a portion of the same debt as that evidenced by such particular Debenture, and, for the purposes
of this definition, any Debenture authenticated and delivered under Section 2.06 in lieu of a lost,
destroyed or stolen Debenture shall be deemed to evidence the same debt as the lost, destroyed or
stolen Debenture that it replaces.
PREMIUM means any premium payable under the terms of the Debentures, including, without
limitation, any Make-Whole Premium.
PRINCIPAL VALUE CONVERSION has the meaning specified in Section 16.01.
PROVISIONAL REDEMPTION has the meaning specified in Section 3.01.
PUBLICLY TRADED SECURITIES has the meaning specified in Section 3.05(a).
PURCHASED SHARES has the meaning specified in Section 16.05(e).
QIB means a qualified institutional buyer as defined in Rule 144A.
RECORD DATE has the meaning specified in Section 2.03 and Section 16.05(f).
REGISTRATION RIGHTS AGREEMENT means the Registration Rights Agreement, dated as of June 27, 2005,
between the Company and the Initial Purchaser, as amended from time to time in accordance with its
terms.
REPRESENTATIVE means (a) the indenture trustee or other trustee, agent or representative for
holders of Senior Indebtedness or (b) with respect to any Senior Indebtedness that does not have
any such trustee, agent or other representative, (i) in the case of such Senior Indebtedness issued
pursuant to an agreement providing for voting arrangements as among the
9
holders or owners of such Senior Indebtedness, any holder or owner of such Senior Indebtedness
acting with the consent of the required persons necessary to bind such holders or owners of such
Senior Indebtedness, and (ii) in the case of all other such Senior Indebtedness, the holder or
owner of such Senior Indebtedness.
REPURCHASE DATE has the meaning specified in Section 3.06.
REPURCHASE EXPIRATION TIME has the meaning specified in Section 3.06.
REPURCHASE NOTICE has the meaning specified in Section 3.06.
RESIDUAL CASH VALUE has the meaning specified in Section 16.03(a).
RESIDUAL VALUE SHARES has the meaning specified in Section 16.03(a).
RESPONSIBLE OFFICER shall mean, when used with respect to the Trustee, any officer within the
corporate trust department of the Trustee with direct responsibility for the administration of this
Indenture and also means, with respect to a particular corporate trust matter, any other officer to
whom such matter is referred because of such officers knowledge of or familiarity with the
particular subject.
RESTRICTED SECURITIES has the meaning specified in Section 2.05(c).
RIGHTS has the meaning specified in Section 16.11.
RULE 144A means Rule 144A as promulgated under the Securities Act.
SECURITIES has the meaning specified in Section 16.05(d).
SECURITIES ACT means the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder, as in effect from time to time.
SENIOR CREDIT FACILITY means the senior credit facility, under that certain Loan and Security
Agreement dated as of October 23, 2002, between Impax Laboratories, Inc, as borrower, and Wachovia
Bank, National Association (successor to Congress Financial Corporation), as lender, together with
the documents now or hereafter related thereto (including, without limitation, any guarantee
agreements and any security documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise modified from time to time,
including any agreement extending the maturity of, refinancing, replacing or otherwise
restructuring (including by way of adding the Company or any Subsidiaries of the Company as
additional borrowers or guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or any other agent,
lender or group of lenders (or other institutions).
SENIOR INDEBTEDNESS means, whether outstanding on the date of this Indenture or thereafter
issued, all Indebtedness of the Company, including without limitation, Designated Senior
Indebtedness, including interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company whether or not a claim for
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post-filing interest is allowed in such proceeding) and premium, if any, thereon, and other
monetary amounts (including fees, expenses, reimbursement obligations under letters of credit and
indemnities) owing in respect thereof which, at the date of determination, is allowed pursuant to
Section 6.12 of this Indenture, and has been specifically designated by the Company in the
instrument evidencing or governing such Senior Indebtedness as Senior Indebtedness for purposes
of this Indenture; provided, however, that Senior Indebtedness will not include (1) any obligation
of the Company to any majority-owned Subsidiary, (2) any liability for federal, state, foreign,
local or other taxes owed or owing by the Company, (3) any accounts payable or other liability to
trade creditors of the Company arising in the ordinary course of business, (4) any Indebtedness or
obligation of the Company that is expressly subordinate or junior in right of payment to any other
Indebtedness or obligation of the Company, or (5) obligations in respect of any Common Stock.
SIGNIFICANT SUBSIDIARY means, as of any date of determination, a Subsidiary of the Company that
would constitute a SIGNIFICANT SUBSIDIARY as such term is defined under Rule 1-02(w) of
Regulation S-X of the Commission as in effect on the date of this Indenture.
SPINOFF VALUATION PERIOD has the meaning specified in Section 16.05(d).
STOCK PRICE CAP has the meaning set forth in Section 5.01(c).
STOCK PRICE THRESHOLD has the meaning set forth in Section 5.01(c).
SUBSIDIARY means, with respect to any Person, (i) any corporation, association or other business
entity of which more than 50% of the total voting power of shares of capital stock or other equity
interest entitled (without regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly,
by such Person or one or more of the other subsidiaries of that Person (or a combination thereof)
and (ii) any partnership (a) the sole general partner or managing general partner of which is such
Person or a subsidiary of such Person or (b) the only general partners of which are such Person or
of one or more subsidiaries of such Person (or any combination thereof).
TRADING DAY has the meaning specified in Section 16.05(f).
TRADING PRICE means, on any date, the average of the secondary market bid quotations per $1,000
principal amount of Debentures obtained by the Company for $2,000,000 principal amount of
Debentures at approximately 3:30 p.m., New York City time, on such date from three independent nationally recognized securities
dealers selected by the Company; provided that if at least three such bids cannot reasonably be
obtained by the Company, but two bids are obtained, then the average of the two bids shall be used,
and if only one such bid can reasonably be obtained by the Company, one bid shall be used.
TRIGGER EVENT has the meaning specified in Section 16.05(d).
TRIGGERING EVENT has the meaning specified in Section 16.05(d).
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TRUST INDENTURE ACT means the Trust Indenture Act of 1939, as amended, as it was in force at the
date of this Indenture, except as provided in Sections 12.03 and 15.06; provided that if the Trust
Indenture Act of 1939 is amended after the date hereof, the term TRUST INDENTURE ACT shall mean,
to the extent required by such amendment, the Trust Indenture Act of 1939 as so amended.
TRUSTEE means HSBC Bank USA, National Association and its successors and any corporation
resulting from or surviving any consolidation or merger to which it or its successors may be a
party and any successor trustee at the time serving as successor trustee hereunder.
ARTICLE 2
ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF DEBENTURES
Section 2.01. Designation Amount And Issue Of Debentures. The Debentures shall be designated as
3.5% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2012. Debentures not to exceed the aggregate
principal amount of $75,000,000 (except pursuant to Sections 2.05, 2.06, 3.03, 3.05 and 16.02
hereof) upon the execution of this Indenture, or from time to time thereafter, may be executed by
the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon
authenticate and deliver said Debentures to or upon the written order of the Company, signed by its
Chairman of the Board, Chief Executive Officer, President or any Vice President (whether or not
designated by a number or numbers or word or words added before or after the title VICE
PRESIDENT), the Treasurer or any Assistant Treasurer or the Secretary or Assistant Secretary,
without any further action by the Company hereunder. Other than as set forth in the preceding
sentence, the Company shall not issue any Debentures under this Indenture.
Section 2.02. Form of Debentures. The Debentures and the Trustees certificate of authentication to
be borne by such Debentures shall be substantially in the form set forth in Exhibit A. The terms
and provisions contained in the form of Debenture attached as Exhibit A hereto shall constitute,
and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company
and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms
and provisions and to be bound thereby.
Any of the Debentures may have such letters, numbers or other marks of identification and such
notations, legends, endorsements or changes as the officers executing the same may approve
(execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the
provisions of this Indenture, or as may be required by the Custodian, the Depositary or by the
National Association of Securities Dealers, Inc. in order for the Debentures to be tradable on the
Portal Market or as may be required for the Debentures to be tradable on any other market developed
for trading of securities pursuant to Rule 144A or as may be required to comply with any applicable
law or with any rule or regulation made pursuant thereto or with any rule or regulation of any
securities exchange or automated quotation system on which the Debentures may be listed, or to
conform to usage, or to indicate any special limitations or restrictions to which any particular
Debentures are subject.
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So long as the Debentures are eligible for book-entry settlement with the Depositary, or unless
otherwise required by law, or otherwise contemplated by Section 2.05(a), all of the Debentures will
be represented by one or more Debentures in global form registered in the name of the Depositary or
the nominee of the Depositary (a GLOBAL DEBENTURE). The transfer and exchange of beneficial
interests in any such Global Debenture shall be effected through the Depositary in accordance with
this Indenture and the applicable procedures of the Depositary. Except as provided in Section
2.05(a), beneficial owners of a Global Debenture shall not be entitled to have certificates
registered in their names, will not receive or be entitled to receive physical delivery of
certificates in definitive form and will not be considered Holders of such Global Debenture.
Any Global Debenture shall represent such of the outstanding Debentures as shall be specified
therein and shall provide that it shall represent the aggregate amount of outstanding Debentures
from time to time endorsed thereon and that the aggregate amount of outstanding Debentures
represented thereby may from time to time be increased or reduced to reflect redemptions,
repurchases, conversions, transfers or exchanges permitted hereby. Any endorsement of a Global
Debenture to reflect the amount of any increase or decrease in the amount of outstanding Debentures
represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee,
in such manner and upon instructions given by the Holder of such Debentures in accordance with this
Indenture. Payment of principal of and interest and premium, if any, on any Global Debenture shall
be made to the Holder of such Debenture.
Section 2.03. Date And Denomination Of Debentures; Payments Of Interest. The Debentures shall be
issuable in registered form without coupons in denominations of $1,000 principal amount and
integral multiples thereof. Each Debenture shall be dated the date of its authentication and shall
bear interest from the date specified on the face of the form of Debenture attached as Exhibit A
hereto. Interest on the Debentures shall be computed on the basis of a 360-day year comprised of
twelve 30-day months.
The Person in whose name any Debenture (or its Predecessor Debenture) is registered on the
Debenture Register at the close of business on any Record Date with respect to any interest payment
date shall be entitled to receive the interest payable on such interest payment date, except that
the interest payable upon redemption or repurchase will be payable to the Person to whom principal
is payable pursuant to such redemption or repurchase (unless the redemption date or the Repurchase
Date, as the case may be, is an interest payment date, in which case the semi-annual payment of
interest becoming due on such date shall be payable to the Holders of such Debentures registered as
such on the applicable Record Date). Interest shall be payable at the office of the Company
maintained by the Company for such purposes in the Borough of Manhattan, City of New York, which
shall initially be an office or agency of the Trustee. The Company shall pay interest (i) on any
Debentures in certificated form by check mailed to the address of the Person entitled thereto as it
appears in the Debenture Register (or upon written notice, by wire transfer in immediately
available funds, if such Person is entitled to interest on aggregate principal in excess of $2
million) or (ii) on any Global Debenture by wire transfer of immediately available funds to the
account of the Depositary or its nominee. The term RECORD DATE with respect to any interest
payment date shall mean the June 1 or
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December 1 preceding the applicable June 15 or December 15 interest payment date, respectively.
Any interest on any Debenture which is payable, but is not punctually paid or duly provided for, on
any June 15 or December 15 (herein called DEFAULTED INTEREST) shall forthwith cease to be payable
to the Debentureholder on the relevant Record Date by virtue of his having been such
Debentureholder, and such Defaulted Interest shall be paid by the Company, at its election in each
case, as provided in clause (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names
the Debentures (or their respective Predecessor Debentures) are registered at the close of business
on a special record date for the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the amount of Defaulted
Interest proposed to be paid on each Debenture and the date of the proposed payment (which shall be
not less than twenty-five (25) days after the receipt by the Trustee of such notice, unless the
Trustee shall consent to an earlier date), and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted
Interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the
date of the proposed payment, such money when deposited to be held in trust for the benefit of the
Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall
fix a special record date for the payment of such Defaulted Interest which shall be not more than
fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment, and not less than ten (10) days after the
receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the
Company of such special record date and, in the name and at the expense of the Company, shall cause
notice of the proposed payment of such Defaulted Interest and the special record date therefor to
be mailed, first-class postage prepaid, to each Holder at his address as it appears in the
Debenture Register, not less than ten (10) days prior to such special record date. Notice of the
proposed payment of such Defaulted Interest and the special record date therefor having been so
mailed, such Defaulted Interest shall be paid to the Persons in whose names the Debentures (or
their respective Predecessor Debentures) are registered at the close of business on such special
record date and shall no longer be payable pursuant to the following clause (2) of this Section
2.03.
(2) The Company may make payment of any Defaulted Interest in any other lawful manner not
inconsistent with the requirements of any national securities exchange or automated quotation
system on which the Debentures may be listed or designated for issuance, and upon such notice as
may be required by such exchange or automated quotation system, if, after notice given by the
Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment
shall be deemed practicable by the Trustee.
Section 2.04. Execution of Debentures. The Debentures shall be signed in the name and on behalf of
the Company by the manual or facsimile signature of its Chairman of the Board, Chief Executive
Officer, President or any Vice President (whether or not designated by a number or numbers or word
or words added before or after the title VICE PRESIDENT) and attested by the manual or facsimile
signature of its Secretary or any of its Assistant Secretaries or its Treasurer or any of its
Assistant Treasurers (which may be printed, engraved or otherwise
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reproduced thereon, by facsimile or otherwise). Only such Debentures as shall bear thereon a
certificate of authentication substantially in the form set forth on the form of Debenture attached
as Exhibit A hereto, manually executed by the Trustee (or an authenticating agent appointed by the
Trustee as provided by Section 17.11), shall be entitled to the benefits of this Indenture or be valid or obligatory for
any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Debenture
executed by the Company shall be conclusive evidence that the Debenture so authenticated has been
duly authenticated and delivered hereunder and that the Holder is entitled to the benefits of this
Indenture.
In case any officer of the Company who shall have signed any of the Debentures shall cease to be
such officer before the Debentures so signed shall have been authenticated and delivered by the
Trustee, or disposed of by the Company, such Debentures nevertheless may be authenticated and
delivered or disposed of as though the person who signed such Debentures had not ceased to be such
officer of the Company, and any Debenture may be signed on behalf of the Company by such persons
as, at the actual date of the execution of such Debenture, shall be the proper officers of the
Company, although at the date of the execution of this Indenture any such person was not such an
officer.
Section 2.05. Exchange and Registration of Transfer of Debentures; Restrictions on Transfer. (a)The
Company shall cause to be kept at the Corporate Trust Office a register (the register maintained in
such office and in any other office or agency of the Company designated pursuant to Section 6.02
being herein sometimes collectively referred to as the DEBENTURE REGISTER) in which, subject to
such reasonable regulations as it may prescribe, the Company shall provide for the registration of
Debentures and of transfers of Debentures. The Debenture Register shall be in written form or in
any form capable of being converted into written form within a reasonably prompt period of time.
The Trustee is hereby appointed DEBENTURE REGISTRAR for the purpose of registering Debentures and
transfers of Debentures as herein provided. The Company may appoint one or more co-registrars in
accordance with Section 6.02.
Upon surrender for registration of transfer of any Debenture to the Debenture Registrar or any
co-registrar, and satisfaction of the requirements for such transfer set forth in this Section
2.05, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Debentures of any authorized denominations
and of a like aggregate principal amount and bearing such restrictive legends as may be required by
this Indenture.
Debentures may be exchanged for other Debentures of any authorized denominations and of a like
aggregate principal amount, upon surrender of the Debentures to be exchanged at any such office or
agency maintained by the Company pursuant to Section 6.02. Whenever any Debentures are so
surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and
deliver, the Debentures which the Debentureholder making the exchange is entitled to receive
bearing registration numbers not contemporaneously outstanding.
All Debentures issued upon any registration of transfer or exchange of Debentures shall be the
valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under
this Indenture, as the Debentures surrendered upon such registration of transfer or exchange.
15
All Debentures presented or surrendered for registration of transfer or for exchange, redemption,
repurchase or conversion shall (if so required by the Company or the Debenture Registrar) be duly
endorsed, or be accompanied by a written instrument or instruments of transfer in form satisfactory
to the Company, and the Debentures shall be duly executed by the Debentureholder thereof or his
attorney duly authorized in writing.
No service charge shall be made to any Holder for any registration of, transfer or exchange of
Debentures, including those in connection with any redemption, repurchase or conversions pursuant
to the terms of this Indenture but the Company may require payment by the Holder of a sum
sufficient to cover any tax, assessment or other governmental charge that may be imposed in
connection with any such registration of transfer or exchange of Debentures.
Neither the Company nor the Trustee nor any Debenture Registrar shall be required to exchange or
register a transfer of (a) any Debentures for a period of fifteen (15) days next preceding any
selection of Debentures to be redeemed, (b) any Debentures or portions thereof surrendered for
conversion pursuant to Article 16, (c) any Debentures or portions thereof tendered for redemption
(and not withdrawn) pursuant to Section 3.05 or (d) any Debentures or portions thereof tendered for
repurchase (and not withdrawn) pursuant to Section 3.06.
(b) The following provisions shall apply only to Global Debentures:
(i) Each Global Debenture authenticated under this Indenture shall be registered in the name of the
Depositary or a nominee thereof and delivered to such Depositary or a nominee thereof or Custodian
therefor, and each such Global Debenture shall constitute a single Debenture for all purposes of
this Indenture.
(ii) Notwithstanding any other provision in this Indenture, no Global Debenture may be exchanged in
whole or in part for Debentures registered, and no transfer of a Global Debenture in whole or in
part may be registered, in the name of any Person other than the Depositary or a nominee thereof
unless (A) the Depositary (i) has notified the Company that it is unwilling or unable to continue
as Depositary for such Global Debenture and a successor depositary has not been appointed by the
Company within ninety days or (ii) has ceased to be a clearing agency registered under the Exchange
Act, (B) an Event of Default has occurred and is continuing or (C) the Company, in its sole
discretion, notifies the Trustee in writing that it no longer wishes to have all the Debentures
represented by Global Debentures. Any Global Debenture exchanged pursuant to clause (A) or (B)
above shall be so exchanged in whole and not in part and any Global Debenture exchanged pursuant to
clause (C) above may be exchanged in whole or from time to time in part as directed by the Company.
Any Debenture issued in exchange for a Global Debenture or any portion thereof shall be a Global
Debenture; provided that any such Debenture so issued that is registered in the name of a Person
other than the Depositary or a nominee thereof shall not be a Global Debenture.
(iii) Securities issued in exchange for a Global Debenture or any portion thereof pursuant to
clause (ii) above shall be issued in definitive, fully
16
registered form, without interest coupons, shall have an aggregate principal amount equal to that
of such Global Debenture or portion thereof to be so exchanged, shall be registered in such names
and be in such authorized denominations as the Depositary shall designate and shall bear any
legends required hereunder. Any Global Debenture to be exchanged in whole shall be surrendered by
the Depositary to the Trustee, as Debenture Registrar. With regard to any Global Debenture to be
exchanged in part, either such Global Debenture shall be so surrendered for exchange or, if the
Trustee is acting as Custodian for the Depositary or its nominee with respect to such Global
Debenture, the principal amount thereof shall be reduced, by an amount equal to the portion thereof
to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon
any such surrender or adjustment, the Trustee shall authenticate and make available for delivery
the Debenture issuable on such exchange to or upon the written order of the Depositary or an
authorized representative thereof.
(iv) In the event of the occurrence of any of the events specified in clause (ii) above, the
Company will promptly make available to the Trustee a reasonable supply of certificated Debentures
in definitive, fully registered form, without interest coupons.
(v) Neither any members of, or participants in, the Depositary (AGENT MEMBERS) nor any other
Persons on whose behalf Agent Members may act shall have any rights under this Indenture with
respect to any Global Debenture registered in the name of the Depositary or any nominee thereof,
and the Depositary or such nominee, as the case may be, may be treated by the Company, the Trustee
and any agent of the Company or the Trustee as the absolute owner and holder of such Global
Debenture for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent
the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depositary or such nominee, as
the case may be, or impair, as between the Depositary, its Agent Members and any other Person on
whose behalf an Agent Member may act, the operation of customary practices of such Persons
governing the exercise of the rights of a Holder of any Debenture.
(vi) At such time as all interests in a Global Debenture have been redeemed, repurchased,
converted, canceled or exchanged for Debentures in certificated form, such Global Debenture shall,
upon receipt thereof, be canceled by the Trustee in accordance with standing procedures and
instructions existing between the Depositary and the Custodian. At any time prior to such
cancellation, if any interest in a Global Debenture is redeemed, repurchased, converted, canceled
or exchanged for Debentures in certificated form, the principal amount of such Global Debenture
shall, in accordance with the standing procedures and instructions existing between the Depositary
and the Custodian, be appropriately reduced, and an endorsement shall be made on such Global
17
Debenture, by the Trustee or the Custodian, at the direction of the Trustee, to reflect such
reduction.
(c) Every Debenture that bears or is required under this Section 2.05(c) to bear the legend set
forth in this Section 2.05(c) (together with any Common Stock issued upon conversion of the
Debentures and required to bear the legend set forth in Section 2.05(c), collectively, the
RESTRICTED SECURITIES) shall be subject to the restrictions on transfer set forth in this Section
2.05(c) (including those set forth in the legend below) unless such restrictions on transfer shall
be waived by written consent of the Company, and the Holder of each such Restricted Security, by
such Debentureholders acceptance thereof, agrees to be bound by all such restrictions on transfer.
As used in Section 2.05(c) and 2.05(d), the term TRANSFER encompasses any sale, pledge, loan,
transfer or other disposition whatsoever of any Restricted Security or any interest therein.
Until the expiration of the holding period applicable to sales thereof under Rule 144(k) under the
Securities Act (or any successor provision), any certificate evidencing such Debenture (and all
securities issued in exchange therefor or substitution thereof, other than Common Stock, if any,
issued upon conversion thereof, which shall bear the legend set forth in Section 2.05(c), if
applicable) shall bear a legend in substantially the following form, unless such Debenture has been
sold pursuant to a registration statement that has been declared effective under the Securities Act
(and which continues to be effective at the time of such transfer) or pursuant to Rule 144 under
the Securities Act or any similar provision then in force, or unless otherwise agreed by the
Company in writing, with written notice thereof to the Trustee:
THE DEBENTURE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE SECURITIES ACT), OR ANY STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE
HOLDER (1) REPRESENTS THAT IT IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT); (2) AGREES THAT IT WILL NOT, PRIOR TO EXPIRATION OF THE HOLDING PERIOD
APPLICABLE TO SALES OF THIS DEBENTURE UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR
PROVISION), RESELL OR OTHERWISE TRANSFER THIS DEBENTURE OR THE COMMON STOCK ISSUABLE UPON
CONVERSION OF THIS DEBENTURE EXCEPT (A) TO IMPAX LABORATORIES, INC. OR ANY SUBSIDIARY THEREOF, (B)
TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE) OR (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE
SECURITIES ACT (AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER); (3) PRIOR TO
SUCH TRANSFER (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(D) ABOVE), IT WILL FURNISH TO HSBC BANK
USA, NATIONAL ASSOCIATION, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS THE TRUSTEE MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A
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TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT; AND (4) AGREES
THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS DEBENTURE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO
THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS DEBENTURE PRIOR TO THE
EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THIS DEBENTURE UNDER RULE 144(k) UNDER THE
SECURITIES ACT (OR ANY SUCCESSOR PROVISION), THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON
THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO HSBC BANK
USA, NATIONAL ASSOCIATION (OR A SUCCESSOR TRUSTEE, AS APPLICABLE). THIS LEGEND WILL BE REMOVED UPON
THE EARLIER OF THE TRANSFER OF THIS DEBENTURE PURSUANT TO CLAUSE 2(D) ABOVE OR UPON ANY TRANSFER OF
THIS DEBENTURE UNDER RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION). THE
INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS
DEBENTURE IN VIOLATION OF THE FOREGOING RESTRICTION.
Any Debenture (or security issued in exchange or substitution therefor) as to which such
restrictions on transfer shall have expired in accordance with their terms or as to conditions for
removal of the foregoing legend set forth therein have been satisfied may, upon surrender of such
Debenture for exchange to the Debenture Registrar in accordance with the provisions of this Section
2.05, be exchanged for a new Debenture or Debentures, of like tenor and aggregate principal amount,
which shall not bear the restrictive legend required by this Section 2.05(c). If the Restricted
Security surrendered for exchange is represented by a Global Debenture bearing the legend set forth
in this Section 2.05(c), the principal amount of the legended Global Debenture shall be reduced by
the appropriate principal amount and the principal amount of a Global Debenture without the legend
set forth in this Section 2.05(c) shall be increased by an equal principal amount. If a Global
Debenture without the legend set forth in this Section 2.05(c) is not then outstanding, the Company
shall execute and the Trustee shall authenticate and deliver an unlegended Global Debenture to the
Depositary.
(d) Until the expiration of the holding period applicable to sales thereof under Rule 144(k) under
the Securities Act (or any successor provision), any stock certificate representing Common Stock
issued upon conversion of any Debenture shall bear a legend in substantially the following form,
unless such Common Stock has been sold pursuant to a registration statement that has been declared
effective under the Securities Act (and which continues to be effective at the time of such
transfer) or pursuant to Rule 144 under the Securities Act or any similar provision then in force,
or such Common Stock has been issued upon conversion of Debentures that have been transferred
pursuant to a registration statement that has been declared effective under the Securities Act or
pursuant to Rule 144 under the Securities Act or any similar provision then in force, or unless
otherwise agreed by the Company in writing with written notice thereof to the transfer agent:
THE COMMON STOCK EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF
1933, AS AMENDED (THE SECURITIES ACT), OR ANY STATE SECURITIES LAWS AND, ACCORDINGLY, MAY NOT BE
OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. THE
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HOLDER HEREOF AGREES THAT, UNTIL THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THE
COMMON STOCK EVIDENCED HEREBY UNDER RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR
PROVISION), (1) IT WILL NOT RESELL OR OTHERWISE TRANSFER THE COMMON STOCK EVIDENCED HEREBY EXCEPT
(A) TO IMPAX LABORATORIES, INC. OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER
(AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN COMPLIANCE WITH RULE 144A, (C) PURSUANT TO
THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (D)
PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT
(AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER); (2) PRIOR TO SUCH TRANSFER
(OTHER THAN A TRANSFER PURSUANT TO CLAUSE 1(D) ABOVE), IT WILL FURNISH TO STOCKTRANS, INC., AS
TRANSFER AGENT (OR A SUCCESSOR TRANSFER AGENT, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS
OR OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS
BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND (3) IT WILL DELIVER TO EACH PERSON TO WHOM THE COMMON STOCK
EVIDENCED HEREBY IS TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 1(D) ABOVE) A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE
TRANSFER OF THE COMMON STOCK EVIDENCED HEREBY PURSUANT TO CLAUSE 1(D) ABOVE OR UPON ANY TRANSFER OF
THE COMMON STOCK EVIDENCED HEREBY AFTER THE EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF
THE SECURITY EVIDENCED HEREBY UNDER RULE 144(k) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR
PROVISION).
Any such Common Stock as to which such restrictions on transfer shall have expired in accordance
with their terms or as to which the conditions for removal of the foregoing legend set forth
therein have been satisfied may, upon surrender of the certificates representing such shares of
Common Stock for exchange in accordance with the procedures of the transfer agent for the Common
Stock, be exchanged for a new certificate or certificates for a like number of shares of Common
Stock, which shall not bear the restrictive legend required by this Section
2.05(d).
(e) Any Debenture or Common Stock issued upon the conversion of a Debenture that, prior to the
expiration of the holding period applicable to sales thereof under Rule 144(k) under the Securities
Act (or any successor provision), is purchased or owned by the Company or any Affiliate thereof may
not be resold by the Company or such Affiliate unless registered under the Securities Act or resold
pursuant to an exemption from the registration requirements of the Securities Act in a transaction
which results in such Debentures or Common Stock, as the case may be, no longer being Restricted
Securities (as defined under Rule 144).
(f) The Trustee shall have no responsibility or obligation to any Agent Members or any other Person
with respect to the accuracy of the books or records, or the acts or omissions, of the Depository
or its nominee or of any participant or member thereof, with respect to any
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ownership interest in the Debentures or with respect to the delivery to any Agent Member or other
Person (other than the Depositary) of any notice (including any notice of redemption) or the
payment of any amount, under or with respect to such Debentures. All notices and communications to
be given to the Debentureholder and all payments to be made to Debentureholders under the
Debentures shall be given or made only to or upon the order of the registered Debentureholders
(which shall be the Depository or its nominee in the case of a Global Debenture). The rights of
beneficial owners in any Global Debenture shall be exercised only through the Depository subject to
the customary procedures of the Depository. The Trustee may rely and shall be fully protected in
relying upon information furnished by the Depository with respect to its Agent Members.
The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with
any restrictions on transfer imposed under this Indenture or under applicable law with respect to
any transfer of any interest in any Debenture (including any transfers between or among Agent
Members in any Global Indenture) other than to require delivery of such certificates and other
documentation or evidence as are expressly required by, and to do so if and when expressly required
by, the terms of this Indenture, and to examine the same to determine substantial compliance as to
form with the express requirements hereof.
Section 2.06. Mutilated, Destroyed, Lost or Stolen Debentures. In case any Debenture shall become
mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its
written request the Trustee or an authenticating agent appointed by the Trustee shall authenticate
and make available for delivery, a new Debenture, bearing a number not contemporaneously
outstanding, in exchange and substitution for the mutilated Debenture, or in lieu of and in
substitution for the Debenture so destroyed, lost or stolen. In every case, the applicant for a
substituted Debenture shall furnish to the Company, to the Trustee and, if applicable, to such
authenticating agent such security or indemnity as may be required by them to save each of them
harmless for any loss, liability, cost or expense caused by or connected with such substitution,
and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company,
to the Trustee and, if applicable, to such authenticating agent evidence to their satisfaction of
the destruction, loss or theft of such Debenture and of the ownership thereof.
Following receipt by the Trustee or such authenticating agent, as the case may be, of satisfactory
security or indemnity and evidence, as described in the preceding paragraph, the Trustee or such
authenticating agent may authenticate any such substituted Debenture and make available for
delivery such Debenture. Upon the issuance of any substituted Debenture, the Company may require
the payment by the Holder of a sum sufficient to cover any tax, assessment or other governmental
charge that may be imposed in relation thereto and any other expenses connected therewith. In case
any Debenture which has matured or is about to mature or has been tendered for redemption upon a
Designated Event (and not withdrawn) or has been surrendered for repurchase on a Repurchase Date
(and not withdrawn) or is to be converted into Common Stock shall become mutilated or be destroyed,
lost or stolen, the Company may, instead of issuing a substitute Debenture, pay or authorize the
payment of or convert or authorize the conversion of the same (without surrender thereof except in
the case of a mutilated Debenture), as the case may be, if the applicant for such payment or
conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating
agent such security or indemnity as may be required by them to save each of them harmless for any
loss, liability, cost
21
or expense caused by or in connection with such substitution, and, in every case of destruction,
loss or theft, the applicant shall also furnish to the Company, the Trustee and, if applicable, any
paying agent or conversion agent evidence to their satisfaction of the destruction, loss or theft
of such Debenture and of the ownership thereof.
Every substitute Debenture issued pursuant to the provisions of this Section 2.06 by virtue of the
fact that any Debenture is destroyed, lost or stolen shall constitute an additional contractual
obligation of the Company, whether or not the destroyed, lost or stolen Debenture shall be found at
any time, and shall be entitled to all the benefits of (but shall be subject to all the limitations
set forth in) this Indenture equally and proportionately with any and all other Debentures duly
issued hereunder. To the extent permitted by law, all Debentures shall be held and owned upon the
express condition that the foregoing provisions are exclusive with respect to the replacement or
payment or conversion or redemption or repurchase of mutilated, destroyed, lost or stolen
Debentures and shall preclude any and all other rights or remedies notwithstanding any law or
statute existing or hereafter enacted to the contrary with respect to the replacement or payment or
conversion or redemption or repurchase of negotiable instruments or other securities without their
surrender.
Section 2.07. Temporary Debentures. Pending the preparation of Debentures in certificated form, the
Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon
the written request of the Company, authenticate and deliver temporary Debentures (printed or
lithographed). Temporary Debentures shall be issuable in any authorized denomination, and
substantially in the form of the Debentures in certificated form, but with such omissions,
insertions and variations as may be appropriate for temporary Debentures, all as may be determined
by the Company. Every such temporary Debenture shall be executed by the Company and authenticated
by the Trustee or such authenticating agent upon the same conditions and in substantially the same
manner, and with the same effect, as the Debentures in certificated form. Without unreasonable
delay, the Company will execute and deliver to the Trustee or such authenticating agent Debentures
in certificated form and thereupon any or all temporary Debentures may be surrendered in exchange
therefor, at each office or agency maintained by the Company pursuant to Section 6.02 and the
Trustee or such authenticating agent shall authenticate and make available for delivery in exchange
for such temporary Debentures an equal aggregate principal amount of Debentures in certificated
form. Such exchange shall be made by the Company at its own expense and without any charge
therefor. Until so exchanged, the temporary Debentures shall in all respects be entitled to the
same benefits and subject to the same limitations under this Indenture as Debentures in
certificated form authenticated and delivered hereunder.
Section 2.08. Cancellation of Debentures. All Debentures surrendered for the purpose of payment,
redemption, repurchase, conversion, exchange or registration of transfer shall, if surrendered to
the Company or any paying agent or any Debenture Registrar or any conversion agent, be surrendered
to the Trustee and promptly canceled by it, or, if surrendered to the Trustee, shall be promptly
canceled by it, and no Debentures shall be issued in lieu thereof except as expressly permitted by
any of the provisions of this Indenture. All cancelled Debentures held by the Trustee shall be
destroyed and certification of their destruction delivered to the Company unless by a Company order
the Company shall direct that cancelled Debentures be returned to it. If the Company shall acquire
any of the Debentures, such acquisition shall not
22
operate as a redemption, repurchase or satisfaction of the indebtedness represented by such
Debentures unless and until the same are delivered to the Trustee for cancellation.
Section 2.09. CUSIP Numbers. The Company in issuing the Debentures may use CUSIP numbers (if then
generally in use), and, if so, the Trustee shall use CUSIP numbers in notices of redemption as a
convenience to Debentureholders; provided that any such notice may state that no representation is
made as to the correctness of such numbers either as printed on the Debentures or as contained in
any notice of a redemption and that reliance may be placed only on the other identification numbers
printed on the Debentures, and any such redemption shall not be affected by any defect in or
omission of such numbers. The Company will promptly notify the Trustee of any change in the CUSIP
numbers.
Section 2.10. Rank. The Debentures shall be senior, subordinated, unsecured obligations of the
Company and shall rank (a) pari passu with all other existing or future senior, subordinated,
unsecured obligations of the Company allowed pursuant to Section 6.12 of this Indenture, (b) senior
in right of payment to the 1.250% Debentures and any future subordinated obligations of the Company
and (c) junior to the Designated Senior Indebtedness and other Senior Indebtedness allowed pursuant
to Section 6.12 of this Indenture. The Debentures shall constitute Senior Indebtedness, and the
Company hereby specifically designates the Debentures as Designated Senior Indebtedness, in each
case, under the 2004 Indenture.
ARTICLE 3
REDEMPTION AND REPURCHASE OF DEBENTURES
Section 3.01. Redemption of Debentures. The Debentures may not be redeemed at the option of the
Company, at any time prior to maturity, in whole or in part.
Section 3.02. [Intentionally Omitted.]
Section 3.03. [Intentionally Omitted.]
Section 3.04. [Intentionally Omitted.]
Section 3.05. Repurchase at Option of Holders Upon a Designated Event. (a) (i) If there shall occur
any Designated Event at any time prior to maturity of the Debentures, then each Debentureholder
shall have the right, at such Holders option, to require the Company to redeem all of such
Holders Debentures then outstanding, or any portion thereof that is a multiple of $1,000 principal
amount, on the Designated Event Repurchase Date at a redemption price equal to 100% of the
principal amount thereof, together with accrued and unpaid interest to, but excluding, the
Designated Event Repurchase Date (the DESIGNATED EVENT REPURCHASE PRICE); provided that if such
Designated Event Repurchase Date falls after a Record Date and on or prior to the corresponding
interest payment date, then the interest payable on such interest payment date shall be paid to the
holders of record of the Debentures on the applicable Record Date instead of the holders
surrendering the Debentures for redemption on such date.
A FUNDAMENTAL CHANGE will be deemed to have occurred at any time after the Debentures are
originally issued when any of the following events shall occur:
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(1) a person or group within the meaning of Section 13(d) of the Exchange Act other than the
Company, its subsidiaries or the Companys or its subsidiaries employee benefit plans, files a
Schedule TO or any schedule, form or report under the Exchange Act disclosing that such person or
group has become the direct or indirect ultimate beneficial owner, as defined in Rule 13d-3 under
the Exchange Act, of the Common Stock representing more than 50% of the voting power of the Common
Stock entitled to vote generally in the election of directors; or
(2) consummation of any share exchange, consolidation or merger of the Company pursuant to which
its Common Stock will be converted into cash, securities or other property or any sale, lease or
other transfer in one transaction or a series of transactions of all or substantially all of the
consolidated assets of the Company and its subsidiaries, taken as a whole, to any person other than
the Company or one or more of its subsidiaries; provided, however, that a transaction where the
holders of the Common Stock immediately prior to such transaction have directly or indirectly, more
than 50% of the aggregate voting power of all classes of Common Stock of the continuing or
surviving corporation or transferee entitled to vote generally in the election of directors
immediately after such event shall not be a Fundamental Change; or
(3) Continuing Directors cease to constitute at least a majority of the Board of Directors; or
(4) the approval by the holders of the Companys capital stock of any plan or proposal for
liquidation or dissolution.
(ii) Notwithstanding any provision hereof to the contrary, no Designated Event shall be deemed to
have occurred in respect of the foregoing if at least 90% of the consideration (excluding cash
payments for fractional shares) (the 90% CONDITION) in the transaction or transactions
constituting the Fundamental Change consists of shares of capital stock traded on a national
securities exchange or quoted on the Nasdaq National Market or which will be so traded or quoted
when issued or exchanged in connection with a Fundamental Change (such securities being referred to
as PUBLICLY TRADED SECURITIES), and, as a result of the transaction or transactions, the
Debentures become convertible into such Publicly Traded Securities (excluding cash payments for
fractional shares).
For purposes of this Section 3.05(a), (a) CONTINUING DIRECTORS means a director who either was a
member of the Companys board of directors on the date of this Indenture or who becomes a member of
the Companys board of directors subsequent to that date and whose appointment, election or
nomination for election by the Companys stockholders is duly approved by a majority of the
continuing directors on the Companys board of directors at the time of such approval, either by a
specific vote or by approval of the proxy statement issued by the Company on behalf of the board of
directors in which such individual is named as nominee for director and (b) the CAPITAL STOCK of
any Person means any and all shares, interests, participations or other equivalents however
designated of corporate stock or other equity participations, including partnership interests,
whether general or limited, of such Person and any rights (other than debt securities convertible
or exchangeable into any equity interest), warrants or options to acquire an equity interest in
such Person.
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Upon presentation of any Debenture redeemed in part only, the Company shall execute and, upon the
Companys written direction to the Trustee, the Trustee shall authenticate and make available for
delivery to the Holder thereof, at the expense of the Company, a new Debenture or Debentures, of
authorized denominations, in aggregate principal amount equal to the unredeemed portion of the
Debentures presented.
(b) Within ten days after which the Company knows of the occurrence of a Designated Event, the
Company or at its written request (which must be received by the Trustee at least five (5) Business
Days prior to the date the Trustee is requested to give notice as described below, unless the
Trustee shall agree in writing to a shorter period), the Trustee, in the name of and at the expense
of the Company, shall mail or cause to be mailed to all Holders a notice (the DESIGNATED EVENT
NOTICE) of such Designated Event and of the redemption right at the option of the Holders arising
as a result thereof. If the Company shall give such notice, the Company shall also deliver a copy
of the Designated Event Notice to the Trustee at such time as it is mailed to Debentureholders.
Concurrently with the mailing of any Designated Event Notice, the Company shall issue a press
release announcing such Designated Event referred to in the Designated Event Notice, the form and
content of which press release shall be determined by the Company in its sole discretion. The
failure to issue any such press release or any defect therein shall not affect the validity of the
Designated Event Notice or any proceedings for the redemption of any Debenture which any
Debentureholder may elect to have the Company redeem as provided in this Section 3.05.
Each Designated Event Notice shall state, among other things:
(1) briefly, the events causing the Designated Event;
(2) the date of the such Designated Event;
(3) that the Holder must exercise the redemption right prior to the close of business on the
Business Day prior to the Designated Event Repurchase Date (the DESIGNATED EVENT EXPIRATION
TIME);
(4) the Designated Event Repurchase Price, including the amount of interest accrued and Liquidated
Damages, if any, on each Debenture to the Designated Event Repurchase Date;
(5) the anticipated Designated Event Repurchase Date;
(6) the name and address the agent to whom the Holder is to surrender such Holders debentures;
(7) the Conversion Rate and any adjustments to the Conversion Rate;
(8) that the Holder can only convert surrendered Debentures if the Holder withdraws any Debentures
surrendered prior to the Designated Event Expiration Time in accordance with the terms of the
Indenture;
25
(9) a description of the procedure which a Holder must follow to exercise such redemption right and
to withdraw any surrendered Debentures;
(10) the CUSIP number or numbers of the Debentures (if then generally in use);
(11) in the case of a Fundamental Change, that a Make-Whole Premium is required to be paid by the
Company upon any conversion in connection with a Fundamental Change; and
(12) in the case of a Fundamental Change, whether such Make-Whole Premium shall be paid by delivery
of shares of Common Stock (other than cash in lieu of fractional shares) or in the same form of
consideration into which shares of Common Stock have been converted in connection with such
Fundamental Change in accordance with Section 5.01(d) (and containing such information required by
Section 5.01(d)).
If any of the Debentures is in the form of a Global Debenture, then the Company shall modify such
notice to the extent necessary to accord with the procedures of the Depositary.
No failure of the Company to give the foregoing notices and no defect therein shall limit the
Debentureholders redemption rights or affect the validity of the proceedings for the redemption of
the Debentures pursuant to this Section 3.05.
(c) For a Debenture to be so redeemed at the option of the Holder, the Company must receive at the
office or agency of the Company maintained for that purpose or, at the option of such Holder, the
Corporate Trust Office, the form entitled DESIGNATED EVENT REPURCHASE NOTICE duly completed, on
or before the Designated Event Expiration Time. All questions as to the validity, eligibility
(including time of receipt) and acceptance of any Debenture for redemption shall be determined by
the Company, whose determination shall be final and binding absent manifest error.
The Designated Event Repurchase Notice shall state, among other things:
(1) the certificate numbers of the Debentures that the Holder will deliver to be purchased or the
appropriate Depositary procedures if certificated Debentures have not been issued;
(2) the portion of the principal amount of Debentures that the Holder will deliver to be purchased,
which portion must be $1,000 or an integral multiple of $1,000; and
(3) that the Debentures shall be purchased pursuant to the terms and conditions specified in this
Article 3 of the Debentures and in this Indenture.
(d) For a Debenture to be so redeemed at the option of a Holder, the Debentures must be delivered
or transferred by book-entry to the Trustee (or other paying agent appointed by
26
the Company) at any time after delivery of the Designated Event Repurchase Notice (together with
all necessary endorsements) but on or prior to the Designated Event Expiration Time at the
Corporate Trust Office of the Trustee (or other paying agent appointed by the Company) in the
Borough of Manhattan as provided in Section 6.02, such delivery being a condition to the receipt by
the Holder of the purchase price therefor; provided that such purchase price shall be so paid
pursuant to this Section 3.05(d) only if the Debenture so delivered to the Trustee (or other paying
agent appointed by the Company) shall conform in all respects to the description thereof in the
related Designated Event Repurchase Notice.
The Company shall purchase from the Holder thereof, pursuant to this Section 3.05, a portion of a
Debenture, if the principal amount of such portion is $1,000 or a whole multiple of $1,000.
Provisions of this Indenture that apply to the purchase of all of a Debenture also apply to the
purchase of such portion of such Debenture.
Any purchase by the Company contemplated pursuant to the provisions of this Section 3.05 shall be
consummated by the delivery of the consideration to be received by the Holder promptly following
the later of the Designated Event Repurchase Date and the time of the book-entry transfer or
delivery of the Debenture.
Notwithstanding anything herein to the contrary, any Holder delivering the Designated Event
Repurchase Notice contemplated by this Section 3.05(c) shall have the right to withdraw such
Designated Event Repurchase Notice at any time prior to the close of business on the Business Day
immediately preceding the Designated Event Repurchase Date by delivery of a written notice of
withdrawal in accordance with Section 3.08.
The Trustee (or other paying agent appointed by the Company) shall promptly notify the Company of
the receipt by it of any Designated Event Repurchase Notice or written notice of withdrawal
thereof.
Anything herein to the contrary notwithstanding, in the case of Global Debentures, any Designated
Event Repurchase Notice may be delivered or withdrawn and such Debentures may be surrendered or
delivered for purchase in accordance with the applicable procedures of the Depositary as in effect
from time to time, but in no event later than the close of business on the Business Day immediately
preceding the Designated Event Repurchase Date.
(e) In the case of a reclassification, change, consolidation, merger, combination, sale or
conveyance to which Section 16.06 applies, in which the Common Stock of the Company is changed or
exchanged as a result into the right to receive stock, securities or other property or assets
(including cash), which includes shares of Common Stock of the Company or shares of common stock of
another Person that are, or upon issuance will be, traded on a United States national securities
exchange or approved for trading on an established automated over-the-counter trading market in the
United States and such shares constitute at the time such change or exchange becomes effective in
excess of 50% of the aggregate Fair Market Value of such stock, securities or other property or
assets (including cash) (as determined by the Company, which determination shall be conclusive and
binding), then the Person formed by such consolidation or resulting from such merger or which
acquires such assets, as the case may be, shall execute and deliver to the Trustee a supplemental
indenture (accompanied by an Opinion of Counsel that such supplemental indenture complies with the
Trust Indenture Act as in force at the date of execution of such supplemental indenture) modifying
the provisions of this Indenture relating to the right of Holders of the Debentures to cause the
Company to repurchase the
27
Debentures following a Designated Event, including without limitation the applicable provisions of
this Section 3.05 and the definitions of Common Stock and Designated Event, as appropriate, as
determined in good faith by the Company (which determination shall be conclusive and binding), to
make such provisions apply to such other Person if different from the Company and the common stock
issued by such Person (in lieu of the Company and the Common Stock of the Company).
(f) The Company will comply with the provisions of Rule 13e-4 and any other tender offer rules
under the Exchange Act to the extent then applicable in connection with the redemption rights of
the Holders of Debentures in the event of a Designated Event.
Section 3.06. Repurchase of Debentures by the Company at Option of the Holder. Debentures then
outstanding shall be purchased by the Company pursuant to the terms of the Debentures at the option
of the Holder thereof on June 15, 2009 (the REPURCHASE DATE), at a purchase price of 100% of the
principal, plus, in each case, any accrued and unpaid interest to, but excluding, the Repurchase
Date, subject to the provisions of Section 3.07(a). Repurchases of Debentures under this Section
3.06 shall be made, at the option of the Holder thereof, upon:
(y) delivery to the Trustee (or other paying agent appointed by the Company) by such Holder of a
duly completed notice (the REPURCHASE NOTICE) during the period beginning at any time from the
opening of business on the date that is twenty-three Business Days prior to the Repurchase Date
until the close of business on the date that is three Business Days prior to the Repurchase Date
(the REPURCHASE EXPIRATION TIME) that states, among other things:
(1) the certificate numbers of the Debentures that such Holder will deliver to be purchased or the
appropriate Depositary procedures if certificated Debentures have not been issued;
(2) the portion of the principal amount of Debentures that such Holder will deliver to be
purchased, which portion must be $1,000 or an integral multiple of $1,000; and
(3) that the Debentures shall be purchased pursuant to the terms and conditions specified in this
Section 3 of the Debentures and in this Indenture; and
(z) delivery or book-entry transfer of the Debentures to the Trustee (or other paying agent
appointed by the Company) at any time after delivery of the Repurchase Notice (together with all
necessary endorsements) but on or prior to the Repurchase Expiration Time at the Corporate Trust
Office of the Trustee (or other paying agent appointed by the Company) in the Borough of Manhattan
as provided in Section 6.02, such delivery being a condition to receipt by such Holder of the
purchase price therefor; provided that such purchase price shall be so paid pursuant to this
Section 3.06 only if the Debenture so delivered to the Trustee (or other paying agent appointed by
the Company) shall conform in all respects to the description thereof in the related Repurchase
Notice.
The Company shall purchase from the Holder thereof, pursuant to this Section 3.06, a portion of a
Debenture, if the principal amount of such portion is $1,000 or a whole
28
multiple of $1,000. Provisions of this Indenture that apply to the purchase of all of a Debenture
also apply to the purchase of such portion of such Debenture.
Any purchase by the Company contemplated pursuant to the provisions of this Section 3.06 shall be
consummated by the delivery of the consideration to be received by the Holder promptly following
the later of the Repurchase Date and the time of the book-entry transfer or delivery of the
Debenture.
Notwithstanding anything herein to the contrary, any Holder delivering to the Trustee (or other
paying agent appointed by the Company) the Repurchase Notice contemplated by this Section 3.06
shall have the right to withdraw such Repurchase Notice at any time prior to the close of business
on the date that is three Business Days prior to the Repurchase Date by delivery of a written
notice of withdrawal to the Trustee (or other paying agent appointed by the Company) in accordance
with Section 3.08.
The Trustee (or other paying agent appointed by the Company) shall promptly notify the Company of
the receipt by it of any Repurchase Notice or written notice of withdrawal thereof.
Section 3.07. Company Repurchase Notice.
(a) The Debentures to be repurchased on the Repurchase Date pursuant to Section 3.06 will be paid
for in cash.
At least three Business Days before the Company Repurchase Notice Date, the Company shall deliver
an Officers Certificate to the Trustee specifying:
(i) the information required by Section 3.07(b) in the Company Repurchase Notice, and
(ii) whether the Company desires the Trustee to give the Company Repurchase Notice required by
Section 3.07(b).
(b) In connection with any repurchase of Debentures, the Company shall, no less than 23 Business
Days prior to the Repurchase Date (the COMPANY REPURCHASE NOTICE DATE), give notice to Holders at
their addresses shown in the Debenture Register setting forth information specified in this Section
3.07(b) (the COMPANY REPURCHASE NOTICE). The Company will also give notice to beneficial owners
as required by applicable law.
The Company Repurchase Notice shall:
(1) state the repurchase price and the Repurchase Date to which the Company Repurchase Notice
relates;
(2) include a form of Repurchase Notice;
(3) state the name and address of the Trustee (or other paying agent or conversion agent appointed
by the Company);
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(4) state that Debentures must be surrendered to the Trustee (or other paying agent appointed by
the Company) to collect the purchase price;
(5) if the Debentures are then convertible, state that Debentures as to which a Repurchase Notice
has been given may be converted only if the Repurchase Notice is withdrawn in accordance with the
terms of this Indenture; and
(6) state the CUSIP number of the Debentures.
The Company Repurchase Notice may be given by the Company or, at the Companys request, the Trustee
shall give such Company Repurchase Notice in the Companys name and at the Companys expense.
(c) The Company will comply with the provisions of Rule 13e-4 and any other tender offer rules
under the Exchange Act to the extent then applicable in connection with the repurchase rights of
the Holders of Debentures.
Section 3.08. Effect of Designated Event Repurchase Notice or Repurchase Notice. Upon receipt by
the Trustee (or other paying agent appointed by the Company) of the Designated Event Repurchase
Notice or Repurchase Notice specified in Section 3.05 or Section 3.06, as applicable, the Holder of
the Debenture in respect of which such Repurchase Notice, as the case may be, was given shall
(unless such Designated Event Repurchase Notice or Repurchase Notice, as the case may be, is
validly withdrawn) thereafter be entitled to receive solely the purchase price (including any
applicable premium) with respect to such Debenture. Such purchase price (including any applicable
premium) shall be paid to such Holder, subject to receipt of funds and/or Debentures by the Trustee
(or other paying agent appointed by the Company), promptly following the later of (x) the
Designated Event Repurchase Date or Repurchase Date, as the case may be, with respect to such
Debenture (provided the Holder has satisfied the conditions in Section 3.05 or Section 3.06, as
applicable) and (y) the time of delivery of such Debenture to the Trustee (or other paying agent
appointed by the Company) by the Holder thereof in the manner required by Section 3.05 or Section
3.06, as applicable. Debentures in respect of which a Designated Event Repurchase Notice or
Repurchase Notice has been given by the Holder thereof may not be converted pursuant to Article 16
hereof on or after the date of the delivery of such Designated Event Repurchase Notice or
Repurchase Notice, as the case may be, unless such Designated Event Repurchase Notice or Repurchase
Notice, as the case may be, has first been validly withdrawn.
A Designated Event Repurchase Notice or Repurchase Notice may be withdrawn by means of a written
notice of withdrawal delivered to the office of the Trustee (or other paying agent appointed by the
Company) in accordance with the Designated Event Repurchase Notice or Repurchase Notice, as the
case may be, at any time prior to the close of business on the Business Day immediately preceding
the Designated Event Repurchase Date or at any time prior to the close of business on the date that
is three Business Days prior to the Repurchase Date, specifying:
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(a) the certificate number, if any, of the Debenture in respect of which such notice of withdrawal
is being submitted, or the appropriate Depositary information if the Debenture in respect of which
such notice of withdrawal is being submitted is represented by a Global Debenture,
(b) the principal amount of the Debenture with respect to which such notice of withdrawal is being
submitted, and
(c) the principal amount, if any, of such Debenture which remains subject to the original
Designated Event Repurchase Notice or Repurchase Notice, as the case may be, and which has been or
will be delivered for purchase by the Company.
A written notice of withdrawal of a Designated Event Repurchase Notice or Repurchase Notice, as the
case may be, may be in the form set forth in the preceding paragraph.
Section 3.09. Deposit of Purchase Price. (a) Prior to 10:00
a.m., New York City Time, on the Designated Event Repurchase Date or Repurchase Date, as the case
may be, the Company shall deposit with the Trustee (or other paying agent appointed by the Company;
or, if the Company or a Subsidiary or an Affiliate of either of them is acting as the paying agent,
shall segregate and hold in trust as provided in Section 6.04) an amount of funds (in immediately
available funds if deposited on such Business Day), sufficient to pay the aggregate purchase price
of all the Debentures or portions thereof that are to be purchased as of the Designated Event
Repurchase Date or the Repurchase Date, as applicable.
(b) If the Trustee or other paying agent appointed by the Company, or the Company or a Subsidiary
or Affiliate of either of them, if such entity is acting as the paying agent, holds funds
sufficient to pay the aggregate purchase price of all the Debentures, or portions thereof that are
to be purchased as of the Designated Event Repurchase Date or the Repurchase Date, as applicable,
from and after the Designated Event Repurchase Date or the Repurchase Date, as applicable (i) the
Debentures will cease to be outstanding,
(ii) interest on the Debentures will cease to accrue, and (iii) all other rights of the Holders of
such Debentures will terminate, whether or not book-entry transfer of the Debentures has been made
or the Debentures have been delivered to the Trustee or paying agent, other than the right to
receive the repurchase price upon delivery of the Debentures.
Section 3.10. Debentures Repurchased in Part. Upon presentation of any Debenture repurchased only
in part, the Company shall execute and the Trustee shall authenticate and make available for
delivery to the Holder thereof, at the expense of the Company, a new Debenture or Debentures, of
any authorized denomination, in aggregate principal amount equal to the unrepurchased portion of
the Debentures presented.
Section 3.11. Repayment to the Company. The Trustee (or other paying agent appointed by the
Company) shall return to the Company any funds that remains unclaimed as provided in Section 12 of
the Debentures, together with interest, if any, thereon, held by them for the payment of the
purchase price; provided that to the extent that the aggregate amount of funds deposited by the
Company pursuant to Section 3.09 exceeds the aggregate purchase price of the Debentures or portions
thereof which the Company is obligated to purchase as of the Designated
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Event Repurchase Date or the Repurchase Date then, unless otherwise agreed in writing with the
Company, promptly after the Business Day following the Designated Event Repurchase Date or the
Repurchase Date, as the case may be, the Trustee shall return any such excess to the Company.
ARTICLE 4
SUBORDINATION OF DEBENTURES
Section 4.01. Agreement of Subordination. The Company covenants and agrees, and each Holder of
Debentures issued hereunder by its acceptance thereof likewise covenants and agrees, that all
Debentures shall be issued subject to the provisions of this Article 4, and each Person holding any
Debentures, whether upon original issue or upon registration of transfer, assignment or exchange
thereof, accepts and agrees to be bound by such provisions.
The payment of the principal of, premium, if any, and interest on all Debentures (including, but
not limited to, the redemption or repurchase price with respect to the Debentures subject to
redemption or repurchase in accordance with Article 3 as provided in this Indenture) issued
hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and subject
in right of payment to the prior payment in full of all Senior Indebtedness, whether outstanding at
the date of this Indenture or thereafter incurred.
No provision of this Article 4 shall prevent the occurrence of any default or Event of Default
hereunder or have any effect on the rights of the Holders of the Debentures or the Trustee to
accelerate the maturity of the Debentures.
Section 4.02. Payments to Debentureholders. No payment shall be made with respect to the principal
of, premium, if any, or interest on the Debentures (including, but not limited to, the redemption
or repurchase price with respect to the Debentures subject to redemption or repurchase in
accordance with Article 3, as provided in this Indenture), except payments and distributions made
by the Trustee as permitted by the first or second paragraph of Section 4.05, if:
(i) a default in the payment of principal, premium, if any, interest, rent or other obligations in
respect of Designated Senior Indebtedness occurs and is continuing (or, in the case of Designated
Senior Indebtedness for which there is a period of grace, in the event of such a default that
continues beyond the period of grace, if any, specified in the instrument or lease evidencing such
Designated Senior Indebtedness) (a PAYMENT DEFAULT); or
(ii) a default, other than a Payment Default, on any Designated Senior Indebtedness occurs and is
continuing (or would occur as a result of such payment; provided in that case that the Company has
notified the Trustee that such default would result from such payment prior to the time that the
Trustee is required to make such payment) that then permits holders of such Designated Senior
Indebtedness to accelerate its maturity (or in the case of any lease that is Designated Senior
Indebtedness, a default occurs and is continuing that permits the lessor to either terminate the
lease or require the Company to make an
32
irrevocable offer to terminate the lease following an event of default thereunder) and the Trustee
receives a notice of the default (a PAYMENT BLOCKAGE NOTICE) from a holder of Designated Senior
Indebtedness or a Representative of Designated Senior Indebtedness (a NON-PAYMENT DEFAULT).
If the Trustee receives any Payment Blockage Notice pursuant to clause (ii) above, no subsequent
Payment Blockage Notice shall be effective for purposes of this Section 4.02 unless and until at
least 365 days shall have elapsed since the initial effectiveness of the immediately prior Payment
Blockage Notice. No Non-Payment Default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment
Blockage Notice.
The Company may and shall resume payments on and distributions in respect of the Debentures
(including, but not limited to, the redemption price with respect to the Debentures to be redeemed)
upon the earlier of:
(1) in the case of a Payment Default, the date upon which any such Payment Default is cured or
waived or ceases to exist, or
(2) in the case of a Non-Payment Default, the earlier of (a) the date upon which such default is
cured or waived or ceases to exist or (b) 179 days after the applicable Payment Blockage Notice is
received by the Trustee if the maturity of such Designated Senior Indebtedness has not been
accelerated (or in the case of any lease, 179 days after notice is received if the Company has not
received notice that the lessor under such lease has exercised its right to terminate the lease or
require the Company to make an irrevocable offer to terminate the lease following an event of
default thereunder) , unless this Article 4 otherwise prohibits the payment or distribution at the
time of such payment or distribution.
Upon any payment by the Company, or distribution of assets of the Company of any kind or character,
whether in cash, property or securities, to creditors upon any dissolution or winding up or
liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy,
insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior
Indebtedness shall first be paid in full in cash or other payment satisfactory to the holders of
such Senior Indebtedness before any payment is made on account of the principal of, premium, if
any, or interest (including Liquidated Damages, if any) on the Debentures (except payments made
pursuant to Article 14 from monies deposited with the Trustee pursuant thereto prior to
commencement of proceedings for such dissolution, winding up, liquidation or reorganization unless
the Trustee has received notice to the contrary in accordance with Section 4.05), and upon any such
dissolution or winding up or liquidation or reorganization of the Company or bankruptcy,
insolvency, receivership or other similar proceeding, any payment by the Company, or distribution
of assets of the Company of any kind or character, whether in cash, property or securities, to
which the Holders of the Debentures or the Trustee would be entitled, except for the provisions of
this Article 4, shall (except as aforesaid) be paid by the Company or by any receiver, trustee in
bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by
the Holders of the Debentures or by the Trustee under this Indenture if received by them or it,
directly to the holders of Senior Indebtedness (pro rata to
33
such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, or
as otherwise required by law or a court order) or their Representative or Representatives, as their
respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full, in
cash or other payment satisfactory to the holders of such Senior Indebtedness, after giving effect
to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any
payment or distribution is made to the Holders of the Debentures. Without in any way limiting the
provisions of this Article 4, all cash, property and securities (other than Junior Securities) to
be paid or issued by the Company in connection with any conversion of any Debentures (including,
without limitation, the Cash Amount and any cash paid in lieu of Residual Value Shares or in
respect of any Make-Whole Premium) shall be subject to the subordination and other provisions of
this Article 4.
For purposes of this Article 4, the words, CASH, PROPERTY OR SECURITIES shall not be deemed to
include shares of Common Stock of the Company as reorganized or readjusted, or securities of the
Company or any other corporation provided for by a plan of reorganization or readjustment, the
payment of which is subordinated at least to the extent provided in this Article 4 with respect to
the Debentures to the payment of all Senior Indebtedness which may at the time be outstanding;
provided that (i) the Senior Indebtedness is assumed by the new corporation, if any, resulting from
any reorganization or readjustment, and (ii) the rights of the holders of Senior Indebtedness
(other than leases which are not assumed by the Company or the new corporation, as the case may be)
are not, without the consent of such holders, altered by such reorganization or readjustment. The
consolidation of the Company with, or the merger of the Company into, another corporation or the
liquidation or dissolution of the Company following the conveyance or transfer of its property as
an entirety, or substantially as an entirety, to another Person upon the terms and conditions
provided for in Article 13 shall not be deemed a dissolution, winding-up, liquidation or
reorganization for the purposes of this
Section 4.02 if such other Person shall, as a part of such consolidation, merger, conveyance or
transfer, comply with the conditions stated in Article 13.
In the event of the acceleration of the Debentures because of an Event of Default, no payment or
distribution shall be made to the Trustee or any Holder of Debentures in respect of the principal
of, premium, if any, or interest on the Debentures (including, but not limited to, the redemption
price with respect to the Debentures submitted for redemption in accordance with
Section 3.05, as provided in this Indenture), except payments and distributions made by the Trustee
as permitted by the first or second paragraph of Section 4.05, until all Senior Indebtedness has
been paid in full in cash or other payment satisfactory to the holders of Senior Indebtedness or
such acceleration is rescinded in accordance with the terms of this Indenture. If payment of the
Debentures is accelerated because of an Event of Default, the Company shall promptly notify holders
of Senior Indebtedness of the acceleration.
In the event that, notwithstanding the foregoing provisions, any payment or distribution of assets
of the Company of any kind or character, whether in cash, property or securities (including,
without limitation, by way of setoff or otherwise), prohibited by the foregoing provisions in this
Section 4.02, shall be received by the Trustee or the Holders of the Debentures before all Senior
Indebtedness is paid in full in cash or other payment satisfactory to the holders of such Senior
34
Indebtedness, or provision is made for such payment thereof in accordance with its terms in cash or
other payment satisfactory to the holders of such Senior Indebtedness, to the extent that the
Trustee or any Holder of the Debentures has acquired notice, by whatever means, that all Senior
Indebtedness has not been paid in full, such payment or distribution shall be held in trust for the
benefit of the holders of Senior Indebtedness and shall be paid over or delivered to the holders of
Senior Indebtedness or their Representative or Representatives, as their respective interests may
appear, as calculated by the Company (unless the Trustee is directed otherwise by any court of
competent jurisdiction), for application to the payment of any Senior Indebtedness remaining unpaid
to the extent necessary to pay all Senior Indebtedness in full in cash or other payment
satisfactory to the holders of such Senior Indebtedness, after giving effect to any concurrent
payment or distribution to or for the holders of such Senior Indebtedness.
Nothing in this Section 4.02 shall apply to claims of, or payments to, the Trustee under or
pursuant to Section 9.06. This Section 4.02 shall be subject to the further provisions of Section
4.05.
Section 4.03. Subrogation of Debentures. Subject to the payment in full of all Senior Indebtedness,
the rights of the Holders of the Debentures shall be subrogated to the extent of the payments or
distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this
Article 4 (equally and ratably with the holders of all Indebtedness of the Company which by its
express terms is subordinated to other Indebtedness of the Company to substantially the same extent
as the Debentures are subordinated and is entitled to like rights of subrogation) to the rights of
the holders of Senior Indebtedness to receive payments or distributions of cash, property or
securities of the Company applicable to the Senior Indebtedness until the principal, premium, if
any, and interest on the Debentures shall be paid in full, and, for the purposes of such
subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash,
property or securities to which the Holders of the Debentures or the Trustee would be entitled
except for the provisions of this Article 4, and no payment pursuant to the provisions of this
Article 4, to or for the benefit of the holders of Senior Indebtedness by Holders of the Debentures
or the Trustee, shall, as among the Company, its creditors other than holders of Senior
Indebtedness, and the Holders of the Debentures, be deemed to be a payment by the Company to or on
account of the Senior Indebtedness, and no payments or distributions of cash, property or
securities to or for the benefit of the Holders of the Debentures pursuant to the subrogation
provisions of this Article 4, which would otherwise have been paid to the holders of Senior
Indebtedness, shall be deemed to be a payment by the Company to or for the account of the
Debentures. It is understood that the provisions of this Article 4 are intended solely for the
purposes of defining the relative rights of the Holders of the Debentures, on the one hand, and the
holders of the Senior Indebtedness, on the other hand.
Nothing contained in this Article 4 or elsewhere in this Indenture or in the Debentures is intended
to or shall impair, as among the Company, its creditors other than the holders of Senior
Indebtedness, and the Holders of the Debentures, the obligation of the Company, which is absolute
and unconditional, to pay to the Holders of the Debentures the principal of, premium, if any, and
interest on the Debentures as and when the same shall become due and payable in accordance with
their terms, or is intended to or shall affect the relative rights of the Holders of the Debentures
and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything
herein or therein prevent the Trustee or, subject to Section 8.04, the Holder of any Debenture from
exercising all remedies otherwise permitted by
35
applicable law upon default under this Indenture, subject to the rights, if any, under this Article
4 of the holders of Senior Indebtedness in respect of cash, property or securities of the Company
received upon the exercise of any such remedy.
Upon any payment or distribution of assets of the Company referred to in this Article 4, the
Trustee, subject to the provisions of Section 9.01, and the Holders of the Debentures shall be
entitled to rely upon any order or decree made by any court of competent jurisdiction in which such
bankruptcy, dissolution, winding up, liquidation or reorganization proceedings are pending, or a
certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other Person
making such payment or distribution, delivered to the Trustee or to the Holders of the Debentures,
for the purpose of ascertaining the Persons entitled to participate in such distribution, the
holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or
payable thereon and all other facts pertinent thereto or to this Article 4.
Section 4.04. Authorization to Effect Subordination. Each Holder of a Debenture by the Holders
acceptance thereof authorizes and directs the Trustee on the Holders behalf to take such action as
may be necessary or appropriate to effectuate the subordination as provided in this Article 4 and
appoints the Trustee to act as the Holders attorney-in-fact for any and all such purposes. If the
Trustee does not file a proper proof of claim or proof of debt in the form required in any
proceeding referred to in the third paragraph of Section 8.02 hereof at least thirty (30) days
before the expiration of the time to file such claim, the holders of any Senior Indebtedness or
their Representatives are hereby authorized to file an appropriate claim for and on behalf of the
Holders of the Debentures.
Section 4.05. Notice to Trustee. The Company shall give prompt written notice in the form of an
Officers Certificate to a Responsible Officer of the Trustee and to any paying agent of any fact
known to the Company that would prohibit the making of any payment of monies to or by the Trustee
or any paying agent in respect of the Debentures pursuant to the provisions of this Article 4.
Notwithstanding the provisions of this Article 4 or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the
making of any payment of monies to or by the Trustee in respect of the Debentures pursuant to the
provisions of this Article 4, unless and until a Responsible Officer of the Trustee shall have
received written notice thereof at the Corporate Trust Office from the Company (in the form of an
Officers Certificate) or a Representative or a holder or holders of Senior Indebtedness, and
before the receipt of any such written notice, the Trustee, subject to the provisions of Section
9.01, shall be entitled in all respects to assume that no such facts exist; provided, however, that
if by the Business Day prior to the date upon which by the terms hereof any such monies may become
payable for any purpose (including, without limitation, the payment of the principal of, or
premium, if any, or interest on any Debenture) the Trustee shall not have received, with respect to
such monies, the notice provided for in this Section 4.05, then, anything herein contained to the
contrary notwithstanding, the Trustee shall have full power and authority to apply monies received
to the purpose for which they were received, and shall not be affected by any notice to the
contrary that may be received by it on or after such prior date.
36
Notwithstanding anything in this Article 4 to the contrary, nothing shall prevent any payment by
the Trustee to the Debentureholders of monies deposited with it pursuant to Section 14.01, if a
Responsible Officer of the Trustee shall not have received written notice at the Corporate Trust
Office on or before one Business Day prior to the date such payment is due that such payment is not
permitted under Section 4.01 or 4.02.
The Trustee, subject to the provisions of Section 9.01, shall be entitled to rely on the delivery
to it of a written notice by a Representative or a person representing himself to be a holder of
Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been
given by a Representative or a holder of Senior Indebtedness or a trustee on behalf of any such
holder or holders. The Trustee shall not be required to make any payment or distribution to or on
behalf of a holder of Senior Indebtedness pursuant to this Article 4 unless it has received
satisfactory evidence as to the amount of Senior Indebtedness held by such Person, the extent to
which such Person is entitled to participate in such payment or distribution and any other facts
pertinent to the rights of such Person under this Article 4.
Section 4.06. Trustees Relation to Senior Indebtedness. The Trustee, in its individual capacity,
shall be entitled to all the rights set forth in this Article 4 in respect of any Senior
Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness,
and nothing in Section 9.13 or elsewhere in this Indenture shall deprive the Trustee of any of its
rights as such holder. Nothing in this Article shall subordinate to the Senior Indebtedness the
claims of, or payments to, the Trustee under or pursuant to Section 9.06.
With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe
only such of its covenants and obligations as are specifically set forth in this Article 4, and no
implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read
into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty
to the holders of Senior Indebtedness and the Trustee shall not be liable to any holder of Senior
Indebtedness (i) for any failure to make any payments or distributions to such holder or (ii) if it
shall pay over or deliver money to Holders of Debentures, the Company or any other Person in
compliance with this Article 4. Notwithstanding the foregoing, the Trustee shall not be liable to
any holder of Senior Indebtedness if, in the exercise of the Trustees good faith, the Trustee pays
over or delivers money to Holders of Debentures, the Company or any other Person other than in
compliance with this Article 4.
Section 4.07. No Impairment of Subordination. No right of any present or future holder of any
Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company or by any act or
failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the
terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any
such holder may have or otherwise be charged with. Senior Indebtedness may be created, renewed or
extended and holders of Senior Indebtedness may exercise any rights under any instrument creating
or evidencing such Senior Indebtedness, including, without limitation, any waiver of default
thereunder, without any notice to or consent from the Holders of the Debentures or the Trustee. No
compromise, alteration, amendment, modification, extension, renewal or other change of, or waiver,
consent or other action in respect of, any liability or obligation under or in respect of the
Senior Indebtedness or any terms or
37
conditions of any instrument creating or evidencing such Senior Indebtedness shall in any way alter
or affect any of the provisions of this Article 4 or the subordination of the Debentures provided
thereby.
Section 4.08. Certain Conversions Not Deemed Payment. For the purposes of this Article 4 only, the
issuance and delivery of Junior Securities upon conversion of Debentures in accordance with Article
16 and/or delivered as a Make-Whole Premium in accordance with Article 5 shall not be deemed to
constitute a payment or distribution on account of the principal of, premium, if any, or interest
on Debentures or on account of the purchase or other acquisition of Debentures, and shall not be
subject to the subordination and other provisions of this Article 4. For the purposes of this
Section 4.08, the term JUNIOR SECURITIES means (a) Common Stock or (b) securities of the Company
that are subordinated in right of payment to all Senior Indebtedness that may be outstanding at the
time of issuance or delivery of such securities to substantially the same extent as, or to a
greater extent than, the Debentures are so subordinated as provided in this Article 4. Nothing
contained in this Article 4 or elsewhere in this Indenture or in the Debentures is intended to or
shall impair, as among the Company, its creditors (other than holders of Senior Indebtedness) and
the Debentureholders, the right, which is absolute and unconditional, of the Holder of any
Debenture to convert such Debenture in accordance with Article 16.
Section 4.09. Article Applicable to Paying Agents. If at any time any paying agent other than the
Trustee shall have been appointed by the Company and be then acting hereunder, the term TRUSTEE
as used in this Article 4 shall (unless the context otherwise requires) be construed as extending
to and including such paying agent within its meaning as fully for all intents and purposes as if
such paying agent were named in this Article 4 in addition to or in place of the Trustee; provided,
however, that the first paragraph of Section 4.05 shall not apply to the Company or any Affiliate
of the Company if it or such Affiliate acts as paying agent.
The Trustee shall not be responsible for the actions or inactions of any other paying agents
(including the Company if acting as its own paying agent) and shall have no control of any funds
held by such other paying agents.
Section 4.10. Senior Indebtedness Entitled to Rely. The holders of Senior Indebtedness (including,
without limitation, Designated Senior Indebtedness) shall have the right to rely upon this Article
4, and no amendment or modification of the provisions contained herein shall diminish the rights of
such holders unless such holders shall have agreed in writing thereto.
Section 4.11. Reliance on Judicial Order or Certificate of Liquidating Agent. Upon any payment or
distribution of assets of the Company referred to in this Article 4, the Trustee and the
Debentureholders shall be entitled to rely upon any order or decree entered by any court of
competent jurisdiction in which such insolvency, bankruptcy, receivership, liquidation,
reorganization, dissolution, winding up or similar case or proceeding is pending, or a certificate
of the trustee in bankruptcy, liquidating trustee, custodian, receiver, assignee for the benefit of
creditors, agent or other Person making such payment or distribution, delivered to the Trustee or
to the Debentureholders, for the purpose of ascertaining the Persons entitled to participate in
such payment or distribution, the holders of Designated Senior Indebtedness and
38
other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts
paid or distributed thereon and all other facts pertinent thereto or to this Article 4.
ARTICLE 5
MAKE-WHOLE PREMIUM
Section 5.01. Make-Whole Premium. (a) Upon the occurrence of a Fundamental Change, the Holders will
be entitled to receive from the Company, on the Designated Event Repurchase Date, the Make-Whole
Premium, if any, if they convert any of their Debentures pursuant to Section 16.01 hereof at any
time during the Designated Event Conversion/Repurchase Period.
(b) The Make-Whole Premium shall be equal to an additional number of shares of Common Stock
calculated in accordance with Section 5.01(c) hereof. The Make-Whole Premium will be in addition
to, and not in substitution for, any cash, securities, or other assets otherwise due to Holders of
Debentures upon conversion thereof.
(c) The MAKE-WHOLE PREMIUM shall be equal to the principal amount of the Debentures to be
converted divided by $1,000 and multiplied by the applicable number of shares of Common Stock
determined by reference to a table in a substantially similar form to, and prepared in accordance
with a methodology consistent with, the example tables set forth in Exhibit B hereto (the
MAKE-WHOLE PREMIUM TABLE), which Make-Whole Premium Table shall be finalized and agreed upon by
the Company and the Holders of the Debentures by July 6, 2005, and shall be based on the Effective
Date and the Stock Price, with the initial Stock Price for the Make-Whole Premium Table being the
Average Closing Price. Upon the finalization of the Make-Whole Premium Table, the Company and the
Trustee shall, in accordance with Section 12.01, enter into a supplemental indenture setting forth
(x) the price calculated to be the Average Closing Price and (y) the Make-Whole Premium Table (the
INITIAL SUPPLEMENTAL
INDENTURE MATTERS).
(1) If the Stock Price is between two stock price amounts on the Make-Whole Premium Table or the
Effective Date is between two dates on the Make-Whole Premium Table, the Make-Whole Premium will be
determined by straight-line interpolation between Make-Whole Premium amounts set forth for the
higher and lower stock price amounts and the two dates, as applicable, based on a 365-day year (or
a 366-day year if the Effective Date occurs in a leap year).
(2) If the Stock Price is in excess of 4.0 times the Average Closing Price (subject to adjustment
as described in Section 5.03, the STOCK PRICE CAP), the Make-Whole Premium shall equal zero
shares of Common Stock.
(3) If the Stock Price is less than the Average Closing Price (subject to adjustment as described
in Section 5.03, the STOCK PRICE THRESHOLD), the Make-Whole Premium shall equal zero shares of
Common Stock.
(4) For purposes of this Section 5.01(c), STOCK PRICE means the price paid per share of Common
Stock in the transaction constituting the Fundamental Change, determined as follows: (i) if holders
of Common Stock receive only cash in the transaction constituting the
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Fundamental Change, the Stock Price shall equal the cash amount paid per share of Common Stock; and
(ii) in all other cases, the Stock Price shall equal the arithmetic average of the Closing Sale
Prices of a share of Common Stock over the five Trading Day period ending on the Trading Day
immediately preceding the Effective Date.
(d) The Company may pay the Make-Whole Premium in shares of Common Stock (other than cash paid in
lieu of fractional shares) or in the same form of consideration into which shares of Common Stock
have been converted in connection with the applicable Fundamental Change; provided, however, that
in the event that the Company is prohibited by operation of Article 4 from paying any of the
Make-Whole Premium payable in cash by virtue of Exchange Property being comprised of cash, the
Company shall pay such premium solely by the delivery of shares of Common Stock. The Designated
Event Notice delivered pursuant to Section 3.05(b) in connection with the Fundamental Change shall
state the percentage of any Make-Whole Premium, stated in total principal amount as if all
Debentures then Outstanding shall be converted or redeemed during the Designated Event
Conversion/Repurchase Period, that will be paid in shares of Common Stock (which indication shall
be irrevocable). If holders of Common Stock have the right to elect the form of consideration
received in a Fundamental Change, then for purposes of the foregoing the consideration into which a
share of Common Stock has been converted shall be deemed to equal the same percentage of each form
of consideration as encompasses the aggregate consideration distributed in respect of all shares of
Common Stock participating in the distribution. Unless the Company gives notice to the contrary,
the Make-Whole Premium shall be paid in shares of Common Stock (or, if applicable, in Exchange
Property).
If the Company elects to pay the Make-Whole Premium in the same form of consideration used to pay
for the shares of the Common Stock in connection with the applicable Fundamental Change, the value
of the consideration to be delivered in respect of the Make-Whole Premium will be calculated as
follows:
(i) securities that are traded on a United States national securities exchange or approved for
quotation on the Nasdaq National Market or any similar system of automated dissemination of
quotations of securities prices will be based on 98% of the arithmetic average of the Closing Price
of such securities during each of the ten (10) Trading Days ending on the Trading Day immediately
preceding the Effective Date;
(ii) other securities, assets or property (other than cash) will be valued on 98% of the arithmetic
average of the Fair Market Value of such securities, assets or property (other than cash) as
determined by two independent nationally recognized investment banks selected by the Company; and
(iii) 100% of any cash.
If a Make-Whole Premium is required, the Company shall from time to time appoint an independent
nationally recognized investment bank to serve as calculation agent with respect to calculation of
the Make-Whole Premium (the CALCULATION AGENT). The Calculation Agent shall, on behalf and upon
request by the Company, calculate (A) the Stock Price and (B) the
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Make-Whole Premium with respect to such Stock Price based on the Effective Date specified by the
Company, and shall deliver its calculation of the Stock Price and Make-Whole Premium to the Company
and the Trustee within five (5) Business Days after the request by the Company. The Company, (X)
shall notify the Holders of the Stock Price and the estimated Make-Whole Premium per $1,000
Principal Amount of Securities with respect to a Fundamental Change as part of the Designated Event
Notice delivered in connection with a Fundamental Change in accordance with Section 3.05(b) or
otherwise in accordance with the notice provisions of the Indenture and (Y) shall notify the
Holders promptly upon the opening of business on the Effective Date of the number of shares of
Common Stock (or, at the option of the Company, other securities, assets or property or cash into
which all or substantially all of the shares of Common Stock have been converted as of the
Effective Date as described above) to be delivered in respect of the Make-Whole Premium, if any,
payable in connection with conversions upon such Fundamental Change.
(e) In the event of a Fundamental Change where the Company is not the surviving entity, for each
conversion by a Holder after the Effective Date, such Holder shall receive in lieu of each share of
Common Stock payable as part of the Make-Whole Premium the Exchange Property received in such
Fundamental Change for each share of Common Stock.
(f) Promptly after determination of the actual number of shares of Common Stock to be issued in
respect of the Make-Whole Premium, the Company shall publish a notice containing this information
in a newspaper published in the English language, customarily published each Business Day and of
general circulation in The City of New York and publish such information on the Companys web site
or through such other public medium as the Company may use at that time.
Section 5.02. Payment Of Make-Whole Premium. On or prior to 10:00 a.m., New York City time, on the
Designated Event Repurchase Date, the Company will deposit with the Trustee or with one or more
paying agents, additional shares of Common Stock, cash and/or other assets or property sufficient
to satisfy the entitlement of the Holders of Debentures under Section
5.01. Payment of the entitlement pursuant to Section 5.01 to Holders of Debentures surrendered for
conversion during the Designated Event Conversion/Repurchase Period will be made promptly by the
Trustee or such paying agent on the Designated Event Repurchase Date. To the extent that the
aggregate amount of shares of Common Stock, cash and/or other assets or property deposited by the
Company pursuant to this Section exceeds the aggregate entitlement of the Holders of Debentures
under Section 5.01 that are converted in respect of the Fundamental Change and are entitled to
receive the Make-Whole Premium, then, promptly after the Designated Event Repurchase Date, the
paying agent shall return any such excess to the Company.
Section 5.03. Adjustments Relating To The Make-Whole Premium. Each time that the Conversion Rate is
adjusted by the Company pursuant to
Section 16.05 hereof, (A) the Stock Price Threshold, the Stock Price Cap and each of the stock
prices set forth in the left hand column of the Make-Whole Premium Table shall be adjusted (rounded
to the nearest cent) by multiplying each such amount by a fraction, the numerator of which is the
Conversion Rate immediately prior to such adjustment and the denominator of which is the Conversion
Rate as so adjusted, and (B) each of share amounts set forth in the body of the Make-Whole Premium
Table
41
shall be adjusted (rounded to the nearest one-one hundredth of a share) in the same manner as the
Conversion Rate is adjusted pursuant to Section 16.05 hereof.
ARTICLE 6
PARTICULAR COVENANTS OF THE COMPANY
Section 6.01. Payment of Principal, Premium and Interest. The Company covenants and agrees that it
will duly and punctually pay or cause to be paid the principal of and premium, if any (including
the redemption price upon redemption or the purchase price upon repurchase, in each case pursuant
to Article 3), and interest, on each of the Debentures at the places, at the respective times and
in the manner provided herein and in the Debentures.
Section 6.02. Maintenance of Office or Agency. The Company will, or will cause the Trustee to,
maintain an office or agency in the Borough of Manhattan, the City of New York, where the
Debentures may be surrendered for registration of transfer or exchange or for presentation for
payment or for conversion, redemption or repurchase and where notices and demands to or upon the
Company in respect of the Debentures and this Indenture may be served. The Company will give prompt
written notice to the Trustee of the location, and any change in the location, of such office or
agency not designated or appointed by the Trustee. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate
Trust Office.
The Company may also from time to time designate co-registrars and one or more offices or agencies
where the Debentures may be presented or surrendered for any or all such purposes and may from time
to time rescind such designations. The Company will give prompt written notice of any such
designation or rescission and of any change in the location of any such other office or agency.
The Company hereby initially designates the Trustee as paying agent, Debenture Registrar, Custodian
and conversion agent and the Corporate Trust Office shall be considered as one such office or
agency of the Company for each of the aforesaid purposes.
So long as the Trustee is the Debenture Registrar, the Trustee agrees to mail, or cause to be
mailed, the notices set forth in Section 9.10(a) and the third paragraph of Section 9.11. If
co-registrars have been appointed in accordance with this Section, the Trustee shall mail such
notices only to the Company and the Holders of Debentures it can identify from its records.
Section 6.03. Appointments to Fill Vacancies in Trustees Office. The Company, whenever necessary
to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in
Section 9.10, a Trustee, so that there shall at all times be a Trustee hereunder.
Section 6.04. Provisions as to Paying Agent. (a) If the Company shall appoint a paying agent other
than the Trustee, or if the Trustee shall appoint such a paying agent, the Company will cause such
paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree
with the Trustee, subject to the provisions of this Section 6.04:
42
(1) that it will hold all sums held by it as such agent for the payment of the principal of and
premium, if any, or interest on the Debentures (whether such sums have been paid to it by the
Company or by any other obligor on the Debentures) in trust for the benefit of the Holders of the
Debentures;
(2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on
the Debentures) to make any payment of the principal of and premium, if any, or interest on the
Debentures when the same shall be due and payable; and
(3) that at any time during the continuance of an Event of Default, upon request of the Trustee, it
will forthwith pay to the Trustee all sums so held in trust.
The Company shall, on or before each due date of the principal of, premium, if any, or interest on
the Debentures, deposit with the paying agent a sum (in funds which are immediately available on
the due date for such payment) sufficient to pay such principal, premium, if any, or interest, and
(unless such paying agent is the Trustee) the Company will promptly notify the Trustee of any
failure to take such action; provided that if such deposit is made on the due date, such deposit
shall be received by the paying agent by 10:00 a.m., New York City time, on such date.
(b) If the Company shall act as its own paying agent, it will, on or before each due date of the
principal of, premium, if any, or interest on the Debentures, set aside, segregate and hold in
trust for the benefit of the Holders of the Debentures a sum sufficient to pay such principal,
premium, if any, or interest so becoming due and will promptly notify the Trustee of any failure to
take such action and of any failure by the Company (or any other obligor under the Debentures) to
make any payment of the principal of, premium, if any, or interest on the Debentures when the same
shall become due and payable.
(c) Anything in this Section 6.04 to the contrary notwithstanding, the Company may, at any time,
for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other
reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying
agent hereunder as required by this Section 6.04, such sums to be held by the Trustee upon the
trusts herein contained and upon such payment by the Company or any paying agent to the Trustee,
the Company or such paying agent shall be released from all further liability with respect to such
sums.
(d) Anything in this Section 6.04 to the contrary notwithstanding, the agreement to hold sums in
trust as provided in this Section 6.04 is subject to Sections 14.03 and 14.04.
The Trustee shall not be responsible for the actions of any other paying agents (including the
Company if acting as its own paying agent) and shall have no control of any funds held by such
other paying agents.
Section 6.05. Existence. Subject to Article 13, the Company will do or cause to be done all things
necessary to preserve and keep in full force and effect its existence and rights (charter and
statutory); provided that the Company shall not be required to preserve any such
43
right if the Company shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and that the loss thereof does not adversely effect in any
material respect the Debentureholders.
Section 6.06. Maintenance of Properties. The Company will cause all properties used or useful in
the conduct of its business or the business of any Significant Subsidiary to be maintained and kept
in good condition, repair and working order (normal wear and tear excepted) and supplied with all
necessary equipment and will cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may be necessary so
that the business carried on in connection therewith may be properly conducted at all times;
provided that nothing in this
Section shall prevent the Company from (i) selling, assigning, transferring, consigning, delivering
or otherwise disposing of such properties or (ii) discontinuing the operation or maintenance of any
of such properties, in each case, if such sale, assignment, transfer, conveyance, delivery,
disposition or discontinuance is, in the judgment of the Company, desirable in the conduct of its
business or the business of any subsidiary.
Section 6.07. Payment of Taxes and Other Claims. The Company will pay or discharge, or cause to be
paid or discharged, before the same may become delinquent, (i) all taxes, assessments and
governmental charges levied or imposed upon the Company or any Significant Subsidiary or upon the
income, profits or property of the Company or any Significant Subsidiary, (ii) all claims for
labor, materials and supplies which, if unpaid, might by law become a lien or charge upon the
property of the Company or any Significant Subsidiary and (iii) all stamp taxes and other duties,
if any, which may be imposed by the United States or any political subdivision thereof or therein
in connection with the issuance, transfer, exchange, conversion, redemption or repurchase of any
Debentures or with respect to this Indenture; provided that, in the case of clauses (i) and (ii),
the Company shall not be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim (A) if the failure to do so will not, in the aggregate, have a
material adverse impact on the Company, or (B) if the amount, applicability or validity is being
contested in good faith by appropriate proceedings.
Section 6.08. Rule 144A Information Requirement. Within the period prior to the expiration of the
holding period applicable to sales thereof under Rule 144(k) under the Securities Act (or any
successor provision), the Company covenants and agrees that it shall, during any period in which it
is not subject to Section 13 or 15(d) under the Exchange Act, make available to any Holder or
beneficial holder of Debentures or any Common Stock issued upon conversion thereof which continue
to be Restricted Securities in connection with any sale thereof and any prospective purchaser of
Debentures or such Common Stock designated by such Holder or beneficial holder, the information
required pursuant to Rule 144A(d)(4) under the Securities Act upon the request of any Holder or
beneficial holder of the Debentures or such Common Stock and it will take such further action as
any Holder or beneficial holder of such Debentures or such Common Stock may reasonably request, all
to the extent required from time to time to enable such Holder or beneficial holder to sell its
Debentures or Common Stock without registration under the Securities Act within the limitation of
the exemption provided by Rule 144A, as such Rule may be amended from time to time. Upon the
reasonable request of any Holder or any beneficial holder of the Debentures or such Common Stock,
the Company will
44
deliver to such Holder or beneficial holder a written statement as to whether it has complied with
such requirements.
Section 6.09. Extension and Usury Laws. The Company covenants (to the extent that it may lawfully
do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take
the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or
forgive the Company from paying all or any portion of the principal of, premium, if any, or
interest on the Debentures as contemplated herein, wherever enacted, now or at any time hereafter
in force, or which may affect the covenants or the performance of this Indenture and the Company
(to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it will not, by resort to any such law, hinder, delay or impede the
execution of any power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
Section 6.10. Compliance Certificate. The Company shall deliver to the Trustee, within one hundred
twenty (120) days after the end of each fiscal year of the Company (which on the date hereof ends
on December 31), a certificate signed by either the principal executive officer, principal
financial officer or principal accounting officer of the Company, stating whether or not, to the
best knowledge of the signer thereof, the Company is in default, in any material respect, in the
performance and observance of any of the terms, provisions and conditions of this Indenture
(without regard to any period of grace or requirement of notice provided hereunder) and, if the
Company shall be in default, specifying all such defaults and the nature and the status thereof of
which the signer may have knowledge.
The Company will deliver to the Trustee, forthwith upon becoming aware of (i) any default in any
material respect in the performance or observance of any covenant, agreement or condition contained
in this Indenture, or (ii) any Event of Default, an Officers Certificate specifying with
particularity such default or Event of Default and further stating what action the Company has
taken, is taking or proposes to take with respect thereto.
Any notice required to be given under this Section 6.10 shall be delivered to a Responsible Officer
of the Trustee at its Corporate Trust Office.
Section 6.11. Liquidated Damages Notice. In the event that the Company is required to pay
Liquidated Damages to Holders of Debentures pursuant to the Registration Rights Agreement, the
Company will provide written notice (LIQUIDATED DAMAGES NOTICE) to the Trustee of its obligation
to pay Liquidated Damages no later than fifteen (15) days prior to the proposed payment date for
the Liquidated Damages, and the Liquidated Damages Notice shall set forth the amount of Liquidated
Damages to be paid by the Company on such payment date. The Trustee shall not at any time be under
any duty or responsibility to any Holder of Debentures to determine the Liquidated Damages, or with
respect to the nature, extent or calculation of the amount of Liquidated Damages when made, or with
respect to the method employed in such calculation of the Liquidated Damages.
Section 6.12. Limitation on Indebtedness. (a) The Company shall not, and shall not permit any of
its Subsidiaries to, incur, create, issue, assume, guarantee or otherwise become liable for any
outstanding Indebtedness that is secured or which ranks senior to, or pari passu
45
with, the Debentures in an aggregate principal amount in excess of the greater of (i) $50 million
or (ii) four times LTM EBITDA, measured at the time the Company incurs, creates, issues, assumes,
guarantees or otherwise becomes liable for such Indebtedness, including any amounts owing under the
Senior Credit Facility; provided, that, to the extent any Indebtedness is permitted pursuant to the
immediately preceding clause of this Section 6.12, such Indebtedness shall not under any
circumstances be convertible into, or exchangeable or exercisable for, Common Stock. At any such
time that the Company seeks to incur, create, issue, assume, guarantee or otherwise become liable
for Indebtedness in excess of $50 million, the Company shall deliver, prior to the incurrence of
such Indebtedness, an Officers Certificate to the Trustee (w) certifying the amount of LTM EBITDA,
(x) setting forth the calculation of such figure , (y) specifying the publicly available financial
information upon which such calculation was based and (z)directing the Trustee to deliver a copy of
such Officers Certificate to the Holders in accordance with the last sentence of this Section
6.12(a); provided, that, to the extent that any Officers Certificate delivered hereunder contains
any material, nonpublic information, the Company shall, prior to or contemporaneously with the
delivery of such certificate to the Trustee, publicly disclose such information. The Trustee shall
deliver a copy of any Officers Certificate delivered to it pursuant to this Section 6.12(a) to the
Holders within five Business Days of its receipt thereof.
(b) The Company may incur, create, issue, assume, guarantee or otherwise become liable for any
Indebtedness or issue redeemable preferred stock of the Company so long as such Indebtedness and
redeemable preferred stock is made expressly subordinate in right of payment to the Debentures and
which Indebtedness or redeemable preferred stock does not provide at any time for the payment,
prepayment, repayment, repurchase or defeasance, directly or indirectly, of any principal or
premium, if any, thereon, or any return of capital, as applicable, prior to 91 days following the
maturity of the Debentures.
Section 6.13. Prohibition on Certain Issuances and Offers. The Company shall not, in any manner,
effect any issuances, dividends or distributions or make or enter into any tender or exchange
offers or take any other similar actions subject to the adjustment provisions of Section 16.05, if
the effect of any such issuances, distributions, offers or actions would cause an adjustment
(without regard to any limitations on adjustment set forth in
Section 16.05(l)) of the Conversion Rate such that the resulting Conversion Price would be less
than the Average Closing Price (as appropriately adjusted for any stock dividend, stock split,
stock combination or other similar transaction ).
Section 6.14. Disclosure on Finalization of Make-Whole Premium Table. The Company shall file the
completed Make-Whole Premium Table following the finalization of such table in accordance with
Section 5.01(c), as part of the Companys Quarterly Report on Form 10-Q or Annual Report on Form
10-K next filed with the Commission, unless the Make-Whole Premium Table was previously filed by
the Company on any Current Report on Form 8-K filed with the Commission.
46
ARTICLE 7
DEBENTUREHOLDERS LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE
Section 7.01. Debentureholders Lists. The Company covenants and agrees that it will furnish or
cause to be furnished to the Trustee, semiannually, not more than fifteen (15) days after each June
1 and December 1 in each year beginning with December 1, 2005, and at such other times as the
Trustee may request in writing, within thirty (30) days after receipt by the Company of any such
request (or such lesser time as the Trustee may reasonably request in order to enable it to timely
provide any notice to be provided by it hereunder), a list in such form as the Trustee may
reasonably require of the names and addresses of the Holders of Debentures as of a date not more
than fifteen (15) days (or such other date as the Trustee may reasonably request in order to so
provide any such notices) prior to the time such information is furnished, except that no such list
need be furnished by the Company to the Trustee so long as the Trustee is acting as the sole
Debenture Registrar.
Section 7.02. Preservation And Disclosure Of Lists. (a) The Trustee shall preserve, in as current a
form as is reasonably practicable, all information as to the names and addresses of the Holders of
Debentures contained in the most recent list furnished to it as provided in Section 7.01 or
maintained by the Trustee in its capacity as Debenture Registrar or co-registrar in respect of the
Debentures, if so acting. The Trustee may destroy any list furnished to it as provided in Section
7.01 upon receipt of a new list so furnished.
(b) The rights of Debentureholders to communicate with other holders of Debentures with respect to
their rights under this Indenture or under the Debentures, and the corresponding rights and duties
of the Trustee, shall be as provided by the Trust Indenture Act.
(c) Every Debentureholder, by receiving and holding the same, agrees with the Company and the
Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held
accountable by reason of any disclosure of information as to names and addresses of holders of
Debentures made pursuant to the Trust Indenture Act.
Section 7.03. Reports By Trustee. (a) Within sixty (60) days after May 15 of each year commencing
with the year 2006, the Trustee shall transmit to Holders of Debentures such reports dated as of
May 15 of the year in which such reports are made in accordance with and to the extent required
under,
Section 313 of the Trust Indenture Act.
(b) A copy of such report shall, at the time of such transmission to Holders of Debentures, be
filed by the Trustee with each stock exchange and automated quotation system upon which the
Debentures are listed and with the Company. The Company will promptly notify the Trustee in writing
when the Debentures are listed on any stock exchange or automated quotation system or delisted
therefrom.
Section 7.04. Reports by Company. The Company shall file with the Trustee (and the Commission if at
any time after the Indenture becomes qualified under the Trust Indenture Act), and transmit to
Holders of Debentures, such information, documents and other reports and such summaries thereof, as
may be required pursuant to the Trust Indenture Act at the times and in the manner provided
pursuant to such Act, whether or not the Debentures are
47
governed by such Act; provided that, notwithstanding the provisions of the Trust Indenture Act, any
such information, documents or reports required to be filed with the Commission pursuant to Section
13 or 15(d) of the Exchange Act shall be filed with the Trustee within fifteen (15) days after the
same is filed with the Commission. Delivery of such reports, information and documents to the
Trustee is for informational purposes only and the Trustees receipt of such shall not constitute
constructive notice of any information contained therein or determinable from information contained
therein, including the Companys compliance with any of its covenants hereunder (as to which the
Trustee is entitled to rely exclusively on an Officers Certificate).
ARTICLE 8
REMEDIES OF THE TRUSTEE AND DEBENTUREHOLDERS ON AN EVENT OF DEFAULT
Section 8.01. Events Of Default. In case one or more of the following Events of Default (whatever
the reason for such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any court or any
order, rule or regulation of any administrative or governmental body) shall have occurred and be
continuing:
(a) default in the payment of the principal of or premium, if any, on any of the Debentures as and
when the same shall become due and payable either at maturity or in connection with any redemption,
repurchase or otherwise, in each case pursuant to Article 3, by acceleration or otherwise and
whether or not prohibited by Article 4; or
(b) default in the payment of any installment of interest upon any of the Debentures as and when
the same shall become due and payable, whether or not prohibited by Article 4, and continuance of
such default for a period of thirty (30) days; or
(c) default in the Companys obligation to convert (or otherwise settle for) any Debentures
following the exercise by the Holder of the Debentures of the right to convert such Debentures
pursuant to and in accordance with Article 16; or
(d) default in the Companys obligation to provide a Designated Event Notice upon a Designated
Event as provided in Section 3.05; or
(e) (i) default in the payment of principal when due at stated maturity or resulting in
acceleration of other Indebtedness of the Company or any of its Subsidiaries for borrowed money
where the aggregate principal amount with respect to which the default or acceleration has occurred
exceeds $10 million and such acceleration has not been cured or rescinded within a period of 30
days after written notice of such failure, requiring the Company to remedy the same, shall have
been given to the Company by the Trustee, or to the Company and the Trustee by the Holders of at
least 25% in aggregate principal amount of the Debentures at the time outstanding determined in
accordance with Section 10.04 or (ii) the entry by a court of competent jurisdiction against the
Company or any of its Subsidiaries of a final, non-appealable judgment or judgments aggregating in
excess of $10 million, which judgments remain unpaid, unstayed, undischarged or unbonded for a
period of 60 days or such longer period of time provided for under any such judgment; or
48
(f) failure on the part of the Company duly to observe or perform any other of the covenants or
agreements on the part of the Company in the Debentures or in this Indenture (other than a covenant
or agreement a default in whose performance or whose breach is elsewhere in this Section 8.01
specifically dealt with) continued for a period of sixty (60) days after the date on which written
notice of such failure, requiring the Company to remedy the same, shall have been given to the
Company by the Trustee, or the Company and a Responsible Officer of the Trustee by the Holders of
at least twenty-five percent (25%) in aggregate principal amount of the Debentures at the time
outstanding determined in accordance with Section 10.04; or
(g) failure on the part of the Company to duly observe and comply with the limitations on
Indebtedness set out in Section 6.12; or
(h) the Company or any of its Significant Subsidiaries shall commence a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to the Company or any
of its Significant Subsidiaries or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian
or other similar official of the Company or any of its Significant Subsidiaries or any substantial
part of the property of the Company or any of its Significant Subsidiaries, or shall consent to any
such relief or to the appointment of or taking possession by any such official in an involuntary
case or other proceeding commenced against the Company or any of its Significant Subsidiaries, or
shall make a general assignment for the benefit of creditors, or shall fail generally to pay its
debts as they become due; or
(i) an involuntary case or other proceeding shall be commenced against the Company or any of its
Significant Subsidiaries seeking liquidation, reorganization or other relief with respect to the
Company or any of its Significant Subsidiaries or its debts under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of the Company or any of its Significant
Subsidiaries or any substantial part of the property of the Company or any of its Significant
Subsidiaries, and such involuntary case or other proceeding shall remain undismissed and unstayed
for a period of sixty
(60) consecutive days; or
then, and in each and every such case (other than an Event of Default specified in Section 8.01(h)
or 8.01(i)), unless the principal of all of the Debentures then outstanding shall have already
become due and payable, either the Trustee or the Holders of not less than twenty-five percent
(25%) in aggregate principal amount of the Debentures then outstanding hereunder determined in
accordance with Section 10.04, by notice in writing to the Company (and to the Trustee if given by
Debentureholders), may declare the principal of and premium, if any, on all the Debentures then
outstanding and the interest accrued thereon to be due and payable immediately, and upon any such
declaration the same shall become and shall be immediately due and payable, anything in this
Indenture or in the Debentures contained to the contrary notwithstanding. If an Event of Default
specified in Section 8.01(h) or 8.01(i) occurs, the principal of all the Debentures then
outstanding and the interest accrued thereon shall be immediately and automatically due and payable
without necessity of further action. This provision, however, is subject to the conditions that if,
at any time after the principal of the Debentures shall have been so declared due and payable, and
before any judgment or decree for the payment of the monies due shall have been obtained or entered
as hereinafter provided, the
49
Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured
installments of interest upon all Debentures then outstanding and the principal of and premium, if
any, on any and all Debentures which shall have become due otherwise than by acceleration (with
interest on overdue installments of interest (to the extent that payment of such interest is
enforceable under applicable law) and on such principal and premium, if any, at the rate borne by
the Debentures, to the date of such payment or deposit) and amounts due to the Trustee pursuant to
Section 9.06, and if any and all defaults under this Indenture, other than the nonpayment of
principal of and premium, if any, and accrued interest on Debentures which shall have become due by
acceleration, shall have been cured or waived pursuant to Section 8.07, then and in every such case
the Holders of a majority in aggregate principal amount of the Debentures then outstanding, by
written notice to the Company and to the Trustee, may waive all defaults or Events of Default and
rescind and annul such declaration and its consequences; but no such waiver or rescission and
annulment shall extend to or shall affect any subsequent default or Event of Default, or shall
impair any right consequent thereon. The Company shall notify in writing a Responsible Officer of
the Trustee, promptly upon becoming aware thereof, of any Event of Default.
In case the Trustee shall have proceeded to enforce any right under this Indenture and such
proceedings shall have been discontinued or abandoned because of such waiver or rescission and
annulment or for any other reason or shall have been determined adversely to the Trustee, then and
in every such case the Company, the Holders of Debentures, and the Trustee shall be restored
respectively to their several positions and rights hereunder, and all rights, remedies and powers
of the Company, the Holders of Debentures, and the Trustee shall continue as though no such
proceeding had been taken.
Section 8.02. Payments of Debentures on Default; Suit Therefor. The Company covenants that (a) in
case default shall be made in the payment of any installment of interest upon any of the Debentures
then outstanding as and when the same shall become due and payable, and such default shall have
continued for a period of thirty (30) days, or (b) in case default shall be made in the payment of
the principal of or premium, if any, on any of the Debentures then outstanding as and when the same
shall have become due and payable, whether at maturity of the Debentures or in connection with any
redemption, by or under this Indenture declaration or otherwise, then, upon demand of the Trustee,
the Company will pay to the Trustee, for the benefit of the Holders of the Debentures, the whole
amount that then shall have become due and payable on all such Debentures for principal and
premium, if any, or interest, as the case may be, with interest upon the overdue principal and
premium, if any, and (to the extent that payment of such interest is enforceable under applicable
law) upon the overdue installments of interest at the rate borne by the Debentures, plus 1% and, in
addition thereto, such further amount as shall be sufficient to cover the costs and expenses of
collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel,
and all other amounts due the Trustee under Section 9.06. Until such demand by the Trustee, the
Company may pay the principal of and premium, if any, and interest on the Debentures to the
Holders, whether or not the Debentures are overdue.
In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its
own name and as trustee of an express trust, shall be entitled and empowered to institute any
actions or proceedings at law or in equity for the collection of the sums so due
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and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may
enforce any such judgment or final decree against the Company or any other obligor on the
Debentures and collect in the manner provided by law out of the property of the Company or any
other obligor on the Debentures wherever situated the monies adjudged or decreed to be payable.
In case there shall be pending proceedings for the bankruptcy or for the reorganization of the
Company or any other obligor on the Debentures under Title 11 of the United States Code, or any
other applicable law, or in case a receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, sequestrator or similar official shall have been appointed for or taken possession of
the Company or such other obligor, the property of the Company or such other obligor, or in the
case of any other judicial proceedings relative to the Company or such other obligor upon the
Debentures, or to the creditors or property of the Company or such other obligor, the Trustee,
irrespective of whether the principal of the Debentures shall then be due and payable as therein
expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made
any demand pursuant to the provisions of this Section 8.02, shall be entitled and empowered, by
intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole
amount of principal, premium, if any, and interest owing and unpaid in respect of the Debentures,
and, in case of any judicial proceedings, to file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the Trustee and of the
Debentureholders allowed in such judicial proceedings relative to the Company or any other obligor
on the Debentures, its or their creditors, or its or their property, and to collect and receive any
monies or other property payable or deliverable on any such claims, and to distribute the same
after the deduction of any amounts due the Trustee under Section 9.06, and to take any other action
with respect to such claims, including participating as a member of any official committee of
creditors, as it reasonably deems necessary or advisable, and, unless prohibited by law or
applicable regulations, and any receiver, assignee or trustee in bankruptcy or reorganization,
liquidator, custodian or similar official is hereby authorized by each of the Debentureholders to
make such payments to the Trustee, and, in the event that the Trustee shall consent to the making
of such payments directly to the Debentureholders, to pay to the Trustee any amount due it for
reasonable compensation, expenses, advances and disbursements, including counsel fees and expenses
incurred by it up to the date of such distribution. To the extent that such payment of reasonable
compensation, expenses, advances and disbursements out of the estate in any such proceedings shall
be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out
of, any and all distributions, dividends, monies, securities and other property which the Holders
of the Debentures may be entitled to receive in such proceedings, whether in liquidation or under
any plan of reorganization or arrangement or otherwise. Nothing herein contained shall be deemed to
authorize the Trustee to authorize or consent to or accept or adopt on behalf of any
Debentureholders any plan of reorganization, arrangement, adjustment or composition affecting the
Debentures or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of
the claim of any Debentureholder in any such proceeding.
All rights of action and of asserting claims under this Indenture, or under any of the Debentures,
may be enforced by the Trustee without the possession of any of the Debentures, or the production
thereof at any trial or other proceeding relative thereto, and any such suit or proceeding
instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any
recovery of judgment shall, after provision for the payment of the reasonable
51
compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for
the ratable benefit of the Holders of the Debentures.
In any proceedings brought by the Trustee (and in any proceedings involving the interpretation of
any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to
represent all the Holders of the Debentures, and it shall not be necessary to make any Holders of
the Debentures parties to any such proceedings.
Section 8.03. Application of Monies Collected By Trustee. Any monies collected by the Trustee
pursuant to this Article 8 shall be applied in the order following, at the date or dates fixed by
the Trustee for the distribution of such monies, upon presentation of the several Debentures, and
stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid:
FIRST: To the payment of all amounts due the Trustee under
Section 9.06;
SECOND: Subject to the terms of Article 4, in case the principal of the outstanding Debentures
shall not have become due and be unpaid, to the payment of interest on the Debentures in default in
the order of the maturity of the installments of such interest, with interest (to the extent that
such interest has been collected by the Trustee) upon the overdue installments of interest at the
rate borne by the Debentures, such payments to be made ratably to the Persons entitled thereto;
THIRD: Subject to the terms of Article 4, in case the principal of the outstanding Debentures shall
have become due, by declaration or otherwise, and be unpaid to the payment of the whole amount then
owing and unpaid upon the Debentures for principal and premium, if any, and interest, with interest
on the overdue principal and premium, if any, and (to the extent that such interest has been
collected by the Trustee) upon overdue installments of interest at the rate borne by the
Debentures, and in case such monies shall be insufficient to pay in full the whole amounts so due
and unpaid upon the Debentures, then to the payment of such principal and premium, if any, and
interest without preference or priority of principal and premium, if any, over interest, or of
interest over principal and premium, if any, or of any installment of interest over any other
installment of interest, or of any Debenture over any other Debenture, ratably to the aggregate of
such principal and premium, if any, and accrued and unpaid interest; and
FOURTH: To the payment of the remainder, if any, to the Company or any other Person lawfully
entitled thereto.
Section 8.04. Proceedings by Debentureholder. No Holder of any Debenture shall have any right by
virtue of or by reference to any provision of this Indenture to institute any suit, action or
proceeding in equity or at law upon or under or with respect to this Indenture, or for the
appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any
other remedy hereunder, unless such Holder previously shall have given to the Trustee written
notice of an Event of Default and of the continuance thereof, as hereinbefore provided, and unless
also the Holders of not less than twenty-five percent (25%) in aggregate principal amount of the
Debentures then outstanding shall have made written request upon the Trustee to institute such
action, suit or proceeding in its own name as Trustee hereunder and shall have
52
offered to the Trustee such reasonable security or indemnity as it may require against the costs,
expenses and liabilities to be incurred therein or thereby, and the Trustee for sixty (60) days
after its receipt of such notice, request and offer of indemnity, shall have neglected or refused
to institute any such action, suit or proceeding and no direction inconsistent with such written
request shall have been given to the Trustee pursuant to Section 8.07; it being understood and
intended, and being expressly covenanted by the taker and Holder of every Debenture with every
other taker and Holder and the Trustee, that no one or more Holders of Debentures shall have any
right in any manner whatever by virtue of or by reference to any provision of this Indenture to
affect, disturb or prejudice the rights of any other Holder of Debentures, or to obtain or seek to
obtain priority over or preference to any other such Holder, or to enforce any right under this
Indenture, except in the manner herein provided and for the equal, ratable and common benefit of
all Holders of Debentures (except as otherwise provided herein). For the protection and enforcement
of this Section 8.04, each and every Debentureholder and the Trustee shall be entitled to such
relief as can be given either at law or in equity.
Notwithstanding any other provision of this Indenture and any provision of any Debenture, the right
of any Holder of any Debenture to receive payment of the principal of and premium, if any
(including the redemption price upon redemption pursuant to Article 8), and accrued interest on
such Debenture, on or after the respective due dates expressed in such Debenture or in the event of
redemption, or to institute suit for the enforcement of any such payment on or after such
respective dates against the Company shall not be impaired or affected without the consent of such
Holder.
Anything in this Indenture or the Debentures to the contrary notwithstanding, the Holder of any
Debenture, without the consent of either the Trustee or the Holder of any other Debenture, in its
own behalf and for its own benefit, may enforce, and may institute and maintain any proceeding
suitable to enforce, its rights of conversion as provided herein.
Section 8.05. Proceedings By Trustee. In case of an Event of Default, the Trustee may, in its
discretion, proceed to protect and enforce the rights vested in it by this Indenture by such
appropriate judicial proceedings as are necessary to protect and enforce any of such rights, either
by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the
specific enforcement of any covenant or agreement contained in this Indenture or in aid of the
exercise of any power granted in this Indenture, or to enforce any other legal or equitable right
vested in the Trustee by this Indenture or by law.
Section 8.06. Remedies Cumulative And Continuing. Except as provided in Section 2.06, all powers
and remedies given by this Article 8 to the Trustee or to the Debentureholders shall, to the extent
permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and
remedies available to the Trustee or the Holders of the Debentures, by judicial proceedings or
otherwise, to enforce the performance or observance of the covenants and agreements contained in
this Indenture, and no delay or omission of the Trustee or of any Holder of any of the Debentures
to exercise any right or power accruing upon any default or Event of Default occurring and
continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver
of any such default or any acquiescence therein, and, subject to the provisions of Section 8.04,
every power and remedy given by this Article 8 or
53
by law to the Trustee or to the Debentureholders may be exercised from time to time, and as often
as shall be deemed expedient, by the Trustee or by the Debentureholders.
Section 8.07. Direction of Proceedings and Waiver of Defaults By Majority of Debentureholders. The
Holders of a majority in aggregate principal amount of the Debentures at the time outstanding
determined in accordance with
Section 10.04 shall have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or power conferred on
the Trustee; provided that (a) such direction shall not be in conflict with any rule of law or with
this Indenture, expose the Trustee to personal liability, or be unduly prejudicial to Holders not
joining therein, and (b) the Trustee may take any other action which is not inconsistent with such
direction. The Holders of a majority in aggregate principal amount of the Debentures at the time
outstanding determined in accordance with Section 10.04 may, on behalf of the Holders of all of the
Debentures, waive any past default or Event of Default hereunder and its consequences except (i) a
default in the payment of interest or premium, if any, on, or the principal of, the Debentures,
(ii) a failure by the Company to convert any Debentures into Common Stock, (iii) a default in the
payment of the redemption price pursuant to Article 3, (iv) a default in the payment of the
purchase price pursuant to Article 3 or (v) a default in respect of a covenant or provisions hereof
which under Article 12 cannot be modified or amended without the consent of the Holders of each or
all Debentures then outstanding or affected thereby. Upon any such waiver, the Company, the Trustee
and the Holders of the Debentures shall be restored to their former positions and rights hereunder;
but no such waiver shall extend to any subsequent or other default or Event of Default or impair
any right consequent thereon. Whenever any default or Event of Default hereunder shall have been
waived as permitted by this Section 8.07, said default or Event of Default shall for all purposes
of the Debentures and this Indenture be deemed to have been cured and to be not continuing; but no
such waiver shall extend to any subsequent or other default or Event of Default or impair any right
consequent thereon.
Section 8.08. Notice of Defaults. The Trustee shall, within ninety (90) days after a Responsible
Officer of the Trustee has knowledge of the occurrence of a default, mail to all Debentureholders,
as the names and addresses of such Holders appear upon the Debenture Register, notice of all
defaults known to a Responsible Officer, unless such defaults shall have been cured or waived
before the giving of such notice; provided that except in the case of default in the payment of the
principal of, or premium, if any, or interest on any of the Debentures, the Trustee shall be
protected in withholding such notice if and so long as a trust committee of directors and/or
Responsible Officers of the Trustee in good faith determines that the withholding of such notice is
in the interests of the Debentureholders.
Section 8.09. Undertaking To Pay Costs. All parties to this Indenture agree, and each Holder of any
Debenture by his acceptance thereof shall be deemed to have agreed, that any court may, in its
discretion, require, in any suit for the enforcement of any right or remedy under this Indenture,
or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by
any party litigant in such suit of an undertaking to pay the costs of such suit and that such court
may in its discretion assess reasonable costs, including reasonable attorneys fees and expenses,
against any party litigant in such suit, having due regard to the merits and good faith of the
claims or defenses made by such party litigant; provided that the provisions of this Section 8.09
(to the extent permitted by law) shall not apply to any suit instituted by the Trustee, to any
54
suit instituted by any Debentureholder, or group of Debentureholders, holding in the aggregate more
than ten percent in principal amount of the Debentures at the time outstanding determined in
accordance with Section 10.04, or to any suit instituted by any Debentureholder for the enforcement
of the payment of the principal of or premium, if any, or interest on any Debenture on or after the
due date expressed in such Debenture or to any suit for the enforcement of the right to convert any
Debenture in accordance with the provisions of Article 16.
ARTICLE 9
THE TRUSTEE
Section 9.01. Duties and Responsibilities of Trustee. The Trustee, prior to the occurrence of an
Event of Default and after the curing of all Events of Default which may have occurred, undertakes
to perform such duties and only such duties as are specifically set forth in this Indenture. In
case an Event of Default has occurred (which has not been cured or waived), the Trustee shall
exercise such of the rights and powers vested in it by this Indenture, and use the same degree of
care and skill in their exercise, as a prudent person would exercise or use under the circumstances
in the conduct of his own affairs.
No provision of this Indenture shall be construed to relieve the Trustee from liability for its own
negligent action, its own negligent failure to act or its own willful misconduct, except that:
(a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of
Default which may have occurred:
(i) the duties and obligations of the Trustee shall be determined solely by the express provisions
of this Indenture and the Trust Indenture Act, and the Trustee shall not be liable except for the
performance of such duties and obligations as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture and the Trust Indenture Act
against the Trustee; and
(ii) in the absence of bad faith and willful misconduct on the part of the Trustee, the Trustee may
conclusively rely as to the truth of the statements and the correctness of the opinions expressed
therein, upon any certificates or opinions furnished to the Trustee and conforming to the
requirements of this Indenture; but, in the case of any such certificates or opinions which by any
provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be
under a duty to examine the same to determine whether or not they conform to the requirements of
this Indenture;
(b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible
Officer or Officers of the Trustee, unless the Trustee was negligent in ascertaining the pertinent
facts;
(c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it
in good faith in accordance with the written direction of the Holders of not less than a majority
in principal amount of the Debentures at the time outstanding determined as provided in Section
10.04
55
relating to the time, method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture;
(d) whether or not therein provided, every provision of this Indenture relating to the conduct or
affecting the liability of, or affording protection to, the Trustee shall be subject to the
provisions of this Section;
(e) the Trustee shall not be liable in respect of any payment (as to the correctness of amount,
entitlement to receive or any other matters relating to payment) or notice effected by the Company
or any paying agent or any records maintained by any co-registrar with respect to the Debentures;
(f) if any party fails to deliver a notice relating to an event the fact of which, pursuant to this
Indenture, requires notice to be sent to the Trustee, the Trustee may conclusively rely on its
failure to receive such notice as reason to act as if no such event occurred; and
(g) the Trustee shall not be deemed to have knowledge of any Event of Default hereunder unless it
shall have been notified in writing of such Event of Default by the Company or the Holders of at
least 10% in aggregate principal amount of the Debentures.
None of the provisions contained in this Indenture shall require the Trustee to expend or risk its
own funds or otherwise incur personal financial liability in the performance of any of its duties
or in the exercise of any of its rights or powers, if there is reasonable ground for believing that
the repayment of such funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
Section 9.02. Reliance on Documents, Opinions, Etc. Except as otherwise provided in Section 9.01:
(a) the Trustee may conclusively rely and shall be protected in acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request, consent, order, bond,
debenture, note, coupon or other paper or document (whether in its original or facsimile form)
believed by it in good faith to be genuine and to have been signed or presented by the proper party
or parties;
(b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently
evidenced by an Officers Certificate (unless other evidence in respect thereof be herein
specifically prescribed); and any resolution of the Board of Directors may be evidenced to the
Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company;
(c) the Trustee may consult with counsel of its own selection and any advice or Opinion of Counsel
shall be full and complete authorization and protection in respect of any action taken or omitted
by it hereunder in good faith and in accordance with such advice or Opinion of Counsel;
56
(d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it
by this Indenture at the request, order or direction of any of the Debentureholders pursuant to the
provisions of this Indenture, unless such Debentureholders shall have offered to the Trustee
reasonable security or indemnity satisfactory to it against the costs, expenses and liabilities
which may be incurred therein or thereby;
(e) the Trustee shall not be bound to make any investigation into the facts or matters stated in
any resolution, certificate, statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture or other paper or document, but the Trustee may make such further
inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall
determine to make such further inquiry or investigation, it shall be entitled to examine the books,
records and premises of the Company, personally or by agent or attorney; and
(f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder
either directly or by or through agents or attorneys and the Trustee shall not be responsible for
any misconduct or negligence on the part of any agent or attorney appointed by it with due care
hereunder.
(g) the Trustee shall not be liable for any action taken, suffered or omitted to be taken by it in
good faith and reasonably believed by it to be authorized or within the discretion or rights or
powers conferred upon it by this Indenture;
(h) the rights, privileges, protections, immunities and benefits given to the Trustee, including,
without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the
Trustee in each of its capacities hereunder, and each agent, custodian and other Person employed to
act hereunder;
(i) the Trustee may request that the Company deliver an Officers Certificate setting forth the
names of individuals and/or titles of officers authorized at such time to take specified actions
pursuant to this Indenture, which Officers Certificate may be signed by any person authorized to
sign an Officers Certificate, including any person specified as so authorized in any such
certificate previously delivered and not superseded; and
(j) Any permissive right or authority granted to the Trustee shall not be construed as a mandatory
duty.
Section 9.03. No Responsibility For Recitals, Etc. The recitals contained herein and in the
Debentures (except in the Trustees certificate of authentication) shall be taken as the statements
of the Company, and the Trustee assumes no responsibility for the correctness of the same. The
Trustee makes no representations as to the validity or sufficiency of this Indenture or of the
Debentures. The Trustee shall not be accountable for the use or application by the Company of any
Debentures or the proceeds of any Debentures authenticated and delivered by the Trustee in
conformity with the provisions of this Indenture.
Section 9.04. Trustee, Paying Agents, Conversion Agents or Registrar May Own Debentures. The
Trustee, any paying agent, any conversion agent or Debenture Registrar, in its individual or any
other capacity, may become the owner or pledgee of Debentures with the same
57
rights it would have if it were not Trustee, paying agent, conversion agent or Debenture Registrar.
Section 9.05. Monies to Be Held in Trust. Subject to the provisions of Section 14.04, all monies
received by the Trustee shall, until used or applied as herein provided, be held in trust for the
purposes for which they were received. Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee shall be under no
liability for interest on any money received by it hereunder except as may be agreed in writing
from time to time by the Company and the Trustee.
Section 9.06. Compensation and Expenses of Trustee. The Company covenants and agrees to pay to the
Trustee from time to time, and the Trustee shall be entitled to, such compensation for all services
rendered by it hereunder in any capacity (which shall not be limited by any provision of law in
regard to the compensation of a trustee of an express trust) as mutually agreed to from time to
time in writing between the Company and the Trustee, and the Company will pay or reimburse the
Trustee upon its request for all reasonable expenses, disbursements and advances reasonably
incurred or made by the Trustee in accordance with any of the provisions of this Indenture
(including the reasonable compensation and the expenses and disbursements of its counsel and of all
Persons not regularly in its employ) except any such expense, disbursement or advance as may arise
from its negligence, willful misconduct or bad faith. The Company also covenants to indemnify the
Trustee and any predecessor Trustee (or any officer, director or employee of the Trustee), in any
capacity under this Indenture and its agents and any authenticating agent for, and to hold them
harmless against, any and all loss, liability, damage, claim or expense including taxes (other than
taxes based on the income of the Trustee) incurred without negligence, willful misconduct or bad
faith on the part of the Trustee or such officers, directors, employees and agent or authenticating
agent, as the case may be, and arising out of or in connection with the acceptance or
administration of this trust or in any other capacity hereunder, including the costs and expenses
of defending themselves against any claim (whether asserted by the Company, any Holder or any other
Person) of liability in the premises. The obligations of the Company under this Section 9.06 to
compensate or indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements
and advances shall be secured by a lien prior to that of the Debentures upon all property and funds
held or collected by the Trustee as such, except funds held in trust for the benefit of the Holders
of particular Debentures. The obligation of the Company under this Section shall survive the
satisfaction and discharge of this Indenture.
When the Trustee and its agents and any authenticating agent incur expenses or render services
after an Event of Default specified in Section 8.01(h) or (i) with respect to the Company occurs,
the expenses and the compensation for the services are intended to constitute expenses of
administration under any bankruptcy, insolvency or similar laws.
Section 9.07. Officers Certificate As Evidence. Except as otherwise provided in Section 9.01,
whenever in the administration of the provisions of this Indenture the Trustee shall deem it
necessary or desirable that a matter be proved or established prior to taking or omitting any
action hereunder, such matter (unless other evidence in respect thereof be herein specifically
prescribed) may, in the absence of bad faith or willful misconduct on the part of the Trustee, be
58
deemed to be conclusively proved and established by an Officers Certificate delivered to the
Trustee.
Section 9.08. Conflicting Interests of Trustee. The Trustee shall comply with the terms of Section
3.10(b) of the Trust Indenture Act.
Section 9.09. Eligibility of Trustee. There shall at all times be a Trustee hereunder which shall
be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined
capital and surplus of at least $50,000,000 (or if such Person is a member of a bank holding
company system, its bank holding company shall have a combined capital and surplus of at least
$50,000,000). If such Person publishes reports of condition at least annually, pursuant to law or
to the requirements of any supervising or examining authority, then for the purposes of this
Section the combined capital and surplus of such Person shall be deemed to be its combined capital
and surplus as set forth in its most recent report of condition so published. If at any time the
Trustee shall cease to be eligible in accordance with the provisions of this
Section 9.09, it shall resign immediately in the manner and with the effect hereinafter specified
in this Article.
Section 9.10. Resignation or Removal of Trustee.
(a) The Trustee may at any time resign by giving written notice of such resignation to the Company
and to the Holders of Debentures. Upon receiving such notice of resignation, the Company shall
promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the
Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and
one copy to the successor trustee. If no successor trustee shall have been so appointed and have
accepted appointment sixty (60) days after the mailing of such notice of resignation to the
Debentureholders, the resigning Trustee may, upon ten (10) Business Days notice to the Company and
the Debentureholders, appoint a successor identified in such notice or may petition, at the expense
of the Company, any court of competent jurisdiction for the appointment of a successor trustee, or,
if any Debentureholder who has been a bona fide Holder of a Debenture or Debentures for at least
six (6) months may, subject to the provisions of Section 8.09, on behalf of himself and all others
similarly situated, petition any such court for the appointment of a successor trustee. Such court
may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor
trustee.
(b) In case at any time any of the following shall occur:
(i) the Trustee shall fail to comply with Section 9.08 after written request therefor by the
Company or by any Debentureholder who has been a bona fide Holder of a Debenture or Debentures for
at least six (6) months; or
(ii) the Trustee shall cease to be eligible in accordance with the provisions of Section 9.09 and
shall fail to resign after written request therefor by the Company or by any such Debentureholder;
or
(iii) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent,
or a receiver of the Trustee or of its property shall be
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appointed, or any public officer shall take charge or control of the Trustee or of its property or
affairs for the purpose of rehabilitation, conservation or liquidation;
then, in any such case, the Company may remove the Trustee and appoint a successor trustee by
written instrument, in duplicate, executed by order of the Board of Directors, one copy of which
instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or,
subject to the provisions of Section 8.09, any Debentureholder who has been a bona fide Holder of a
Debenture or Debentures for at least six (6) months may, on behalf of himself and all others
similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor trustee; provided that if no successor Trustee shall have been
appointed and have accepted appointment sixty (60) days after either the Company or the
Debentureholders has removed the Trustee, or the Trustee resigns, the Trustee so removed may
petition, at the expense of the Company, any court of competent jurisdiction for an appointment of
a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and
prescribe, remove the Trustee and appoint a successor trustee.
(c) The Holders of a majority in aggregate principal amount of the Debentures at the time
outstanding may at any time remove the Trustee and nominate a successor trustee which shall be
deemed appointed as successor trustee unless, within ten (10) days after notice to the Company of
such nomination, the Company objects thereto, in which case the Trustee so removed or any
Debentureholder, or if such Trustee so removed or any Debentureholder fails to act, the Company,
upon the terms and conditions and otherwise as in Section 9.10(a) provided, may petition any court
of competent jurisdiction for an appointment of a successor trustee.
(d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to
any of the provisions of this Section 9.10 shall become effective upon acceptance of appointment by
the successor trustee as provided in Section 9.11.
(e) Notwithstanding the replacement of the Trustee pursuant to this Section, the Companys
obligations under Section 9.06 shall continue for the benefit of the retiring Trustee.
Section 9.11. Acceptance by Successor Trustee. Any successor trustee appointed as provided in
Section 9.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee
an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the
predecessor trustee shall become effective and such successor trustee, without any further act,
deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its
predecessor hereunder, with like effect as if originally named as trustee herein; but,
nevertheless, on the written request of the Company or of the successor trustee, the trustee
ceasing to act shall, upon payment of any amount then due it pursuant to the provisions of Section
9.06, execute and deliver an instrument transferring to such successor trustee all the rights and
powers of the trustee so ceasing to act. Upon request of any such successor trustee, the Company
shall execute any and all instruments in writing for more fully and certainly vesting in and
confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall,
nevertheless, retain a lien upon all property and funds held or collected by such trustee as such,
except for funds held in trust for the benefit of Holders of particular Debentures, to secure any
amounts then due it pursuant to the provisions of Section 9.06.
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No successor trustee shall accept appointment as provided in this Section 9.11 unless, at the time
of such acceptance, such successor trustee shall be qualified under the provisions of Section 9.08
and be eligible under the provisions of Section 9.09.
Upon acceptance of appointment by a successor trustee as provided in this Section 9.11, the Company
(or the former trustee, at the written direction of the Company) shall mail or cause to be mailed
notice of the succession of such trustee hereunder to the Holders of Debentures at their addresses
as they shall appear on the Debenture Register. If the Company fails to mail such notice within ten
(10) days after acceptance of appointment by the successor trustee, the successor trustee shall
cause such notice to be mailed at the expense of the Company.
Section 9.12. Succession By Merger. Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to
all or substantially all of the corporate trust business of the Trustee (including any trust
created by this Indenture), shall be the successor to the Trustee hereunder without the execution
or filing of any paper or any further act on the part of any of the parties hereto, provided that
in the case of any corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, such corporation shall be qualified under the provisions of Section 9.08
and eligible under the provisions of Section 9.09.
In case at the time such successor to the Trustee shall succeed to the trusts created by this
Indenture, any of the Debentures shall have been authenticated but not delivered, any such
successor to the Trustee may adopt the certificate of authentication of any predecessor trustee or
authenticating agent appointed by such predecessor trustee, and deliver such Debentures so
authenticated; and in case at that time any of the Debentures shall not have been authenticated,
any successor to the Trustee or any authenticating agent appointed by such successor trustee may
authenticate such Debentures in the name of the successor trustee; and in all such cases such
certificates shall have the full force that is provided in the Debentures or in this Indenture;
provided that the right to adopt the certificate of authentication of any predecessor Trustee or
authenticate Debentures in the name of any predecessor Trustee shall apply only to its successor or
successors by merger, conversion or consolidation.
Section 9.13. Preferential Collection of Claims. If and when the Trustee shall be or become a
creditor of the Company (or any other obligor upon the Debentures), the Trustee shall be subject to
the provisions of the Trust Indenture Act regarding the collection of the claims against the
Company (or any such other obligor).
ARTICLE 10
THE DEBENTUREHOLDERS
Section 10.01. Action By Debentureholders. Whenever in this Indenture it is provided that the
Holders of a specified percentage in aggregate principal amount of the Debentures may take any
action (including the making of any demand or request, the giving of any notice, consent or waiver
or the taking of any other action), the fact that at the time of taking any such action, the
Holders of such specified percentage have joined therein may be evidenced in any reasonable manner
which the Trustee deems sufficient. Whenever the Company or the
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Trustee solicits the taking of any action by the Holders of the Debentures, the Company or the
Trustee may fix in advance of such solicitation, a date as the record date for determining Holders
entitled to take such action. The record date shall be not more than fifteen (15) days prior to the
date of commencement of solicitation of such action.
Section 10.02. Proof of Execution by Debentureholders. Subject to the provisions of Sections 9.01,
9.02 and 11.05, proof of the execution of any instrument by a Debentureholder or its agent or proxy
shall be sufficient if made in accordance with such reasonable rules and regulations as may be
prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The holding of
Debentures shall be proved by the registry of such Debentures or by a certificate of the Debenture
Registrar.
The record of any Debentureholders meeting shall be proved in the manner provided in Section
11.06.
Section 10.03. Who Are Deemed Absolute Owners. The Company, the Trustee, any authenticating agent,
any paying agent, any conversion agent and any Debenture Registrar may deem the Person in whose
name such Debenture shall be registered upon the Debenture Register to be, and may treat it as, the
absolute owner of such Debenture (whether or not such Debenture shall be overdue and
notwithstanding any notation of ownership or other writing thereon made by any Person other than
the Company or any Debenture Registrar) for the purpose of receiving payment of or on account of
the principal of, premium, if any, and interest on such Debenture, for conversion of such Debenture
and for all other purposes; and neither the Company nor the Trustee nor any authenticating agent
nor any paying agent nor any conversion agent nor any Debenture Registrar shall be affected by any
notice to the contrary. All such payments so made to any holder for the time being, or upon his
order, shall be valid, and, to the extent of the sum or sums so paid, effectual to satisfy and
discharge the liability for monies payable upon any such Debenture.
Section 10.04. Company-owned Debentures Disregarded. In determining whether the Holders of the
requisite aggregate principal amount of Debentures have concurred in any direction, consent, waiver
or other action under this Indenture, Debentures which are owned by the Company or any other
obligor on the Debentures or any Affiliate of the Company or any other obligor on the Debentures
shall be disregarded and deemed not to be outstanding for the purpose of any such determination;
provided that for the purposes of determining whether the Trustee shall be protected in relying on
any such direction, consent, waiver or other action, only Debentures which a Responsible Officer
knows are so owned shall be so disregarded. Debentures so owned which have been pledged in good
faith may be regarded as outstanding for the purposes of this
Section 10.04 if the pledgee shall establish to the satisfaction of the Trustee the pledgees right
to vote such Debentures and that the pledgee is not the Company, any other obligor on the
Debentures or any Affiliate of the Company or any such other obligor. In the case of a dispute as
to such right, any decision by the Trustee taken upon the advice of counsel shall be full
protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee
promptly an Officers Certificate listing and identifying all Debentures, if any, known by the
Company to be owned or held by or for the account of any of the above described Persons, and,
subject to Section 9.01, the Trustee shall be entitled to accept such Officers Certificate as
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conclusive evidence of the facts therein set forth and of the fact that all Debentures not listed
therein are outstanding for the purpose of any such determination.
Section 10.05. Revocation Of Consents, Future Holders Bound. At any time prior to (but not after)
the evidencing to the Trustee, as provided in
Section 10.01, of the taking of any action by the Holders of the percentage in aggregate principal
amount of the Debentures specified in this Indenture in connection with such action, any Holder of
a Debenture which is shown by the evidence to be included in the Debentures the Holders of which
have consented to such action may, by filing written notice with the Trustee at its Corporate Trust
Office and upon proof of holding as provided in Section 10.02, revoke such action so far as
concerns such Debenture. Except as aforesaid, any such action taken by the Holder of any Debenture
shall be conclusive and binding upon such Holder and upon all future Holders and owners of such
Debenture and of any Debentures issued in exchange or substitution therefor, irrespective of
whether any notation in regard thereto is made upon such Debenture or any Debenture issued in
exchange or substitution therefor.
ARTICLE 11
MEETINGS OF DEBENTUREHOLDERS
Section 11.01. Purpose Of Meetings. A meeting of Debentureholders may be called at any time and
from time to time pursuant to the provisions of this Article 11 for any of the following purposes:
(1) to give any notice to the Company or to the Trustee or to give any directions to the Trustee
permitted under this Indenture, or to consent to the waiving of any default or Event of Default
hereunder and its consequences, or to take any other action authorized to be taken by
Debentureholders pursuant to any of the provisions of Article 8;
(2) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article 9;
(3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the
provisions of
Section 12.02; or
(4) to take any other action authorized to be taken by or on behalf of the Holders of any specified
aggregate principal amount of the Debentures under any other provision of this Indenture or under
applicable law.
Section 11.02. Call Of Meetings By Trustee. The Trustee may at any time call a meeting of
Debentureholders to take any action specified in
Section 11.01, to be held at such time and at such place as the Trustee shall determine. Notice of
every meeting of the Debentureholders, setting forth the time and the place of such meeting and in
general terms the action proposed to be taken at such meeting and the establishment of any record
date pursuant to
Section 10.01, shall be mailed to Holders of Debentures at their addresses as they shall appear on
the Debenture Register. Such notice shall also be mailed to the Company. Such notices shall be
mailed not less than twenty (20) nor more than ninety (90) days prior to the date fixed for the
meeting.
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Any meeting of Debentureholders shall be valid without notice if the Holders of all Debentures then
outstanding are present in person or by proxy or if notice is waived before or after the meeting by
the Holders of all Debentures outstanding, and if the Company and the Trustee are either present by
duly authorized representatives or have, before or after the meeting, waived notice.
Section 11.03. Call Of Meetings By Company Or Debentureholders. In case at any time the Company,
pursuant to a resolution of its Board of Directors, or the Holders of at least ten percent (10%) in
aggregate principal amount of the Debentures then outstanding, shall have requested the Trustee to
call a meeting of Debentureholders, by written request setting forth in reasonable detail the
action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of
such meeting within twenty (20) days after receipt of such request, then the Company or such
Debentureholders may determine the time and the place for such meeting and may call such meeting to
take any action authorized in Section 11.01, by mailing notice thereof as provided in Section
11.02.
Section 11.04. Qualifications For Voting. To be entitled to vote at any meeting of Debentureholders
a person shall (a) be a Holder of one or more Debentures on the record date pertaining to such
meeting or (b) be a person appointed by an instrument in writing as proxy by a Holder of one or
more Debentures on the record date pertaining to such meeting. The only persons who shall be
entitled to be present or to speak at any meeting of Debentureholders shall be the persons entitled
to vote at such meeting and their counsel and any representatives of the Trustee and its counsel
and any representatives of the Company and its counsel.
Section 11.05. Regulations. Notwithstanding any other provisions of this Indenture, the Trustee may
make such reasonable regulations as it may deem advisable for any meeting of Debentureholders, in
regard to proof of the holding of Debentures and of the appointment of proxies, and in regard to
the appointment and duties of inspectors of votes, the submission and examination of proxies,
certificates and other evidence of the right to vote, and such other matters concerning the conduct
of the meeting as it shall think fit.
The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless
the meeting shall have been called by the Company or by Debentureholders as provided in Section
11.03, in which case the Company or the Debentureholders calling the meeting, as the case may be,
shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary
of the meeting shall be elected by vote of the Holders of a majority in principal amount of the
Debentures represented at the meeting and entitled to vote at the meeting.
Subject to the provisions of Section 10.04, at any meeting each Debentureholder or proxyholder
shall be entitled to one vote for each $1,000 principal amount of Debentures held or represented by
him; provided that no vote shall be cast or counted at any meeting in respect of any Debenture
challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The
chairman of the meeting shall have no right to vote other than by virtue of Debentures held by him
or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other
Debentureholders. Any meeting of Debentureholders duly called pursuant to the provisions of Section
11.02 or 11.03 may be adjourned from time to time by the
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Holders of a majority of the aggregate principal amount of Debentures represented at the meeting,
whether or not constituting a quorum, and the meeting may be held as so adjourned without further
notice.
Section 11.06. Voting. The vote upon any resolution submitted to any meeting of Debentureholders
shall be by written ballot on which shall be subscribed the signatures of the Holders of Debentures
or of their representatives by proxy and the outstanding principal amount of the Debentures held or
represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes
who shall count all votes cast at the meeting for or against any resolution and who shall make and
file with the secretary of the meeting their verified written reports in duplicate of all votes
cast at the meeting. A record in duplicate of the proceedings of each meeting of Debentureholders
shall be prepared by the secretary of the meeting and there shall be attached to said record the
original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by
one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting
and showing that said notice was mailed as provided in Section 11.02. The record shall show the
principal amount of the Debentures voting in favor of or against any resolution. The record shall
be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and
one of the duplicates shall be delivered to the Company and the other to the Trustee to be
preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting.
Any record so signed and verified shall be conclusive evidence of the matters therein stated.
Section 11.07. No Delay Of Rights By Meeting. Nothing contained in this Article 11 shall be deemed
or construed to authorize or permit, by reason of any call of a meeting of Debentureholders or any
rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the
exercise of any right or rights conferred upon or reserved to the Trustee or to the
Debentureholders under any of the provisions of this Indenture or of the Debentures.
ARTICLE 12
SUPPLEMENTAL INDENTURES
Section 12.01. Supplemental Indentures Without Consent of Debentureholders. The Company, when
authorized by the resolutions of the Board of Directors, and the Trustee may, from time to time,
and at any time enter into an indenture or indentures supplemental hereto for one or more of the
following purposes:
(a) make provision with respect to the conversion rights of the Holders of Debentures pursuant to
the requirements of Section 16.06 and the redemption obligations of the Company pursuant to the
requirements of Section 3.05(e) provided that any such provision does not adversely effect the
interests of the Holders of the Debentures;
(b) to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Debentures,
any property or assets;
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(c) to evidence the succession of another Person to the Company, or successive successions, and the
assumption by the successor Person of the covenants, agreements and obligations of the Company
pursuant to Article 13;
(d) to add to the covenants of the Company such further covenants, restrictions or conditions as
the Board of Directors and the Trustee shall consider to be for the benefit of the Holders of
Debentures, and to make the occurrence, or the occurrence and continuance, of a default in any such
additional covenants, restrictions or conditions a default or an Event of Default permitting the
enforcement of all or any of the several remedies provided in this Indenture as herein set forth;
provided that in respect of any such additional covenant, restriction or condition, such
supplemental indenture may provide for a particular period of grace after default (which period may
be shorter or longer than that allowed in the case of other defaults) or may provide for an
immediate enforcement upon such default or may limit the remedies available to the Trustee upon
such default;
(e) to provide for the issuance under this Indenture of Debentures in coupon form (including
Debentures registrable as to principal only) and to provide for exchangeability of such Debentures
with the Debentures issued hereunder in fully registered form and to make all appropriate changes
for such purpose;
(f) to cure any ambiguity or to correct or supplement any provision contained herein or in any
supplemental indenture that may be defective or inconsistent with any other provision contained
herein or in any supplemental indenture, or to make such other provisions in regard to matters or
questions arising under this Indenture that shall not materially adversely affect the interests of
the Holders of the Debentures;
(g) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with
respect to the Debentures;
(h) to make provision for the Initial Supplemental Indenture Matters; or
(i) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be
necessary to effect the qualifications of this Indenture under the Trust Indenture Act, or under
any similar federal statute hereafter enacted.
Upon the written request of the Company, accompanied by a copy of the resolutions of the Board of
Directors certified by its Secretary or Assistant Secretary authorizing the execution of any
supplemental indenture, the Trustee is hereby authorized to join with the Company in the execution
of any such supplemental indenture, to make any further appropriate agreements and stipulations
that may be therein contained and to accept the conveyance, transfer and assignment of any property
thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any
supplemental indenture that affects the Trustees own rights, duties or immunities under this
Indenture or otherwise.
Any supplemental indenture authorized by the provisions of this
Section 12.01 may be executed by the Company and the Trustee without the consent of the Holders of
any of the Debentures at the time outstanding, notwithstanding any of the provisions of Section
12.02.
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Notwithstanding any other provision of the Indenture or the Debentures, the Registration Rights
Agreement and the obligation to pay Liquidated Damages thereunder may be amended, modified or
waived in accordance with the provisions of the Registration Rights Agreement.
Section 12.02. Supplemental Indenture With Consent Of Debentureholders. With the consent (evidenced
as provided in Article 10) of the Holders of at least a majority in aggregate principal amount of
the Debentures at the time outstanding, the Company, when authorized by the resolutions of the
Board of Directors, and the Trustee may, from time to time and at any time, enter into an indenture
or indentures supplemental hereto for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of this Indenture or any supplemental indenture or of
modifying in any manner the rights of the Holders of the Debentures; provided that no such
supplemental indenture shall (i) extend the fixed maturity of any Debenture, or reduce the rate or
extend the time of payment of interest thereon, or reduce the principal amount thereof or premium,
if any, thereon, or reduce any amount payable on redemption or repurchase thereof, or impair the
right of any Debentureholder to institute suit for the payment thereof, or make the principal
thereof or interest or premium, if any, thereon payable in any coin or currency other than that
provided in the Debentures, or change the obligation of the Company to redeem any Debenture on a
redemption date in a manner adverse to the Holders of Debentures, or change the obligation of the
Company to redeem any Debenture upon the happening of a Designated Event in a manner adverse to the
Holders of Debentures, or change the obligation of the Company to repurchase any Debenture on a
Repurchase Date in a manner adverse to the Holders of Debentures, or impair the right to convert
the Debentures into Common Stock subject to the terms set forth herein, including Section 16.06, in
each case, without the consent of the Holder of each Debenture so affected, or modify any of the
provisions of this Section 12.02 or Section 8.07, except to increase any such percentage or to
provide that certain other provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each Debenture so affected, or change any obligation of the Company to
maintain an office or agency in the places and for the purposes set forth in Section 6.01, or
reduce the quorum or voting requirements set forth in Article 11, or change the provisions of
Article 4 in a manner adverse to the Holders of Debentures, or modify in any manner the calculation
of the Make-Whole Premium, or change the ranking of the Debentures in a manner adverse to the
Holders of the Debentures, or (ii) reduce the aforesaid percentage of Debentures, the Holders of
which are required to consent to any such supplemental indenture, without the consent of the
Holders of all Debentures then outstanding.
Upon the written request of the Company, accompanied by a copy of the resolutions of the Board of
Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such
supplemental indenture, and upon the filing with the Trustee of evidence of the consent of
Debentureholders as aforesaid, the Trustee shall join with the Company in the execution of such
supplemental indenture unless such supplemental indenture affects the Trustees own rights, duties
or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion,
but shall not be obligated to, enter into such supplemental indenture.
Notwithstanding the foregoing, with the consent of the Holders of at least a majority in aggregate
principal amount of the Debentures at the time outstanding, the Company,
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when authorized by the resolutions of the Board of Directors, and the Trustee may, from time to
time and at any time, enter into an indenture or indentures supplemental hereto for the purpose of
modifying Section 16.03 such that, from and after the date of such modification or amendment, the
Company shall have the ability to satisfy its obligation to make the payment under Section
16.03(a)(i) of this Indenture upon conversion of a Debenture in cash, Common Stock, or any
combination thereof; provided, however, that the Company may, without the consent of the Holders,
(i) increase the percentage of such Holders required to approve the amendment or modification set
forth in this paragraph or (ii) eliminate the Companys right to implement any such amendment or
modification.
It shall not be necessary for the consent of the Debentureholders under this Section 12.02 to
approve the particular form of any proposed supplemental indenture, but it shall be sufficient if
such consent shall approve the substance thereof.
Section 12.03. Effect Of Supplemental Indenture. Any supplemental indenture executed pursuant to
the provisions of this Article 12 shall comply with the Trust Indenture Act, as then in effect,
provided that this
Section 12.03 shall not require such supplemental indenture or the Trustee to be qualified under
the Trust Indenture Act prior to the time such qualification is in fact required under the terms of
the Trust Indenture Act or the Indenture has been qualified under the Trust Indenture Act, nor
shall it constitute any admission or acknowledgment by any party to such supplemental indenture
that any such qualification is required prior to the time such qualification is in fact required
under the terms of the Trust Indenture Act or the Indenture has been qualified under the Trust
Indenture Act. Upon the execution of any supplemental indenture pursuant to the provisions of this
Article 12, this Indenture shall be and be deemed to be modified and amended in accordance
therewith and the respective rights, limitation of rights, obligations, duties and immunities under
this Indenture of the Trustee, the Company and the Holders of Debentures shall thereafter be
determined, exercised and enforced hereunder, subject in all respects to such modifications and
amendments and all the terms and conditions of any such supplemental indenture shall be and be
deemed to be part of the terms and conditions of this Indenture for any and all purposes.
Section 12.04. Notation On Debentures. Debentures authenticated and delivered after the execution
of any supplemental indenture pursuant to the provisions of this Article 12 may bear a notation in
form approved by the Trustee as to any matter provided for in such supplemental indenture. If the
Company or the Trustee shall so determine, new Debentures so modified as to conform, in the opinion
of the Trustee and the Board of Directors, to any modification of this Indenture contained in any
such supplemental indenture may, at the Companys expense, be prepared and executed by the Company,
authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to
Section 17.10) and delivered in exchange for the Debentures then outstanding, upon surrender of
such Debentures then outstanding.
Section 12.05. Evidence Of Compliance Of Supplemental Indenture To Be Furnished To Trustee. Prior
to entering into any supplemental indenture, the Trustee shall be provided with an Officers
Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture
executed pursuant hereto complies with the requirements of this Article 12 and is otherwise
authorized or permitted by this Indenture.
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ARTICLE 13
CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE
Section 13.01. Company May Consolidate On Certain Terms. Subject to the provisions of Section
13.02, the Company shall not consolidate or merge with or into any other Person or Persons (whether
or not affiliated with the Company), nor shall the Company or its successor or successors be a
party or parties to successive consolidations or mergers, nor shall the Company sell, convey,
transfer or lease all or substantially all of the property and assets of the Company, to any other
Person (whether or not affiliated with the Company), unless: (i) the Company is the surviving
Person, or the resulting, surviving or transferee Person is a corporation organized and existing
under the laws of the United States of America, any state thereof or the District of Columbia; (ii)
upon any such consolidation, merger, sale, conveyance, transfer or lease, the due and punctual
payment of the principal of and premium, if any, and interest on all of the Debentures, according
to their tenor and the due and punctual performance and observance of all of the covenants and
conditions of this Indenture to be performed by the Company, shall be expressly assumed, by
supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee
by the Person (if other than the Company) formed by such consolidation, or into which the Company
shall have been merged, or by the Person that shall have acquired or leased such property, and such
supplemental indenture shall provide for the applicable conversion rights set forth in
Section 16.06; and (iii) immediately after giving effect to the transaction described above, no
Event of Default, and no event which, after notice or lapse of time or both, would become an Event
of Default, shall have happened and be continuing.
Section 13.02. Successor To Be Substituted. In case of any such consolidation, merger or sale,
conveyance, transfer or lease of all or substantially all of the Companys properties and assets,
and upon the assumption by the successor Person, by supplemental indenture, executed and delivered
to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the
principal of and premium, if any, and interest on all of the Debentures and the due and punctual
performance of all of the covenants and conditions of this Indenture to be performed by the
Company, such successor Person shall succeed to and be substituted for the Company, with the same
effect as if it had been named herein as the party of this first part. Such successor Person
thereupon may cause to be signed, and may issue either in its own name or in the name of Impax
Laboratories, Inc. any or all of the Debentures, issuable hereunder that theretofore shall not have
been signed by the Company and delivered to the Trustee; and, upon the order of such successor
Person instead of the Company and subject to all the terms, conditions and limitations in this
Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause to be
authenticated and delivered, any Debentures that previously shall have been signed and delivered by
the officers of the Company to the Trustee for authentication, and any Debentures that such
successor Person thereafter shall cause to be signed and delivered to the Trustee for that purpose.
All the Debentures so issued shall in all respects have the same legal rank and benefit under this
Indenture as the Debentures theretofore or thereafter issued in accordance with the terms of this
Indenture as though all of such Debentures had been issued at the date of the execution hereof. In
the event of any such consolidation, merger or sale, conveyance, transfer or lease of all or
substantially all of the Companys properties and assets, the Person named as the COMPANY in the
first paragraph of this Indenture or any successor that shall thereafter have become such in the
manner prescribed in this Article 13 may be dissolved,
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wound up and liquidated at any time thereafter and such Person shall be released from its
liabilities as obligor and maker of the Debentures and from its obligations under this Indenture.
In case of any such consolidation, merger or sale, conveyance, transfer or lease of all or
substantially all of the Companys properties and assets, such changes in phraseology and form (but
not in substance) may be made in the Debentures thereafter to be issued as may be appropriate.
Section 13.03. Opinion Of Counsel To Be Given Trustee. The Trustee shall receive an Officers
Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger or
sale, conveyance, transfer or lease of all or substantially all of the Companys properties and
assets and any such assumption is authorized or permitted and complies with the provisions of this
Article 13 and the Indenture.
ARTICLE 14
SATISFACTION AND DISCHARGE OF INDENTURE
Section 14.01. Discharge Of Indenture. When (a) the Company shall deliver to the Trustee for
cancellation all Debentures theretofore authenticated (other than any Debentures that have been
destroyed, lost or stolen and in lieu of or in substitution for which other Debentures shall have
been authenticated and delivered) and not theretofore canceled, or (b) all the Debentures not
theretofore canceled or delivered to the Trustee for cancellation shall have become due and
payable, or are by their terms to become due and payable within one year or are to be called for
redemption within one year under arrangements satisfactory to the Trustee for the giving of notice
of redemption, and the Company shall deposit with the Trustee, in trust, funds sufficient to pay at
maturity or upon redemption of all of the Debentures (other than any Debentures that shall have
been mutilated, destroyed, lost or stolen and in lieu of or in substitution for which other
Debentures shall have been authenticated and delivered) not theretofore canceled or delivered to
the Trustee for cancellation, including principal and premium, if any, and interest due or to
become due to such date of maturity or redemption date, as the case may be, accompanied by a
verification report, as to the sufficiency of the deposited amount, from an independent certified
accountant or other financial professional satisfactory to the Trustee, and if the Company shall
also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture
shall cease to be of further effect (except as to (i) remaining rights of registration of transfer,
substitution and exchange and conversion of Debentures, (ii) rights hereunder of Debentureholders
to receive payments of principal of and premium, if any, and interest on, the Debentures and the
other rights, duties and obligations of Debentureholders, as beneficiaries hereof with respect to
the amounts, if any, so deposited with the Trustee and (iii) the rights, obligations and immunities
of the Trustee hereunder), and the Trustee, on written demand of the Company accompanied by an
Officers Certificate and an Opinion of Counsel as required by Section 17.05 and at the cost and
expense of the Company, shall execute proper instruments acknowledging satisfaction of and
discharging this Indenture; the Company, however, hereby agrees to reimburse the Trustee for any
costs or expenses thereafter reasonably and properly incurred by the Trustee and to compensate the
Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection
with this Indenture or the Debentures. Notwithstanding the satisfaction and discharge of the
Indenture, the obligation of the Company to the Trustee under Section 9.06 shall survive.
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Section 14.02. Deposited Monies To Be Held In Trust By Trustee. Subject to Section 14.04, all
monies deposited with the Trustee pursuant to
Section 14.01, shall be held in trust for the sole benefit of the Debentureholders, and such monies
shall be applied by the Trustee to the payment, either directly or through any paying agent
(including the Company if acting as its own paying agent), to the Holders of the particular
Debentures for the payment or redemption of which such monies have been deposited with the Trustee,
of all sums due and to become due thereon for principal and interest and premium, if any.
Section 14.03. Paying Agent To Repay Monies Held. Upon the satisfaction and discharge of this
Indenture, all monies then held by any paying agent of the Debentures (other than the Trustee)
shall, upon written request of the Company, be repaid to it or paid to the Trustee, and thereupon
such paying agent shall be released from all further liability with respect to such monies.
Section 14.04. Return Of Unclaimed Monies. Subject to the requirements of applicable law, any
monies deposited with or paid to the Trustee for payment of the principal of, premium, if any, or
interest on Debentures and not applied but remaining unclaimed by the Holders of Debentures for two
years after the date upon which the principal of, premium, if any, or interest on such Debentures,
as the case may be, shall have become due and payable, shall be repaid to the Company by the
Trustee on demand and all liability of the Trustee shall thereupon cease with respect to such
monies; and the Holder of any of the Debentures shall thereafter look only to the Company for any
payment that such Holder may be entitled to collect unless an applicable abandoned property law
designates another Person.
Section 14.05. Reinstatement. If the Trustee or the paying agent is unable to apply any money in
accordance with Section 14.02 by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application, the Companys
obligations under this Indenture and the Debentures shall be revived and reinstated as though no
deposit had occurred pursuant to Section 14.01 until such time as the Trustee or the paying agent
is permitted to apply all such money in accordance with Section 14.02; provided that if the Company
makes any payment of interest on or principal of any Debenture following the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of such Debentures to
receive such payment from the money held by the Trustee or paying agent.
ARTICLE 15
IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS
Section 15.01. Indenture And Debentures Solely Corporate Obligations. No recourse for the payment
of the principal of or premium, if any, or Interest on any Debenture, or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or
agreement of the Company in this Indenture or in any supplemental indenture or in any Debenture, or
because of the creation of any indebtedness represented thereby, shall be had against any
incorporator, stockholder, employee, agent, officer, director or subsidiary, as such, past, present
or future, of the Company or of any successor corporation, either directly or through the Company
or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by
the enforcement of any assessment or penalty or
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otherwise; it being expressly understood that all such liability is hereby expressly waived and
released as a condition of, and as a consideration for, the execution of this Indenture and the
issue of the Debentures.
ARTICLE 16
CONVERSION OF DEBENTURES
Section 16.01. Right To Convert. (a) Subject to and upon compliance with the provisions of this
Indenture, the Holder of any Debenture shall have the right, at such Holders option, at any time
and from time to time, to convert the principal amount of the Debenture, or any portion of such
principal amount which is a multiple of $1,000, into cash and fully paid and non-assessable shares
of Common Stock (as such shares shall then be constituted), if any, at the Conversion Rate (the
CONVERSION OBLIGATION) in effect at such time, by surrender of the Debenture so to be converted
in whole or in part, together with any required funds, under the circumstances described in this
Section 16.01 and in the manner provided in Section 16.02. Any Holder of a Debenture electing to
convert a Debenture, in whole or in part, in connection with a Fundamental Change, shall be
entitled to receive, in addition to any cash and shares of Common Stock, if any, provided for in
the foregoing sentence, a Make-Whole Premium in accordance with Article V. Notwithstanding any
provision hereof to the contrary, the Debentures shall be convertible prior to June 15, 2011 only
upon the occurrence of one of the following events:
(i) during any Fiscal Quarter, if the Closing Sale Price of the Common Stock exceeds 120% of the
Conversion Price then in effect for at least 20 Trading Days in the 30 consecutive Trading Day
period ending on the last Trading Day of the immediately preceding Fiscal Quarter (it being
understood for purposes of this Section 16.01(a)(i) that the Conversion Price in effect at the
close of business on each of the 30 consecutive Trading Days should be used) (the CONVERSION
TRIGGER PRICE);
(ii) (A) during the five Business Day period after any five consecutive Trading Day period in which
the Trading Price per $1,000 principal amount of the Debentures for each day of such five Trading
Day period was less than 98% of the product of the Closing Sale Price of the Common Stock and the
Conversion Rate (a PRINCIPAL VALUE CONVERSION);
(B) in the event that the conversion agent is unable to determine if the Debentures are convertible
in accordance with Section 16.01(ii)(A), if at any time (x) the fee charged by any three
independent nationally recognized securities dealers for borrowing shares of Common Stock as
indicated on their electronic locate systems is in excess of the applicable Cost Threshold or (y)
the Common Stock appears on the list of Threshold Securities (or any successor list thereto)
published daily as required by the Commission under Regulation SHO (or any successor regulation
thereto); or
(iii) as provided in Section (b) of this Section 16.01.
The Trustee (or other conversion agent appointed by the Company) shall, on the Companys behalf,
determine if the Debentures are convertible in accordance with
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Section 16.01(a)(i), as a result of the occurrence of an event specified in
Section 16.01(a)(i); provided that the Company shall provide to the conversion agent, upon written
request, the Closing Sale Price of the Common Stock. The conversion agent shall make such
determination for the last 30 consecutive Trading Days ending on the last Trading Day of each
calendar quarter. If the Debentures shall be so convertible the Trustee (or other conversion agent
appointed by the Company) shall promptly deliver to the Company and the Trustee (if the Trustee is
not the conversion agent) written notice thereof. Whenever the Debentures shall become convertible
pursuant to this Section 16.01, the Company or, at the Companys request, the Trustee (or other
conversion agent appointed by the Company) in the name and at the expense of the Company, shall
notify the Holders of the event triggering such convertibility in the manner provided in Section
17.03, and the Company shall also publicly announce such information and publish it on the
Companys web site. Any notice so given shall be conclusively presumed to have been duly given,
whether or not the Holders receive such notice.
With respect to a conversion pursuant to Section 16.01(a)(ii), the Trustee (or other conversion
agent appointed by the Company) shall have no obligation to determine the Trading Price under this
Section 16.01 unless the Company has requested such a determination; and the Company shall have no
obligation to make such request unless a Holder provides it with reasonable evidence that the
Trading Price per $1,000 principal amount of Debentures would be less than 98% of the product of
the Closing Sale Price of the Common Stock and the Conversion Rate; provided that the Trustee (or
other conversion agent appointed by the Company) shall be under no duty or obligation to make the
calculations described in Section 16.01(a)(ii) hereof or to determine whether the Debentures are
convertible pursuant to such section. For the avoidance of doubt, the Company shall make the
calculations described in Section 16.01(a)(ii), using the Trading Price provided by the Trustee (or
other conversion agent appointed by the Company).
The Trustee (or other conversion agent appointed by the Company) shall be entitled at its sole
discretion to consult with the Company and to request the assistance of the Company in connection
with the Trustees duties and obligations pursuant to Section 16.01(a)(i) and Section 16.01(a)(ii)
hereof (or those of other conversion agent appointed by the Company) (including without limitation
the calculation or determination of the Conversion Price, the Closing Sales Price and the Trading
Price), and the Company agrees, if requested by the Trustee (or other conversion agent appointed by
the Company), to cooperate with, and provide assistance to, the Trustee (or other conversion agent
appointed by the Company) in carrying out its duties under this Section 16.01; provided, however,
that nothing herein shall be construed to relieve the Trustee of its duties pursuant to Section
16.01(a)(i) and Section 16.01(a)(ii) hereof.
(b) In addition, if:
(i) (A) the Company distributes to all holders of its Common Stock rights or warrants entitling
them (for a period expiring within 45 days of the record date for the determination of the
stockholders entitled to receive such distribution) to subscribe for or purchase shares of Common
Stock, at a price per share less than the Closing Sale Price of the Common Stock for the Trading
Day immediately preceding the date such distribution is first publicly announced by the Company, or
(B) the Company distributes to all holders of its Common Stock, cash or other assets, debt
securities or rights to purchase its securities,
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where the Fair Market Value of such distribution per share of Common Stock exceeds 15% of the
Closing Sale Price of the Common Stock on the Trading Day immediately preceding the date such
distribution is first publicly announced by the Company, then, in either case, the Debentures may
be surrendered for conversion at any time on and after the date that the Company gives notice to
the Holders of such distribution, which shall be not less than 20 days prior to the Ex-Dividend
Time for such distribution, until the earlier of the close of business on the Business Day
immediately preceding, but not including, the Ex-Dividend Time or the date the Company publicly
announces that such distribution will not take place; provided that no adjustment to the Conversion
Price or the ability of a Holder of a Debenture to convert will be made if the Holder will
otherwise participate in such distribution without conversion; or
(ii) any event constituting a Fundamental Change (without regard to the 90% Condition) occurs, then
the Debentures may be converted at any time during the Designated Event Conversion/Repurchase
Period.
EX-DIVIDEND TIME means, with respect to any distribution on shares of Common Stock, the first
date on which the shares of Common Stock trade regular way on the principal securities market on
which the shares of Common Stock are then traded without the right to receive such distribution.
(c) If the Company engages in any reclassification of the Common Stock (other than a subdivision or
combination to which 16.04(c) applies, or a change in par value, or from par value to no par value,
or from no par value to par value) or is party to a consolidation, merger, or transfer of all or
substantially all of its assets pursuant to which holders of Common Stock would be entitled to
receive cash, securities or other property, then at the effective time of such transaction, the
Conversion Obligation and the Conversion Settlement Distribution, to the extent relating to amounts
of the Conversion Settlement Distribution to be settled in shares of Common Stock, shall be based
on the applicable Conversion Rate and the kind and amount of cash, securities or other property
that a holder of one share of the Common Stock would have received in such transaction (such
property, collectively, the EXCHANGE PROPERTY). In addition, if a Holder converts Debentures
following the effective time of any such transaction, any amounts of the Conversion Settlement
Distribution to be settled in shares of Common Stock shall be paid in such Exchange Property rather
than shares of Common Stock.
(d) A Debenture in respect of which a Holder is electing to exercise its option to require
redemption upon a Designated Event pursuant to
Section 3.05 or repurchase pursuant to Section 3.06 may be converted only if such Holder withdraws
its election in accordance with Section 3.05(b) or Section 3.08, respectively. A Holder of
Debentures is not entitled to any rights of a holder of Common Stock until such Holder has
converted his Debentures to Common Stock, and only to the extent such Debentures are deemed to have
been converted to Common Stock under this Article 16.
Section 16.02. Exercise Of Conversion Privilege; Issuance Of Common Stock On Conversion; No
Adjustment For Interest Or Dividends. In order to exercise the conversion privilege with respect to
any Debenture in certificated form, the Company must receive at the
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office or agency of the Company maintained for that purpose or, at the option of such Holder, the
Corporate Trust Office, such Debenture with the original or facsimile of the form entitled
CONVERSION NOTICE on the reverse thereof, duly completed and manually signed, together with such
Debentures duly endorsed for transfer, accompanied by the funds, if any, required by the
penultimate paragraph of this Section 16.02. Such notice shall also state the name or names (with
address or addresses) in which the certificate or certificates for shares of Common Stock which
shall be issuable on such conversion shall be issued, and shall be accompanied by transfer or
similar taxes, if required pursuant to
Section 16.07.
In order to exercise the conversion privilege with respect to any interest in a Global Debenture,
the beneficial holder must complete, or cause to be completed, the appropriate instruction form for
conversion pursuant to the Depositarys book-entry conversion program, deliver, or cause to be
delivered, by book-entry delivery an interest in such Global Debenture, furnish appropriate
endorsements and transfer documents if required by the Company or the Trustee or conversion agent,
and pay the funds, if any, required by this
Section 16.02 and any transfer taxes if required pursuant to Section 16.07.
In order to validly exercise the conversion privilege under this
Section 16.02, a conversion must be effected prior to the expiration of the period of time set
forth in the applicable clause of Section 16.01. Each conversion shall be deemed to have been
effected as to any such Debenture (or portion thereof) on the date on which the requirements set
forth above in this
Section 16.02 have been satisfied as to such Debenture (or portion thereof) (the CONVERSION
DATE), and the Person in whose name any certificate or certificates for shares of Common Stock
shall be issuable upon such conversion shall be deemed to have become on said date the holder of
record of the shares represented thereby; provided that any such surrender on any date when the
stock transfer books of the Company shall be closed shall constitute the Person in whose name the
certificates are to be issued as the holder of record thereof for all purposes on the next
succeeding day on which such stock transfer books are open, but such conversion shall be at the
Conversion Rate in effect on the date upon which such Debenture shall be surrendered.
Subject to compliance with any restrictions on transfer if shares issuable on conversion are to be
issued in a name other than that of the Debentureholder (as if such transfer were a transfer of the
Debenture or Debentures (or portion thereof) so converted), the Company shall, on the Conversion
Settlement Date, (i) pay the cash component (including cash in lieu of any fraction of a share to
which such Holder would otherwise be entitled) of the Conversion Obligation determined pursuant to
Section 16.03 to the Holder of a Debenture surrendered for conversion, or such Holders nominee or
nominees,
(ii) (A) provided the conversion agent is participating in the Depositarys Fast Automated
Securities Transfer Program, issue, or cause to be issued, and deliver such aggregate number of
shares of Common Stock to which the applicable Debentureholder shall be entitled as part of such
Conversion Obligation to such Debentureholders or its nominees or nominees balance account with
the Depositary through its Deposit Withdrawal Agent Commission system or (B) if the conversion
agent is not participating in the Depositarys Fast Automated Securities Transfer Program, issue,
or cause to be issued, and deliver to the conversion agent or to such Debentureholder, or such
Debentureholders nominee or nominees, a certificate or certificates for the number of full shares
of Common Stock issuable upon the conversion of such Debenture or portion thereof as determined by
the Company in accordance with the provisions of this Article
16. In case any Debenture of a denomination
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greater than $1,000 shall be surrendered for partial conversion, and subject to
Section 2.03, the Company shall execute and the Trustee shall authenticate and deliver to the
Holder of the Debenture so surrendered, without charge to him, a new Debenture or Debentures in
authorized denominations in an aggregate principal amount equal to the unconverted portion of the
surrendered Debenture.
Any Debenture or portion thereof surrendered for conversion during the period from the close of
business on the Record Date for any interest payment date to the close of business on the Business
Day preceding the following interest payment date (excluding (1) Debentures or portions thereof
presented for purchase pursuant to Article 3 hereof on a Designated Event Repurchase Date occurring
during the period beginning at the close of business on a Record Date and ending at the opening of
business on the next succeeding interest payment date or (2) Debentures that are submitted for
conversion between the Record Date for the final interest payment and the opening of business on
the final interest payment date) shall be accompanied by payment, in immediately available funds or
other funds acceptable to the Company, of an amount equal to the interest otherwise payable on such
interest payment date on the principal amount being converted; provided that no such payment need
be made to the extent of any overdue interest, if any overdue interest exists at the time of
conversion with respect to such Debenture. Notwithstanding the foregoing, upon conversion, a
Debentureholder shall be entitled to receive any accrued and unpaid Liquidated Damages to, but not
including, the Conversion Date, it being understood that no Liquidated Damages shall accrue after
such conversion. Except as provided above in this Section 16.02, no payment or other adjustment
shall be made for interest accrued on any Debenture converted or for dividends on any shares issued
upon the conversion of such Debenture as provided in this Article 16.
Upon the conversion of an interest in a Global Debenture, the Trustee (or other conversion agent
appointed by the Company), or the Custodian at the direction of the Trustee (or other conversion
agent appointed by the Company), shall make a notation on such Global Debenture as to the reduction
in the principal amount represented thereby.
Upon the conversion of a Debenture, that portion of the accrued but unpaid interest, attributable
to the period from the issue date of the Debenture to the Conversion Date, with respect to the
converted Debenture shall not be cancelled, extinguished or forfeited, but rather shall be deemed
to be paid in full to the Holder thereof through delivery of cash and shares of the Common Stock,
if any, (together with the cash payment, if any, in lieu of fractional shares) in exchange for the
Debenture being converted pursuant to the provisions hereof; and the cash and the Fair Market Value
of such shares of Common Stock, if any, (together with any such cash payment in lieu of fractional
shares) shall be treated as delivered, to the extent thereof, first in exchange for and in
satisfaction of the Companys obligation to pay the principal amount of the converted Debenture,
the accrued but unpaid interest, through the Conversion Date from the issue date, and the balance,
if any, of such cash and Fair Market Value of such Common Stock, if any (and any such cash payment
in lieu of fractional shares), shall be treated as delivered in exchange for and in satisfaction of
the right to convert the Debenture being converted pursuant to the provisions hereof.
(b) No holder shall have the right to convert any portion of such Debenture, to the extent that
after giving effect to such conversion, such holder (together with such holders
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Affiliates) would beneficially own in excess of 9.99% of the number of shares of Common Stock
outstanding immediately after giving effect to such conversion (the CONVERSION LIMITATION). For
purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by such
holder and its Affiliates shall include the number of shares of Common Stock issuable upon
conversion of a Debenture with respect to which the determination of such sentence is being made,
but shall exclude the number of shares of Common Stock which would be issuable upon (A) conversion
of the remaining, nonconverted portion of any Debenture beneficially owned by such holder or any of
its Affiliates and (B) exercise or conversion of the unexercised or nonconverted portion of any
other securities of the Company subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by such holder or any of its Affiliates. Except as
set forth in the preceding sentence, for purposes of this Section, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act. For purposes of this Section
16.02, in determining the number of outstanding shares of Common Stock, such holder may rely on the
number of outstanding shares of Common Stock as reflected in (x) the Companys most recent annual,
quarterly or current report on Form 10-K, 10-Q or Form 8-K, respectively, as the case may be; (y) a
more recent public announcement by the Company or (z) any other notice by the Company setting forth
the number of shares of Common Stock outstanding. In any case, the number of outstanding shares of
Common Stock shall be determined after giving effect to the conversion or exercise of securities of
the Company, including any Debenture, by such holder or its Affiliates since the date as of which
such number of outstanding shares of Common Stock was reported. By written notice to the Trustee
and the Company, any holder may increase or decrease the Conversion Limitation to any other
percentage not in excess of 9.99% specified in such notice; provided that (i) any such increase
will not be effective until the 61st day after such notice is delivered to the Trustee and the
Company, and (ii) any such increase or decrease will apply only to the holder sending such notice
and not to any other holder of Debentures. Notwithstanding the foregoing, the Conversion Limitation
shall not be applicable (i) on any of the ten Trading Days up to and including the maturity date or
(ii) during the Designated Event Conversion/Repurchase Period.
(c) In no event shall the shares issuable upon conversion of each $1,000 principal amount of
Debentures pursuant to Section 16.01 plus the shares issuable pursuant to Section 5.01 hereof be in
excess of 157.2248 shares of Common Stock (subject to appropriate adjustment for any stock
dividend, stock split, stock combination or other similar transaction, the CONVERSION SHARES
CAP).
Section 16.03. Payment Upon Conversion. (a) Upon conversion of Debentures, the Company shall
deliver to Holders surrendering Debentures for conversion, for each $1,000 principal amount of
Debentures, a settlement amount (the CONVERSION SETTLEMENT DISTRIBUTION) on the Conversion
Settlement Date consisting of:
(i) a cash amount (the CASH AMOUNT) equal to the lesser of $1,000 and the Conversion Value; and
(ii) to the extent the Conversion Value exceeds $1,000, a number of shares of Common Stock (the
RESIDUAL VALUE SHARES) equal to the sum of the Daily Share Amounts for each Trading Day of the
Conversion Reference Period,
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subject to the Companys right to deliver cash in lieu of all or a portion of such Residual Value
Shares.
The DAILY SHARE AMOUNT means, for any Trading Day, a number of shares of Common Stock equal to
the quotient of:
(I)(A) the product of (x) the Closing Sale Price of the Common Stock on that Trading Day,
multiplied by (y) the Conversion Rate in effect on the Conversion Date, minus (B) $1,000, divided
by
(II) the product of (A) the Closing Sale Price of the Common Stock on that Trading Day, multiplied
by (B) 20.
Notwithstanding the foregoing, the Company may elect to pay cash to the Holders of the Debentures
surrendered for conversion in lieu of all or a portion of the Residual Value Shares issuable upon
conversion of such Debentures. If the Company elects to pay cash for all or a portion of the
Residual Value Shares in lieu of delivery of the Common Stock, it shall inform the Holders who have
surrendered their Debentures for conversion through the Trustee of the dollar amount to be
satisfied in cash (expressed as a percentage of each Residual Value Share that will be paid in cash
in lieu of shares of the Common Stock) at any time on or before the date that is three (3) Business
Days following the Companys receipt of such Conversion Notice (CASH SETTLEMENT NOTICE PERIOD).
If the Company timely elects to pay cash for any portion of the shares of Common Stock otherwise
issuable to the Holders of the Debentures, each Holder may retract its respective Conversion Notice
at any time during the two Business Day period immediately following the Cash Settlement Notice
Period (the CONVERSION RETRACTION PERIOD). If the Company does not make such an election, no such
retraction can be made (and a Conversion Notice shall be irrevocable). The amount of cash payable
to the Holders in respect of each Residual Value Share otherwise issuable upon conversion shall
equal the sum of the Residual Cash Value (as defined below) for such share of Common Stock
calculated for each day of the Conversion Reference Period. The RESIDUAL CASH VALUE for any
Trading Day shall be the product of (1) the percentage of each Residual Value Share otherwise
issuable upon conversion that the Company elects to pay in cash, multiplied by (2) the cash value
of the Daily Share Amount for such Trading Day. The cash value of the Daily Share Amount for any
Trading Day shall be an amount equal to the product of (A) the Daily Share Amount for such Trading
Day, multiplied by (B) the Closing Sale Price of the Common Stock for such Trading Day.
The Company shall not issue fractional shares of Common Stock upon conversion of the Debentures.
Instead, the Company shall pay the cash value of such fractional shares in accordance with Section
16.04. In addition, if the Company chooses to settle all or any portion of the Residual Value
Shares in cash in connection with conversions within 20 Trading Days prior to June 15, 2012, the
Company shall send, on or prior to such date, a single notice to the Trustee of the Residual Value
Shares to be satisfied in cash.
The CONVERSION VALUE means the product of (1) the Conversion Rate in effect (plus any applicable
Make-Whole Premium) and (2) the arithmetic average of the Closing Sale Prices of the Common Stock
on each Trading Days during the Conversion Reference Period.
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The CONVERSION REFERENCE PERIOD with respect to any Debentures means the 20 consecutive Trading
Days beginning on the second Trading Day after the Conversion Date, or if the Company elects to pay
cash to Holders in lieu of all or a portion of the Residual Value Shares, the second Trading Day
after the Conversion Retraction Period ends, except in circumstances where conversions occur within
20 Trading Days prior to June 15, 2012, in which case the Conversion Reference Period will be the
20 consecutive Trading Days beginning on the fifth Trading Day following June 15, 2012.
(b) If a Holder tenders Debentures for conversion and the Conversion Value is being determined at a
time when the Debentures are convertible into Exchange Property, the Conversion Value of each
Debenture shall be determined based on the kind and amount of such Exchange Property and the value
thereof during the Conversion Reference Period. Settlement of Debentures tendered for conversion
after the effective date of any transaction giving rise to Exchange Property shall be as set forth
above.
For the purposes of this Section, the Closing Sale Price of the Common Stock shall be deemed to
equal the sum of (A) 100% of the value of any Exchange Property consisting of cash received per
share of Common Stock, (B) the Closing Sale Price of any Exchange Property received per share of
Common Stock consisting of securities that are traded on a U.S. national securities exchange or
approved for quotation on the Nasdaq National Market and (C) the Fair Market Value of any other
Exchange Property received per share, as determined by two independent nationally recognized
investment banks selected by the Company for this purpose. Settlement (in cash and/or shares) in
such circumstances will occur on the third Business Day following the date the Conversion
Settlement Distribution is determined.
Section 16.04. Cash Payments in Lieu of Fractional Shares. No fractional shares of Common Stock or
scrip certificates representing fractional shares shall be issued upon conversion of Debentures. If
more than one Debenture shall be surrendered for conversion at one time by the same Holder, the
number of full shares that shall be issuable upon conversion shall be computed on the basis of the
aggregate principal amount of the Debentures (or specified portions thereof to the extent permitted
hereby) so surrendered. If any fractional share of stock would be issuable upon the conversion of
any Debenture or Debentures, the Company shall make an adjustment and payment therefor in cash at
the current market price thereof to the Holder of Debentures. The current market price of a share
of the Common Stock for purposes of this Section 16.04 shall be the Closing Sale Price of the
Common Stock on the last Trading Day immediately preceding the day on which the Debentures (or
specified portions thereof) are deemed to have been converted.
Section 16.05. Adjustment Of Conversion Rate. The Conversion Rate shall be adjusted from time to
time by the Company as follows:
(a) In case the Company shall hereafter pay a dividend or make a distribution to all holders of the
outstanding Common Stock in shares of Common Stock, the Conversion Rate shall be increased so that
the same shall equal the rate determined by multiplying the Conversion Rate in effect at the
opening of business on the date following the date fixed for the determination of stockholders
entitled to receive such dividend or other distribution by a fraction,
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(i) the numerator of which shall be the sum of the number of shares of Common Stock outstanding at
the close of business on the date fixed for the determination of stockholders entitled to receive
such dividend or other distribution plus the total number of shares of Common Stock constituting
such dividend or other distribution; and
(ii) the denominator of which shall be the number of shares of Common Stock outstanding at the
close of business on the date fixed for such determination,
such increase to become effective immediately after the opening of business on the day following
the date fixed for such determination. For the purpose of this paragraph (a), the number of shares
of Common Stock at any time outstanding shall not include shares held in the treasury of the
Company. The Company will not pay any dividend or make any distribution on shares of Common Stock
held in the treasury of the Company. If any dividend or distribution of the type described in this
Section 16.05(a) is declared but not so paid or made, the Conversion Rate shall again be adjusted
to the Conversion Rate that would then be in effect if such dividend or distribution had not been
declared.
(b) In case the Company shall issue rights, options or warrants to all or substantially all holders
of its outstanding shares of Common Stock entitling them (for a period expiring within forty-five
(45) days after the date fixed for determination of stockholders entitled to receive such rights or
warrants) to subscribe for or purchase shares of Common Stock (or securities convertible into or
exerciseable or exchangeable for Common Stock) at a price per share (or having a conversion
exercise or exchange price per share) less than the Current Market Price on the date fixed for
determination of stockholders entitled to receive such rights, options or warrants (treating the
conversion, exercise or exchange price per share of the securities convertible into or exercisable
or exchangeable for Common Stock as equal to (x) the sum of
(i) the price for a unit of the security convertible into or exercisable or exchangeable for Common
Stock and (ii) any additional consideration initially payable upon the conversion of such security
into or exercise or exchange of such security for Common Stock divided by (y) the number of shares
of Common Stock initially underlying such security) the Conversion Rate shall be increased so that
the same shall equal the rate determined by multiplying the Conversion Rate in effect immediately
prior to the date fixed for determination of stockholders entitled to receive such rights, options
or warrants (or securities convertible into or exerciseable or exchangeable for Common Stock) by a
fraction,
(i) the numerator of which shall be the number of shares of Common Stock outstanding on the date
fixed for determination of stockholders entitled to receive such rights, options or warrants plus
the total number of additional shares of Common Stock offered for subscription or purchase (or into
which the securities so offered are convertible, exchangeable or exerciseable), and
(ii) the denominator of which shall be the sum of the number of shares of Common Stock outstanding
at the close of business on the date fixed for determination of stockholders entitled to receive
such rights, options or warrants plus the number of shares (or the aggregate conversion, exercise
or exchange
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price of the securities so offered, which shall be determined by multiplying the number of shares
of Common Stock issuable upon conversion, exercise or exchange of such securities by the applicable
conversion, exercise or exchange price per share of Common Stock pursuant to the terms of such
securities) that the aggregate offering price of the total number of shares so offered would
purchase at such Current Market Price.
Such adjustment shall be successively made whenever any such rights, options or warrants are
issued, and shall become effective immediately after the opening of business on the day following
the date fixed for determination of stockholders entitled to receive such rights, options or
warrants. To the extent that shares of Common Stock are not delivered after the expiration of such
rights, options or warrants, the Conversion Rate shall be readjusted to the Conversion Rate that
would then be in effect had the adjustments made upon the issuance of such rights, options or
warrants been made on the basis of delivery of only the number of shares of Common Stock actually
delivered. If such rights or warrants are not so issued, the Conversion Rate shall again be
adjusted to be the Conversion Rate that would then be in effect if such date fixed for the
determination of stockholders entitled to receive such rights or warrants had not been fixed. In
determining whether any rights or warrants entitle the holders to subscribe for or purchase shares
of Common Stock at less than such Current Market Price, and in determining the aggregate offering
price of such shares of Common Stock, there shall be taken into account any consideration received
by the Company for such rights or warrants and any amount payable on conversion, exercise or
exchange thereof, the value of such consideration, if other than cash, to be determined by the
Board of Directors.
(c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares
of Common Stock, the Conversion Rate in effect at the opening of business on the day following the
day upon which such subdivision becomes effective shall be proportionately increased, and
conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of
shares of Common Stock, the Conversion Rate in effect at the opening of business on the day
following the day upon which such combination becomes effective shall be proportionately reduced,
such increase or reduction, as the case may be, to become effective immediately after the opening
of business on the day following the day upon which such subdivision or combination becomes
effective.
(d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common
Stock a portion of its assets (including cash and shares of a Subsidiary) or debt or other
securities issued by the Company or certain rights to purchase the Companys securities (including
securities, but excluding any rights, options or warrants referred to in Section 16.05(b), and
excluding any dividend or distribution (x) paid exclusively in cash or (y) referred to in Section
16.05(a) (any of the foregoing hereinafter in this Section 16.05(d)) called the SECURITIES)),
then, in each such case (unless the Company elects to reserve such Securities for distribution to
the Debentureholders upon the conversion of the Debentures so that any such Holder converting
Debentures will receive upon such conversion, in addition to the shares of Common Stock to which
such Holder is entitled, the amount and kind of such Securities which such Holder would have
received if such Holder had converted its Debentures into Common Stock immediately prior to the
Record Date) the Conversion Rate shall be increased so that the
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same shall be equal to the rate determined by multiplying the Conversion Rate in effect on the
Record Date with respect to such distribution by a fraction,
(i) the numerator of which shall be the Current Market Price on such Record Date; and
(ii) the denominator of which shall be the Current Market Price on such Record Date less the Fair
Market Value (as determined by the Board of Directors, whose determination shall be conclusive, and
described in a resolution of the Board of Directors) on the Record Date of the portion of the
Securities so distributed applicable to one share of Common Stock,
such adjustment to be made successively whenever any such distribution is made and shall become
effective immediately prior to the opening of business on the day following such Record Date;
provided that if the then Fair Market Value (as so determined) of the portion of the Securities so
distributed applicable to one share of Common Stock is equal to or greater than the Current Market
Price on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so
that each Debentureholder shall have the right to receive upon conversion the amount of Securities
such Holder would have received had such Holder converted each Debenture on the Record Date. If
such dividend or distribution is not so paid or made, the Conversion Rate shall again be adjusted
to be the Conversion Rate that would then be in effect if such dividend or distribution had not
been declared. If the Board of Directors determines the Fair Market Value of any distribution for
purposes of this Section 16.05(d) by reference to the actual or when issued trading market for any
securities, it must in doing so consider the prices in such market over the same period used in
computing the Current Market Price on the applicable Record Date.
Notwithstanding the foregoing, if the Securities distributed by the Company to all holders of its
Common Stock consists of capital stock of, or similar equity interests in, a Subsidiary or other
business unit, the Conversion Rate shall be increased so that the same shall be equal to the rate
determined by multiplying the Conversion Rate in effect on the Record Date with respect to such
distribution by a fraction:
(i) the numerator of which shall be the sum of (x) the average Closing Sale Price of the Common
Stock over the ten
(10) consecutive Trading Day period (the SPINOFF VALUATION PERIOD) commencing on and including
the fifth Trading Day after the date on which ex-dividend trading commences on the Common Stock
on the Nasdaq National Market or such other national or regional exchange or market on which the
Common Stock is then listed or quoted and (y) the average Fair Market Value (as determined by the
Board of Directors, whose determination shall be conclusive, and described in a resolution of the
Board of Directors) over the Spinoff Valuation Period of the portion of the Securities so
distributed applicable to one share of Common Stock; and
(ii) the denominator of which shall be the arithmetic average of the Closing Sale Prices of the
Common Stock over the Spinoff Valuation Period,
such adjustment to become effective immediately prior to the opening of business on the day
following such Record Date; provided that the Company may in lieu of the foregoing adjustment
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make adequate provision so that each Debentureholder shall have the right to receive upon
conversion the amount of Securities such Holder would have received had such Holder converted each
Debenture on the Record Date with respect to such distribution.
In case the Company shall, by dividend or otherwise, at any time distribute (a TRIGGERING
DISTRIBUTION) to all or substantially all holders of its Common Stock cash, the Conversion Rate
shall be increased so that the same shall equal the rate determined by multiplying such Conversion
Rate in effect immediately prior to the Business Day immediately preceding the day on which such
Triggering Distribution is declared (DECLARATION DATE) by a fraction of which:
(i) the numerator shall be such Current Market Price per share of the Common Stock (as determined
in accordance with subsection (6) of this Section 4.6(a)) on the Declaration Date; and
(ii) the denominator of which shall be the Current Market Price per share of the Common Stock (as
determined in accordance with subsection (6) of this Section 4.6(a)) on the Declaration Date less
the sum of the Triggering Distribution applicable to one share of Common Stock (determined on the
basis of the number of shares of Common Stock outstanding on the Declaration Date).
such increase to become effective immediately prior to the opening of business on the day following
the date on which the Triggering Distribution is paid.
Rights, options or warrants distributed by the Company to all holders of Common Stock entitling the
holders thereof to subscribe for or purchase shares of the Companys capital stock (either
initially or under certain circumstances), which rights, options or warrants, until the occurrence
of a specified event or events (TRIGGER EVENT): (i) are deemed to be transferred with such shares
of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be deemed not to have
been distributed for purposes of this Section 16.05 (and no adjustment to the Conversion Rate under
this Section 16.05 will be required) until the occurrence of the earliest Trigger Event, whereupon
such rights, options and warrants shall be deemed to have been distributed and an appropriate
adjustment (if any is required) to the Conversion Rate shall be made under this
Section 16.05(d). If any such right, option or warrant, including any such existing rights, options
or warrants distributed prior to the date of this Indenture, are subject to events, upon the
occurrence of which such rights, options or warrants become exercisable to purchase different
securities, evidences of indebtedness or other assets, then the date of the occurrence of any and
each such event shall be deemed to be the date of distribution and record date with respect to new
rights, options or warrants with such rights (and a termination or expiration of the existing
rights, options or warrants without exercise by any of the holders thereof). In addition, in the
event of any distribution (or deemed distribution) of rights, options or warrants, or any Trigger
Event or other event (of the type described in the preceding sentence) with respect thereto that
was counted for purposes of calculating a distribution amount for which an adjustment to the
Conversion Rate under this Section 16.05 was made, (1) in the case of any such rights, options or
warrants that shall all have been redeemed, purchased by the Company or repurchased without
exercise by any holders thereof, the Conversion Rate shall be readjusted upon such final redemption
or repurchase to give effect
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to such distribution or Trigger Event, as the case may be, as though it were a cash distribution,
equal to the per share redemption or repurchase price received by a holder or holders of Common
Stock with respect to such rights, options or warrants (assuming such holder had retained such
rights, options or warrants), made to all holders of Common Stock as of the date of such redemption
or repurchase, and (2) in the case of such rights, options or warrants that shall have expired or
been terminated without exercise by any holders thereof, the Conversion Rate shall be readjusted as
if such rights, options and warrants had not been issued.
No adjustment of the Conversion Rate shall be made pursuant to this Section 16.05(d) in respect of
rights, options or warrants distributed or deemed distributed on any Trigger Event to the extent
that such rights, options or warrants are actually distributed, or reserved by the Company for
distribution to Holders of Debentures upon conversion by such Holders of Debentures to Common
Stock.
For purposes of this Section 16.05(d) and Section 16.05(a) and
(b), any dividend or distribution to which this Section 16.05(d) is applicable that also includes
shares of Common Stock, or rights, options or warrants to subscribe for or purchase shares of
Common Stock (or both), shall be deemed instead to be (1) a dividend or distribution of the
evidences of indebtedness, assets or shares of capital stock other than such shares of Common Stock
or rights or warrants (and any Conversion Rate adjustment required by this Section 16.05(d) with
respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend
or distribution of such shares of Common Stock or such rights, options or warrants (and any further
Conversion Rate adjustment required by Sections 16.05(a) and 16.05(b) with respect to such dividend
or distribution shall then be made), except (A) the Record Date of such dividend or distribution
shall be substituted as the date fixed for the determination of stockholders entitled to receive
such dividend or other distribution, the date fixed for the determination of stockholders
entitled to receive such rights, options or warrants and the date fixed for such determination
within the meaning of Section 16.05(a) and 16.05(b) and (B) any shares of Common Stock included in
such dividend or distribution shall not be deemed outstanding at the close of business on the date
fixed for such determination within the meaning of Section 16.05(a).
(e) In case a tender or exchange offer made by the Company or any Subsidiary for all or any portion
of the Common Stock shall expire (such date, the EXPIRATION DATE) and such tender or exchange
offer (as amended upon the expiration thereof) shall require the payment to stockholders of
consideration per share of Common Stock having a Fair Market Value (as determined by the Board of
Directors, whose determination shall be conclusive and described in a resolution of the Board of
Directors) that as of the last time (the EXPIRATION TIME) tenders or exchanges may be made on the
Expiration Date exceeds the Closing Sale Price of the Common Stock on the Trading Day next
succeeding the Expiration Time, the Conversion Rate shall be increased so that the same shall equal
the rate determined by multiplying the Conversion Rate in effect immediately prior to the
Expiration Time by a fraction,
(i) the numerator of which shall be the sum of (x) the Fair Market Value (determined as aforesaid)
of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum
specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged
and
84
not withdrawn as of the Expiration Time (the shares deemed so accepted up to any such maximum,
being referred to as the Purchased Shares) and (y) the product of the number of shares of Common
Stock outstanding (less any Purchased Shares) at the Expiration Time and the Closing Sale Price of
the Common Stock on the Trading Day next succeeding the Expiration Time, and
(ii) the denominator of which shall be the number of shares of Common Stock outstanding (including
any Purchased Shares) at the Expiration Time multiplied by the Closing Sale Price of the Common
Stock on the Trading Day next succeeding the Expiration Time
such adjustment to become effective immediately prior to the opening of business on the day
following the Expiration Time. If the Company is obligated to purchase shares pursuant to any such
tender or exchange offer, but the Company is permanently prevented by applicable law from effecting
any such purchases or all such purchases are rescinded, the Conversion Rate shall again be adjusted
to be the Conversion Rate that would then be in effect if such tender or exchange offer had not
been made.
(f) For purposes of this Section 16.05, the following terms shall have the meaning indicated:
(i) CURRENT MARKET PRICE shall mean the arithmetic average of the Closing Sale Prices of the
Common Stock for the ten consecutive Trading Days selected by the Company commencing no more than
30 Trading Days before and ending not later than the earlier of such date of determination and the
day before the EX date with respect to the issuance, distribution, subdivision or combination
requiring such computation immediately prior to the date in question. For purpose of this
paragraph, the term EX date, (1) when used with respect to any issuance or distribution, means
the first date on which the Common Stock trades, regular way, on the relevant exchange or in the
relevant market from which the Closing Sale Price of the Common Stock was obtained without the
right to receive such issuance or distribution, and (2) when used with respect to any subdivision
or combination of shares of Common Stock, means the first date on which the Common Stock trades,
regular way, on such exchange or in such market after the time at which such subdivision or
combination becomes effective.
If another issuance, distribution, subdivision or combination to which Section 16.05 applies occurs
during the period applicable for calculating CURRENT MARKET PRICE pursuant to the definition in
the preceding paragraph, CURRENT MARKET PRICE shall be calculated for such period in a manner
determined by the Board of Directors to reflect the impact of such issuance, distribution,
subdivision or combination on the Closing Sale Price of the Common Stock during such period.
(ii) FAIR MARKET VALUE shall mean the amount which a willing buyer would pay a willing seller in
an arms-length transaction.
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(iii) RECORD DATE shall mean, for purposes of this
Section 16.05, with respect to any dividend, distribution or other transaction or event in which
the holders of Common Stock have the right to receive any cash, securities or other property or in
which the Common Stock (or other applicable security) is exchanged for or converted into any
combination of cash, securities or other property, the date fixed for determination of stockholders
entitled to receive such cash, securities or other property (whether such date is fixed by the
Board of Directors or by statute, contract or otherwise).
(iv) TRADING DAY shall mean (w) if the applicable security is quoted on the Nasdaq National
Market, a day on which trades may be made thereon or (x) if the applicable security is listed or
admitted for trading on the New York Stock Exchange or another U.S. national securities exchange, a
day on which the New York Stock Exchange or such other national securities exchange is open for
business, (y) if the applicable security is not so listed, days on which such security is traded
regular way in the over-the-counter market and for which a closing bid and closing asking price for
such security are available or (z) if the applicable security is not so listed, admitted for
trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions
in the State of New York are authorized or obligated by law or executive order to close.
(g) The Company may make such increases in the Conversion Rate, in addition to those required by
Section 16.05(a), (b), (c) or (d) as the Board of Directors considers to be advisable to avoid or
diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting
from any dividend or distribution of stock (or rights to acquire stock) or from any event treated
as such for income tax purposes.
To the extent permitted by applicable law, the Company from time to time may increase the
Conversion Rate by any amount for any period of time if the period is at least twenty (20) days,
the increase is irrevocable during the period and the Board of Directors shall have made a
determination that such increase would be in the best interests of the Company, which determination
shall be conclusive. Whenever the Conversion Rate is increased pursuant to the preceding sentence,
the Company shall mail to Holders of the Debentures a notice of the increase at least fifteen (15)
days prior to the date the increased Conversion Rate takes effect, and such notice shall state the
increased Conversion Rate and the period during which it will be in effect.
(h) Whenever the Conversion Rate is adjusted as herein provided, the Company shall promptly file
with the Trustee and any conversion agent other than the Trustee an Officers Certificate setting
forth the Conversion Rate after such adjustment and setting forth a brief statement of the facts
requiring such adjustment. Unless and until a Responsible Officer of the Trustee shall have
received such Officers Certificate, the Trustee shall not be deemed to have knowledge of any
adjustment of the Conversion Rate and may assume that the last Conversion Rate of which it has
knowledge is still in effect. Promptly after delivery of such certificate, the Company shall
prepare a notice of such adjustment of the Conversion Rate setting forth the adjusted Conversion
Rate and the date on which each adjustment becomes effective and shall mail such notice of such
adjustment of the Conversion Rate to the Holder of each Debenture at his last address appearing on
the Debenture Register provided for in Section 2.05 of this
86
Indenture, within twenty (20) days after execution thereof. Failure to deliver such notice shall
not affect the legality or validity of any such adjustment.
(i) In any case in which this Section 16.05 provides that an adjustment shall become effective
immediately after (1) a record date or Record Date for an event, (2) the date fixed for the
determination of stockholders entitled to receive a dividend or distribution pursuant to Section
16.05(a), (3) a date fixed for the determination of stockholders entitled to receive rights or
warrants pursuant to Section 16.05(b) or (4) the Expiration Time for any tender or exchange offer
pursuant to Section 16.05(e), (each a DETERMINATION DATE), the Company may elect to defer until
the occurrence of the applicable Adjustment Event (as hereinafter defined) (x) issuing to the
Holder of any Debenture converted after such Determination Date and before the occurrence of such
Adjustment Event, the additional shares of Common Stock or other securities issuable upon such
conversion by reason of the adjustment required by such Adjustment Event over and above the Common
Stock issuable upon such conversion before giving effect to such adjustment and (y) paying to such
Holder any amount in cash in lieu of any fraction pursuant to
Section 16.04. For purposes of this Section 16.05(i), the term ADJUSTMENT EVENT shall mean:
(i) in any case referred to in clause (1) hereof, the occurrence of such event,
(ii) in any case referred to in clause (2) hereof, the date any such dividend or distribution is
paid or made,
(iii) in any case referred to in clause (3) hereof, the date of expiration of such rights or
warrants, and
(iv) in any case referred to in clause (4) or clause
(5) hereof, the date a sale or exchange of Common Stock pursuant to such tender or exchange offer
is consummated and becomes irrevocable.
(j) For purposes of this Section 16.05, the number of shares of Common Stock at any time
outstanding shall not include shares held in the treasury of the Company but shall include shares
issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock.
The Company will not pay any dividend or make any distribution on shares of Common Stock held in
the treasury of the Company.
(k) No adjustment pursuant to this Section 16.05 shall cause the Conversion Price to be less than
the Average Closing Price, as appropriately adjusted for any stock dividend, stock split, stock
combination or similar transaction.
Section 16.06. Effect Of Reclassification, Consolidation, Merger or Sale. (a) If any of the
following events occur, namely: (i) any reclassification or change of the outstanding shares of
Common Stock (other than a subdivision or combination to which Section 16.05(c) applies), (ii) any
consolidation, merger or combination of the Company with another Person as a result of which
holders of Common Stock shall be entitled to receive Exchange Property with respect to or in
exchange for such Common Stock, or (iii) any sale or conveyance of all or substantially all of the
properties and assets of the Company to any other Person as a result of which holders of Common
Stock shall be entitled to receive stock, other securities or other
87
property or assets (including cash) with respect to or in exchange for such Common Stock, then the
Company or the successor or purchasing Person, as the case may be, shall execute with the Trustee a
supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of
execution of such supplemental indenture) providing for the conversion and settlement of the
Debentures as provided in this Indenture (including, without limitation, Sections 16.02 and Section
16.03). Such supplemental indenture shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Article 16.
If, in the case of any such reclassification, change, consolidation, merger, combination, sale or
conveyance, the Exchange Property receivable thereupon by a holder of Common Stock includes shares
of stock or other securities or other property or assets of a corporation other than the successor
or purchasing Person, in such reclassification, change, consolidation, merger, combination, sale or
conveyance, then such supplemental indenture shall also be executed by such other corporation and
shall contain such additional provisions to protect the Holders of the Debentures as the Board of
Directors shall consider reasonably necessary.
(b) The Conversion Obligation with respect to each $1,000 principal amount of Debentures converted
following the effective date of any such transaction, shall be calculated (as provided in clause
(c) below) based on the Exchange Property assuming such holder of Common Stock did not exercise his
rights of election, if any, as to the kind or amount of Exchange Property receivable upon such
consolidation, merger, sale or conveyance (provided that, if the Exchange Property receivable upon
such consolidation, merger, sale or conveyance is not the same for each share of Common Stock in
respect of which such rights of election shall not have been exercised (NON-ELECTING SHARE), then
for the purposes of this Section 16.05 the Exchange Property receivable upon such consolidation,
merger, binding share exchange, sale or conveyance for each Non-Electing Share shall be deemed to
be the kind and amount so receivable per share by a plurality of the Non-Electing Shares).
(c) The Conversion Obligation in respect of any Debentures converted following the effective date
of any such transaction shall be computed in the same manner as set forth in Section 16.03(a)
except that (1) the Conversion Reference Period shall be the 10 Trading Day period beginning on the
second Trading Day after the Conversion Date (or, in the event the Conversion Date is on the
Business Day prior to the maturity, the 10 Trading Day period beginning on the second Trading Day
after the maturity), and (2) if the Debentures become convertible into Exchange Property, the
Closing Sale Price of the Common Stock shall be deemed to equal the sum of (A) 100% of the value of
any Exchange Property consisting of cash received per share of Common Stock, (B) the Closing Sale
Price of any Exchange Property received per share of Common Stock consisting of securities that are
traded on a U.S. national securities exchange or approved for quotation on the Nasdaq National
Market and (C) the Fair Market Value of any other Exchange Property received per share, as
determined by two independent nationally recognized investment banks selected by the Company for
this purpose. Settlement (in cash and/or shares) shall occur on the third Business Day following
the date the Conversion Settlement Distribution is determined, provided, that any amount of the
Conversion Settlement Distribution to be delivered in shares of Common Stock shall be paid in
Exchange Property rather than shares of Common Stock. If the Exchange Property includes more than
one kind of property, the amount of Exchange Property of each kind to be delivered shall be in the
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proportion that the value of the Exchange Property (as calculated pursuant to
Section 16.03) of such kind bears to the value of all such Exchange Property. If the foregoing
calculations would require the Company to deliver a fractional share or unit of Exchange Property
to a Holder of Debentures being converted, the Company shall deliver cash in lieu of such
fractional share or unit based on the value of the Exchange Property.
The Company shall cause notice of the execution of such supplemental indenture to be mailed to each
Holder of Debentures, at its address appearing on the Debenture Register provided for in Section
2.05 of this Indenture, within twenty (20) days after execution thereof. Failure to deliver such
notice shall not affect the legality or validity of such supplemental indenture.
The above provisions of this Section shall similarly apply to successive reclassifications,
changes, consolidations, mergers, combinations, sales and conveyances.
If this Section 16.06 applies to any event or occurrence,
Section 16.05 shall not apply.
Section 16.07. Taxes On Shares Issued. The issue of stock certificates on conversions of Debentures
shall be made without charge to the converting Debentureholder for any documentary, stamp or
similar issue or transfer tax in respect of the issue thereof. The Company shall not, however, be
required to pay any such tax which may be payable in respect of any transfer involved in the issue
and delivery of stock in any name other than that of the Holder of any Debenture converted, and the
Company shall not be required to issue or deliver any such stock certificate unless and until the
Person or Persons requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax has been paid.
Section 16.08. Reservation of Shares, Shares to Be Fully Paid; Compliance With Governmental
Requirements; Listing of Common Stock. The Company shall provide, free from preemptive rights, out
of its authorized but unissued shares or shares held in treasury, sufficient shares of Common Stock
to provide for the conversion of the Debentures from time to time as such Debentures are presented
for conversion.
Before taking any action which would cause an adjustment increasing the Conversion Rate to an
amount that would cause the Conversion Price to be reduced below the then par value, if any, of the
shares of Common Stock issuable upon conversion of the Debentures, the Company will take all
corporate action which may, in the opinion of its counsel, be necessary in order that the Company
may validly and legally issue shares of such Common Stock at such adjusted Conversion Rate.
The Company covenants that all shares of Common Stock which may be issued upon conversion of
Debentures (or as a Make-Whole Premium) will upon issue be fully paid and non-assessable by the
Company and free from all taxes, liens and charges with respect to the issue thereof.
The Company covenants that, if any shares of Common Stock to be provided for the purpose of
conversion of Debentures hereunder require registration with or approval of any
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governmental authority under any federal or state law before such shares may be validly issued upon
conversion, the Company will in good faith and as expeditiously as possible, to the extent then
permitted by the rules and interpretations of the Commission (or any successor thereto), endeavor
to secure such registration or approval, as the case may be.
The Company further covenants that, if at any time the Common Stock shall be listed on the Nasdaq
National Market or any other national securities exchange or automated quotation system, the
Company will, if permitted by the rules of such exchange or automated quotation system, list and
keep listed, so long as the Common Stock shall be so listed on such exchange or automated quotation
system, all Common Stock issuable upon conversion of the Debenture; provided that if the rules of
such exchange or automated quotation system permit the Company to defer the listing of such Common
Stock until the first conversion of the Debentures into Common Stock in accordance with the
provisions of this Indenture, the Company covenants to list such Common Stock issuable upon
conversion of the Debentures in accordance with the requirements of such exchange or automated
quotation system at such time.
Section 16.09. Responsibility Of Trustee. The Trustee and any other conversion agent shall not at
any time be under any duty or responsibility to any Holder of Debentures to determine the
Conversion Rate or whether any facts exist which may require any adjustment of the Conversion Rate,
or with respect to the nature or extent or calculation of any such adjustment when made, or with
respect to the method employed, or herein or in any supplemental indenture provided to be employed,
in making the same. The Trustee and any other conversion agent shall not be accountable with
respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any
securities or property, which may at any time be issued or delivered upon the conversion of any
Debenture; and the Trustee and any other conversion agent make no representations with respect
thereto. Neither the Trustee nor any conversion agent shall be responsible for any failure of the
Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other
securities or property or cash upon the surrender of any Debenture for the purpose of conversion or
to comply with any of the duties, responsibilities or covenants of the Company contained in this
Article 16. Without limiting the generality of the foregoing, neither the Trustee nor any
conversion agent shall be under any responsibility to determine the correctness of any provisions
contained in any supplemental indenture entered into pursuant to Section 16.06 relating either to
the kind or amount of shares of stock or securities or property (including cash) receivable by
Debentureholders upon the conversion of their Debentures after any event referred to in such
Section 16.06 or to any adjustment to be made with respect thereto, but, subject to the provisions
of Section 9.01, may accept as conclusive evidence of the correctness of any such provisions, and
shall be protected in relying upon, the Officers Certificate (which the Company shall be obligated
to file with the Trustee prior to the execution of any such supplemental indenture) with respect
thereto.
Section 16.10. Notice To Holders Prior To Certain Actions. In case:
(a) the Company shall declare a dividend (or any other distribution) on its Common Stock that would
require an adjustment in the Conversion Rate pursuant to Section 16.05; or
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(b) the Company shall authorize the granting to the holders of all or substantially all of its
Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other
rights or warrants; or
(c) of any reclassification or reorganization of the Common Stock of the Company (other than a
subdivision or combination of its outstanding Common Stock, or a change in par value, or from par
value to no par value, or from no par value to par value), or of any consolidation or merger to
which the Company is a party and for which approval of any stockholders of the Company is required,
or of the sale or transfer of all or substantially all of the assets of the Company; or
(d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company;
the Company shall cause to be filed with the Trustee and to be mailed to each Holder of Debentures
at his address appearing on the Debenture Register provided for in Section 2.05 of this Indenture,
as promptly as possible but in any event at least ten (10) days prior to the applicable date
hereinafter specified, a notice stating (x) the date on which a record is to be taken for the
purpose of such dividend, distribution or rights or warrants, or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to such dividend,
distribution or rights are to be determined, or (y) the date on which such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up is expected to become
effective or occur, and the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their Common Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding
up. Failure to give such notice, or any defect therein, shall not affect the legality or validity
of such dividend, distribution, reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up.
Section 16.11. Stockholder Rights Plans. If the rights provided for in any future rights plan
adopted by the Company have separated from the shares of Common Stock in accordance with the
provisions of the applicable stockholder rights agreement so that the Holders of the Debentures
would not be entitled to receive any rights in respect of Common Stock issuable upon conversion of
the Debentures, the conversion rate will be adjusted as if the Company distributed to all holders
of Common Stock a portion of its assets (including cash and shares of a Subsidiary) or debt or
other securities issued by the Company or certain rights to purchase the Companys securities
(including securities but excluding rights or warrants to purchase Common Stock issued to all
holders of Common Stock, Common Stock issued as a dividend or distribution on Common Stock and cash
distributions) as described in Section 16.05(d), subject to readjustment in the event of the
expiration, termination or redemption of the rights. In lieu of any such adjustment, the Company
may amend such applicable stockholder rights agreement to provide that upon conversion of the
Debentures the Holders will receive, in addition to the Common Stock issuable upon such conversion,
the rights which would have attached to such Common Stock if the rights had not become separated
from the Common Stock under such applicable stockholder rights agreement.
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ARTICLE 17
MISCELLANEOUS PROVISIONS
Section 17.01. Provisions Binding On Companys Successors. All the covenants, stipulations,
promises and agreements by the Company contained in this Indenture shall bind its successors and
assigns whether so expressed or not.
Section 17.02. Official Acts By Successor Corporation. Any act or proceeding by any provision of
this Indenture authorized or required to be done or performed by any board, committee or officer of
the Company shall and may be done and performed with like force and effect by the like board,
committee or officer of any Person that shall at the time be the lawful sole successor of the
Company.
Section 17.03. Addresses For Notices, Etc. Any notice or demand which by any provision of this
Indenture is required or permitted to be given or served by the Trustee or by the Holders of
Debentures on the Company shall be deemed to have been sufficiently given or made, for all
purposes, if given or served by being deposited postage prepaid by registered or certified mail in
a post office letter box or sent by telecopier transmission addressed as follows:
to Impax Laboratories, Inc., 3735 Castor Avenue, Philadelphia, PA 19124, Telecopier No:
215-289-2223, Attention: Chief Financial Officer. Any notice, direction, request or demand
hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all
purposes, if given or served by being deposited, postage prepaid, by registered or certified mail
in a post office letter box or sent by telecopier transmission addressed as follows: HSBC Bank USA,
National Association, 452 Fifth Avenue, New York, New York 10018, Telecopier No: 212-525-1300,
Attention: Corporate Trust & Loan Agency.
The Trustee, by notice to the Company, may designate additional or different addresses for
subsequent notices or communications.
Any notice or communication mailed to a Debentureholder shall be mailed to him by first class mail,
postage prepaid, at his address as it appears on the Debenture Register and shall be sufficiently
given to him if so mailed within the time prescribed.
Failure to mail a notice or communication to a Debentureholder or any defect in it shall not affect
its sufficiency with respect to other Debentureholders. If a notice or communication is mailed in
the manner provided above, it is duly given, whether or not the addressee receives it.
Section 17.04. Governing Law. This Indenture and each Debenture shall be deemed to be a contract
made under the laws of the State of New York, and for all purposes shall be construed in accordance
with the laws of the State of New York, without regard to conflicts of laws principles thereof.
Section 17.05. Evidence Of Compliance With Conditions Precedent, Certificates To Trustee. Upon any
application or demand by the Company to the Trustee to take any action under any of the provisions
of this Indenture, the Company shall furnish to the Trustee an Officers Certificate stating that
all conditions precedent, if any, provided for in this Indenture
92
relating to the proposed action have been complied with, and an Opinion of Counsel stating that, in
the opinion of such counsel, all such conditions precedent have been complied with.
Each certificate or opinion provided for in this Indenture and delivered to the Trustee with
respect to compliance with a condition or covenant provided for in this Indenture shall include:
(1) a statement that the person making such certificate or opinion has read such covenant or
condition; (2) a brief statement as to the nature and scope of the examination or investigation
upon which the statement or opinion contained in such certificate or opinion is based; (3) a
statement that, in the opinion of such person, he has made such examination or investigation as is
necessary to enable him to express an informed opinion as to whether or not such covenant or
condition has been complied with; and (4) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
Section 17.06. Legal Holidays. In any case in which the date of maturity of interest on or
principal of the Debentures or the redemption date of any Debenture will not be a Business Day,
then payment of such interest on or principal of the Debentures need not be made on such date, but
may be made on the next succeeding Business Day with the same force and effect as if made on the
date of maturity or the redemption date, and no interest shall accrue for the period from and after
such date.
Section 17.07. Trust Indenture Act. This Indenture is hereby made subject to, and shall be governed
by, the provisions of the Trust Indenture Act required to be part of and to govern indentures
qualified under the Trust Indenture Act; provided that unless otherwise required by law,
notwithstanding the foregoing, this Indenture and the Debentures issued hereunder shall not be
subject to the provisions of subsections (a)(1), (a)(2), and (a)(3) of Section 314 of the Trust
Indenture Act as now in effect or as hereafter amended or modified; provided further that this
Section 17.07 shall not require this Indenture or the Trustee to be qualified under the Trust
Indenture Act prior to the time such qualification is in fact required under the terms of the Trust
Indenture Act, nor shall it constitute any admission or acknowledgment by any party to the
Indenture that any such qualification is required prior to the time such qualification is in fact
required under the terms of the Trust Indenture Act. If any provision hereof limits, qualifies or
conflicts with another provision hereof which is required or deemed to be included in an indenture
qualified under the Trust Indenture Act, such required or deemed provision shall control.
Section 17.08. No Security Interest Created. Nothing in this Indenture or in the Debentures,
expressed or implied, shall be construed to constitute a security interest under the Uniform
Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any
jurisdiction in which property of the Company or its subsidiaries is located.
Section 17.09. Benefits Of Indenture. Nothing in this Indenture or in the Debentures, express or
implied, shall give to any Person, other than the parties hereto, any paying agent, any
authenticating agent, any Debenture Registrar and their successors hereunder and the Holders of
Debentures any benefit or any legal or equitable right, remedy or claim under this Indenture.
93
Section 17.10. Table Of Contents, Headings, Etc. The table of contents and the titles and headings
of the Articles and Sections of this Indenture have been inserted for convenience of reference
only, are not to be considered a part hereof, and shall in no way modify or restrict any of the
terms or provisions hereof.
Section 17.11. Authenticating Agent. The Trustee may appoint an authenticating agent that shall be
authorized to act on its behalf, and subject to its direction, in the authentication and delivery
of Debentures in connection with the original issuance thereof and transfers and exchanges of
Debentures hereunder, including under Sections 2.04, 2.05, 2.06, 2.07, 3.03 and 3.05, as fully to
all intents and purposes as though the authenticating agent had been expressly authorized by this
Indenture and those Sections to authenticate and deliver Debentures. For all purposes of this
Indenture, the authentication and delivery of Debentures by the authenticating agent shall be
deemed to be authentication and delivery of such Debentures by the Trustee and a certificate of
authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to
satisfy any requirement hereunder or in the Debentures for the Trustees certificate of
authentication. Such authenticating agent shall at all times be a Person eligible to serve as
trustee hereunder pursuant to Section 9.09.
Any corporation into which any authenticating agent may be merged or converted or with which it may
be consolidated, or any corporation resulting from any merger, consolidation or conversion to which
any authenticating agent shall be a party, or any corporation succeeding to the corporate trust
business of any authenticating agent, shall be the successor of the authenticating agent hereunder,
if such successor corporation is otherwise eligible under this Section 17.11, without the execution
or filing of any paper or any further act on the part of the parties hereto or the authenticating
agent or such successor corporation.
Any authenticating agent may at any time resign by giving written notice of resignation to the
Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating
agent by giving written notice of termination to such authenticating agent and to the Company. Upon
receiving such a notice of resignation or upon such a termination, or in case at any time any
authenticating agent shall cease to be eligible under this Section, the Trustee shall either
promptly appoint a successor authenticating agent or itself assume the duties and obligations of
the former authenticating agent under this Indenture and, upon such appointment of a successor
authenticating agent, if made, shall give written notice of such appointment of a successor
authenticating agent to the Company and shall mail notice of such appointment of a successor
authenticating agent to all Holders of Debentures as the names and addresses of such Holders appear
on the Debenture Register.
The Company agrees to pay to the authenticating agent from time to time such reasonable
compensation for its services as shall be agreed upon in writing between the Company and the
authenticating agent.
The provisions of Sections 9.02, 9.03, 9.04 and 10.03 and this
Section 17.11 shall be applicable to any authenticating agent.
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Section 17.12. Execution In Counterparts. This Indenture may be executed in any number of
counterparts, each of which shall be an original, but such counterparts shall together constitute
but one and the same instrument.
Section 17.13. Severability. In case any provision in this Indenture or in the Debentures shall be
invalid, illegal or unenforceable, then (to the extent permitted by law) the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or impaired thereby.
HSBC Bank USA, National Association, hereby accepts the trusts in this Indenture declared and
provided, upon the terms and conditions herein above set forth.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed.
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IMPAX LABORATORIES, INC.
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By:
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/s/ Barry R. Edwards
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Name:
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Barry R. Edwards
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Title:
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Chief Executive Officer
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HSBC BANK USA, NATIONAL ASSOCIATION, as Trustee
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By:
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/s/ Frank J. Godino
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Name:
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Frank J. Godino
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Title:
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Vice President
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EXHIBIT A
[Include only for Global Debentures:]
[UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST
COMPANY (55 WATER STREET, NEW YORK, NEW YORK) (THE
DEPOSITARY, WHICH TERM INCLUDES ANY SUCCESSOR DEPOSITARY FOR THE CERTIFICATES) TO THE COMPANY OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITARY (AND ANY PAYMENT HEREIN IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITARY), ANY TRANSFER, PLEDGE, OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
[Include only for Debentures that are Restricted Securities]
[THE DEBENTURE EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR ANY STATE SECURITIES LAWS AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT IT IS A QUALIFIED INSTITUTIONAL BUYER (AS
DEFINED IN RULE 144A UNDER THE SECURITIES ACT); (2) AGREES THAT IT WILL NOT, PRIOR TO EXPIRATION OF
THE HOLDING PERIOD APPLICABLE TO SALES OF THIS DEBENTURE UNDER RULE 144(K) UNDER THE SECURITIES ACT
(OR ANY SUCCESSOR PROVISION), RESELL OR OTHERWISE TRANSFER THIS DEBENTURE OR THE COMMON STOCK
ISSUABLE UPON CONVERSION OF THIS DEBENTURE EXCEPT (A) TO IMPAX LABORATORIES, INC. OR ANY SUBSIDIARY
THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES
ACT, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT
(IF AVAILABLE) OR (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER
THE SECURITIES ACT (AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER); (3) PRIOR TO
SUCH TRANSFER (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 2(D) ABOVE), IT WILL FURNISH TO HSBC BANK
USA, NATIONAL ASSOCIATION, AS TRUSTEE (OR A SUCCESSOR TRUSTEE, AS APPLICABLE), SUCH CERTIFICATIONS,
LEGAL OPINIONS OR OTHER INFORMATION AS THE TRUSTEE MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT; AND (4) AGREES THAT IT WILL DELIVER TO EACH PERSON
TO WHOM THIS DEBENTURE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
CONNECTION WITH ANY TRANSFER OF THIS DEBENTURE PRIOR TO THE EXPIRATION OF THE HOLDING PERIOD
APPLICABLE
A-1
TO SALES OF THIS DEBENTURE UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION),
THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF
SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO HSBC BANK USA, NATIONAL ASSOCIATION, AS TRUSTEE (OR A
SUCCESSOR TRUSTEE, AS APPLICABLE). THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE TRANSFER OF
THE DEBENTURE EVIDENCED HEREBY PURSUANT TO CLAUSE 2(D) ABOVE OR UPON ANY TRANSFER OF THIS DEBENTURE
UNDER RULE 144(K) UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION). THE INDENTURE CONTAINS A
PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS DEBENTURE IN VIOLATION
OF THE FOREGOING RESTRICTION.]
A-2
IMPAX LABORATORIES, INC.
3.5% CONVERTIBLE SENIOR SUBORDINATED DEBENTURE DUE 2012
CUSIP: 45256B AC 5
No. ___ $[
]
Impax Laboratories, Inc., a corporation duly organized and validly existing under the laws of the
State of Delaware (herein called the COMPANY, which term includes any successor corporation under
the Indenture referred to on the reverse hereof), for value received
hereby promises to pay to [ ] or its registered assigns, the aggregate principal sum set forth on Schedule I hereto on June
15, 2012 at the office or agency of the Company maintained for that purpose in accordance with the
terms of the Indenture, in such coin or currency of the United States of America as at the time of
payment shall be legal tender for the payment of public and private debts, and to pay interest,
semiannually on June 15 and December 15 of each year, commencing December 15, 2005, on said
principal sum at said office or agency, in like coin or currency, at the rate per annum of 3.5%,
from the June 15 or December 15, as the case may be, next preceding the date of this Debenture to
which interest has been paid or duly provided for, unless the date hereof is a date to which
interest has been paid or duly provided for, in which case from the date of this Debenture, or
unless no interest has been paid or duly provided for on the Debentures, in which case from June
27, 2005 until payment of said principal sum has been made or duly provided for. Notwithstanding
the foregoing, if the date hereof is after any June 1 or December 1, as the case may be, and before
the following June 15 or December 15, this Debenture shall bear interest from such June 15 or
December 15; provided that if the Company shall default in the payment of interest due on such June
15 or December 15, then this Debenture shall bear interest from the next preceding June 15 or
December 15 to which interest has been paid or duly provided for or, if no interest has been paid
or duly provided for on such Debenture, from June 27, 2005. Except as otherwise provided in the
Indenture, the interest payable on the Debenture pursuant to the Indenture on any June 15 or
December 15 will be paid to the Person entitled thereto as it appears in the Debenture Register at
the close of business on the Record Date, which shall be the June 1 or December 1 (whether or not a
Business Day) next preceding such June 15 or December 15, as provided in the Indenture; provided
that any such interest not punctually paid or duly provided for shall be payable as provided in the
Indenture. The Company shall pay interest (i) on any Debentures in certificated form by check
mailed to the address of the Person entitled thereto as it appears in the Debenture Register or
(ii) on any Global Debenture by wire transfer of immediately available funds to the account of the
Depositary or its nominee.
The Company promises to pay interest on overdue principal, premium, if any, and (to the extent that
payment of such interest is enforceable under applicable law) interest at the rate of 1% per annum.
Reference is made to the further provisions of this Debenture set forth on the reverse hereof,
including, without limitation, provisions giving the Holder of this Debenture the right to convert
this Debenture into cash and Common Stock of the Company on the terms and subject to the
limitations referred to on the reverse hereof and as more fully specified in the
A-3
Indenture. Such further provisions shall for all purposes have the same effect as though fully set
forth at this place.
This Debenture shall be deemed to be a contract made under the laws of the State of New York, and
for all purposes shall be construed in accordance with and governed by the laws of the State of New
York, without regard to conflicts of laws principles thereof.
This Debenture shall not be valid or become obligatory for any purpose until the certificate of
authentication hereon shall have been manually signed by the Trustee or a duly authorized
authenticating agent under the Indenture.
A-4
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly executed.
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IMPAX LABORATORIES, INC.
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By:
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By:
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TRUSTEES CERTIFICATE OF AUTHENTICATION
This is one of the Debentures described in the within-named Indenture.
HSBC BANK USA, NATIONAL ASSOCIATION,
as Trustee
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By:
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Authorized Signatory
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, or
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By:
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As Authenticating Agent
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(if different from Trustee)
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By:
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Authorized Signatory
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A-5
FORM OF REVERSE OF DEBENTURE
IMPAX LABORATORIES, INC.
3.5% CONVERTIBLE SENIOR SUBORDINATED DEBENTURE DUE 2012
This Debenture is one of a duly authorized issue of Debentures of the Company, designated as its
3.5% Convertible Senior Subordinated Debentures Due 2012 (herein called the DEBENTURES), limited
in aggregate principal amount to $75,000,000, issued and to be issued under and pursuant to an
Indenture dated as of June 27, 2005 (herein called the INDENTURE), between the Company and HSBC
Bank USA, National Association, as trustee (herein called the TRUSTEE), to which Indenture and
all indentures supplemental thereto reference is hereby made for a description of the rights,
limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company
and the Holders of the Debentures.
In case an Event of Default shall have occurred and be continuing, the principal of, premium, if
any, and accrued interest, on all Debentures may be declared by either the Trustee or the Holders
of not less than 25% in aggregate principal amount of the Debentures then outstanding, and upon
said declaration shall become, due and payable, in the manner, with the effect and subject to the
conditions provided in the Indenture.
The Indenture contains provisions permitting the Company and the Trustee, with the consent of the
Holders of at least a majority in aggregate principal amount of the Debentures at the time
outstanding, to execute supplemental indentures adding any provisions to or changing in any manner
or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying
in any manner the rights of the Holders of the Debentures; provided that no such supplemental
indenture shall (i) extend the fixed maturity of any Debenture, or reduce the rate or extend the
time of payment of interest thereon, or reduce the principal amount thereof or premium, if any,
thereon, or reduce any amount payable upon redemption or repurchase thereof, or impair the right of
any Debentureholder to institute suit for the payment thereof, or make the principal thereof or
interest or premium, if any, thereon payable in any coin or currency other than that provided in
the Debentures, or change the obligation of the Company to redeem any Debenture on a redemption
date in a manner adverse to the Holders or change the obligation of the Company to redeem any
Debenture upon the happening of a Designated Event in a manner adverse to the Holder of the
Debentures, or change the obligation of the Company to repurchase any Debenture on a Repurchase
Date in a manner adverse to the Holder of the Debentures, or impair the right to convert the
Debentures into Common Stock subject to the terms set forth in the Indenture, including
Section 16.06 thereof, without the consent of the Holder of each Debenture so affected, or modify
any of the provisions of Section 12.02 or Section 8.07 thereof, except to increase any such
percentage or to provide that certain other provisions of the Indenture cannot be modified or
waived without the consent of the Holder of each Debenture so affected, or change any obligation of
the Company to maintain an office or agency in the places and for the purposes set forth in Section
6.01 thereof, or reduce the quorum or voting requirements set forth in Article 11 or change the
provisions of Article 4 in a manner adverse to the Holders of Debentures, or modify in any manner
the calculation of the Make-Whole Premium, or change the ranking of the Debentures in a manner
adverse to the Holders of the
A-6
Debentures, (ii) reduce the aforesaid percentage of Debentures, the Holders of which are required
to consent to any such supplemental indenture, without the consent of the Holders of all Debentures
then outstanding. Subject to the provisions of the Indenture, the Holders of a majority in
aggregate principal amount of the Debentures at the time outstanding may on behalf of the Holders
of all of the Debentures waive any past default or Event of Default under the Indenture and its
consequences except (A) a default in the payment of interest, or any premium on, or the principal
of, any of the Debentures, (B) a failure by the Company to convert any Debentures into Common Stock
of the Company, (C) a default in the payment of the redemption price pursuant to Article 3 of the
Indenture, (D) a default in the payment of the purchase price pursuant to Article 3 of the
Indenture, or (E) a default in respect of a covenant or provisions of the Indenture which under
Article 12 of the Indenture cannot be modified or amended without the consent of the Holders of
each or all Debentures then outstanding or affected thereby. Any such consent or waiver by the
Holder of this Debenture (unless revoked as provided in the Indenture) shall be conclusive and
binding upon such Holder and upon all future Holders and owners of this Debenture and any
Debentures which may be issued in exchange or substitution hereof, irrespective of whether or not
any notation thereof is made upon this Debenture or such other Debentures.
The Debentures shall be senior, subordinated, unsecured obligations of the Company and shall rank
(a) pari passu with all other existing or future senior, subordinated, unsecured obligations of the
Company allowed pursuant to Section 6.12 of this Indenture, (b) senior in right of payment to the
1.250% Debentures and any future subordinated obligations of the
Company and (c) junior to the Designated Senior Indebtedness and other Senior Indebtedness allowed pursuant to
Section 6.12 of the Indenture. The Debentures shall constitute Senior Indebtedness, and the
Company hereby specifically designates the Debentures as Designated Senior Indebtedness, in each
case, under the 2004 Indenture.
The indebtedness evidenced by the Debentures is, to the extent and in the manner provided in the
Indenture, expressly subordinated and subject in right of payment to the prior payment in full of
all Senior Indebtedness of the Company, whether outstanding at the date of the Indenture or
thereafter incurred, and this Debenture is issued subject to the provisions of the Indenture with
respect to such subordination. Each Holder of this Debenture, by accepting the same, agrees to and
shall be bound by such provisions and authorizes the Trustee on its behalf to take such action as
may be necessary or appropriate to effectuate the subordination so provided and appoints the
Trustee his attorney-in-fact for such purpose.
No reference herein to the Indenture and no provision of this Debenture or of the Indenture shall
alter or impair the obligation of the Company, which is absolute and unconditional, to pay the
principal of and any premium and interest, on this Debenture at the place, at the respective times,
at the rate and in the coin or currency herein prescribed.
Interest on the Debentures shall be computed on the basis of a 360-day year of twelve 30-day
months.
The Debentures are issuable in fully registered form, without coupons, in denominations of $1,000
principal amount and any integral multiple of $1,000. At the office or agency of the Company
referred to on the face hereof, and in the manner and subject to the
A-7
limitations provided in the Indenture, without payment of any service charge but with payment of a
sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in
connection with any registration or exchange of Debentures, Debentures may be exchanged for a like
aggregate principal amount of Debentures of any other authorized denominations.
The Debentures may not be redeemed, in whole or in part, at the option of the Company at any time
prior to maturity.
The Debentures are not subject to redemption through the operation of any sinking fund.
If a Designated Event occurs at any time prior to maturity of the Debentures, this Debenture will
be redeemable on a Designated Event Repurchase Date, at the option of the Holder of this Debenture
at a redemption price equal to 100% of the principal amount thereof, together with accrued interest
to (but excluding) the Designated Event Repurchase Date; provided that if such Designated Event
Repurchase Date falls after a Record Date and on or prior the corresponding interest payment date,
the interest payable on such interest payment date shall be paid to the Holder of this Debenture on
the preceding June 1 or December 1, respectively. The Debentures will be redeemable in multiples of
$1,000 principal amount. The Company (or, at its request, the Trustee) shall mail to all Holders of
the Debentures a notice of a Designated Event and of the redemption right arising as a result
thereof within 10 days after the Company knows of the occurrence of such Designated Event. For a
Debenture to be so redeemed at the option of the Holder, the Company must receive at the office or
agency of the Company maintained for that purpose in accordance with the terms of the Indenture, a
written notice of purchase (a DESIGNATED EVENT REPURCHASE NOTICE) together with such Debenture,
duly endorsed for transfer, prior to the close of business on the Business Day before the
Designated Event Repurchase Date.
The Company shall pay a Make-Whole Premium on the Designated Event Repurchase Date on all
Debentures presented for conversion in connection with a Fundamental Change in accordance with the
terms of the Indenture. The Company may make the Make-Whole Premium in shares of Common Stock or in
the same form of consideration into which shares of Common Stock have been converted in connection
with the applicable Fundamental Change; provided, however, that in the event that the Company is
prohibited by operation of Article 4 from paying any of the Make-Whole Premium payable in cash by
virtue of Exchange Property being comprised of cash, the Company shall pay such premium solely by
the delivery of shares of Common Stock. The Company shall specify the type of consideration for the
Make-Whole Premium in the Designated Event Notice.
Subject to the terms and conditions of the Indenture, the Company shall become obligated to
purchase, at the option of the Holder, all or any portion of the Debentures held by such Holder on
June 15, 2009 in whole multiples of $1,000 at a purchase price of 100% of the principal amount,
plus any accrued and unpaid interest, on such Debenture up to the Repurchase Date. To exercise such
right, a Holder shall deliver to the Trustee such Debenture with the form entitled REPURCHASE
NOTICE on the reverse thereof duly completed, together with the Debenture, duly endorsed for
transfer, at any time from the opening of business on the date that
A-8
is twenty-three Business Days prior to such Repurchase Date until the close of business on the date
that is three Business Days prior to such Repurchase Date, and shall deliver the Debentures to the
Trustee (or other paying agent appointed by the Company) as set forth in the Indenture.
Holders have the right to withdraw any Repurchase Notice by delivering to the Trustee (or other
paying agent appointed by the Company) a written notice of withdrawal prior to the date that is
three Business Days prior to the Repurchase Date, all as provided in the Indenture.
If cash, sufficient to pay the purchase price of all Debentures or portions thereof to be purchased
as of the Repurchase Date is deposited with the Trustee (or other paying agent appointed by the
Company), on or prior to the Repurchase Date, interest will cease to accrue on such Debentures (or
portions thereof) immediately after such Repurchase Date, and the Holder thereof shall have no
other rights as such other than the right to receive the purchase price upon surrender of such
Debenture.
Subject to the occurrence of certain events and in compliance with the provisions of the Indenture,
prior to the final maturity date of the Debentures, the Holder hereof has the right, at its option,
to convert the principal amount of the Debentures into cash and fully paid and non-assessable
shares of Common Stock, as such shares shall be constituted at the date of conversion and subject
to adjustment from time to time as provided in the Indenture, upon surrender of this Debenture with
the form entitled CONVERSION NOTICE on the reverse hereof duly completed, to the Company at the
office or agency of the Company maintained for that purpose in accordance with the terms of the
Indenture, or at the option of such Holder, the Corporate Trust Office, together with this
Debenture, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the
Company duly executed by, the Holder or by his duly authorized attorney. The Company will notify
the Holder thereof of any event triggering the right to convert the Debentures as specified above
in accordance with the Indenture.
No adjustment in respect of interest on any Debenture converted or dividends on any shares issued
upon conversion of such Debenture will be made upon any conversion except as set forth in the next
sentence. If this Debenture (or portion hereof) is surrendered for conversion during the period
from the close of business on any Record Date for the payment of interest to the close of business
on the Business Day preceding the following interest payment date (excluding (1) Debentures or
portions thereof presented for purchase pursuant to Article 3 of the Indenture on a Designated
Event Repurchase Date occurring during the period beginning at the close of business on a Record
Date and ending on the next succeeding interest payment date or (2) Debentures that are submitted
for conversion between the Record Date for the final interest payment and the opening of business
on the final interest payment date), this Debenture (or portion hereof being converted) must be
accompanied by payment, in immediately available funds or other funds acceptable to the Company, of
an amount equal to the interest otherwise payable on such interest payment date on the principal
amount being converted; provided that no such payment shall be required to the extent of any
overdue interest, if any overdue interest exists at the time of conversion with respect to such
debenture. Notwithstanding the foregoing, upon conversion, a Debentureholder shall be entitled to
receive any accrued and unpaid
A-9
Liquidated Damages to, but not including, the Conversion Date, it being understood that no
Liquidated Damages shall accrue after such conversion.
No fractional shares will be issued upon any conversion, but an adjustment and payment in cash will
be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise
be issuable upon the surrender of any Debenture or Debentures for conversion.
A Debenture in respect of which a Holder is exercising its right to require redemption upon a
Designated Event or repurchase on a Repurchase Date may be converted only if such Holder withdraws
its election to exercise either such right in accordance with the terms of the Indenture.
Upon due presentment for registration of transfer of this Debenture at the office or agency of the
Company maintained for that purpose in accordance with the terms of the Indenture, a new Debenture
or Debentures of authorized denominations for an equal aggregate principal amount will be issued to
the transferee in exchange thereof, subject to the limitations provided in the Indenture, without
service charge except for any tax, assessment or other governmental charge imposed in connection
therewith.
The Company, the Trustee, any authenticating agent, any paying agent, any conversion agent and any
Debenture Registrar may deem and treat the Holder hereof as the absolute owner of this Debenture
(whether or not this Debenture shall be overdue and notwithstanding any notation of ownership or
other writing hereon made by anyone other than the Company or any Debenture Registrar) for the
purpose of receiving payment hereof, or on account hereof, for the conversion hereof and for all
other purposes, and neither the Company nor the Trustee nor any other authenticating agent nor any
paying agent nor other conversion agent nor any Debenture Registrar shall be affected by any notice
to the contrary. All payments made to or upon the order of such Holder shall, to the extent of the
sum or sums paid, satisfy and discharge liability for monies payable on this Debenture.
No recourse for the payment of the principal of or any premium or interest on this Debenture, or
for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture or any supplemental indenture or
in any Debenture, or because of the creation of any indebtedness represented thereby, shall be had
against any incorporator, stockholder, employee, agent, officer or director or subsidiary, as such,
past, present or future, of the Company or of any successor corporation, either directly or through
the Company or any successor corporation, whether by virtue of any constitution, statute or rule of
law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by
acceptance hereof and as part of the consideration for the issue hereof, expressly waived and
released.
This Debenture shall be deemed to be a contract made under the laws of New York, and for all
purposes shall be construed in accordance with the laws of New York, without regard to conflicts of
laws principles thereof.
A-10
Terms used in this Debenture and defined in the Indenture are used herein as therein defined.
A-11
ABBREVIATIONS
The following abbreviations, when used in the inscription of the face of this Debenture, shall be
construed as though they were written out in full according to applicable laws or regulations.
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TEN COM -
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as tenants in common
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UNIF GIFT MIN ACT -___Custodian ___
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TEN ENT -
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as tenant by the entireties
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(Cust) (Minor)
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JT TEN -
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as joint tenants with right
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under Uniform Gifts to Minors
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of survivorship and not as
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Act
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tenants in common
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(State)
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Additional abbreviations may also be used though not in the above list.
CONVERSION NOTICE
TO: IMPAX LABORATORIES, INC.
HSBC BANK USA, NATIONAL ASSOCIATION
The undersigned registered owner of this Debenture hereby irrevocably exercises the option to
convert this Debenture, or the portion thereof (which is $1,000 or a multiple thereof) below
designated, into cash and shares of Common Stock of Impax Laboratories, Inc., if any, in accordance
with the terms of the Indenture referred to in this Debenture, and directs that the cash and
shares, if any, issuable and deliverable upon such conversion, together with any check in payment
for fractional shares and any Debentures representing any unconverted principal amount hereof, be
issued and delivered to the Holder hereof unless a different name has been indicated below.
Capitalized terms used herein but not defined shall have the meanings ascribed to such terms in the
Indenture. If shares or any portion of this Debenture not converted are to be issued in the name of
a person other than the undersigned, the undersigned will provide the appropriate information
below, together with evidence satisfactory to Impax Laboratories, Inc. and the Trustee of transfer,
and pay all transfer taxes payable with respect thereto. Any amount required to be paid by the
undersigned on account of interest accompanies this Debenture.
Dated:
Signature(s)
Signature(s) must be guaranteed
by an ELIGIBLE GUARANTOR
INSTITUTION meeting the
requirements of the Debenture
Registrar, which requirements
include membership or
participation in the Security
Transfer Agent Medallion
Program (STAMP) or such other
SIGNATURE GUARANTEE program
as may be determined by the
Debenture Registrar in addition
to, or in substitution for,
STAMP, all in accordance with
the Securities Exchange Act of
1934, as amended.
Signature Guarantee
Fill in the registration of shares of Common Stock if to be issued, and Debentures if to be
delivered, other than to and in the name of the registered holder:
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(Name)
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(Street Address)
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(City, State and Zip Code)
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Please print name and address
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Principal amount to be converted (if less than all):
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$
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Social Security or Other Taxpayer
Identification Number:
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DESIGNATED EVENT
REPURCHASE NOTICE
TO: IMPAX LABORATORIES, INC.
HSBC BANK USA, NATIONAL ASSOCIATION
The undersigned registered owner of this Debenture hereby irrevocably acknowledges receipt of a
notice from Impax Laboratories, Inc. (the COMPANY) as to the occurrence of a Designated Event
with respect to the Company and requests and instructs the Company to redeem the entire principal
amount of this Debenture, or the portion thereof (which is $1,000 or a multiple thereof) below
designated, in accordance with the terms of the Indenture referred to in this Debenture at the
price of 100% of such entire principal amount or portion thereof, together with accrued interest
to, but excluding, the Designated Event Repurchase Date to the Holder hereof. Capitalized terms
used herein but not defined shall have the meanings ascribed to such terms in the Indenture.
Dated:
Signature(s)
NOTICE: The above
signatures of the holder(s)
hereof must correspond with
the name as written upon
the face of the Debenture
in every particular without
alteration or enlargement
or any change whatever.
Principal amount to be
repaid (if less than all):
Social Security or Other Taxpayer Identification Number
ASSIGNMENT
For value received
hereby sell(s) assign(s) and transfer(s) unto
(Please insert social security or other Taxpayer Identification
Number of assignee) the within Debenture, and hereby irrevocably constitutes and appoints
attorney to transfer said Debenture on the books of the
Company, with full power of substitution in the premises.
In connection with any transfer of the Debenture prior to the expiration of the holding period
applicable to sales thereof under Rule 144(k) under the Securities Act (or any successor provision)
(other than any transfer pursuant to a registration statement that has been declared effective
under the Securities Act), the undersigned confirms that such Debenture is being transferred:
[ ] To Impax Laboratories, Inc. or a subsidiary thereof; or
[ ] To a qualified institutional buyer in compliance with Rule 144A under the Securities Act of
1933, as amended; or
[ ] Pursuant to and in compliance with Rule 144 under the Securities Act of 1933, as amended; or
[ ] Pursuant to a Registration Statement which has been declared effective under the Securities Act
of 1933, as amended, and which continues to be effective at the time of transfer;
and unless the Debenture has been transferred to Impax Laboratories, Inc. or a subsidiary thereof,
the undersigned confirms that such Debenture is not being transferred to an affiliate of the
Company as defined in Rule 144 under the Securities Act of 1933, as amended.
Unless one of the boxes is checked, the Trustee will refuse to register any of the Debentures
evidenced by this certificate in the name of any person other than the registered holder thereof.
Dated:
Signature(s)
Signature(s) must be
guaranteed by an ELIGIBLE
GUARANTOR INSTITUTION
meeting the requirements of
the Debenture Registrar,
which requirements include
membership or participation
in the Security Transfer
Agent Medallion Program
(STAMP) or such other
SIGNATURE GUARANTEE
PROGRAM as may be
determined by the Debenture
Registrar in addition to,
or in substitution for,
STAMP, al in accordance
with the Securities
Exchange Act of 1934, as
amended.
Signature Guarantee
NOTICE: The signature on the Conversion Notice, the Option to Elect Redemption Upon a Designated
Event or the Assignment must correspond with the name as written upon the face of the Debenture in
every particular without alteration or enlargement or any change whatever.
Schedule I
IMPAX LABORATORIES, INC.
3.5% Convertible Senior Subordinated Debenture Due 2012
No.
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Notation Explaining Principal Amount
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Authorized Signature of Trustee or Custodian
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Date
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Principal Amount
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Recorded
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EXHIBIT B
EXAMPLE MAKE-WHOLE PREMIUM TABLES
EXAMPLE TABLE #1
MAKE-WHOLE PREMIUM
(NUMBER OF ADDITIONAL SHARES OF COMMON STOCK)
EFFECTIVE DATE
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STOCK
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PRICE
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JULY 1, 2005
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JULY 1, 2006
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JULY 1, 2007
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JULY 1, 2008
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JULY 1, 2009
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JULY 1, 2010
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JULY 1, 2011
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JULY 1, 2012
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$16.19
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14.25
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14.25
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14.25
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14.25
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14.25
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14.25
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14.25
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0.00
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$17.00
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12.89
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12.64
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12.37
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12.08
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11.31
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9.92
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9.91
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0.00
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$18.00
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11.47
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11.11
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10.67
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10.15
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8.62
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8.03
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7.53
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0.00
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$19.00
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10.29
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9.85
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9.31
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8.63
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7.33
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6.54
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5.66
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0.00
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$20.00
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9.31
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8.81
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8.20
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7.43
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6.28
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5.36
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4.21
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0.00
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$22.50
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7.44
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6.89
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6.23
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5.42
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4.46
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3.41
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2.00
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0.00
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$25.00
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6.15
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5.62
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4.98
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4.23
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3.37
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2.35
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1.04
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0.00
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$27.50
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5.22
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4.72
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4.14
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3.46
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2.69
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1.76
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0.64
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0.00
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$30.00
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4.51
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4.06
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3.53
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2.93
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2.24
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1.42
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0.48
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0.00
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$35.00
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3.51
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3.15
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2.72
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2.24
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1.69
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1.06
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0.36
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0.00
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$40.00
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2.82
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2.53
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2.19
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1.81
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1.36
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0.86
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0.30
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0.00
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$45.00
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2.32
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2.08
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1.81
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1.50
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1.13
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0.72
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0.25
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0.00
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$50.00
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1.92
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1.74
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1.51
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1.26
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0.96
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0.61
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0.22
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0.00
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$55.00
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1.61
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l.46
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l.27
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l.06
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0.81
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0.52
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0.19
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0.00
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$60.00
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|
|
1.36
|
|
|
|
1.23
|
|
|
|
1.08
|
|
|
|
0.91
|
|
|
|
0.70
|
|
|
|
0.45
|
|
|
|
0.16
|
|
|
|
0.00
|
|
$65.00
|
|
|
1.15
|
|
|
|
1.04
|
|
|
|
0.92
|
|
|
|
0.77
|
|
|
|
0.60
|
|
|
|
0.39
|
|
|
|
0.14
|
|
|
|
0.00
|
|
B-1
EXHIBIT B
EXAMPLE MAKE-WHOLE PREMIUM TABLES
EXAMPLE TABLE #2
MAKE-WHOLE PREMIUM
(NUMBER OF ADDITIONAL SHARES OF COMMON STOCK)
EFFECTIVE DATE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRICE
|
|
JULY 1, 2005
|
|
JULY 1, 2006
|
|
JULY 1, 2007
|
|
JULY 1, 2008
|
|
JULY 1, 2009
|
|
JULY 1, 2010
|
|
JULY 1, 2011
|
|
JULY 1, 2012
|
$17.00
|
|
|
13.57
|
|
|
|
13.57
|
|
|
|
13.57
|
|
|
|
13.57
|
|
|
|
13.57
|
|
|
|
13.57
|
|
|
|
13.57
|
|
|
|
0.00
|
|
$18.00
|
|
|
12.07
|
|
|
|
11.80
|
|
|
|
11.52
|
|
|
|
11.20
|
|
|
|
10.31
|
|
|
|
9.16
|
|
|
|
9.07
|
|
|
|
0.00
|
|
$19.00
|
|
|
10.81
|
|
|
|
10.44
|
|
|
|
10.02
|
|
|
|
9.49
|
|
|
|
8.07
|
|
|
|
7.49
|
|
|
|
6.97
|
|
|
|
0.00
|
|
$20.00
|
|
|
9.75
|
|
|
|
9.31
|
|
|
|
8.80
|
|
|
|
8.14
|
|
|
|
6.91
|
|
|
|
6.16
|
|
|
|
5.29
|
|
|
|
0.00
|
|
$22.50
|
|
|
7.76
|
|
|
|
7.24
|
|
|
|
6.63
|
|
|
|
5.84
|
|
|
|
4.87
|
|
|
|
3.90
|
|
|
|
2.60
|
|
|
|
0.00
|
|
$25.00
|
|
|
6.39
|
|
|
|
5.86
|
|
|
|
5.24
|
|
|
|
4.49
|
|
|
|
3.63
|
|
|
|
2.63
|
|
|
|
1.32
|
|
|
|
0.00
|
|
$27.50
|
|
|
5.40
|
|
|
|
4.90
|
|
|
|
4.32
|
|
|
|
3.64
|
|
|
|
2.86
|
|
|
|
1.92
|
|
|
|
0.76
|
|
|
|
0.00
|
|
$30.00
|
|
|
4.66
|
|
|
|
4.20
|
|
|
|
3.67
|
|
|
|
3.05
|
|
|
|
2.35
|
|
|
|
1.51
|
|
|
|
0.53
|
|
|
|
0.00
|
|
$35.00
|
|
|
3.62
|
|
|
|
3.24
|
|
|
|
2.81
|
|
|
|
2.32
|
|
|
|
1.75
|
|
|
|
1.10
|
|
|
|
0.37
|
|
|
|
0.00
|
|
$40.00
|
|
|
2.91
|
|
|
|
2.61
|
|
|
|
2.26
|
|
|
|
1.86
|
|
|
|
1.40
|
|
|
|
0.88
|
|
|
|
0.31
|
|
|
|
0.00
|
|
$45.00
|
|
|
2.40
|
|
|
|
2.15
|
|
|
|
1.87
|
|
|
|
1.54
|
|
|
|
1.16
|
|
|
|
0.74
|
|
|
|
0.26
|
|
|
|
0.00
|
|
$50.00
|
|
|
2.00
|
|
|
|
1.80
|
|
|
|
1.57
|
|
|
|
1.30
|
|
|
|
0.99
|
|
|
|
0.63
|
|
|
|
0.22
|
|
|
|
0.00
|
|
$55.00
|
|
|
1.69
|
|
|
|
1.52
|
|
|
|
1.33
|
|
|
|
1.11
|
|
|
|
0.84
|
|
|
|
0.54
|
|
|
|
0.19
|
|
|
|
0.00
|
|
$60.00
|
|
|
1.43
|
|
|
|
1.29
|
|
|
|
1.13
|
|
|
|
0.95
|
|
|
|
0.72
|
|
|
|
0.47
|
|
|
|
0.17
|
|
|
|
0.00
|
|
$65.00
|
|
|
1.21
|
|
|
|
1.10
|
|
|
|
0.97
|
|
|
|
0.81
|
|
|
|
0.63
|
|
|
|
0.40
|
|
|
|
0.14
|
|
|
|
0.00
|
|
$70.00
|
|
|
1.03
|
|
|
|
0.94
|
|
|
|
0.83
|
|
|
|
0.70
|
|
|
|
0.54
|
|
|
|
0.35
|
|
|
|
0.13
|
|
|
|
0.00
|
|
B-2
EXHIBIT
10.1
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
between
IMPAX LABORATORIES, INC.
Borrower
and
WACHOVIA BANK, NATIONAL ASSOCIATION
Bank
Dated: December 15, 2005
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
|
|
|
|
|
|
|
|
|
|
|
1.
|
|
Definitions
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
1.1
|
|
Defined Terms:
|
|
|
1
|
|
|
|
1.2
|
|
Financial Terms
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
The Credit Facility; Letters of Credit; Interest and Fees
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
The Credit Facility
|
|
|
21
|
|
|
|
2.2
|
|
Collections Account
|
|
|
21
|
|
|
|
2.3
|
|
Interest
|
|
|
22
|
|
|
|
2.4
|
|
Interest Rate Adjustments
|
|
|
23
|
|
|
|
2.5
|
|
Notice and Manner of Borrowing and Rate Conversion
|
|
|
23
|
|
|
|
2.6
|
|
Repayment of Loans
|
|
|
24
|
|
|
|
2.7
|
|
Additional Payment Provisions
|
|
|
25
|
|
|
|
2.8
|
|
Default Rate
|
|
|
26
|
|
|
|
2.9
|
|
Calculation of Interest
|
|
|
26
|
|
|
|
2.10
|
|
Letters of Credit
|
|
|
27
|
|
|
|
2.11
|
|
Fees
|
|
|
27
|
|
|
|
2.12
|
|
Statement of Account
|
|
|
28
|
|
|
|
2.13
|
|
Termination
|
|
|
28
|
|
|
|
2.14
|
|
USA Patriot Act Notice
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
3.
|
|
Conditions Precedent to Extensions of Credit
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
Conditions Precedent to Initial Loan
|
|
|
28
|
|
|
|
3.2
|
|
Conditions Precedent to Each Revolver Loan
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
4.
|
|
Representations and Warranties
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Valid Existence and Power
|
|
|
31
|
|
|
|
4.2
|
|
Authority
|
|
|
31
|
|
|
|
4.3
|
|
Financial Condition
|
|
|
31
|
|
|
|
4.4
|
|
Litigation
|
|
|
32
|
|
|
|
4.5
|
|
Agreements, Etc.
|
|
|
32
|
|
|
|
4.6
|
|
Authorizations
|
|
|
32
|
|
|
|
4.7
|
|
Title
|
|
|
32
|
|
|
|
4.8
|
|
Collateral
|
|
|
32
|
|
|
|
4.9
|
|
Jurisdiction of Organization; Location
|
|
|
32
|
|
|
|
4.10
|
|
Taxes
|
|
|
33
|
|
|
|
4.11
|
|
Labor Law Matters
|
|
|
33
|
|
|
|
4.12
|
|
Accounts
|
|
|
33
|
|
|
|
4.13
|
|
Judgment Liens
|
|
|
33
|
|
|
|
4.14
|
|
Corporate Structure
|
|
|
33
|
|
|
|
4.15
|
|
Deposit Accounts
|
|
|
34
|
|
|
|
4.16
|
|
Environmental
|
|
|
34
|
|
|
|
4.17
|
|
ERISA
|
|
|
34
|
|
|
|
4.18
|
|
Investment Company Act
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
|
|
|
|
|
|
|
|
|
|
|
|
|
4.19
|
|
Names
|
|
|
34
|
|
|
|
4.20
|
|
Insider
|
|
|
35
|
|
|
|
4.21
|
|
Sanctioned Persons; Sanctioned Countries
|
|
|
35
|
|
|
|
4.22
|
|
Compliance with Covenants; No Default
|
|
|
35
|
|
|
|
4.23
|
|
Full Disclosure
|
|
|
35
|
|
|
|
4.24
|
|
Borrower Information Certificate
|
|
|
35
|
|
|
|
4.25
|
|
Intellectual Property
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
5.
|
|
Affirmative Covenants of Borrower
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
5.1
|
|
Use of Revolver Loan Proceeds
|
|
|
36
|
|
|
|
5.2
|
|
Maintenance of Business and Properties
|
|
|
36
|
|
|
|
5.3
|
|
Insurance
|
|
|
36
|
|
|
|
5.4
|
|
Notice of Default
|
|
|
36
|
|
|
|
5.5
|
|
Inspections of Books and Records and Field Examinations
|
|
|
37
|
|
|
|
5.6
|
|
Financial Information
|
|
|
38
|
|
|
|
5.7
|
|
Maintenance of Existence and Rights
|
|
|
40
|
|
|
|
5.8
|
|
Payment of Taxes, Etc.
|
|
|
40
|
|
|
|
5.9
|
|
Subordination
|
|
|
40
|
|
|
|
5.10
|
|
Compliance with Laws, Regulations,
Etc.
|
|
|
40
|
|
|
|
5.11
|
|
Compliance with ERISA
|
|
|
41
|
|
|
|
5.12
|
|
License Agreements
|
|
|
41
|
|
|
|
5.13
|
|
Additional Real Property Collateral
|
|
|
43
|
|
|
|
5.14
|
|
Further Assurances
|
|
|
43
|
|
|
|
5.15
|
|
Covenants Regarding Collateral
|
|
|
44
|
|
|
|
5.16
|
|
Material Contracts
|
|
|
44
|
|
|
|
5.17
|
|
Notices
|
|
|
44
|
|
|
|
5.18
|
|
2004 Audited Financial Statements
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
6.
|
|
Negative Covenants of Borrower
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
|
Debt
|
|
|
45
|
|
|
|
6.2
|
|
Liens
|
|
|
46
|
|
|
|
6.3
|
|
Restricted Payments
|
|
|
46
|
|
|
|
6.4
|
|
Loans and Other Investments
|
|
|
47
|
|
|
|
6.5
|
|
Change in Business
|
|
|
47
|
|
|
|
6.6
|
|
Accounts
|
|
|
47
|
|
|
|
6.7
|
|
Transactions with Affiliates
|
|
|
47
|
|
|
|
6.8
|
|
No Change in Name, Offices or Jurisdiction of Organization; Removal of Collateral
|
|
|
47
|
|
|
|
6.9
|
|
No Sale, Leaseback
|
|
|
48
|
|
|
|
6.10
|
|
Margin Stock
|
|
|
48
|
|
|
|
6.11
|
|
Tangible Collateral
|
|
|
48
|
|
|
|
6.12
|
|
Subsidiaries
|
|
|
48
|
|
|
|
6.13
|
|
Liquidation, Mergers, Consolidations and Dispositions of Substantial Assets, Name and Good Standing
|
|
|
48
|
|
|
|
6.14
|
|
Change of Fiscal Year or Accounting Methods
|
|
|
48
|
|
|
|
6.15
|
|
Deposit Accounts
|
|
|
48
|
|
|
|
6.16
|
|
Negative-negative Pledge
|
|
|
49
|
|
ii
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
|
|
|
|
|
|
|
|
|
|
|
|
|
6.17
|
|
Material Adverse Contracts
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
7.
|
|
Other Covenants of Borrower
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
7.1
|
|
Fixed Charge Coverage Ratio
|
|
|
49
|
|
|
|
7.2
|
|
Capital Expenditures
|
|
|
49
|
|
|
|
7.3
|
|
Effect of FAS 133 Charge
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
8.
|
|
Default
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
8.1
|
|
Events of Default
|
|
|
50
|
|
|
|
8.2
|
|
Remedies
|
|
|
52
|
|
|
|
8.3
|
|
Receiver
|
|
|
53
|
|
|
|
8.4
|
|
Deposits
|
|
|
53
|
|
|
|
8.5
|
|
Insurance
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
9.
|
|
Security Agreement
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
9.1
|
|
Security Interest
|
|
|
54
|
|
|
|
9.2
|
|
Financing Statements; Power of Attorney
|
|
|
54
|
|
|
|
9.3
|
|
Entry
|
|
|
55
|
|
|
|
9.4
|
|
Other Rights
|
|
|
55
|
|
|
|
9.5
|
|
Accounts
|
|
|
55
|
|
|
|
9.6
|
|
Waiver of Marshaling
|
|
|
56
|
|
|
|
9.7
|
|
Control
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
10.
|
|
Miscellaneous
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
|
10.1
|
|
No Waiver, Remedies Cumulative
|
|
|
56
|
|
|
|
10.2
|
|
Survival of Representations
|
|
|
56
|
|
|
|
10.3
|
|
Indemnity By Borrower; Expenses
|
|
|
56
|
|
|
|
10.4
|
|
Notices
|
|
|
57
|
|
|
|
10.5
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Governing Law
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58
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10.6
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Successors and Assigns
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58
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10.7
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Counterparts; Telecopied Signatures
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58
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10.8
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No Usury
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58
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10.9
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Powers
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58
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10.10
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Approvals; Amendments
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59
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10.11
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Participations and Assignments
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59
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10.12
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Waiver of Certain Defenses
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59
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10.13
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Integration; Final Agreement
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59
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10.14
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LIMITATION ON LIABILITY; WAIVER OF PUNITIVE DAMAGES
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59
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10.15
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WAIVER OF JURY TRIAL
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60
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10.16
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Amendment and Restatement of Existing Loan Agreement
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60
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iii
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the Agreement), dated as of December 15,
2005 between IMPAX LABORATORIES, INC. a Delaware corporation (Borrower), and WACHOVIA BANK,
NATIONAL ASSOCIATION, a national banking association (together with its successors and assigns,
Bank);
WITNESSETH:
In consideration of the premises and of the mutual covenants herein contained and to induce Bank to
extend credit to Borrower, intending to be legally bound hereby, the parties agree as follows:
1.
Definitions
. Capitalized terms that are not otherwise defined herein shall have
the meanings set forth in this Section 1.
1.1
Defined Terms
:
Accession has the meaning set forth in the Code.
Account has the meaning set forth in the Code, together with any guaranties, letters of credit,
Letter-of-Credit Rights, and other security therefore, including Supporting Obligations. Account
shall specifically include all Royalty Payments.
Account Debtor means a Person who is obligated under any Account, Chattel Paper, General
Intangible or Instrument.
Acquisition Consideration means the purchase consideration for any Permitted Acquisition and all
other payments by Borrower or any of its Subsidiaries in exchange for, or as part of, or in
connection with, the aggregate consideration for any Permitted Acquisition (including, without
limitation, any Debt assumed by Borrower or any of its Subsidiaries), whether paid in cash or by
exchange of properties or otherwise (but excluding consideration in the form of Subordinated Debt
or capital stock of Borrower) and whether payable at or prior to the consummation of such Permitted
Acquisition or deferred for payment at any future time, whether or not any such future payment is
subject to the occurrence of any contingency, and includes any and all payments representing the
purchase price and any incurrence or assumption of Debt, earn-outs and other similar agreements
to make any payment the amount of which is, or the terms of payment of which are, in any respect
subject to or contingent upon the revenues, income, cash flow or profits (or the like) of any
Person or business acquired in such Permitted Acquisition.
Affiliate of a Person means (a) any Person directly or indirectly owning 5% or more of the voting
stock or equity interests of such named Person or of which the named Person owns 5% or more of such
voting stock or equity interests; (b) any Person controlling, controlled by or under common control
with such named Person; (c) any officer, director or employee of such named Person or any Affiliate
of the named Person; and (d) any family member of the named Person or any Affiliate of such named
Person.
ANDAs shall mean Abbreviated New Drug Applications filed by Borrower with the United States Food
and Drug Administration.
Applicable Margin shall mean, at any time, the applicable percentage set forth below if the Fixed
Charge Coverage Ratio for the immediately preceding fiscal quarter is at or within the amounts
indicated for such percentage:
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Applicable
|
|
Applicable
|
|
|
Margin for
|
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Margin for
|
Fixed Charge Coverage Ratio
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Prime Rate Loans
|
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LIBOR Loans
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|
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Less than 1.50 to 1
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0
|
%
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2.25
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%
|
Greater than or equal to 1.50 to 1 but
less than or equal to 2.00 to 1
|
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0
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%
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2.00
|
%
|
Greater than 2.00 to 1 but less than or
equal to 2.50 to 1
|
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0
|
%
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1.75
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%
|
Greater than 2.50 to 1
|
|
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0
|
%
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1.50
|
%
|
provided, that the Applicable Margin shall be calculated and established once each fiscal quarter
(commencing with the fiscal quarter ending on September 30, 2005) and shall remain in effect until
adjusted thereafter during the next fiscal quarter. Each change in the Applicable Margin resulting
from a change in the Fixed Charge Coverage Ratio shall be effective on and after the date of
delivery to the Bank of the financial statements and certificates required by Section 5.6(b) and
Section 5.6(d), respectively, indicating such change, and until the date immediately preceding the
next date of delivery of such financial statements and certificates indicating another such change.
In the event that Borrower has failed to deliver the financial statements and certificates required
by Sections 5.6(b) or (d), respectively, and in addition to all other rights and remedies available
to Bank, the Applicable Margin shall be the highest percentage set forth above until receipt by
Bank of such information. Prior to Borrowers fiscal quarter ending September 30, 2005, the
Applicable Margin shall be two percent (2%).
Banking Relationship Debt means any Debt or other obligations of Borrower to Bank or any
Affiliate of Bank arising out of or relating to (a) credit cards; (b) merchant card services; (c)
products or services under cash management agreements; (d) Swap Agreements Obligations; and (e)
such other banking products or services provided by Bank or any Affiliate of Bank other than
Letters of Credit.
Borrower Information Certificate means a certificate submitted by Borrower to Bank on or before
the Closing Date pursuant to Section 3.1 hereto concerning certain factual information about
Borrower, to be substantially in the form of Exhibit 3.1.2(f) hereto.
Borrowing Base means, on any date of determination thereof (and after giving effect to the
limitations set forth in Section 2.1.1(b)), an amount equal to:
(a) up to 80% (or such lesser percentage as Bank may determine from time to time in its sole
and absolute discretion) of the total amount of Eligible Accounts, plus
(b) the lesser of (a) up to 65% (or such lesser percentage as Bank may determine from time to
time in its sole and absolute discretion) of the total amount of
2
Eligible Inventory consisting of finished goods or (b) 80% (or such lesser percentage as Bank
may determine from time to time in its sole and absolute discretion) of the NOLV of Eligible
Inventory consisting of finished goods;
plus
(c) the lesser of 25% (or such lesser percentage as Bank may determine from time to time in
its sole and absolute discretion) of the total amount of Eligible Inventory consisting of raw
materials, or (b) 80% (or such lesser percentage as Bank may determine from time to time in its
sole and absolute discretion) of the NOLV of such Eligible Inventory consisting of raw materials;
plus
(d) the lesser of (a) up to 85% (or such lesser percentage as Bank may determine from time to
time in its sole and absolute discretion) of the NOLV of Eligible Equipment or (b) the Maximum
Equipment Advance Amount;
minus
(e) any Reserves.
Borrowing Base Certificate has the meaning set forth in Section 5.6(a).
Bulk Inventory means all of Borrowers Inventory in the form of capsules and tablets which are
not bottled, packaged or labeled but which otherwise constitute finished goods held for sale in the
ordinary course of business of Borrower.
Bulk Inventory Loan Limit means an amount equal to One Million Five Hundred Thousand Dollars
($1,500,000.00).
Business Day means a weekday on which Bank is open for business in Charlotte, North Carolina and
Philadelphia, Pennsylvania.
Capital Stock shall mean, with respect to any Person, any and all shares, interests,
participations or other equivalents (however designated) of such Persons capital stock or
partnership, limited liability company or other equity interests at any time outstanding, and any
and all rights, warrants or options exchangeable for or convertible into such capital stock or
other interests (but excluding any debt security that is exchangeable for or convertible into such
capital stock).
Cash Equivalents shall mean, with respect to any Person, (a) securities issued, or directly,
unconditionally and fully guaranteed or insured, by the United States or any agency or
instrumentality thereof having maturities of not more than one year from the date of acquisition by
such Person; (b) time deposits, certificates of deposit and bankers acceptances of Bank or any
commercial bank, or which is the principal banking subsidiary of a bank holding company, in each
case, organized under the laws of the United States, any state thereof or the District of Columbia
having, capital and surplus aggregating in excess of $500 million with maturities of not more than
one year from the date of acquisition by such Person; (c) repurchase obligations with a term of not
more than 30 days for underlying securities of the types described in clause (a) above entered into
with any bank meeting the qualifications specified in clause (b) above, which repurchase
obligations are secured by a valid perfected security interest in the underlying securities; (d)
commercial paper issued by any Person incorporated in the United States rated at least A-1 or the
equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moodys and in each case
maturing not more than one year after the date of acquisition by such Person; (e) direct
obligations issued by any state of the United States or any political subdivision thereof
3
having one of the two highest rating categories obtainable from either S&P or Moodys with
maturities of not more than one year from the date of acquisition thereof, (t) demand deposit
accounts maintained in the ordinary course of business; and (g) investments in money market funds
substantially all of whose assets are comprised of securities of the types described in clauses (a)
through (f) above.
Change of Control shall mean (a) the transfer (in one transaction or a series of transactions) of
all or substantially all of the assets of Borrower to any Person or group (as such term is used in
Section 13(d)(3) of the Exchange Act); (b) the liquidation or dissolution of Borrower or the
adoption of a plan by the stockholders of Borrower relating to the dissolution or liquidation of
Borrower; (c) the acquisition by any Person or group (as such term is used in Section 13(d)(3) of
the Exchange Act) of beneficial ownership, directly or indirectly, of a majority of the voting
power of the total outstanding Voting Stock of Borrower or the Board of Directors of Borrower; or
(d) during any period of two (2) consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of Borrower (together with any new directors whose nomination
for election by the stockholders of Borrower was approved by a vote of at least sixty-six and
two-thirds (66 2/3%) percent of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was previously so approved)
cease for any reason to constitute a majority of the Board of Directors of Borrower then still in
office.
Chattel Paper has the meaning set forth in the Code, including Electronic Chattel Paper and
Tangible Chattel Paper, together with any guaranties, letters of credit, Letter-of-Credit Rights,
and other security therefore, including Supporting Obligations.
Closing Date means the date on which all of the conditions precedent in Section 3 of this
Agreement are satisfied and the initial Loans are made under this Agreement.
Code means the Uniform Commercial Code (or any successor statute), as adopted and in force in the
Jurisdiction or, when the laws of any other state govern the method or manner of the perfection or
enforcement of any security interest in any of the Collateral, the Uniform Commercial Code (or any
successor statute) of such state. Any term used in this Agreement and in any financing statement
filed in connection herewith which is defined in the Code and not otherwise defined in this
Agreement or in any other Loan Document has the meaning given to the term in the Code.
Collateral means all property of Borrower, wherever located and whether now owned by Borrower or
hereafter acquired, including but not limited to: (a) all Inventory; (b) all General Intangibles;
(c) all Accounts; (d) Chattel Paper; (e) all Instruments and Documents and any other instrument or
intangible representing payment for goods or services; (f) all Equipment, provided however,
specifically excluding all fixtures that would be defined as Building Equipment in that certain
Beneficiary Agreement dated October 23, 2002 executed by Cathay Bank in favor of Congress; (g) all
Investment Property; (h) all Commercial Tort Claims; (i) all Letter-of-Credit Rights; (j) all
Deposit Accounts and funds on deposit therein, including but not limited to any Disbursements
Account, Collections Account or funds otherwise on deposit with or under the control of Bank or its
agents or correspondents; (k) all Fixtures; and (l) all parts, replacements, substitutions,
profits, products, Accessions and cash and non-cash Proceeds and Supporting Obligations of any of
the foregoing (including, but not limited to, insurance proceeds) in any form and wherever located.
The foregoing Fixtures collateral is located at or affixed to the real
4
property known as 3775 Kensington Avenue, Philadelphia, Pennsylvania, Philadelphia County, PA, 1502
Crocker Avenue, Hayward, CA, 31153 San Antonio Street, Hayward, CA and 30831 Huntwood Avenue,
Hayward, CA. Collateral shall include all written or electronically recorded books and records
relating to any such Collateral and other rights relating thereto. Collateral shall specifically
exclude all Intellectual Property.
Collateral Location means any location where Collateral is located, as identified and certified
by Borrower on the Borrower Information Certificate.
Collections Account means any Deposit Account maintained by Borrower at Bank to which
collections, deposits and other payments on or with respect to Collateral may be made pursuant to
the terms hereof, to which only Bank shall have access to withdraw or otherwise direct the
disposition of funds on deposit therein.
Commercial Tort Claim has the meaning set forth in the Code.
Debt means all liabilities of a Person as determined under GAAP and all obligations which such
Person has guaranteed or endorsed or is otherwise secondarily or jointly liable for, and shall
include, without limitation (a) all obligations for borrowed money or purchased assets, (b)
obligations secured by assets whether or not any personal liability exists, (c) the capitalized
amount of any capital or finance lease obligations, (d) the unfunded portion of pension or benefit
plans or other similar liabilities, (e) obligations as a general partner, (f) contingent
obligations pursuant to guaranties, endorsements, letters of credit and other secondary
liabilities, (g) obligations for deposits, and (h) obligations under Swap Agreements.
Default has the meaning set forth in the definition of Event of Default.
Default Rate on any date, means a rate per annum that is equal to (i) in the case of each Loan
outstanding on such date, 3.0% in excess of the rate otherwise applicable to such Loan on such
date, and (ii) in the case of any other Obligations outstanding on such date, 3.0% in excess of the
Prime Rate in effect on such date, provided that Obligations under Swap Agreements shall bear
interest at the Default Rate determined in accordance with the terms of said Swap Agreements.
Deposit Account has the meaning set forth in the Code.
Disbursement Account means any Deposit Account maintained by Borrower with Bank for the purpose
of depositing the proceeds of Loans made pursuant hereto.
Document has the meaning set forth in the Code.
Electronic Chattel Paper has the meaning set forth in the Code.
Eligible Accounts means all Accounts in U.S. dollars evidenced by a paper invoice or electronic
equivalent (valued at the face amount of such invoice, less maximum discounts, credits and
allowances which may be taken by Account Debtors on such Accounts, net of any sales tax, finance
charges or late payment charges included in the invoiced amount, net of any accruals for
adjustments, returns, rebates, chargebacks and discounts and net of Borrowers chargeback/wac
accrual) created or acquired by Borrower arising from the sale of Inventory and/or the provision of
certain services in Borrowers ordinary course of business (as approved by Bank) in which Bank has
a first (and only) priority, perfected security interest, but excluding, without duplication
5
(a) Accounts outstanding for longer than (i) with respect to Accounts owing by Teva, (A) sixty
(60) days from the original invoice date or (B) thirty (30) days from the original due date,
whichever is shorter and (ii) with respect to all Account Debtors other than Teva, ninety (90) days
from original invoice date or (iii) sixty (60) days from the original due date, which ever is
shorter;
(b) all Accounts owed by an Account Debtor if more than fifty percent (50%) of the Accounts
owed by such Account Debtor to Borrower are deemed ineligible hereunder pursuant to clause (a);
(c) Accounts owing from any Affiliate of Borrower;
(d) Accounts owed by a creditor of Borrower to the extent of the amount of the indebtedness of
Borrower to such creditor;
(e) Accounts which are in dispute or subject to any counterclaim, contra-account, volume
rebate, cooperative advertising accrual, deposit or offset, to the extent of the amount of such
counterclaim, contra-account, volume rebate, cooperative advertising accrual, deposit or offset;
(f) Accounts owing by any Account Debtor which is not Solvent;
(g) Accounts arising from a sale on a bill-and-hold, guaranteed sale, sale-or-return,
sale-on-approval, consignment or similar basis or which is subject to repurchase, return,
rejection, repossession, loss or damage;
(h) Accounts owed by an Account Debtor that (1) is a Sanctioned Person or (2) except with
respect to Teva, is located outside of the United States of America or Canada, unless in its sole
and absolute discretion Bank agrees to allow such Account to be an Eligible Account and such
Account is supported by a letter of credit or credit insurance assigned to Bank and which is issued
by a financial institution and in an amount and on terms which are acceptable to Bank in its sole
and absolute discretion;
(i) Accounts owed by the United States of America or other governmental or quasi-governmental
unit, agency or subdivision unless Borrower shall have complied with all applicable federal and
state assignment of claims laws;
(j) Accounts as to which the goods giving rise to the Account have not been delivered to and
accepted by the Account Debtor or the service giving rise to the Account has not been completely
performed or which do not represent a final sale;
(k) Accounts evidenced by a note or other Instrument or Chattel Paper or reduced to judgment;
(l) such Accounts of a single account debtor or its Affiliates (other than Cardinal Health,
Inc., Amerisource Bergen Corp., McKesson Corp., Teva, Schering Corporation and Walgreen Co.) which
constitute more than ten (10%) percent of all otherwise
6
Eligible Accounts, or in the case of Cardinal Health, Inc., Walgreen Co., Schering
Corporation, Amen source Bergen Corp. or McKesson Corp., such Accounts of each such Person which
constitute more than thirty (30%) percent of all otherwise Eligible Accounts, or in the case of
Teva, such Accounts of such Person which constitute more than the Teva Percentage of all otherwise
Eligible Accounts (but the portion of the Accounts not in excess of such percentages may be deemed
Eligible Accounts); provided, however, that Bank may reduce the percentages for Cardinal Health,
Inc., Amerisource Bergen Corp., McKesson Corp., Teva, Schering Corporation and/or Walgreen Co. set
forth above to a percentage not less than ten (10%) percent of all otherwise Eligible Accounts of
such Person as determined by Bank in good faith based on either: (i) an event, condition or other
circumstance arising after the date hereof, or (ii) an event, condition or other circumstance
existing on the date hereof to the extent Bank has no written notice thereof from Borrower prior to
the date hereof, in either case under clause (i) or (ii) which adversely affects or could
reasonably be expected to adversely affect the Accounts in the good faith determination of Bank;
(m) Accounts which, by contract, subrogation, mechanics lien laws or otherwise, are subject
to claims by Borrowers creditors or other third parties or which are owed by Account Debtors as to
whom any creditor of Borrower (including any bonding company) has lien or retainage rights;
(n) Accounts owed by an Account Debtor which is located in a jurisdiction where Borrower is
required to qualify to transact business or to file reports, unless Borrower has so qualified or
filed;
(o) Accounts owed by an Account Debtor who disputes the liability therefor;
(p) Accounts owed by an Account Debtor that shall be the subject of any proceeding of the type
described in Section 8.1(g) or (h)
(q) Accounts consisting of Royalty Payments that have been outstanding more than thirty (30)
days from the due date therefore or with respect to which Bank has not received a copy of the
written confirmation of the account debtor with respect to such Royalty Payment of such account
debtors obligation to Borrower to pay such Royalty Payment.
(r) Any other Account which Bank otherwise in its sole and absolute discretion deems to be
ineligible.
No Account shall be an Eligible Account if any representation, warranty or covenant herein relating
thereto shall be untrue, misleading or in default.
Eligible Equipment means Eligible Equipment shall mean all Equipment owned by Borrower and is
in good order, repair, running and marketable condition, located at Borrowers premises and
acceptable to Lender in all respects. In general, Eligible Equipment shall not include: (i)
Equipment at premises other than those owned and controlled by Borrower, except for Equipment at
locations leased by Borrower if either Bank shall have received a Third Party Waiver duly
authorized, executed and delivered by the owner or operator of such premises in form and substance
satisfactory to Bank, or if Bank shall not have received such an agreement
7
(or Bank shall determine to accept a Third Party Waiver that does not include all required
provisions or provisions in the form otherwise required by Bank), Bank shall have established a
reserve against availability of Revolver Loans with respect to amounts at any time payable by
Borrower to the owner and lessor of such premises as Bank shall determine; (ii) Equipment subject
to a security interest or lien in favor of any person other than Bank, except for Permitted Liens;
(iii) Equipment which is not located in the continental United States of America; (iv) Equipment
which is not subject to the first priority, valid and perfected security interest of Bank; (v)
worn-out, obsolete, damaged or defective Equipment or Equipment not used or usable in the ordinary
course of Borrowers business as presently conducted; (vi) computer hardware, furniture, fixtures
and soft-costs; or (vii) Equipment that is or becomes a fixture to any Real Property unless such
Real Property is encumbered by a first priority mortgage lien in favor of Bank. General criteria
for Eligible Equipment may be established and revised from time to time by Bank in good faith based
on an event, condition or other circumstance arising after the date hereof, or existing on the date
hereof to the extent Bank has no written notice thereof from Borrower, which adversely affects or
could reasonably be expected to adversely affect the Equipment in the good faith determination of
Bank. Any Equipment which is not Eligible Equipment shall nevertheless be part of the Collateral.
Eligible Inventory means all Inventory acquired by Borrower in the ordinary course of its
business as presently conducted consisting of raw materials and finished goods (but specifically
excluding work-in-process) which Bank has determined to be eligible for credit extensions
hereunder, valued at the lower of cost or market on a first-in, first-out basis and consistent with
the most recent appraisal received by Bank, but excluding, however, in any event, without
limitation of the foregoing, unless otherwise approved by Bank, any such Inventory which
(a) is not at all times subject to a duly perfected, first priority (and only) security
interest in favor of Bank;
(b) is not in good and saleable condition;
(c) is on consignment from, or subject to, any repurchase agreement with any supplier;
(d) constitutes returned, repossessed, damaged, defective, obsolete, or slow-moving goods as
determined by Bank;
(e) does not conform in all respects to the warranties and representations set forth in the
Loan Documents in respect of inventory Collateral or Collateral generally;
(f) is subject to a negotiable document of title (unless issued or endorsed to Bank);
(g) is subject to any license or other agreement that limits or restricts Borrowers or Banks
right to sell or otherwise dispose of such inventory (unless the licensor and Borrower enter into a
licensor waiver in form and substance satisfactory to Bank);
(h) is not located at a Collateral Location;
8
(i) constitutes inventory-in-transit;
(j) is located at a Collateral Location with respect to which, if not owned and controlled by
Borrower, Bank has not received from the Person owning such property or in control thereof a Third
Party Waiver (unless Reserves are imposed with regard thereto as determined by Bank in its sole and
absolute discretion);
(k) consists of any packaging materials, supplies or promotional materials;
(l) consists of samples;
(m) consists of trial, test, unapproved or developmental products including, without
limitation, products which are not FDA Approved Products;
(n) consists of Inventory which is not readily saleable in accordance with, or does not meet
all standards imposed by, applicable law, including, without limitation, the Federal Food, Drug and
Cosmetic Act and all rules and regulations and orders related thereto;
(o) consists of Short Dated Inventory;
(p) has been returned to, or repossessed by, Borrower;
(q) consists of Inventory which Bank otherwise in its sole and absolute discretion deems to
not be Eligible Inventory.
Eligible Royalty Payments means all Royalty Payments that have not been outstanding more than
thirty (30) days from their respective due date and with respect to which Bank has received a copy
of the written confirmation of the account debtor with respect to such Royalty Payment of the
account debtors obligation to pay such Royalty Payment to Borrower.
Environmental Laws means, collectively the following acts and laws, as amended: the Comprehensive
Environmental Response, Compensation and Liability Act of 1980; the Superfund Amendments and
Reauthorization Act of 1986; the Resource Conservation and Recovery Act; the Toxic Substances Act;
the Clean Water Act; the Clean Air Act; the Oil Pollution and Hazardous Substances Control Act of
1978; and any other Superfund or Superlien law or any other federal, state or local statute,
law, ordinance, code, rule, regulation, order or decree relating to, or imposing liability or
standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as
now or at any time hereafter in effect.
ERISA has the meaning set forth in Section 4.17.
ERISA Affiliate shall mean any person required to be aggregated with Borrower or any of its
Subsidiaries under Sections 414(b), 414(c), 414(m) or 414(o) of the IRS Code.
ERISA Event shall mean (a) any reportable event, as defined in Section 4043 of ERISA or the
regulations issued thereunder, with respect to a Plan; (b) the adoption of any amendment to a Plan
that would require the provision of security pursuant to Section 401(a)(29) of the IRS Code
9
or Section 307 of ERISA; (c) the existence with respect to any Plan of an accumulated funding
deficiency (as defined in Section 412 of the IRS Code or Section 302 of ERISA), whether or not
waived; (d) the filing pursuant to Section 412 of the IRS Code or Section 303(d) of ERISA of an
application for a waiver of the minimum funding standard with respect to any Plan; (e) the
occurrence of a prohibited transaction with respect to which Borrower or any of its Subsidiaries
is a disqualified person (within the meaning of Section 4975 of the IRS Code) or with respect to
which Borrower or any of its Subsidiaries could otherwise be liable; (f) a complete or partial
withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan or a cessation of
operations which is treated as such a withdrawal or notification that a Multiemployer Plan is in
reorganization; (g) the filing of a notice of intent to terminate, the treatment of a Plan
amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings
by the Pension Benefit Guaranty Corporation to terminate a Plan; (h) an event or condition which
might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination
of, or the appointment of a trustee to administer, any Plan; (i) the imposition of any liability
under Title IV of ERISA, other than the Pension Benefit Guaranty Corporation premiums due but not
delinquent under Section 4007 of ERISA, upon Borrower or any ERISA Affiliate in excess of
$1,000,000; and (j) any other event or condition with respect to a Plan including any Plan subject
to Title IV of ERISA maintained, or contributed to, by any ERISA Affiliate that could reasonably be
expected to result in liability of Borrower in excess of$1,000,000.
Equipment has the meaning set forth in the Code.
Eurodollar Reserve Percentage means, for any day, the percentage (expressed as a decimal and
rounded upwards, if necessary, to the next higher 1/100th of 1%) which is in effect for such day as
prescribed by the Federal Reserve Board (or any successor) for determining the maximum reserve
requirement (including without limitation any basic, supplemental or emergency reserves) in respect
of eurocurrency liabilities or any similar category of liabilities for a member bank of the Federal
Reserve System in New York City.
Event of Default means any event specified as such in Section 8.1 hereof (Events of Default),
provided that there shall have been satisfied any requirement in connection with such event for the
giving of notice or the lapse of time, or both; Default or default means any of such events,
whether or not any such requirement for the giving of notice or the lapse of time or the happening
of any further condition, event or act shall have been satisfied.
Excess Availability means, on any date, the difference derived when (a) the principal amount of
Revolver Loans and Letter of Credit Obligations then outstanding (including any amounts that Bank
may have paid for the account of Borrower pursuant to any of the Loan Documents and that have not
been reimbursed by Borrower), plus all sums due and owing Borrowers trade creditor which are more
than sixty (60) days past due, is subtracted from (b) the lesser of the (i) Revolver Commitment and
(ii) Borrowing Base on such date.
Exchange Act shall mean the Securities Exchange Act of 1934, together with all rules, regulations
and interpretations thereunder or related thereto.
Existing Loan Agreement means that certain Loan and Security Agreement dated as of October 22,
2002 between Borrower and Bank (as successor in interest to Congress Financial Corporation), as the
same may have been modified, amended and or restated.
10
Existing Loan Documents means the Financing Agreements, as such term is defined in the Existing
Loan Agreement, as the same may have been modified, amended or restated.
Existing Loans means those certain loans made by Bank to Borrower under the Existing Loan
Agreement.
FDA means the Food and Drug Administration.
FDA Approved Products means Inventory of Borrower which has been approved for sale with no
restrictions by the FDA and each other governmental agency, authority, bureau or subdivision which
has jurisdiction thereover.
Federal Funds Rate means, for any period, a fluctuating interest rate per annum equal, for each
day during such period, to the weighted average of the rates on overnight Federal Funds
transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as
published for such day (or, if such day is not a Business Day, for the next preceding Business Day)
by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day on such transactions received by Bank from
three Federal Funds brokers of recognized standing selected by it.
Field Exam Cost Limit shall mean Ten Thousand Dollars ($10,000.00) per field exam during the 2006
calendar year, and, for each calendar year subsequent to the 2006 calendar year, one hundred two
percent of the Field Exam Cost Limit for the immediately preceding calendar year.
Fixtures has the meaning set forth in the Code.
GAAP means generally accepted accounting principles as in effect in the Unites States from time
to time.
General Intangibles has the meaning set forth in the Code, and includes, without limitation,
general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower,
including all choses in action, causes of action, company or other business records, inventions,
blueprints, designs, patents, patent applications, trademarks, trademark applications, trade names,
trade secrets, service marks, goodwill, brand names, copyrights, registrations, licenses,
franchises, customer lists, permits, tax refund claims, computer programs, operational manuals,
internet addresses and domain names, insurance refunds and premium rebates, all claims under
guaranties, security interests or other security held by or granted to Borrower to secure payment
of any of any of Borrowers Accounts by an Account Debtor, all rights to indemnification and all
other intangible property of Borrower of every kind and nature (other than Accounts).
Instrument has the meaning set forth in the Code.
Intellectual Property shall mean Borrowers now owned and hereafter arising or acquired: patents,
patent rights, patent applications, copyrights, works which are the subject matter of copyrights,
copyright registrations, trademarks, trade names, trade styles, trademark and service mark
applications, and licenses and rights to use any of the foregoing; all extensions, renewals,
reissues, divisions, continuations, and continuations-in-part of any of the foregoing; all rights
to sue for past, present and future infringement of any of the foregoing; inventions, trade
secrets, formulae, processes, compounds, drawings, designs, blueprints, surveys, reports, manuals,
and operating standards; goodwill (including any goodwill associated with any trademark or the
license of any trademark); customer and other lists in whatever form maintained; and trade secret
11
rights, copyright rights, rights in works of authorship, domain names and domain name
registrations; software and contract rights relating to software, in whatever form created or
maintained.
Interest Period means, in respect of each LIBOR Loan, a period of one, two, three or six months
with respect to such LIBOR Loan; provided that:
(a) the Interest Period shall commence on the date of advance of or conversion to an LIBOR
Loan and, in the case of immediately successive Interest Periods, each successive Interest Period
shall commence on the date on which the next preceding Interest Period expires;
(b) if any Interest Period would otherwise expire on a day that is not a Business Day, such
Interest Period shall expire on the next succeeding Business Day; provided, that if any Interest
Period with respect to a LIBOR Loan would otherwise expire on a day that is not a Business Day but
is a day of the month after which no further Business Day occurs in such month, such Interest
Period shall expire on the next preceding Business Day;
(c) any Interest Period with respect to a LIBOR Loan that begins on the last Business Day of a
calendar month (or on a day for which there is not numerically corresponding day in the calendar
month at the end of such Interest Period) shall end on the last Business Day of the relevant
calendar month at the end of such Interest Period;
(d) no Interest Period shall extend beyond the Termination Date.
Inventory has the meaning set forth in the Code.
Inventory Loan Limit means an amount equal to Fifteen Million Dollars ($15,000,000.00).
Inventory Reliance means, as of the last day of each month, calculated on a rolling six (6) month
period ending on such date, the quotient (expressed as a percentage) obtained by dividing (a) the
average outstanding Revolver Loans, plus the average outstanding Letter of Credit Obligations, in
each case supported by Borrowers Eligible Inventory by (b) the average total outstanding Revolver
Loans, plus the average outstanding Letter of Credit Obligations. During any such period during
which no Revolver Loans are outstanding, the Inventory Reliance shall be zero.
IRS Code means the Internal Revenue Code of 1986, as the same now exists or may from time to time
hereafter be amended, modified, recodified or supplemented, together with all rules, regulations
and interpretations thereunder or related thereto.
Investment Property has the meaning set forth in the Code.
Item means any item as defined in Section 4-104 of the Code, and shall also mean and include
checks, drafts, money orders or other media of payment.
Jurisdiction means the Commonwealth of Pennsylvania.
Letter of Credit means a letter of credit issued by Bank for the account of Borrower as provided
in Sections 2.1.1 and 2.10 hereof.
12
Letter of Credit Obligations means, at any time, (a) the undrawn face amount of each outstanding
Letter of Credit and (b) all obligations of Borrower to Bank, including but not limited to
reimbursement obligations, commissions and fees, incurred by Borrower in connection with Banks
issuance, amendment, renewal or extension of Letters of Credit hereunder.
Letter-of-Credit Right has the meaning set forth in the Code.
Lien means any mortgage, deed of trust, deed to secure debt, pledge, statutory lien or other lien
arising by operation of law, security interest, trust arrangement, security deed, financing lease,
collateral assignment or other encumbrance, conditional sale or title retention agreement, or any
other interest in property designed to secure the repayment of Obligations, whether arising by
agreement or under any statute or law or otherwise.
LIBOR means the rate of interest per annum determined on the basis of the rate for deposits in
U.S. dollars in minimum amounts of at least Five Million Dollars ($5,000,000.00) for a period equal
to the applicable Interest Period which appears on Telerate page 3750 at approximately 11:00 a.m.
(London time) two (2) LIBOR Business Days prior to the first day of the applicable Interest Period
(rounded upward, if necessary, to the nearest one-sixteenth of one percent (1/16%)). If, for any
reason, such rate does not appear on Telerate page 3750, then LIBOR shall be determined by Bank
to be the arithmetic average of the rate per annum at which deposits in U.S. dollars in minimum
amounts of at least $5,000,000 would be offered by first class banks in the London interbank market
to Bank at approximately 11:00 a.m. (London time) two (2) LIBOR Business Days prior to the first
day of the applicable Interest Period for a period equal to such Interest Period. Each calculation
by Bank of LIBOR shall be conclusive and binding for all purposes, absent demonstrated error.
LIBOR Business Day means with respect to all notices and determinations in connection with, and
payments of principal and interest on, any LIBOR Loan, any day that is a Business Day and that is
also a day for trading by and between banks in Dollar deposits in the London interbank market.
LIBOR Loan means a Loan or portion thereof, during any period in which it bears interest at a
rate based upon the LIBOR Rate.
LIBOR Rate means a rate per annum (rounded upwards, if necessary, to the next higher
1/100
th
of 1%) determined by Bank pursuant to the following formula:
|
|
|
LIBOR RATE =
|
|
LIBOR
|
|
|
1.00 Eurodollar Reserve Percentage
|
Loans means the Revolver Loans.
Loan Documents means this Agreement, each other Security Agreement, the Note, the Notice of
Borrowings, the Borrower Information Certificate, Borrowing Base Certificates, UCC-1 financing
statements and all other documents and instruments now or hereafter evidencing, describing,
guaranteeing or securing the Obligations contemplated hereby or delivered in connection herewith,
as they maybe modified, amended, extended, renewed or substituted from time to time, but does not
include Swap Agreements.
Material Adverse Effect means any (a) material adverse effect upon the validity, performance or
enforceability of any of the Loan Documents or any of the transactions contemplated hereby or
thereby, (b) material adverse effect upon the properties, business, prospects or condition
13
(financial or otherwise) of Borrower and/or any other Person obligated under any of the Loan
Documents, (c) material adverse effect upon the ability of Borrower or any other Person to fulfill
any obligation under any of the Loan Documents, or (d) material adverse effect on the Collateral;
provided, however, any change in the stock price or trading volume of the capital stock of Borrower
shall not be taken into account in determining whether there has been or would be a Material
Adverse Effect.
Material Agreement means an agreement to which Borrower is a party (other than the Loan
Documents) (a) which is deemed to be a material contract as provided in Regulation S-K promulgated
by the Securities and Exchange Commission under the Securities Act of 1933 or (b) for which breach,
termination, cancellation, nonperformance or failure to renew could reasonably be expected to have
a Material Adverse Effect.
Material ANDA shall mean any ANDA the breach, nonperformance, cancellation or failure to renew by
any party thereto would have a material adverse effect on the business, assets, condition
(financial or otherwise) or results of operations of Borrower or the validity or enforceability of
this Agreement, any of the other Loan Documents, or any of the rights and remedies of Bank
hereunder or thereunder.
Material Contract shall mean any contract or other agreement (excluding the Loan Documents but
specifically including each Material Agreement), whether written or oral, to which Borrower is a
party as to which the breach, nonperformance, cancellation or failure to renew by any party thereto
would have a material adverse effect on the business, assets, condition (financial or otherwise) or
results of operations of Borrower or the validity or enforceability of this Agreement, any of the
other Loan Documents, or any of the rights and remedies of Bank hereunder or thereunder.
Material License Agreement shall mean any Material Contract of Borrower pursuant to which
Borrower has a license or other right to use any patents, trademarks, logos, designs,
representations or other Intellectual Property owned by another Person.
Material Licensor License Agreement shall mean any Material Contract of Borrower pursuant to
which Borrower has granted a license or other right to use any patents, trademarks, logos, designs,
representations or other Intellectual Property owned by Borrower.
Maximum Equipment Advance Amount shall mean, initially Six Million Dollars ($6,000,000.00).
Commencing on May 1, 2006, the Maximum Equipment Advance Amount shall permanently reduce on a
monthly basis on the first day of each month by $200,000.00 per month.
Mortgage means the Amended and Restated Open-End Mortgage and Security Agreement of even date
herewith by Borrower in favor of Bank with respect to real property located at 3775 Kensington
Avenue, Philadelphia, PA and related assets of Borrower, as the same now exists or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced in accordance with its
respective terms.
Multiemployer Plan shall mean a multi-employer plan as defined in Section 4001(a)(3) of ERISA
which is or was at any time during the current year or the immediately preceding six (6) years
contributed to by Borrower.
Net Cash Position means, as of any date, Borrowers cash and Cash Equivalents on such date
(specifically excluding any deposit accounts, certificates of deposit or other similar items
14
maintained with a financial institution other than Bank unless Bank has received a satisfactory
control agreement with respect to such account or otherwise obtained a first priority perfected
security interest in such account or certificate of deposit), minus outstanding Revolver Loans on
such date.
NOLV means, with respect to any Inventory or Equipment, the expected net dollar amount to be
realized at an orderly negotiated sale of such Inventory or Equipment, expressed as a percentage of
the original cost of such Inventory or Equipment net of operating expenses, liquidation expenses
and commissions, as determined by Bank from time to time based upon the most recent appraisals of
Bank or its agents in form and substance satisfactory to Bank in all respects.
Net Proceeds means, with respect to a disposition of any Collateral, proceeds (including cash
receivable (when received) by way of deferred payment) received by Borrower in cash from the sale,
lease, transfer or other disposition of such Collateral, including insurance proceeds and awards of
compensation received with respect to the destruction or condemnation of all or part of such
Collateral, net of: (a) the reasonable and customary costs and expenses of such sale, lease,
transfer or other disposition (including legal fees and sales commissions); (b) amounts applied to
repayment of Debt for borrowed money (other than the Obligations) secured by a Permitted Lien on
such Collateral disposed of that is senior to Banks Liens; and (c) in connection with any sale of
Collateral, a reasonable reserve for post-closing adjustments to the purchase price, provided that
upon the expiration of not more than ninety (90) days after the sale, any remaining reserve balance
is remitted to Bank for application to the Obligations.
Note shall mean the Revolver Note and any other promissory note now or hereafter evidencing any
Obligations, and all modifications, extensions and renewals thereof.
Notice of Borrowing with respect to Revolver Loans means the written request for a Revolver Loan
as identified in Section 2.5.2 hereof.
OFAC means the United States Department of the Treasurys Office of Foreign Assets Control or any
successor thereto.
Obligations means all obligations now or hereafter owed to Bank or any Affiliate of Bank by
Borrower, whether related or unrelated to the Loans, this Agreement or the Loan Documents,
including, without limitation, amounts owed or to be owed under the terms of the Loan Documents, or
arising out of the transactions described therein, including, without limitation, the Loans, any
Debt arising out of or relating to any Deposit Accounts of Borrower at Bank or any Affiliate of
Bank or any cash management services or other products or services, including merchant card and ACH
transfer services, Letter of Credit Obligations for outstanding Letters of Credit, obligations for
bankers acceptances issued for the account of Borrower or its Subsidiaries, amounts paid by Bank
under Letters of Credit or drafts accepted by Bank for the account of Borrower or its Subsidiaries,
together with all interest accruing thereon, including any interest on pre-petition Debt accruing
after bankruptcy, all existing and future obligations under any Swap Agreements between Bank or any
Affiliate of Bank and Borrower whenever executed (including obligations under Swap Agreements
entered into prior to any transfer or sale of Banks interests hereunder if Bank ceases to be a
party hereto), all fees, all costs of collection, attorneys fees and expenses of or advances by
Bank which Bank pays or incurs in discharge of obligations of Borrower or to inspect, repossess,
protect, preserve, store or dispose of any Collateral, whether such amounts are now due or
hereafter become due, direct or indirect and
15
whether such amounts due are from time to time reduced or entirely extinguished and thereafter
re-incurred.
Permitted Acquisition means any acquisition by Borrower or any wholly-owned Subsidiary, whether
by purchase, merger or otherwise, of all or substantially all of the assets of, all of the equity
interests of, or a business line or unit or a division of, any Person which is organized in and
whose operations and assets are conducted and located in the United States of America; provided
that,
(i) immediately prior to, and after giving effect thereto, no Default or Event of Default
shall have occurred and be continuing or would result therefrom;
(ii) all transactions in connection therewith shall be consummated, in all material respects,
in accordance with all applicable laws and in conformity with all applicable laws;
(iii) in the case of the acquisition of equity interests, all of the equity interests (except
for any such securities in the nature of directors qualifying shares required pursuant to
applicable law) acquired or otherwise issued by such Person or any newly formed Subsidiary of
Borrower in connection with such acquisition shall be owned 100% by Borrower or such newly formed
Subsidiary;
(iv) Borrower shall have delivered to Bank at least ten (10) Business Days prior to such
proposed acquisition (A) a compliance certificate and supporting calculations evidencing compliance
with Sections 7.1 and 7.2 both before and after giving effect to such acquisition and pro form
compliance with Sections 7.1 and 7.2 for the twelve (12) month period following such acquisition,
(B) all relevant financial information with respect to such acquired assets or equity interests
(and any issuer thereof), including, without limitation, the Acquisition Consideration for such
acquisition and any other information required to demonstrate compliance with Sections 7.1 and 7.2,
(C) projections for Borrower after giving effect to such acquisition, in form and content
satisfactory to Bank for the next succeeding twelve (12) month period, which projections must
demonstrate, inter alia, that the proposed acquisition will be accretive to Borrowers earnings,
and (D) copies of all material documents and agreements in connection with such acquisition;
(v) any Person or assets or division as acquired in accordance herewith shall be in same
business or lines of business in which Borrower and its Subsidiaries are engaged or a similar or
related business or line of business or such other lines of businesses as may be consented to by
Bank;
(vi) Borrowers Net Cash Position after giving effect to such acquisition shall be at least
Twenty Million Dollars ($20,000,000.00);
(vii) Borrower shall have Excess Availability (specifically excluding any acquired assets) of
at least Twenty-Five Million Dollars ($25,000,000.00) both before and after giving effect to such
acquisition;
(viii) if such acquisition is structured as a purchase of equity interests by Borrower or a
newly formed Subsidiary of Borrower, both the Person acquired as well as any
16
newly formed Subsidiary of Borrower shall (A) have joined this Agreement as a Borrower and
shall have executed such documentation in connection therewith as may be required by Bank and (B)
be deemed to have made and joined in all of the representations, warranties and covenants set forth
in this Agreement and each of the other Loan Documents, all of which shall be true and correct for
such Person and any newly formed subsidiary on and as of the date of such acquisition and at all
times thereafter;
(ix) such acquisition shall be funded solely by Borrowers cash and/or Subordinated Debt and
no Revolver Loans may be used to fund such acquisition;
(x) if such acquisition is structured as a purchase of assets, such assets shall not be
included in the calculation of the Borrowing Base until Bank has completed an audit and/or field
exam with respect to such assets which is satisfactory to Bank; and
(xi) the total Acquisition Consideration paid (A) in connection with any one acquisition shall
not exceed Twenty Million Dollars ($20,000,000.00) and (B) for all Permitted Acquisitions during
the Term shall not exceed Forty Million Dollars ($40,000,000.00); and
(xii) within ten (10) days of the closing of such acquisition, Borrower shall have delivered
to Bank copies of all material documents and agreements in connection with such acquisition.
Permitted Debt has the meaning set forth in Section 6.1 hereof.
Permitted Dispositions means, collectively, each of the following:
(a) dispositions of obsolete or worn out property, whether now owned or hereafter acquired, in
the ordinary course of business;
(b) dispositions of inventory in the ordinary course of business; and
(c) dispositions of equipment to the extent that, within ninety (90) days, (i) such property
is exchanged for credit against the purchase price of similar replacement property or (ii) the
proceeds of such disposition are applied to the purchase price of such replacement property.
Permitted Liens has the meaning set forth in Section 6.2 hereof.
Person means any natural person, corporation, unincorporated organization, trust, joint-stock
company, joint venture, association, company, limited or general partnership, limited liability
company, any government or any agency or political subdivision of any government, or any other
entity or organization.
Plan means an employee benefit plan (as defined in Section 3(3) of ERISA) which Borrower
sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in
the case of a Multiemployer Plan has made contributions at any time during the immediately
preceding six (6) plan years.
Prime Rate means that rate announced by Bank from time to time as its prime rate and is one of
several interest rate bases used by Bank. Bank lends at rates both above and below Banks
17
Prime Rate, and Borrower acknowledges that Banks Prime Rate is not represented or intended to be
the lowest or most favorable rate of interest offered by Bank.
Prime Rate Loan means a Loan, or portion thereof, during any period in which it bears interest at
a rate based upon the Prime Rate.
Proceeds has the meaning set forth in the Code.
Properly Contested means, in the case of any Debt of Borrower (including any taxes) that is not
paid as and when due or payable by reason of Borrowers bona fide dispute concerning its liability
to pay same or concerning the amount thereof, (a) such Debt is being properly contested in good
faith by appropriate proceedings promptly instituted and diligently conducted; (b) Borrower has
established appropriate reserves as shall be required in conformity with GAAP; (c) the non-payment
of such Debt will not have a Material Adverse Effect and will not result in a forfeiture or sale of
any assets of Borrower; (d) no Lien is imposed upon any of Borrowers assets with respect to such
Debt unless such Lien is at all times junior and subordinate in priority to the Liens in favor of
Bank (except only with respect to property taxes that have priority as a matter of applicable state
law) and enforcement of such Lien is stayed during the period prior to the final resolution or
disposition of such dispute; (e) if the Debt results from, or is determined by the entry, rendition
or issuance against Borrower or any of its assets of a judgment, writ, order or decree, enforcement
of such judgment, writ, order or decree is stayed pending a timely appeal or other judicial review;
and (f) if such contest is abandoned, settled or determined adversely (in whole or in part) to
Borrower, Borrower forthwith pays such Debt and all penalties, interest and other amounts due in
connection therewith.
Raw Materials Inventory Loan Limit means at any time the amount of Seven Million Dollars
($7,000,000.00).
Regulated Materials means any hazardous, toxic or dangerous waste, substance or material, the
generation, handling, storage, disposal, treatment or emission of which is subject to any
Environmental Law.
Reserves means, on any date of determination thereof, an amount equal to the sum of the following
(without duplication): (a) such reserves as may be established from time to time by Bank to reflect
changes in the salability of any Eligible Inventory in the ordinary course of business of Borrower
or such other factors as may negatively impact the value of any Eligible Inventory, including
reserves based on obsolescence, seasonality, theft or other shrinkage, imbalance, change in
composition or mix, or markdowns; (b) all amounts of past due rent, fees or other charges owing at
such time by Borrower to any landlord of any premises where any of the Collateral is located or to
any processor, repairman, mechanic or other Person who is in possession of any Collateral or has
asserted any Lien or claim thereto; (c) any amounts which Borrower is obligated to pay pursuant to
the provisions of any of the Loan Documents that Bank elects to pay for the account of Borrower in
accordance with authority contained in any of the Loan Documents; (d) any amount received by Bank
from an assignment of business interruption insurance and applied to the Revolver Loans; (e) the
aggregate amount of reserves established by Bank in its reasonable discretion in respect of Banking
Relationship Debt; (f) all customer deposits or other prepayments held by Borrower; (g) the
aggregate amount of all liabilities and obligations that are secured by Liens upon any of the
Collateral that are senior in priority to Banks Liens if such Liens are not Permitted Liens
(provided that the imposition of a reserve hereunder on account of such Liens shall not be deemed a
waiver of the Event of Default that
18
arises from the existence of such Liens); (h) such reserves as may be established from time to time
by Bank as a result of dilution with respect to the Accounts (based on the ratio of the aggregate
amount of non-cash reductions in Accounts for any period to the aggregate dollar amount of the
sales of Borrower for such period) as calculated by Bank for any period exceeding six (6%) percent
of the aggregate dollar amount of the sales of Borrower for such period, (i) such reserves as may
be established from time to time by Bank with regard to chargebacks and/or rebates with respect to
the Accounts, (j) such reserves may be established from time to time by Bank with regard to
discounts, claims, credits and allowances of any nature with respect to Accounts, (k) amounts due
or to become due to owners and licensors of Intellectual Property used by Borrower; and (l) such
additional reserves, in such amounts and with respect to such matters, as Bank in its sole and
absolute discretion may elect to impose from time to time.
Revolver Commitment means the commitment of Bank, subject to the terms and conditions herein, to
make Revolver Loans and issue Letters of Credit in accordance with the provisions of Section 2
hereof in an aggregate amount not to exceed Thirty-Five Million Dollars ($35,000,000.00) at any one
time.
Revolver Loan means a loan made by Bank as provided in Section 2.1.1 hereof.
Revolver Note has the meaning set forth in Section 2.1.2 hereof.
Royalty Payments means all royalty payments or other similar payments, however characterized or
defined, which are payable to Borrower by any Person.
Sanctioned Country means a country subject to the sanctions program identified on the list
maintained by OFAC and available at http://www.treas.gov/offices/eotffc/ofac/sanctions/index.html
or as otherwise published from time to time.
Sanctioned Person means (i) a Person named on the list of Specially Designated Nationals or
Blocked Persons maintained by OFAC available at
http://www.treas.gov/offices/eotffc/ofac/sdn/index.html or as otherwise published from time to
time, or (ii) (A) an agency of the government of a Sanctioned Country, (B) an organization
controlled by a Sanctioned Country, or (C) a Person resident in a Sanctioned Country, to the extent
subject to a sanctions program administered by OFAC.
Security Agreement means this Agreement as it relates to a security interest in the Collateral,
and any other mortgage instrument, security agreement or similar instrument now or hereafter
executed by Borrower or other Person granting Bank a security interest in any Collateral to secure
the Obligations.
Senior Officer means the chairman of the board of directors, the president or the chief financial
officer of, or in-house legal counsel to, Borrower.
Short Dated Inventory means, at any time of determination, Inventory having an expiration date of
less than twelve (12) months from such date.
Solvent means, as to any Person, that such Person has capital sufficient to carry on its business
and transactions in which it is currently engaged and all business and transactions in which it is
about to engage, is able to pay its debts as they mature, and has assets having a fair value
greater than its liabilities, at fair valuation.
19
Subordinated Debt means any Debt of Borrower or any of its Subsidiaries that is subordinated
to the Obligations pursuant to a written agreement by and among Borrower, Bank and the applicable
subordinated lender, which agreement must be in form and content satisfactory to Bank.
Subsidiary means any corporation, partnership or other entity in which Borrower, directly or
indirectly, owns more than fifty percent (50%) of the stock, capital or income interests, or other
beneficial interests, or which is effectively controlled by such Person.
Supporting Obligation has the meaning set forth in the Code.
Swap Agreement has the meaning for swap agreement as defined in 11 U.S.C. § 101, as in effect
from time to time, or any successor statute, and includes, without limitation, any rate swap
agreement, forward rate agreement, commodity swap, commodity option, interest rate option, forward
foreign exchange agreement, spot foreign exchange agreement, rate cap agreement, rate floor
agreement, rate collar agreement, currency swap agreement, cross-currency rate swap agreement,
currency option and any other similar agreement.
Tangible Chattel Paper has the meaning set forth in the Code.
Term means the period from and including the Closing Date to but not including the Termination
Date.
Termination Date means the earliest of (a) October 31, 2008, (b) the date on which Borrower
terminates this Agreement and the credit facilities provided hereunder pursuant to Section 2.13
hereof, and (c) the date on which Bank terminates its obligation to make Loans and other extensions
of credit to Borrower pursuant to Section 8.2(a) hereof.
Teva means Teva Pharmaceuticals Curacao N.V., a corporation organized under the laws of the
Netherlands Antilles.
Teva Percentage means thirty percent (30%). The Teva Percentage may be increased in connection
with new product launches by Borrower to up to fifty percent (50%) as determined by Bank in good
faith, in each case no more than twice per year for no more than sixty (60) days each time.
Third Par Waiver means a waiver or subordination of Liens satisfactory to Bank from any lessors,
mortgages, warehouse operators, processors or other third parties that might have lienholders
enforcement rights against any Collateral, waiving or subordinating those rights in favor of Bank
and assuring Banks access to the Collateral in exercise of Banks rights hereunder.
USA Patriot Act means the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001.
Voting Stock shall mean with respect to any Person, (a) one (1) or more classes of Capital Stock
of such Person having general voting powers to elect at least a majority of the board of directors,
managers or trustees of such Person, irrespective of whether at the time Capital Stock of any other
class or classes have or might have voting power by reason of the happening of any contingency, and
(b) any Capital Stock of such Person convertible or exchangeable without restriction at the option
of the holder thereof into Capital Stock of such Person described in clause (a) of this definition.
20
1.2
Financial Terms
. All financial terms used herein shall have the meanings assigned
to them under GAAP unless another meaning shall be specified.
2.
The Credit Facility; Letters of Credit; Interest and Fees
.
2.1
The Credit Facility
.
2.1.1
Revolver Commitment
.
(a) Bank agrees, on the terms and conditions set forth in this Agreement, to make Revolver
Loans to Borrower and to issue letters of credit on behalf of Borrower from time to time during the
Term in amounts such that the aggregate principal amount of Revolver Loans and the face amount of
any letters of credit at any one time outstanding will not exceed the lesser of (i) the Revolver
Commitment and (ii) the Borrowing Base, subject to the limitations set forth in Section 2.1.1(b).
Revolver Loans may be Prime Loans or LIBOR Loans. Within the foregoing limit, Borrower may borrow,
prepay and reborrow Revolver Loans at any time during the Term.
(b) The aggregate amount of Revolver Loans,
plus
Letter of Credit Obligations
outstanding at any time (i) based upon Eligible Inventory, shall not exceed the inventory Loan
Limit, (ii) based upon Eligible Inventory constituting Bulk Inventory, shall not exceed the Bulk
Inventory Loan Limit and (iii) based upon Eligible Inventory consisting of raw materials, shall not
exceed the Raw Materials Inventory Loan Limit.
(c) No Revolver Loans supported by Eligible Inventory or Eligible Equipment shall be available
to Borrower until Bank receives a current appraisal of all of Borrowers Inventory (in the case of
Revolver Loans supported by Eligible Inventory) or Equipment (in the case of Revolver Loans
supported by Eligible Equipment) which appraisal shall be in form and content satisfactory to Bank
and prepared by an appraiser satisfactory to Bank.
(d) The aggregate amount of Revolver Loans supported by Eligible Royalty Payments shall at no
time exceed One Million Five Hundred Thousand Dollars ($1,500,000.00).
2.1.2 Revolver Note. Borrower shall execute and deliver to Bank, on the Closing Date, a
promissory note in the form of Exhibit A-1 attached hereto and made a part hereof (the Revolver
Note), which Revolver Note, in addition to the records of Bank, shall evidence the Revolver Loans
and interest accruing thereon. All outstanding principal amounts and accrued interest under the
Revolver Note shall be due and payable in accordance with the terms of the Revolver Note and this
Agreement.
2.2
Collections Account
.
2.2.1
Collections Account
. Borrower shall establish a lockbox under the control of
Bank to which all Account Debtors shall forward payments on the Accounts. Borrower shall pay all of
Banks standard fees and charges in connection with such lockbox arrangement and Collections
Account as such fees and charges may change from time to time.
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Borrower shall notify Account Debtors on the Accounts to forward payments on the Accounts to
the lockbox; provided, however, that, after the occurrence and during the continue of an Event of
Default, Bank shall have the right to directly contact Account Debtors at any time to ensure that
payments on the Accounts are directed to the lockbox. All payment items received by Borrower on
Accounts and sale of Inventory and other Collateral shall be held by Borrower in trust for Bank and
not commingled with Borrowers funds and shall be deposited promptly by Borrower to the Collections
Account. All such items shall be the exclusive property of Bank upon the earlier of the receipt
thereof by Bank or by Borrower. Borrower hereby grants to Bank a security interest in and lien upon
all items and balances held in any lockbox, the Disbursements Account and the Collections Account
as Collateral for the Obligations, in addition to and cumulative with the general security interest
in all assets of Borrower (including all Deposit Accounts) contained in Section 9.1 hereof.
2.2.2
Power of Attorney
. Borrower hereby irrevocably appoints Bank (and any duly
authorized Person designated by Bank) as Borrowers attorney-in-fact to endorse Borrowers name on
any checks, drafts, money orders or other media of payment which come into Banks possession or
control; this power being coupled with an interest is irrevocable so long as any of the Obligations
remain outstanding. Such endorsement by Bank under power of attorney shall, for all purposes, be
deemed to have been made by Borrower (prior to any subsequent endorsement by Bank) in negotiation
of the item.
2.2.3
Application of Payments
. Payment items received shall be deposited into the
Collections Account, subject to chargebacks for uncollected payment items, and if no Event of
Default exists and no Revolver Loans are then outstanding or have been repaid, Bank shall pay over
such of the proceeds of such payments to a Deposit Account maintained by Borrower at Bank and
designated in writing by Borrower. All funds deposited into the Collections Account on any Business
Day shall be deemed to have been applied by Bank, for interest calculation purposes and for the
purpose of determining the availability of Revolver Loans hereunder, one (1) Business Day following
deposit of such funds, to reduce the then outstanding balance of the Revolver Loans and to pay
accrued interest thereon and to pay any other outstanding Obligations which are then due and
payable hereunder. All amounts received directly by Borrower from any Account Debtor, in addition
to all other cash received from any other source including but not limited to proceeds from any
realization on any Collateral (but excluding the proceeds of any Revolver Loans made hereunder)
shall be held by Borrower pursuant to an express trust (which is hereby created) for the benefit of
Bank, shall be held by Borrower separate and segregated from all other funds of Borrower and shall
be deposited into the Collection Account within one (1) Business Day of receipt thereof by
Borrower. No payment item received by Bank shall constitute payment to Bank until such item is
actually collected by Bank and credited to the Collections Account; provided, however, that Bank
shall have the right to charge back to the Collections Account (or any other account of Borrower
maintained at Bank) an item which is returned for inability to collect, plus accrued interest
during the period of Banks provisional credit for such item prior to receiving notice of dishonor.
2.3
Interest
. Borrower agrees to pay interest in respect of all unpaid principal
amounts of the Loans from the respective dates such principal amounts are advanced until paid
(whether at stated maturity, on acceleration or otherwise) at a rate per annum equal to the
applicable rate indicated below:
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2.3.1
Prime Rate Loans
. For Loans made or outstanding as Prime Rate Loans, the
Applicable Margin in effect from time to time for such Prime Rate Loans plus the Prime Rate in
effect from time to time.
2.3.2
LIBOR Loans
. For Loans made or outstanding as LIBOR Loans, the Applicable Margin
in effect from time to time for such LIBOR Loans plus the LIBOR Rate.
2.3.3
Indemnification
. Borrower shall indemnify Bank against Banks loss or expense
as a consequence of (a) Borrowers failure to make any payment when due on a LIBOR Loan, (b) any
payment, prepayment or conversion of any LIBOR Loan on a day other than the last day of the
Interest Period, or (c) any failure to make a borrowing or conversion of a LIBOR Loan after giving
notice thereof, in each case whether voluntarily, by reason of acceleration or otherwise
(Indemnified Loss or Expense). The amount of such Indemnified Loss or Expense shall be determined
by Bank based upon the assumption that Bank funded 100% of the applicable LIBOR Loan in the London
interbank market.
2.4
Interest Rate Adjustments
.
2.4.1
Prime Rate Loan
. When a Prime Rate Loan is selected, the interest rate shall be
adjusted from time to time, effective as of the date of each change in Banks Prime Rate and the
Prime-based Rate shall continue to apply until another interest rate option is selected by Borrower
for that Loan.
2.4.2
LIBOR Loan
. When a LIBOR Loan is selected, such interest rate shall be fixed for
each Interest Period for which it is determined and shall apply for that Loan until another
interest rate option is selected by Borrower for that Loan.
2.5
Notice and Manner of Borrowing and Rate Conversion
.
2.5.1
Revolver Loans
. Borrower shall give Bank irrevocable telephonic notice of each
proposed Revolver Loan or permitted rate conversion not later than 11:00 a.m. (local time in
Philadelphia, Pennsylvania) (a) on the same business day as each proposed Loan or rate conversion
to a Prime Rate Loan and (b) at least two (2) LIBOR Business Days before each proposed Loan at or
rate conversion to a LIBOR Loan. For each Revolver Loan each such notice shall specify (i) the date
of such Loan or rate conversion, which shall be a Business Day or in the case of a LIBOR Loan, a
LIBOR Business Day and, in the case of a conversion from a LIBOR Loan, shall be the last day of an
Interest Period, (ii) the amount of each Loan or the amount to be converted, (iii) the interest
rate selected by Borrower from the interest rate options set forth in this Agreement, and (iv)
except for a Prime Loan, the Interest Period applicable thereto, which period must correspond to
one of the interest rate options set forth in the definition of LIBOR Rate. Notices received after
11:00 a.m. (local time in Philadelphia, Pennsylvania) shall be deemed received on the next Business
Day. Banks acceptance of such a request shall be indicated by its making the Loan requested. Such
a Loan shall be made available to Borrower in immediately available funds by deposit into the
Disbursement Account. Borrower may not request any LIBOR Loans if a Default or Event of Default
exists. In no event may the number of LIBOR Loans outstanding at any time exceed four (4). Each
LIBOR Loan requested shall be in a
23
minimum amount of $1,000,000.00 and integral multiples of $100,000.00 in excess of that
amount.
2.5.2
Additional Provisions for Requests for Revolver Loans
. Bank, in its discretion,
may require from Borrower a signed written request for a Revolver Loan in form of a Notice of
Borrowing satisfactory to Bank, which request shall be irrevocable and shall be delivered to Bank
no later than 11:00 a.m. (local time in Philadelphia, Pennsylvania) on the date determined in
accordance with Section 2.5.1, and shall set forth the calculation of the Borrowing Base and a
reconciliation to the previous request or Borrowing Base Certificate, specify the information
required by Section 2.5.1 for the proposed Revolver Loan and provide such other information as Bank
may reasonably require.
(a) Subject to Section 2.5.2(c) below, unless payment is otherwise timely made by Borrower,
the becoming due of any amount required to be paid with respect to any of the Obligations (whether
as principal, accrued interest, fees or other charges owed to Bank or any Affiliate of Bank) shall
be deemed irrevocably to be a request (without the requirement for the submission of a Notice of
Borrowing) for Revolver Loans on the due date of, and in an aggregate amount required to pay, such
Obligations, and Bank may disburse the proceeds of such Revolver Loans by way of direct payment of
the relevant Obligations, and such Revolver Loans shall bear interest as Prime Rate Loans.
(b) Subject to Section 2.5.2(c) below, the presentation for payment of any check or other item
of payment drawn on the Disbursement Account at a time when there are insufficient funds in such
account to cover such item shall be deemed irrevocably to be a request (without any requirement for
the submission of a Notice of Borrowing) for Revolver Loans on the date of such presentation in an
amount equal to the aggregate amount of the items presented for payment, and Bank may disburse the
proceeds of such Revolver Loans to the Disbursement Account and such Revolver Loans shall bear
interest as Prime Rate Loans.
(c) Bank shall have no obligation to Borrower to honor any deemed request for a Revolver Loan
under Section 2.5.2(a) or Section 2.5.2(b) above after the Termination Date or when the principal
amount of such Revolver Loan, when added to the aggregate outstanding principal amount of all
Revolver Loans and the Letter of Credit Obligations would exceed the lesser of the Revolver
Commitment and the Borrowing Base at such time or when any condition precedent in Section 3.2
hereof is not satisfied, but may do so in its discretion and without regard to the existence of,
and without being deemed to have waived, any Default or Event of Default.
2.5.3
Excess Outstandings
. Notwithstanding the foregoing, Bank may, in its sole and
absolute discretion, make or permit to remain outstanding Revolver Loans which, when added to the
principal amount of all other Revolver Loans and Letter of Credit Obligations, exceed the Revolver
Commitment or the Borrowing Base, and all such amounts shall (a) be part of the Obligations
evidenced by the Revolver Note, (b) bear interest as provided herein, (c) be payable upon demand by
Bank, and (d) be secured by the Collateral and be entitled to all rights and security as provided
under the Loan Documents.
2.6
Repayment of Loans
.
24
2.6.1
Repayment of Revolver Loans
.
(a) The outstanding principal amount of the Revolver Loans shall be repaid as follows: Any
portion of the Revolver Loans shall be paid by Borrower to Bank immediately upon each receipt by
Bank or Borrower of any proceeds of any Accounts or Inventory, to the extent of such proceeds.
Unless otherwise specified by Borrower, all principal repayments of Revolver Loans shall be applied
by Bank, first, to outstanding Prime Rate Loans and, second, to any outstanding LIBOR Loans. After
the occurrence and during the continuance of an Event of Default, Bank may apply all proceeds of
Accounts or other Collateral received by Bank and all other payments in respect of the Obligations
to the Revolver Loans whether or not then due or to any other Obligations then due, in whatever
order or manner Bank shall determine. In any event, the outstanding principal amount of Revolver
Loans shall be due and payable on the Termination Date.
(b) Interest accrued on the Revolver Loans shall be due and payable as follows: (i) in the
case of a Prime Rate Loan, on the first day of each month for the immediately preceding month),
computed through the last calendar day of the preceding month, (ii) in the case of LIBOR Loan, on
the last day of the Interest Period for such loan, except that in the case of a LIBOR Loan having a
six (6) month Interest Period, interest shall also be payable on the last day of the third month of
the Interest Period; and (iii) in the case of all Revolver Loans, on the Termination Date.
2.7
Additional Payment Provisions
.
2.7.1
Payment of Other Obligations
. The balance of the Obligations under the Loan
Documents requiring the payment of money shall be repaid by Borrower to Bank as and when provided
in the relevant Loan Documents, or, if no date of payment is otherwise specified in the Loan
Documents, on demand.
2.7.2
Authorization to Debit
. Bank may debit the Disbursement Account, the Collections
Account and any account subject to Banks control (as such term is used in Article 9 of the Code)
and/or make Revolver Loans to Borrower (whether or not in excess of the lesser of the Revolver
Commitment and the Borrowing Base) and apply such amounts to the payment of interest, fees,
expenses and other amounts to which Bank may be entitled from time to time and Bank is hereby
irrevocably authorized to do so without the consent of Borrower. Bank shall provide Borrower
contemporaneous notice of all such debits other than debits for interest payment.
2.7.3
Time and Location of Payment
. Borrower shall make each payment of principal of
and interest on the Loans and fees hereunder not later than 1:00 p.m. (local time Philadelphia,
Pennsylvania) on the date when due, without set off, counterclaim or other deduction, in
immediately available funds to Bank at its address referred to in Section 10.4. Whenever any
payment of principal of, or interest on, the Loans or of fees shall be due on a day which is not a
Business Day, the date for payment thereof shall be extended to the next succeeding Business Day.
If the date for any payment of principal is extended by operation of law or otherwise, interest
thereon shall be payable for such extended time.
25
2.7.4
Late Charge
. If any payments are not timely made, Borrower shall also pay to
Bank a late charge equal to five percent (5%) of each payment past due for ten (10) or more days.
2.7.5
Excess Over Borrowing Base
. To the extent that the aggregate amount of all
Revolver Loans and the Letter of Credit Obligations exceeds the Borrowing Base (after giving effect
to all sublimits and reserves then in effect), the amount of such excess will be paid immediately
to Bank.
2.7.6
Swaps Are Independent
. Any prepayment shall not affect Borrowers obligation to
continue making payments under any Swap Agreement, which shall remain in full force and effect
notwithstanding such prepayment, subject to the terms of such Swap Agreement.
2.7.7
Capital Requirements
. If either (a) the introduction of, or any change in, or in
the interpretation of, any applicable law or (b) compliance with any guideline or request from any
central bank or comparable agency or other governmental authority (whether or not having the force
of law) made or promulgated after the date hereof, has or would have the effect of reducing the
rate of return on the capital of, or has affected or would affect the amount of capital required to
be maintained by Bank or any corporation controlling Bank as a consequence of, or with reference
to, the Revolver Commitment and other commitments of this type, below the rate which Bank or such
other corporation could have achieved by for such introduction, change or compliance, then within
five (5) Business Days after written demand by Bank, Borrower shall pay to Bank from time to time
as specified by Bank additional amounts sufficient to compensate Bank or such other corporation for
such reduction; provided, however, Borrower shall not be obligated to compensate Bank under this
Section 2.7.7 for sums due for any period which is more than one hundred eighty (180) days prior to
such written demand by Bank. A certificate as to such amounts submitted to Borrower by Bank shall,
in the absence of demonstrated error, be presumed to be correct and binding for all purposes. Bank
shall determine the applicability of and the amount due under this Section 2.7.7 substantially
consistent with the manner in which it applies similar provisions and calculates similar amounts
payable to it by other similarly situated borrowers having comparable provisions in their credit
agreements.
2.8
Default Rate
. In addition to all other rights contained in the Loan Documents, if
an Event of Default occurs, the principal amount of all outstanding Obligations, other than
Obligations under any Swap Agreements between Borrower and Bank or its affiliates, may, at Banks
option, bear interest at the Default Rate. The Default Rate shall apply from acceleration until
such Obligations or any judgment thereon is paid in full.
2.9
Calculation of Interest
. All fees and other charges provided for in this Agreement
that are calculated as a per annum percentage of any amount and all interest shall be calculated
daily and shall be computed on the actual number of days elapsed over a year of 360 days. For
purposes of computing interest and other charges hereunder, all payment items and other forms of
payment received by Bank (other than immediately available funds) shall be deemed applied by Bank
on account of the Obligations (subject to final payment of such items) on the second Business Day
after Bank receives such items in the Collections Account. Each
26
determination by Bank of interest and fees hereunder shall be presumptive evidence of the
correctness of such interest and fees.
2.10
Letters of Credit
.
2.10.1
Issuance of Letters of Credit
. Bank shall from time to time issue, upon five
(5) Business Days prior written notice, extend or renew letters of credit for the account of
Borrower or its Subsidiaries; provided that (a) the aggregate face amount of Letters of Credit
issued by Bank which are outstanding at any one time shall not exceed Five Million Dollars
($5,000,000.00), (b) Bank shall have no obligation to issue any Letter of Credit if, after giving
effect thereto, the principal amount of all Revolver Loans and the Letter of Credit Obligations
would exceed the lesser of the Borrowing Base and the Revolver Commitment, and (c) all other
conditions precedent to the issuance of each such Letter or Credit as set forth herein are
satisfied or waived in writing by Bank. All payments made by Bank under any such Letters of Credit
(whether or not Borrower is the account party) and all fees, commissions, discounts and other
amounts owed or to be owed to Bank in connection therewith, shall be paid on demand, unless
Borrower instructs Bank to make a Revolver Loan to pay such amount, Bank agrees to do so, and the
necessary amount remains available to be drawn as a Revolver Loan hereunder. All Letter of Credit
Obligations shall be secured by the Collateral. Borrower shall complete and sign such applications
and supplemental agreements and provide such other documentation as Bank may reasonably require.
The form and substance of all Letters of Credit, including expiration dates, shall be subject to
Banks approval, and Bank shall have no obligation to issue any Letter of Credit or accept which
has a maturity date later than the Termination Date. Bank may charge certain fees or commissions
for the issuance, handling, renewal or extension of a Letter of Credit. Borrower unconditionally
guarantees all obligations of any Subsidiary with respect to Letters of Credit issued by Bank for
the account of such Subsidiary. Upon a Default, Borrower shall, on demand, deliver to Bank good
funds equal to one hundred five percent (105%) of Banks maximum liability under all outstanding
Letters of Credit, to be held as cash Collateral for Borrowers reimbursement obligations and other
Obligations.
2.10.2
Law Governing Letter of Credit
. Any Letter of Credit issued hereunder shall be
governed, as applicable, by the Uniform Customs and Practice for Documentary Credits International
Chamber of Commerce (ICC) Publication 500 or any subsequent revision or restatement thereof
adopted by the ICC and in use by Bank or the International Standby Practices, ICC Publication No.
590 or any subsequent revision or restatement thereof adopted by the ICC and in use by Bank, except
to the extent that the terms of such publication would limit or diminish rights granted to Bank
hereunder or in any other Loan Document.
2.11
Fees
.
2.11.1
Servicing Fee
. Borrower shall pay to Bank a monthly non-refundable servicing
fee in the amount of One Thousand Five Hundred Dollars ($1,500.00) with respect to any month during
which Revolver Loans are outstanding and Seven Hundred Fifty Dollars ($750.00) with respect to any
month during which no Revolver Loans are outstanding, payable on the first day of each month with
respect to the preceding month.
27
2.11.2
Unused Line Fee
. Borrower shall pay to Bank an Unused Line Fee for each day
equal to the product of (i) 25 basis points per annum multiplied by (ii) the difference between (A)
the Revolver Commitment and (B) the aggregate average monthly outstanding principal amount of the
Revolver Loans and Letter of Credit Obligations on such day, payable monthly on the first day of
each month with respect to the immediately preceding month.
2.11.3
Letter of Credit Fees
. Borrower shall pay to Bank, at such times as Bank shall
require, Banks standard fees in connection with Letters of Credit, as in effect from time to time,
and with respect to standby Letters of Credit, at the time of issuance of each standby Letter of
Credit, a fee equal to the Applicable Margin for LIBOR Loans then in effect per annum on the face
amount of the Letter of Credit for the period of time the standby Letter of Credit will be
outstanding.
2.12
Statement of Account
. If Bank provides Borrower with a statement of account on a
periodic basis, such statement will be presumed complete and accurate and will be definitive and
binding on Borrower, unless objected to with specificity by Borrower in writing within forty-five
(45) days after receipt.
2.13
Termination
. Upon at least thirty (30) days prior written notice to Bank,
Borrower may, at its option, terminate this Agreement and the Revolver Commitment in its entirety
but not partially; provided however, no such termination by Borrower shall be effective until the
full, final and indefeasible payment of the Obligations in cash or immediately available funds and
in the case of any Obligations consisting of contingent obligations, Banks receipt of either cash
or a direct pay letter of credit naming Bank as beneficiary and in form and substance and from an
issuing bank acceptable to Bank, in each case in an amount not less than one hundred five percent
(105%) of the aggregate amount of all such contingent obligations. Any notice of termination given
by Borrower shall be irrevocable unless Bank otherwise agrees in writing. Bank may terminate this
Agreement and the Revolver Commitment by written notice to Borrower, upon or at any time after the
occurrence of an Event of Default.
2.14
USA Patriot Act Notice
. To help fight the funding of terrorism and money
laundering activities, Federal law requires all financial institutions to obtain, verify, and
record information that identifies each Person who open an account. For purposes of this section,
account shall be understood to include loan accounts.
3.
Conditions Precedent to Extensions of Credit
.
3.1
Conditions Precedent to Initial Loan
. In addition to any other requirement set
forth in this Agreement, Bank shall not be required to fund any Loan or make any other extension of
credit hereunder unless and until the following conditions shall have been satisfied, in the sole
opinion of Bank and its counsel:
3.1.1
Loan Documents
. Borrower and each other party to any Loan Document, as
applicable, shall have executed and delivered this Agreement, the Note, and other required Loan
Documents, all in form and substance satisfactory to Bank.
3.1.2
Supporting Documents and Other Conditions
. Borrower shall cause to be delivered
to Bank the following documents and shall satisfy the following conditions:
28
(a) A copy of the governing instruments of Borrower and each Subsidiary, and good standing
certificates of Borrower and each Subsidiary, certified by the appropriate official of their
respective states of incorporation and each state in which Borrower or such Subsidiary is qualified
to do business;
(b) Incumbency certificate and certified resolutions of the board of directors (or other
appropriate governing body) of Borrower and each other Person executing any Loan Documents, signed
by the Secretary or another authorized officer of Borrower or such other Person, authorizing the
execution, delivery and performance of the Loan Documents;
(c) The legal opinion of Borrowers legal counsel addressed to Bank regarding such matters as
Bank and its counsel may request;
(d) A satisfactory Borrowing Base Certificate duly completed by Borrower, together with all
supporting statements, schedules and reconciliations as required by Bank;
(e) UCC-1 searches and other Lien searches showing no existing security interests in or Liens
on the Collateral except for Permitted Liens;
(f) A satisfactory Borrower Information Certificate duly completed by Borrower;
(g) Satisfactory evidence of insurance meeting the requirements of Section 5.3;
(h) UCC-1 financing statements and the Mortgage shall duly have been recorded or filed in the
manner and places required by law to establish, preserve, protect and perfect the interests and
rights created or intended to be created by the Security Agreement; and all taxes, fees and other
charges in connection with the execution, delivery and filing of the Security Agreement and the
financing statements shall duly have been paid;
(i) Subordinations satisfactory to Bank from all Affiliates, if any, as required by Section
5.9;
(j) Third Party Waivers as required by Section 5.12 (c);
(k) All required field exams shall have been completed to Banks satisfaction;
(l) All additional opinions, documents, certificates and other assurances that Bank or its
counsel may reasonably require;
(m) Satisfactory evidence of payment of all fees due and reimbursement of all costs incurred
by Bank, and evidence of payment to other parties of all fees or costs which Borrower is required
under the Loan Documents to pay by the date of the initial Loan;
29
(n) There shall be no litigation in which Borrower or any Subsidiary is a party defendant,
which Bank determines may have a Material Adverse Effect;
(o) Bank shall have received Borrowers financial statements for its most recently concluded
fiscal quarter and such other financial reports and information concerning Borrower as Bank shall
reasonably request, and Bank shall be satisfied therewith, including in connection with the initial
Revolver Loan made hereunder the audited financial statements of Borrower for its most recently
concluded fiscal year 2003; and
(p) Bank shall have determined that after the making of the initial Loan to be made on the
Closing Date, the issuance of any Letters of Credit to be issued on the Closing Date and the
payment of all fees and closing costs incurred on or prior to the Closing Date, Excess Availability
is not less than Nine Million Dollars ($9,000,000.00).
3.2
Conditions Precedent to Each Revolver Loan
. In addition to any other requirements
set forth in this Agreement, Bank shall not be required to fund any Revolver Loan or issue any
Letter of Credit unless and until the following conditions shall have been satisfied, in the sole
opinion of Bank and its counsel, and each Notice of Borrowing (whether or not a written Notice of
Borrowing is required) shall be deemed to be a representation that all such conditions have been
satisfied:
3.2.1
Notice of Borrowing
. Borrower shall have delivered to Bank a Notice of Borrowing
and such other information, as Bank may reasonably request.
3.2.2
No Default
. No Default shall have occurred and be continuing or could occur upon
the making of the Revolver Loan in question and, if Borrower is required to deliver a written
Notice of Borrowing, Borrower shall have delivered to Bank an officers certificate to such effect,
which may be incorporated in the Notice of Borrowing.
3.2.3
Correctness of Representations
. All representations and warranties made by
Borrower herein or otherwise in writing in connection herewith shall be true and correct in all
material respects with the same effect as though the representations and warranties had been made
on and as of date of the proposed Revolver Loan or Letter of Credit, and, if Borrower is required
to deliver a written Notice of Borrowing, Borrower shall have delivered to Bank an officers
certificate to such effect, which may be incorporated in the Notice of Borrowing.
3.2.4
No Adverse Change
. There shall have been no change which could have a Material
Adverse Effect since the date of the most recent financial statements of such Borrower delivered to
Bank from time to time.
3.2.5
Limitations Not Exceeded
. The proposed Revolver Loan or Letter of Credit shall
not cause the aggregate outstanding principal balance of the Revolver Loans plus Letter of Credit
Obligations to exceed the lesser of the Revolver Commitment and the Borrowing Base.
3.2.6
No Termination
. Bank shall not have received notice from any surety terminating
or repudiating such Persons guaranty of the Obligations incurred by Borrower.
30
3.2.7
Further Assurances
. Borrower shall have delivered such further documentation or
assurances as Bank may reasonably require.
4.
Representations and Warranties
. In order to induce Bank to enter into this
Agreement and to make the Loans or extend credit as provided for herein, Borrower makes the
following representations and warranties, all of which shall survive the execution and delivery of
the Loan Documents. Unless otherwise specified, such representations and warranties shall be deemed
made as of the date hereof and as of the date of each request for a Loan or extension of credit
hereunder:
4.1
Valid Existence and Power
. Each of Borrower and each Subsidiary is a corporation
duly organized, validly existing and in good standing under the laws of the jurisdiction of its
organization and is duly qualified or licensed to transact business in all places where the failure
to be so qualified would have a Material Adverse Effect on it. Each of Borrower and each other
Person which is a party to any Loan Document (other than Bank) has the power to make and perform
the Loan Documents executed by it and all such instruments will constitute the legal, valid and
binding obligations of such Person, enforceable in accordance with their respective terms, subject
only to bankruptcy and similar laws affecting creditors rights generally. Borrower is organized
under the laws of Delaware and has not changed the jurisdiction of its organization within the five
years preceding the date hereof except as previously reported to Bank in writing.
4.2
Authority
. The execution, delivery and performance thereof by Borrower and each
other Person (other than Bank) executing any Loan Document have been duly authorized by all
necessary actions of such Person, and do not and will not violate any provision of law or
regulation, or any writ, order or decree of any court or governmental or regulatory authority or
agency or any provision of the governing instruments of such Person, and do not and will not, with
the passage of time or the giving of notice, result in a breach of, or constitute a default or
require any consent under, or result in the creation of any Lien upon any property or assets of
such Person pursuant to, any law, regulation, instrument or agreement to which any such Person is a
party or by which any such Person or its respective properties may be subject, bound or affected.
4.3
Financial Condition
. Other than as disclosed in financial statements delivered on
or prior to the date hereof to Bank, neither Borrower nor any Subsidiary has any direct or
contingent obligations or liabilities (including any guarantees or leases) or any material
unrealized or anticipated losses from any commitments of such Person. All such financial statements
have been prepared in accordance with GAAP and fairly present the financial condition of Borrower
or Subsidiary, as the case may be, as of the date thereof. Borrower is not aware of any material
adverse fact (other than facts which are generally available to the public and not particular to
Borrower, such as general economic trends) concerning the conditions or future prospects of
Borrower or any Subsidiary which has not been fully disclosed to Bank, including any adverse change
in the operations or financial condition of such Person since the date of the most recent financial
statements delivered to Bank. Borrower is Solvent, and after consummation of the transactions set
forth in this Agreement and the other Loan documents, Borrower will be Solvent.
31
4.4
Litigation
. Except as disclosed on Schedule 8.6 to the Borrower Information
Certificate, there are no suits or proceedings pending, or to the knowledge of Borrower threatened,
before any court or by or before any governmental or regulatory authority, commission, bureau or
agency or public regulatory body against or affecting Borrower or any Subsidiary, or their assets,
which if adversely determined would have a Material Adverse Effect.
4.5
Agreements, Etc
. Neither Borrower nor any Subsidiary is a party to any agreement
or instrument or subject to any court order, governmental decree or any charter or other corporate
restriction, adversely affecting its business, assets, operations or condition (financial or
otherwise) in a material manner, nor is any such Person in default in the performance, observance
or fulfillment of any of the material obligations, covenants or conditions contained in any
agreement or instrument to which it is a party, or any law, regulation, decree, order or the like.
4.6
Authorizations
. All authorizations, consents, approvals and licenses required
under applicable law or regulation for the ownership or operation of the property owned or operated
by Borrower or any Subsidiary or for the conduct of any business in which it is engaged have been
duly issued and are in full force and effect, and it is not in default, nor has any event occurred
which with the passage of time or the giving of notice, or both, would constitute a default, under
any of the terms or provisions of any part thereof, or under any order, decree, ruling, regulation,
closing agreement or other decision or instrument of any governmental commission, bureau or other
administrative agency or public regulatory body having jurisdiction over such Person, which default
would have a Material Adverse Effect. Except as noted herein, no approval, consent or authorization
of, or filing or registration with, any governmental commission, bureau or Other regulatory
authority or agency is required with respect to the execution, delivery or performance of any Loan
Document.
4.7
Title
. Each of Borrower and each Subsidiary has good title to all of the assets
shown in its financial statements free and clear of all Liens, except Permitted Liens, Borrower
alone has full ownership rights in all Collateral.
4.8
Collateral
. The security interests granted to Bank herein and pursuant to any
other Security Agreement (a) constitute and, as to subsequently acquired property included in the
Collateral covered by the Security Agreement, will constitute, security interests under the Code
entitled to all of the rights, benefits and priorities provided by the Code and (b) are, and as to
such subsequently acquired Collateral will be, fully perfected, superior and prior to the rights of
all third persons, now existing or hereafter arising, except for Permitted Liens. All of the
Collateral is intended for use solely in Borrowers business.
4.9
Jurisdiction of Organization; Location
. The jurisdiction in which Borrower is
organized, existing and in good standing, the chief executive office of Borrower where Borrowers
business records are located, all of Borrowers other places of business and any other places where
any Collateral is kept, are all correctly and completely indicated on the Borrower Information
Certificate. The Collateral is located and shall at all times be kept and maintained only at
Borrowers location or locations as described on the Borrower Information Certificate. No such
Collateral is attached or affixed to any real property so as to be classified as a fixture unless
Bank has otherwise agreed in writing. Borrower has not changed it legal status or
32
the jurisdiction in which it is organized or moved its chief executive office within the five
(5) years preceding the date hereof.
4.10
Taxes
. Borrower and each Subsidiary have filed all federal and state income and
other tax returns which are required to be filed, and have paid all taxes as shown on said returns
and all taxes, including withholding, FICA and ad valorem taxes, shown on all assessments received
by it to the extent that such taxes have become due. Neither Borrower nor any Subsidiary is subject
to any federal, state or local tax Liens nor has such Person received any notice of deficiency or
other official notice to pay any taxes. Borrower and each Subsidiary have paid all sales and excise
taxes payable by it.
4.11
Labor Law Matters
. No goods or services have been or will be produced by Borrower
or any Subsidiary in violation of any applicable labor laws or regulations or any collective
bargaining agreement or other labor agreements or in violation of any minimum wage, wage-and-hour
or other similar laws or regulations except for violations that could not reasonably be expected to
result in a Material Adverse Effect.
4.12
Accounts
. Each Account, Instrument, Chattel Paper and other writing constituting
any portion of the Collateral (a) is genuine and enforceable in accordance with its terms except
for such limits thereon arising from bankruptcy and similar laws relating to creditors rights; (b)
is not subject to any deduction, discount, defense, set off, claim or counterclaim of a material
nature against Borrower except those arising in the ordinary course of Borrowers business; (c) is
not subject to any other circumstances that would impair the validity, enforceability or amount of
such Collateral except as to which Borrower has notified Bank in writing; (d) arises from a bona
fide sale of goods or delivery of services in the ordinary course and in accordance with the terms
and conditions of any applicable purchase order, contract or agreement; (e) is free of all Liens,
except for Permitted Liens; and (f) is for a liquidated amount maturing as stated in the invoice
therefor. Each Account included in any Notice of Borrowing, Borrowing Base Certificate, report or
other document as an Eligible Account meets all the requirements of an Eligible Account set forth
herein.
4.13
Judgment Liens
. Neither Borrower nor any Subsidiary, nor any of their assets, are
subject to any unpaid judgments (whether or not stayed) or any judgment liens in any jurisdiction.
4.14
Corporate Structure
. As of the date hereof, Schedule 8.12 of the Borrower
Information Certificate sets forth (a) the correct name of each Subsidiary, its jurisdiction of
organization and the percentage of its equity interests having voting powers owned by each Person,
(b) the name of each of Borrowers corporate or joint venture Affiliates and the nature of the
affiliation, (c) the number, nature and holder of all outstanding equity interests of Borrower and
each of its Subsidiaries and (d) the number of authorized and issued equity interests (and treasury
shares) of Borrower and each Subsidiary. Borrower has good title to all of the shares it purports
to own of the equity interests of each of its Subsidiaries, free and clear in each case of any Lien
other than Permitted Liens. All such equity interests have been duly issued and are fully paid and
non-assessable. Since the date of the last audited financial statements of Borrower delivered to
Bank, Borrower has not made, or obligated itself to make, any dividends (other than stock
dividends) or other distribution on or with respect to, or any purchase, redemption,
33
retirement or other acquisition of, any equity interests of Borrower, except as otherwise
permitted hereunder. There are no outstanding options to purchase, or any rights or warrants to
subscribe for, or any commitments or agreements to issue or sell, or any equity interests or
obligations convertible into, or any powers of attorney relating to, equity interests of Borrower
or any of its Subsidiaries. Except as set forth on Schedule 8.12 of the Borrower Information
Certificate, there are no outstanding agreements or instruments binding upon the holders of any of
Borrowers equity interests relating to the ownership of its equity interests.
4.15
Deposit Accounts
. Borrower and its Subsidiaries have no Deposit Accounts other
than (a) on the Closing Date, those listed in the Borrower Information Certificate and (b) after
the Closing Date, those otherwise permitted by Section 6.15.
4.16
Environmental
. Except for ordinary and customary amounts of solvents, cleaners
and similar materials used in the ordinary course of Borrowers business and in strict compliance
with all Environmental Laws, neither Borrower, nor to Borrowers best knowledge any other previous
owner or operator of any real property currently owned or operated by Borrower, has generated,
stored or disposed of any Regulated Material on any portion of such property, or transferred any
Regulated Material from such property to any other location in violation of any applicable
Environmental Laws. No Regulated Material has been generated, stored or disposed of on any portion
of the real property currently owned or operated by Borrower by any other Person, or is now located
on such property. Borrower is in full compliance with all applicable Environmental Laws except for
noncompliance which could not reasonably be expected to result in a Material Adverse Effect and
Borrower has not been notified of any action, suit, proceeding or investigation which calls into
question compliance by Borrower with any Environmental Laws or which seeks to suspend, revoke or
terminate any license, permit or approval necessary for the generation, handling, storage,
treatment or disposal of any Regulated Material.
4.17
ERISA
. Borrower has furnished to Bank true and complete copies of the latest
annual report required to be filed pursuant to Section 104 of the Employee Retirement Income
Security Act of 1974, as amended (ERISA), with respect to each employee benefit plan or other
plan maintained for employees of Borrower or any Subsidiary and covered by Title IV of ERISA (a
Plan), and no Termination Event (as hereinafter defined) with respect to any Plan has occurred
and is continuing. For the purposes of this Agreement, a Termination Event shall mean a
reportable event as defined in Section 4043(b) of ERISA, or the filing of a notice of intent to
terminate under Section 4041 of ERISA. Neither Borrower nor any Subsidiary has any unfunded
liability with respect to any such Plan.
4.18 Investment Company Act. Neither Borrower nor any Subsidiary is an investment company as
defined in the Investment Company Act of 1940, as amended.
4.19
Names
. Borrower currently conducts all business only under its legal name as set
forth above in the introductory section of this Agreement. Except as disclosed in the Borrower
Information Certificate, during the preceding five (5) years Borrower has not (a) been known as or
used any other corporate, fictitious or trade name, (b) been the surviving entity of a merger or
consolidation or (c) acquired all or substantially all of the assets of any Person.
34
4.20
Insider
. Borrower is not, and no Person having control (as that term is defined
in 12 U.S.C. § 375(b)(5) or in regulations promulgated pursuant thereto) of Borrower is, an
executive officer, director, or principal shareholder (as those terms are defined in 12
U.S.C. §375(b) or in regulations promulgated pursuant thereto) of Bank, of a bank holding company
of which Bank is a subsidiary, or of any subsidiary of a bank holding company of which Bank is a
subsidiary.
4.21
Sanctioned Persons; Sanctioned Countries
. None of Borrower, its Subsidiaries or
its Affiliates (a) is a Sanctioned Person or (b) does business in a Sanctioned Country or with a
Sanctioned Person in violation of the economic sanctions of the United States administered by OFAC,
The proceeds of any Loan will not be used to fund any operation in, finance any investments or
activities in or make any payments to, a Sanctioned Person or a Sanctioned Country.
4.22
Compliance with Covenants; No Default
. Borrower is, and upon funding of the
initial Loans on the Closing Date will be, in compliance with all of the covenants hereof. No
Default has occurred, and the execution, delivery and performance of the Loan Documents and the
funding of the initial Loans on the Closing Date will not cause a Default.
4.23
Full Disclosure
. There is no material fact which is known or which should be
known by Borrower that Borrower has not disclosed to Bank which could have a Material Adverse
Effect. No Loan Document, nor any agreement, document, certificate or statement delivered by
Borrower to Bank, contains any untrue statement of a material fact or omits to state any material
fact which is known or which should be known by Borrower necessary to keep the other statements
from being misleading.
4.24
Borrower Information Certificate
. All representations, warranties and statements
made by Borrower in the Borrower Information Certificate executed and delivered by Borrower to Bank
are true and correct as of the date hereof.
4.25
Intellectual Property
. Borrower owns or licenses or otherwise has the right to
use all Intellectual Property and Material ANDAs necessary for the operation of its business as
presently conducted or proposed to be conducted. As of the date hereof, Borrower does not have any
Intellectual Property registered in the United States Patent and Trademark Office or any similar
office or agency in the United States, any State thereof, any political subdivision thereof or in
any other country, other than those described in Schedule 8.11 of the Borrower Information
Certificate. Borrower has not granted any licenses with respect any Intellectual Property
registered or subject to pending applications in the United States Patent and Trademark Office or
any similar office or agency in the United States, any State thereof, any political subdivision
thereof or in any other country, other than as set forth in Schedule 8.11 of the Borrower
Information Certificate. No event has occurred which permits or would permit after notice or
passage of time or both, the revocation, suspension or termination of such rights. To the best of
Borrowers knowledge, no slogan or other advertising device, product, process, method, substance or
other Intellectual Property or goods bearing or using any Intellectual Property presently
contemplated to be sold by or employed by Borrower infringes any patent, trademark, servicemark,
tradename, copyright, license or other Intellectual Property owned by any other Person presently
and no claim or litigation is pending or threatened against or affecting Borrower
35
contesting its right to sell or use any such Intellectual Property. Schedule 8.11 of the
Borrower Information Certificate sets forth all of the Material License Agreements of Borrower in
effect on the date hereof. Schedule 8.11 of the Borrower Information Certificate sets forth all of
the Material Licensor License Agreements of Borrower in effect on the date hereof. No trademark,
servicemark or other Intellectual Property at any time used by Borrower which is owned by another
person, or owned by Borrower subject to any security interest, lien, collateral assignment, pledge
or other encumbrance in favor of any person other than Bank, is affixed to or used in the
production or sale of any Eligible Inventory, except to the extent permitted under the terms of the
Material License Agreements listed in Schedule 8.11 of the Borrower Information Certificate.
5.
Affirmative Covenants of Borrower
. Borrower covenants and agrees that from the date
hereof and until payment in full of the Obligations and the formal termination of this Agreement,
Borrower and each Subsidiary:
5.1
Use of Revolver Loan Proceeds
. Shall use the proceeds of the Revolver Loans for
working capital for the operation of Borrowers business and shall furnish Bank all evidence that
it may require with respect to such use.
5.2
Maintenance of Business and Properties
. Shall at all times maintain, preserve and
protect all Collateral and all the remainder of its property used or useful in the conduct of its
business, and keep the same in good repair, working order and condition, and from time to time
make, or cause to be made, all material needful and proper repairs, renewals, replacements,
betterments and improvements thereto so that the business carried on in connection therewith may be
conducted properly and in accordance with standards generally accepted in businesses of a similar
type and size at all times, and maintain and keep in full force and effect all licenses and permits
necessary to the proper conduct of its business, except where the failure to do so could not
reasonably be expected to result in a Material Adverse Effect.
5.3
Insurance
. Shall maintain such liability insurance, workers compensation
insurance, business interruption insurance and casualty insurance in amounts as may be required by
law, if applicable, or as are customary and usual for prudent businesses in its industry and any
other insurance that may be reasonably required by Bank and shall insure and keep insured all
Collateral and other properties with insurance companies reasonably satisfactory to Bank. All
hazard insurance covering Collateral shall be in amounts acceptable to Bank, shall name and
directly insure Bank as secured party and loss payee under a long-form lender loss payee and
standard mortgagee clause acceptable to Bank, or its equivalent, and shall not be terminable except
upon thirty (30) days written notice to Bank. Borrower shall furnish to Bank copies of all such
policies and shall provide evidence of insurance on an annual basis or such more frequent basis as
may be reasonably requested by Bank from time to time.
5.4
Notice of Default
. Shall provide to Bank immediate notice of (a) the occurrence of
a Default and what action (if any) Borrower is taking to correct the same, (b)any litigation
involving an amount at issue in excess of Five Hundred Thousand Dollars ($500,000.00) or material
changes in any such existing litigation or any judgment against it or its assets in excess of Five
Hundred Thousand Dollars ($500,000.00), (c) any damage or loss to property in excess of Five
Hundred Thousand Dollars ($500,00.00), (d) any notice from taxing
36
authorities as to claimed deficiencies or any tax lien or any notice relating to alleged ERISA
violations, (e) any Reportable Event, as defined in ERISA, (f) any rejection, return, offset,
dispute, loss or other circumstance having a Material Adverse Effect on any Collateral, (g) the
cancellation or termination of, or any default under, any Material Agreement to which Borrower is a
party or by which any of its properties are bound, or any acceleration of the maturity of any Debt
of Borrower; and (h) any loss or threatened loss of material licenses or permits if such loss could
reasonably be expected to result in a Material Adverse Effect.
5.5
Inspections of Books and Records and Field Examinations.
(a)
Inspections
. Shall permit inspections of the Collateral and the records of such
Person pertaining thereto and verification of the Accounts, at such times and in such manner as may
be required by Bank and shall further permit such inspections, reviews and field examinations of
its other books and records and properties (with such frequency and at such times as Bank may
desire) by Bank as Bank may deem necessary or desirable from time to time. The cost of such field
examinations, reviews, verifications and inspections shall be borne by Borrower, provided that (i)
the cost of field examinations shall not exceed Eight Hundred Fifty Dollars ($850.00) per examiner
per day, plus Banks reasonable out-of-pocket expenses and (ii) as long as no Default or Event of
Default shall have occurred and be continuing, Borrower shall only be responsible for the cost of
(A) one field examination occurring in any calendar year if Borrower maintained average Excess
Availability of at least Ten Million Dollars ($10,000,000.00) as of the end of each month during
such calendar year, and (B) two field examinations occurring in any calendar year if Borrower
maintained average Excess Availability of at least Five Million Dollars ($5,000,000.00) as of the
end of each month during such calendar year. In addition, provided that no Event of Default shall
have occurred and be continuing, Borrower shall not be obligated to pay more than the Field Exam
Cost Limit towards daily field examination costs (specifically excluding all out-of-pocket costs
and expenses). For purposes of this Section 5.5(a), average Excess Availability shall be calculated
monthly using Borrowers Excess Availability for the six month rolling period ending on the last
day of each such month.
(b)
Inventory Appraisals
. Cooperate with appraisals of Borrowers Inventory at such
times and in such manner as may be required by Bank. The cost of such appraisals shall be borne by
Borrower, provided, that, as long as no Default or Event of Default shall have occurred and be
continuing, (i) Borrower shall not be responsible for the cost of any such appraisals occurring
during any fiscal year of Borrower during which the Inventory Reliance is at all times less than or
equal to fifteen percent (15%), and (ii) Borrower shall only be responsible for the cost of one
such appraisal occurring during any fiscal year of Borrower during which Borrowers Inventory
Reliance is at all times more than fifteen percent (15%) but less than twenty-five percent (25%).
The foregoing limitations on appraisal costs shall not be applicable to the appraisals required by
Schedule 2.1.1(c) hereof the costs of which appraisals shall be borne solely by Borrower.
(c) If Borrowers Excess Availability at any time falls below Nine Million Dollars
($9,000,000.00), cooperate with audits and/or appraisals of Borrowers Equipment at such times and
in such manner as may be required by Bank. The costs of such audits and/or appraisals shall be
borne by Borrower.
37
5.6 Financial Information. Shall maintain books and records in accordance with GAAP and shall
furnish to Bank the following periodic financial information:
(a)
Periodic Borrowing Base Information
. A completed Borrowing Base Certificate in the
form attached hereto as Exhibit 5.6(a) (a Borrowing Base Certificate) (which shall be certified
by the chief financial officer or president of Borrower to be accurate and complete and in
compliance with the terms of the Loan Documents) (i) each Business Day of each month if the
immediately prior months average Excess Availability was less than or equal to Five Million
Dollars ($5,000,000.00), (ii) on the last Business Day of each week of each month if the
immediately prior months average Excess Availability was greater than Five Million Dollars
($5,000,000.00) but less than Ten Million Dollars ($10,000,000.00) and (iii) within three (3) days
of the end of each month if the immediately prior months average Excess Availability was Ten
Million Dollars ($10,000,000.00) or more. Bank may, but shall not be required to, rely on each
Borrowing Base Certificate delivered hereunder as accurately setting forth the available Borrowing
Base for all purposes of this Loan Agreement until such time as a new Borrowing Base Certificate is
delivered to Bank in accordance herewith.
(b)
Collateral Reporting
. On the fifteenth (15
th)
day of each month (or if
such day is not a Business Day, then on the next succeeding Business Day), Borrower shall furnish a
written report to Bank setting forth the following, information (i) a Borrowing Base Certificate,
(ii) the detailed accounts receivable aged trial balance on a due date basis as of the immediately
preceding month end for each account debtor, (iii) an accounts payable aged trial balance
(including royalty and other payables with respect to licenses (including under the Material
License Agreements)) and accruals with respect thereto at the end of such month, (iv) inventory
listing, ineligible calculations, obsolete/damaged inventory report, a chargeback report, a report
of Inventory at outside contractors, a report of Inventory broken down by location and broken down
by an indication of which Inventory consists of FDA Approved Products, as of the immediately
preceding month, (v) a reconciliation of accounts receivable against the Borrowing Base and then to
the general ledger, (vi) a reconciliation of Inventory to the Borrowing Base and then to the
general ledger, (vii) and any other supporting documentation reasonably required by Bank, all
certified by the Borrowers chief executive officer or chief financial officer, such certificate to
include a certification by such officer that, to the best of his knowledge, no items other than
those identified in the above reports, have expirations less than 90 days. In addition, with each
such monthly report, Borrower shall certify that each Material License Agreement is in fill force
and effect and there are no outstanding defaults thereunder and no past due royalty or other
payments to be made pursuant to such Material License Agreements.
(c)
Interim Statements
. Within thirty (30) days (or forty-five (45) days with respect
to each quarterly report) after the end of (1) each fiscal quarter of Borrower and (2) each month
if Revolver Loans were outstanding during such month, a balance sheet of Borrower and its
Subsidiaries at the end of that period and an income statement and statement of cash flows for that
period (and for the portion of the fiscal year ending with such period), together with all
supporting schedules, setting forth in comparative form the figures for the same period of the
preceding fiscal year. The foregoing statements and report shall be certified by the chief
financial officer of Borrower as true and correct and fairly representing the financial condition
of Borrower and its Subsidiaries and that such statements are prepared in
38
accordance with GAAP, except without footnotes and subject to normal year-end audit
adjustments.
(d)
Annual Statements
. Within ninety (90) days after the end of each fiscal year, a
detailed audited financial report of Borrower and its Subsidiaries containing a consolidated and
consolidating balance sheet at the end of that period and a consolidated and consolidating income
statement and statement of cash flows for that period, setting forth in comparative form the
figures for the preceding fiscal year, together with all supporting schedules and footnotes, and
containing an unqualified audit opinion of independent certified public accountants acceptable to
Bank that the financial statements were prepared in accordance with GAAP.
(e)
Compliance and No Default Certificates
. Together with each report required by
Subsection (d) and each report for the months of March, June and September required by Subsection
(c), a compliance certificate in the form annexed hereto as Exhibit 5.6(e) and a certificate of its
president or chief financial officer certifying that no Default then exists or if a Default exists,
the nature and duration thereof and Borrowers intention with respect thereto.
(f)
Auditors Management Letters
. Promptly upon receipt thereof, copies of each
report submitted to Borrower by independent public accountants in connection with any annual,
interim or special audit made by them of the books of Borrower including, without limitation, each
report submitted to Borrower concerning its accounting practices and systems and any final comment
letter submitted by such accountants to management in connection with the annual audit of Borrower.
(g)
Stockholder and SEC Reports
. Borrower shall promptly after the sending or filing
thereof furnish or cause to be furnished to Bank copies of all reports which Borrower sends to its
stockholders generally and copies of all reports (other than routine 8-K reports) and registration
statements which Borrower files with the Securities and Exchange Commission, any national
securities exchange or the National Association of Securities Dealers, Inc.
(h)
Pending Suits/Investigations Status Reports
. As soon as possible after the end of
each fiscal quarter of Borrower (but in any event within forty-five (45) days after the end
thereof) or more frequently as Bank may reasonably request, reports summarizing the status of any
and all pending or threatened investigations, actions, suits, proceedings or claims by or against
Borrower relating to (1) products liability and (2) any patents, patent rights, patent applications
or any approved or pending new drug applications or Material ANDAs.
(i)
Other Information
. Such other information reasonably requested by Bank from time
to time concerning the business, properties or financial condition of Borrower and its
Subsidiaries.
(j)
Projections
. Not later than the thirtieth (30th) day before the commencement of
each fiscal year, deliver Projections to Bank for Borrower for such fiscal
39
year. Projections means Borrowers forecasted consolidated and consolidating (i) balance
sheets, (ii) profit and loss statements, (iii) cash flow statements, (iv) capitalization
statements, and (v) Borrowing Base availability calculations, all prepared on a quarterly basis and
on a consistent basis with Borrowers historical financial statements, together with appropriate
supporting details and a statement of underlying assumptions.
5.7
Maintenance of Existence and Rights
. Shall preserve and maintain its corporate
existence, authorities to transact business, rights and franchises, trade names, patents,
trademarks and permits necessary to the conduct of its business.
5.8
Payment of Taxes, Etc
. Shall pay before delinquent all of its debts and taxes,
except and to the extent only that such taxes are being Property Contested.
5.9
Subordination
. Shall cause all debt and other obligations now or hereafter owed
to any Affiliate to be subordinated in right of payment and security to the Obligations in
accordance with subordination agreements satisfactory to Bank.
5.10
Compliance with Laws, Regulations. Etc
.
(a) Borrower shall, and shall cause any Subsidiary to, at all times, comply in all material
respects with all laws, rules, regulations, licenses, permits, approvals and orders applicable to
it and duly observe all requirements of any foreign, Federal, State or local Governmental
Authority, including ERISA, the IRS Code, the Occupational Safety and Health Act of 1970, as
amended, the Fair Labor Standards Act of 1938, as amended, the Federal Food, Drug and Cosmetic Act,
and all statutes, rules, regulations, orders, permits and stipulations relating to environmental
pollution and employee health and safety, including all of the Environmental Laws except where the
failure to so comply could not reasonably be expected to result in a Material Adverse Effect.
(b) Borrower shall give written notice to Bank immediately upon Borrowers receipt of any
notice of, or Borrowers otherwise obtaining knowledge of, (i) the occurrence of any event
involving the release, spill or discharge, threatened or actual, of any Regulated Materials or (ii)
any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect
to: (A) any non-compliance with or violation of any applicable Environmental Law by Borrower or (B)
the release, spill or discharge, threatened or actual, of any Regulated Materials other than in the
ordinary course of business and other than as permitted under any applicable Environmental Law.
Copies of all environmental surveys, audits, assessments, feasibility studies and results of
remedial investigations shall be promptly furnished, or caused to be furnished, by Borrower to
Bank. Borrower shall take prompt and appropriate action to respond to any non-compliance with any
of the Environmental Laws and shall regularly report to Bank on such response.
(c) Without limiting the generality of the foregoing, whenever Bank reasonably determines that
there is material non-compliance, or any condition which requires any action by or on behalf of
Borrower in order to avoid any material non-compliance, with any Environmental Law, Borrower shall,
at Banks request and Borrowers expense: (i) cause an independent environmental engineer
acceptable to Bank to conduct such tests of the site
40
where Borrowers material non-compliance or alleged material non-compliance with such
Environmental Laws has occurred as to such non-compliance and prepare and deliver to Bank a report
as to such non-compliance setting forth the results of such tests, a proposed plan for responding
to any environmental problems described therein, and an estimate of the costs thereof and (ii)
provide to Bank a supplemental report of such engineer whenever the scope of such non-compliance,
or Borrowers response thereto or the estimated costs thereof, shall change in any material
respect.
(d) Borrower shall indemnify and hold harmless Bank, its directors, officers, employees,
agents, invitees, representatives, successors and assigns, from and against any and all losses,
claims, damages, liabilities, costs, and expenses (including attorneys fees and legal expenses)
directly or indirectly arising out of or attributable to the use, generation, manufacture,
reproduction, storage, release, threatened release, spill, discharge, disposal or presence of any
Regulated Materials, including the costs of any required or necessary repair, cleanup or other
remedial work with respect to any property of Borrower and the preparation and implementation of
any closure, remedial or other required plans. All representations, warranties, covenants and
indemnifications in this Section 5.10 shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
5.11
Compliance with ERISA
. Borrower shall and shall cause each ERISA Affiliate to:
(a) maintain each Plan (other than a Multiemployer Plan) in compliance in all material respects
with the applicable provisions of ERISA, the IRS Code and other Federal and State law; (b) cause
each Plan which is qualified under Section 401(a) of the IRS Code to maintain such qualification;
(c) not terminate any of such Plans so as to incur any liability to the Pension Benefit Guaranty
Corporation; (d) not allow or suffer to exist any prohibited transaction involving any of such
Plans or any trust created thereunder which would subject Borrower or such ERISA Affiliate to a tax
or penalty or other liability on prohibited transactions imposed under Section 4975 of the IRS Code
or ERISA; (e) make all required contributions to any Plan which it is obligated to pay under
Section 302 of ERISA, Section 412 of the IRS Code or the terms of such Plan; (f) not allow or
suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such
Plan; or (g) not allow or suffer to exist any occurrence of a reportable event or any other event
or condition which presents a material risk of termination by the Pension Benefit Guaranty
Corporation of any such Plan that is a single employer plan, which termination could result in any
liability to the Pension Benefit Guaranty Corporation.
5.12
License Agreements
.
(a) Borrower shall (i) promptly and faithfully observe and perform all of the material terms,
covenants, conditions and provisions of the Material License Agreements to be observed and
performed by it, at the times set forth therein, if any, (ii) not do, permit, suffer or refrain
from doing anything that could reasonably be expected to result in a default under or breach of any
of the terms of any Material License Agreement, (iii) not cancel, surrender, modify, amend, waive
or release any Material License Agreement in any material respect or any term, provision or right
of the licensee thereunder in any material respect, or consent to or permit to occur any of the
foregoing; except, that, subject to subsection (b) below, Borrower may amend, wave, cancel,
surrender or release any Material License Agreement in the ordinary course of the business of
Borrower; provided, that, Borrower shall give Bank not less
41
than thirty (30) days prior written notice of its intention to so cancel, surrender and
release any such Material License Agreement, (iv) give Bank prompt written notice of any Material
License Agreement entered into by Borrower after the date hereof, together with a true, correct and
complete copy thereof and such other information with respect thereto as Bank may request, (v) give
Bank prompt written notice of any material breach of any obligation, or any default, by any party
under any Material License Agreement, and deliver to Bank (promptly upon the receipt thereof by
Borrower in the case of a notice to Borrower, and concurrently with the sending thereof in the case
of a notice from Borrower) a copy of each notice of default and every other notice and other
communication received or delivered by Borrower in connection with any Material License Agreement
which relates to the right of Borrower to continue to use the property subject to such Material
License Agreement, and (vi) furnish to Bank, promptly upon the request of Bank, such information
and evidence as Bank may require from time to time concerning the observance, performance and
compliance by Borrower or the other party or parties thereto with the terms, covenants or
provisions of any Material License Agreement.
(b) Borrower will either exercise any option to renew or extend the term of each Material
License Agreement in such manner as will cause the term of such Material License Agreement to be
effectively renewed or extended for the period provided by such option and give prompt written
notice thereof to Bank or give Bank prior written notice that Borrower does not intend to renew or
extend the term of any such Material License Agreement or that the term thereof shall otherwise be
expiring, not less than thirty (30) days prior to the date of any such non-renewal or expiration.
In the event of the failure of Borrower to extend or renew any Material License Agreement, Bank
shall have, and is hereby granted, the irrevocable right and authority, at its option, to renew or
extend the term of such Material License Agreement, whether in its own name and behalf, or in the
name and behalf of a designee or nominee of Bank or in the name and behalf of Borrower, as Bank
shall determine at any time that an Event of Default shall exist or have occurred and be
continuing. Bank may, but shall not be required to, perform any or all of such obligations of
Borrower under any of the Material License Agreements, including, but not limited to, the payment
of any or all sums due from Borrower thereunder. Any sums so paid by Bank shall constitute part of
the Obligations.
(c) Borrower shall (i) promptly and faithfully observe and perform all of the material terms,
covenants, conditions and provisions of the Material Licensor License Agreements to be observed and
performed by it, at the times set forth therein, if any, (ii) not do, permit, suffer or refrain
from doing anything that could reasonably be expected to result in a default under or breach of any
of the terms of any Material Licensor License Agreement, (iii) give Bank prompt written notice of
any Material Licensor License Agreement entered into by Borrower after the date hereof, together
with a true, correct and complete copy thereof and such other information with respect thereto as
Bank may request, (iv) give Bank prompt written notice of any material breach of any obligation, or
any default, by any party under any Material Licensor License Agreement, and deliver to Bank
(promptly upon the receipt thereof by Borrower in the case of a notice to Borrower, and
concurrently with the sending thereof in the case of a notice from Borrower) a copy of each notice
of default and every other notice and other communication received or delivered by Borrower in
connection with any Material Licensor License Agreement, and (v) furnish to Bank, promptly upon the
request of Bank, such information and evidence as Bank may require from time to time concerning the
observance,
42
performance and compliance by Borrower or the other party or parties thereto with the terms,
covenants or provisions of any Material Licensor License Agreement.
(d) Borrower shall (i) keep in full force and effect and take all actions necessary to keep in
full force and effect all existing Material ANDAs, (ii) not do, permit, suffer or refrain from
doing anything that could reasonably be expected to result in revocation, termination, cancellation
or other event which would limit or prohibit Borrowers use of any Material ANDA, (iii) give Bank
prompt written notice of any new Material ANDA, together with a true, correct and complete copy
thereof and such other information with respect thereto as Bank may reasonably request, (iv) give
Bank prompt written notice of each notice and other communication received or delivered by Borrower
in connection with any Material ANDA which relates to the right of Borrower to continue to use such
Material ANDA and (v) furnish to Bank, promptly upon the request of Bank, such information and
evidence as Bank may reasonably require from time to time concerning Borrowers right to use and
continue to use each of the Material ANDAs.
(e) Borrower will either exercise any option to renew or extend the each Material ANDA in such
manner as will cause the term of such Material ANDA to be effectively renewed or extended for the
period provided by such option and give prompt written notice thereof to Bank or give Bank prior
written notice that Borrower does not intend to renew or extend the term of any such Material ANDA
or that the term thereof shall otherwise be expiring, not less than thirty (30) days prior to the
date of any such non-renewal or expiration. In the event of the failure of Borrower to extend or
renew any Material ANDA, Bank shall have, and is hereby granted, the irrevocable right and
authority, at its option, to renew or extend the term of such Material ANDA, whether in its own
name and behalf, or in the name and behalf of a designee or nominee of Bank or in the name and
behalf of Borrower, as Bank shall determine at any time that an Event of Default shall exist or
have occurred and be continuing. Bank may, but shall not be required to, perform any or all of such
obligations of Borrower under any of the Material ANDAs, including, but not limited to, the payment
of any or all sums due from Borrower thereunder. Any sums so paid by Bank shall constitute part of
the Obligations.
5.13
Additional Real Property Collateral
. If Borrowers Excess Availability at any
time falls below Nine Million Dollars ($9,000,000.00), without limiting any other rights of Bank or
duties or obligations of Borrower, upon Banks request, Borrower shall execute and deliver to Bank
a mortgage, deed of trust or deed to secure debt with respect to such Real Property of Borrower as
Bank may require, in form and substance reasonably satisfactory to Bank and in form appropriate for
recording in the real estate records of the jurisdiction in which such Real Property or other
property is located granting to Bank a lien and mortgage on and security interest in such Real
Property, fixtures or other property (with such priority as Bank may require) and such other
agreements, documents and instruments as Bank may reasonably require in connection therewith.
5.14
Further Assurances
. Shall take such further action and provide to Bank such
further assurances as may be reasonably requested to ensure compliance with the intent of this
Agreement and the other Loan Documents.
43
5.15
Covenants Regarding Collateral
. Borrower makes the following covenants with Bank
regarding the Collateral for itself and each Subsidiary. Borrower and each Subsidiary:
(a) will use the Collateral only in the ordinary course of its business and will not permit
the Collateral to be used in violation of any applicable law or policy of insurance;
(b) as agent for Bank, will defend the Collateral against all claims and demands of all
Persons, except for Permitted Liens;
(c) will, at Banks request, obtain and deliver to Bank such Third Party Waivers as Bank may
require;
(d) will promptly deliver to Bank all promissory notes, drafts, trade acceptances, chattel
paper, Instruments or documents of title which are Collateral in tangible form, appropriately
endorsed to Banks order, and Borrower will not create or permit any Subsidiary to create any
Electronic Chattel Paper without taking all steps deemed necessary by Bank to confer control of the
Electronic Chattel Paper upon Bank in accordance with the Code;
(e) except for Permitted Dispositions and the voluntary termination of Swap Agreements to
which Borrower or such Subsidiary is a party, will not sell, assign, lease, transfer, pledge,
hypothecate or otherwise dispose of or encumber any Collateral or any interest therein;
(f) shall promptly notify Bank of any future patents, trademarks or copyrights owned by
Borrower or any Subsidiary, any Material License Agreements and any Material Licensor License
Agreements; and
(g) shall give Bank at least thirty (30) days prior written notice of any new trade or
fictitious name. Borrowers or any Subsidiarys use of any trade or fictitious name shall be in
material compliance with all laws regarding the use of such names.
5.16
Material Contracts
. Borrower will deliver to Bank promptly after execution,
copies of each new Material Contract to which it is a party and any amendment to any Material
Contract to which it is a party.
5.17
Notices
. Borrower agrees to promptly notify Bank of and provide Bank with a copy
of (i) any FDA warning letters or other similar notice, letters or reports received by Borrower
from the FDA or any other governmental entity that concerned with is quality, identity, strength,
purity, safety, efficacy, marketing or manufacturing of the pharmaceutical compounds or products
manufactured or sold by Borrower, (ii) any reports sent by Borrower to the FDA or other
governmental entity concerning complaints or reports regarding products manufactured by Borrower
involving death or serious injury and (iii) any civil penalty actions against Borrower or any other
party involving products manufactured or sold by Borrower.
Borrower shall promptly notify Bank in writing of the details of (i) any loss, damage,
investigation, action, suit, proceeding or claim relating to the Collateral or any other property
44
which is security for the Obligations or which could reasonably be expected to result in a Material
Adverse Affect (ii) any Material Contract of Borrower being terminated or amended or any new
Material Contract entered into (in which event Borrower shall provide Bank with a copy of such
Material Contract), (iii) any order, judgment or decree in excess of $250,000 shall have been
entered against Borrower or any of its properties or assets, (iv) any notification of violation of
laws or regulations received by Borrower which could reasonably be expected to result in a Material
Adverse Affect, (v) any ERISA Event, (vi) any action, suit, proceeding or claim by or against
Borrower relating to (A) any patents, patent rights, patent applications or any approved or pending
new drug applications or Material ANDAs or (B) products liability and (vii) the occurrence of any
Default or Event of Default.
5.18
2004 Audited Financial Statements
. On or before December 31, 2005, Borrower shall
deliver to Bank its audited financial statements for its fiscal year ended December 31, 2004 in the
form required by Section 5.6(d) hereof.
6.
Negative Covenants of Borrower
. Borrower covenants and agrees that from the date
hereof and until payment in full of the Obligations and the formal termination of this Agreement,
Borrower and each Subsidiary:
6.1
Debt
. Shall not create or permit to exist any Debt, including any guaranties or
other contingent obligations, except the following (Permitted Debt):
(a) The Obligations;
(b) Endorsement of checks for collection in the ordinary course of business;
(c) Debt payable to suppliers and other trade creditors in the ordinary course of business on
ordinary and customary trade terms;
(d) Purchase money Debt (including capital leases) not exceeding Five Million Dollars
($5,000,000.00) in aggregate principal amount at any time outstanding for Borrower and all
Subsidiaries incurred to purchase Equipment, provided that the amount of such Debt shall not at any
time exceed the purchase price of the Equipment purchased;
(e) Debt existing on the Closing Date and not otherwise permitted under this Section 6.1, as
set forth in Schedule 9.9 of the Borrower Information Certificate, and the renewal and refinancing
(but not any increase in the aggregate principal amount thereof or any shortening of the maturity
thereof);
(f) Subordinated Debt; and
(g) Any Debt incurred under any Swap Agreements with Bank (or with any of its Affiliates).
45
6.2
Liens
. Shall not create or permit any Liens on any of its property (regardless of
whether such property constitutes Collateral and including, without limitation, all Intellectual
Property) except the following (Permitted Liens):
(a) Liens securing the Obligations;
(b) Liens for taxes, assessments and other governmental charges or levies (excluding any Lien
imposed pursuant to any of the provisions of ERISA or Environmental Laws) not yet due and payable
or which are being Properly Contested;
(c) The claims of materialmen, mechanics, carriers, warehousemen, processor or landlords
arising out of operation of law so long as the obligations secured thereby are not past due or are
being Properly Contested;
(d) Liens consisting of deposits or pledges made in the ordinary course of business in
connection with workers compensation, unemployment insurance, social security and similar laws;
(e) Easements, rights-of-way, restrictions and other similar encumbrances affect Real Property
which, in the aggregate, are not substantial in amount, and which do not in any case materially
detract from the value of the property subject thereto or materially interfere with the ordinary
conduct of the business of Borrower;
(f) Judgment and other similar non-tax Liens arising in connection with court proceedings but
only if and for so long as (i) the execution or enforcement of such Liens is and continues to be
effectively stayed and bonded on appeal, (ii) the validity and/or amount of the claims secured
thereby are being Properly Contested and (iii) such Liens do not, in the aggregate, materially
detract from the value of the assets of the Person whose assets are subject to such Lien or
materially impair the use thereof in the operation of such Persons business;
(g) Liens securing Permitted Debt incurred solely for the purpose of purchase money financing
for the acquisition of Equipment, provided that such Lien does not secure more than the purchase
price of such Equipment and does not encumber property other than the purchased property;
(h) Liens not otherwise permitted by this Section 6.2, in existence on the Closing Date and
described in Schedule 8.4 of the Borrower Information Certificate.
6.3
Restricted Payments
. Shall not pay or declare any dividends (other than stock
dividends) or other distributions or purchase, redeem or otherwise acquire any stock or other
equity interests or pay or acquire any Subordinated Debt except the following: (i) any Subsidiary
may pay dividends to Borrower or another Subsidiary wholly-owned by Borrower and (ii) Borrower may
purchase shares of common stock for the purpose of holding shares for future stock option grants,
provided that (a) the total amount of such purchases shall not exceed Two Million Five Hundred
Thousand Dollars ($2,500,000.00) per year and (b) after giving effect
46
to any such purchase, Borrower shall have at least Five Million Dollars ($5,000,000.00) of
Excess Availability.
6.4
Loans and Other Investments
. Shall not make or permit to exist any advances or
loans to, or guarantee or become contingently liable, directly or indirectly, in connection with
the obligations, leases, stock or dividends of, or own, purchase or make any commitment to purchase
any stock, bonds, notes, debentures or other securities of, or any interest in, or make any capital
contributions to (all of which are sometimes collectively referred to herein as Investments) any
Person, except for (a) cash and Cash Equivalents (b) existing investments in Subsidiaries, (c)
endorsement of negotiable instruments for collection in the ordinary course of business, (d)
advances to employees for business travel and other expenses incurred in the ordinary course of
business which do not at any time exceed Five Hundred Thousand Dollars ($500,000.00) in the
aggregate, (e) any Swap Agreements with Bank (or with any of its Affiliates) and (f) Permitted
Acquisitions.
6.5
Change in Business
. Shall not enter into any business which is substantially
different from the business in which it is engaged on the Closing Date.
6.6
Accounts
. (a) Shall not sell, assign or discount any of its Accounts, Chattel
Paper or any promissory notes held by it other than the discount of such notes in the ordinary
course of business for collection; (b) shall not create or accept any Account, Instrument, Chattel
Paper or other obligation of any kind due from or owed by as Sanctioned Person or enter into any
lease that secures the Obligations where the lessee is a Sanctioned Person; and (c) shall notify
Bank promptly in writing of any discount, offset or other deductions not shown on the face of an
Account invoice and any dispute over an Account except for discounts, offsets and other deductions
allowed in the ordinary course of business and disputes arising in the ordinary course of business
that could not reasonably be expected to have a Material Adverse Effect (provided all such
discounts, offsets, other deductions and disputes shall be included, as applicable, in all
information and reports delivered pursuant to Section 5.6 above), and any information relating to
an adverse change in any Account Debtors financial condition or ability to pay its obligations or
if it learns that any Account Debtor is a Sectioned Person.
6.7
Transactions with Affiliates
. Shall not directly or indirectly purchase, acquire
or lease any property from, or sell, transfer or lease any property to, pay any management fees to
or otherwise deal with, in the ordinary course of business or otherwise, any Affiliate (other than
a Subsidiary); provided, however, that any acts or transactions prohibited by this Section may be
performed or engaged in after written notice to Bank if upon terms not less favorable to Borrower
or such Subsidiary than if no such relationship existed.
6.8
No Change in Name, Offices or Jurisdiction of Organization; Removal of Collateral
.
Shall not change its name or the jurisdiction in which Borrower or such Subsidiary is organized or,
unless it shall have given forty-five (45) days advance written notice thereof to Bank, (a) change
the location of its chief executive office or other office where books or records are kept, or (b)
permit any Inventory or other tangible Collateral to be located at any location other than as
specified in the Borrower Information Certificate or such other location as Borrower may elect to
keep such tangible Collateral, provided, Borrower shall have given thirty
47
(30) days advance written notice thereof to Bank and within such thirty (30) day period
provided to Bank such Third Party Waivers as Bank may reasonably require.
6.9
No Sale, Leaseback
. Shall not enter into any sale-and-leaseback or similar
transaction.
6.10
Margin Stock
. Shall not use any proceeds of the Loan to purchase or carry any
margin stock (within the meaning of Regulation U of the Board of Governors of Federal Reserve
System) or extend credit to others for the purpose of purchasing or carrying any margin stock.
6.11
Tangible Collateral
. Shall not, except as otherwise provided herein, allow any
Inventory or other tangible Collateral to be commingled with, or become an accession to or part of,
any property of any other Person so long as such property is Collateral; nor allow any tangible
Collateral to become a fixture unless Bank shall have given its prior written authorization.
6.12
Subsidiaries
. Shall not acquire, form or dispose of any Subsidiaries or permit
any Subsidiary to issue capital stock except to its parent.
6.13
Liquidation, Mergers, Consolidations and Dispositions of Substantial Assets, Name and
Good Standing
. Shall not (i) merge, reorganize, consolidate or amalgamate with any Person,
(ii) liquidate, wind up its affairs or dissolve itself, (iii) acquire by purchase, lease or
otherwise any of the assets of any Person other than a Permitted Acquisition, (iv) sell, transfer,
lease or otherwise dispose of any of its property or assets, except for Permitted Dispositions and
the voluntary termination of Swap Agreements to which Borrower or such Subsidiary is a party, or
sell or dispose of any equity ownership interests in any Subsidiary, in each case whether in a
single transaction or in a series of related transactions; (v) or change its name or jurisdiction
of organization or conduct business under any new fictitious name; (vi) change its Federal Employer
Identification Number; (vii) fail to remain in good standing and qualified to transact business as
a foreign entity in any state or other jurisdiction in which it is required to be qualified to
transact business as a foreign entity and in which the failure to be so qualified could reasonably
be expected to have a Material Adverse Effect.
6.14
Change of Fiscal Year or Accounting Methods
. Shall not change its fiscal year.
Borrowers fiscal year end is December 31, as of the Closing Date. Borrower does not currently
capitalize research and development expenses and shall not do so in the future. If Borrower changes
it accounting methods, Bank shall have the right, at its option, to calculate Borrowers compliance
with the financial covenants set forth in Sections 7.1 and 7.2 hereof using Borrowers historical
methods of accounting.
6.15
Deposit Accounts
. Borrower shall not open or maintain any Deposit Accounts except
for (i) Deposit Accounts opened or maintained at Bank, (ii) Deposit Accounts which are not opened
or maintained at Bank but which are subject to Banks control (as such term is used in Article 9
of the Code) on terms reasonably satisfactory to Bank, (iii) an account maintained with Cathay Bank
solely for the purpose of paying weekly disbursements and with an amount on deposit at no time in
excess of Five Million Dollars ($5,000,000.00) and (iv) such
48
other Deposit Accounts as shall be necessary for payroll, petty cash, local trade payables,
and other occasional needs of Borrower. The aggregate balance of any Deposit Accounts which are not
subject to Banks control (as such term is used in Article 9 of the Code) on terms reasonably
acceptable to Bank shall never exceed $200,000.00 without Banks prior written consent. All Deposit
Accounts maintained at Bank shall be deemed to be under Banks control as such term is used in
Article 9 of the Code.
6.16
Negative-negative Pledge
. Shall not enter into any agreement with any party other
than Bank prohibiting the creation of any Lien upon any of its properties or assets, whether now
owned or hereafter acquired.
6.17
Material Adverse Contracts
. Borrower will not become or be a party to any
contract or agreement which has or could have a Material Adverse Effect.
7.
Other Covenants of Borrower
. Borrower covenants and agrees that from the date
hereof and until payment in full of the Obligations and the termination of this Agreement, Borrower
and each Subsidiary shall comply with the following additional covenants:
7.1
Fixed Charge Coverage Ratio
. At the end of each Applicable Fiscal Period,
Borrower shall have a Fixed Charge Coverage Ratio of not less than 1.25 to 1.00; provided however,
for the Applicable Fiscal Period ending June 30, 2006 only, Borrower shall have a Fixed Charge
Coverage Ratio of not less than 1.0 to 1.0. As used herein, Fixed Charge Coverage Ratio means (i)
EBITDA, less the sum of (A) for any Applicable Fiscal Period during which Borrower does not have a
positive Net Cash Position for each day during such Applicable Fiscal Period, all unfinanced
Capital Expenditures made in the Applicable Fiscal Period, and (B) any dividends, distributions and
any other payments permitted under Section 6.3 above paid in the Applicable Fiscal Period and (C)
cash taxes paid in the Applicable Fiscal Period (without benefit of any refunds), divided by (ii)
the sum of (A) the current portion of scheduled principal amortization on Funded Debt coming due in
the next 12 months as of the end of the most recent fiscal quarter plus (B) cash interest payments
paid in the Applicable Fiscal Period. As used herein, (i) EBITDA means the sum of (A)
consolidated net income of Borrower and its Subsidiaries in the Applicable Fiscal Period (computed
without regard to any extraordinary items of gain or loss) plus (B) to the extent deducted from
revenue in computing consolidated net income for such period, the sum of (1) interest expense, (2)
income tax expense, and (3) depreciation and amortization, less any extraordinary cash losses for
such period; (ii) Capital Expenditures means for any period the aggregate cost of all capital
assets acquired by Borrower and its Subsidiaries during such period, as determined in accordance
with GAAP; (iii) Applicable Fiscal Period means a period of four (4) consecutive, trailing Fiscal
Quarters ending at the end of each fiscal quarter and (iv) Funded Debt means (A) debt for
borrowed funds, (B) to the extent not covered by the immediately preceding clause (A), indebtedness
having a term of one (1) year or more incurred as part of any purchase money obligation, and (C)
any Subordinated Debt.
7.2
Capital Expenditures
. Borrower shall not, directly or indirectly, make total
Capital Expenditures in excess of (a) Fifty Million Dollars ($50,000,000.00) for the period from
January 1, 2005 though December 31, 2006, and (b) Twenty-Five Million Dollars
49
($25,000,000.00) for the period from January 1, 2007 through December 31, 2007 and for each
calendar year thereafter.
7.3
Effect of FAS 133 Charge
. The effect, if any, of the FAS 133 Charge on the
financial covenants set forth herein shall be excluded from the calculation thereof so long as the
FAS 133 Charge does not exceed Two Hundred Thousand Dollars ($200,000.00) at the time of such
calculation. FAS 133 Charge means non-cash charges in connection with any Swap Agreements which
may be required from time to time to be recognized on the financial statements of Borrower pursuant
to Financial Account Standards Board Statement No. 133 (Accounting for Derivative Instruments and
Hedging Activities).
8.
Default
.
8.1
Events of Default
. Each of the following shall constitute an Event of Default:
(a) There shall occur any default by Borrower in the payment, when due, of any principal of or
interest on the Note or any fee due, any other amounts due hereunder or any other Loan Document, or
any other Obligations; or
(b) There shall occur any default by Borrower in the performance of any agreement, covenant or
obligation contained in Section 5.1, 5.4, 5.5, 5.6, 5.12, 5.16, 5.18 or Section 6 or Section 7 of
this Agreement; or
(c) There shall occur any default by Borrower or any other party to any Loan Document (other
than Bank) in the performance of any other agreement, covenant or obligation contained in this
Agreement or such Loan Document not provided for elsewhere in this Section 8 and the breach of such
other agreement, covenant or obligation is not cured to Banks satisfaction within fifteen (15)
days after the sooner to occur of any Senior Officers receipt of notice of such breach from Bank
or the date on which such failure or neglect first becomes known to any Senior Officer; provided,
however, that such notice and opportunity to cure shall not apply in the case of any failure to
perform, keep or observe any covenant which is not capable of being cured at all or within such
fifteen (15) day period or which is a willful and knowing breach by Borrower or such other party;
or
(d) Any representation or warranty made by Borrower or any other party to any Loan Document
(other than Bank) herein or therein or in any certificate or report furnished in connection
herewith or therewith shall prove to have been untrue, misleading or incorrect in any material
respect when made; or
(e) Any other obligation now or hereafter owed by Borrower or any Subsidiary to Bank or any
Affiliate of Bank shall be in default and not cured within the grace period, if any, provided in
the agreement or other document under which such obligation arises; or
(f) Borrower or any Subsidiary shall fail to make any payment in respect of outstanding Debt
(other than the Obligations) in an aggregate principal amount of One Million Five Hundred Thousand
Dollars ($1,500,000.00) or more when due after the
50
expiration of any applicable grace period, or any event or condition shall occur which results
in the acceleration of the maturity of such Debt (including, without limitation, any required
mandatory prepayment or put of such Debt to any such Person) or enables (or, with the giving of
notice or lapse of time or both, would enable) the holders of such Debt or a commitment related to
such Debt (or any Person acting on such holders behalf) to accelerate the maturity thereof or
terminate any such commitment prior to its normal expiration (including, without limitation, any
required mandatory prepayment or put of such Debt to such Person); or
(g) Borrower or any Subsidiary shall (A) voluntarily dissolve, liquidate or terminate
operations or apply for or consent to the appointment of, or the taking of possession by, a
receiver, custodian, trustee or liquidator of such Person or of all or of a substantial part of its
assets, (B) admit in writing its inability, or be generally unable, to pay its debts as the debts
become due, (C) make a general assignment for the benefit of its creditors, (D) commence a
voluntary case under the federal Bankruptcy Code (as now or hereafter in effect), (E) file a
petition seeking to take advantage of any other law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, (F) fail to controvert in a
timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an
involuntary case under Bankruptcy Code, or (G) take any corporate action for the purpose of
effecting any of the foregoing; or
(h) An involuntary petition or complaint shall be filed against Borrower seeking bankruptcy
relief or reorganization or the appointment of a receiver, custodian, trustee, intervenor or
liquidator of Borrower or any Subsidiary, of all or substantially all of its assets, and such
petition or complaint shall not have been dismissed within sixty (60) days of the filing thereof;
or an order, order for relief, judgment or decree shall be entered by any court of competent
jurisdiction or other competent authority approving or ordering any of the foregoing actions; or
(i) A judgment in excess of Five Hundred Thousand Dollars ($500,000.00) or One Million Dollars
($1,000,000.00) when aggregated with all other judgments against Borrower and any Subsidiary shall
be rendered against Borrower or any Subsidiary and shall remain undischarged, undismissed and
unstayed for more than ten days (except judgments validly covered by insurance with a deductible of
not more than Fifty Thousand Dollars ($50,000.00) or there shall occur any levy upon, or
attachment, garnishment or other seizure of, any portion of the Collateral or other assets of
Borrower or any Subsidiary; or
(j) Loss, theft, damage or destruction of any material portion of the tangible Collateral for
which there is either no insurance coverage or for which, in the reasonable opinion of Bank, there
is insufficient insurance coverage;
(k) Any default by Borrower under any Material Contract, which default continues for more than
the applicable cure period, if any, with respect thereto and which results in the right of any
party thereto to terminate such Material Contract or cease performing under such Material Contract;
(l) Any material provision hereof or of any of the other Loan Documents shall for any reason
cease to be valid, binding and enforceable with respect to any
51
party hereto or thereto (other than Bank) in accordance with its terms, or any such party
shall challenge the enforceability hereof or thereof, or shall assert in writing, or take any
action or fail to take any action based on the assertion that any provision hereof or of any of the
other Loan Documents has ceased to be or is otherwise not valid, binding or enforceable in
accordance with its terms, or any security interest provided for herein or in any of the other Loan
Documents shall cease to be a valid and perfected first priority security interest in any of the
Collateral purported to be subject thereto (except as otherwise permitted herein or therein);
(m) An ERISA Event shall occur which results in or could reasonably be expected to result in
liability of Borrower in an aggregate amount in excess of $1,000,000;
(n) Any Change of Control; or
(o) There shall occur any change in the condition (financial or otherwise) of Borrower which
could reasonably be expected to have a Material Adverse Effect.
8.2
Remedies
. If any Event of Default shall occur, Bank may, without notice to
Borrower, at its option, withhold further Loans or other extensions of credit to Borrower. If an
Event of Default shall have occurred and be continuing, Bank may at its option take any or all of
the following actions:
(a) Bank may declare any or all Obligations (other than Obligations under any Swap Agreements,
between Borrower and Bank or any Affiliate of Bank, which shall be due in accordance with and
governed by the provisions of said Swap Agreements) to be immediately due and payable (if not
earlier demanded), terminate its obligation to make Loans and other extensions of credit to
Borrower, reduce the maximum amount of Revolver Loans available to Borrower, bring suit against
Borrower to collect the Obligations, exercise any remedy available to Bank hereunder or at law and
take any action or exercise any remedy provided herein or in any other Loan Document or under
applicable law. No remedy shall be exclusive of other remedies or impair the right of Bank to
exercise any other remedies.
(b) Without waiving any of its other rights hereunder or under any other Loan Document, Bank
shall have all rights and remedies of a secured party under the Code (and the Uniform Commercial
Code of any other applicable jurisdiction) and such other rights and remedies as may be available
hereunder, under other applicable law or pursuant to contract. If requested by Bank, Borrower will
promptly assemble the Collateral and make it available to Bank at a place to be designated by Bank.
Borrower agrees that any notice by Bank of the sale or disposition of the Collateral or any other
intended action hereunder, whether required by the Code or otherwise, shall constitute reasonable
notice to Borrower if the notice is mailed to Borrower by regular or certified mail, postage
prepaid, at least five days before the action to be taken. Borrower shall be liable for any
deficiencies in the event the proceeds of the disposition of the Collateral do not satisfy the
Obligations in full.
(c) Bank may demand, collect and sue for all amounts owed pursuant to Accounts, General
Intangibles, Chattel Paper, Instruments, Documents or for
52
proceeds of any Collateral (either in Borrowers name or Banks name at the latters option),
with the right to enforce, compromise, settle or discharge any such amounts.
8.3
Receiver
. In addition to any other remedy available to it, Bank shall have the
absolute right, upon the occurrence of an Event of Default, to seek and obtain the appointment of a
receiver to take possession of and operate and/or dispose of the business and assets of Borrower
and any costs and expenses incurred by Bank in connection with such receivership shall bear
interest at the Default Rate, at Banks option, and shall be secured by all Collateral.
8.4
Deposits
. After the occurrence of an Event of Default, Borrower authorizes Bank to
collect and apply against the Obligations when due any cash or Deposit Accounts in its possession.
8.5
Insurance
. At its option, Bank may apply any insurance proceeds received by Bank
at any time to the cost of repairs or replacement of Collateral and/or to payment of the
Obligations, whether or not then due, in any order and in such manner as Bank may determine or hold
such proceeds as cash collateral for the Obligations,
except
that
notwithstanding
anything to the contrary contained herein, if any Equipment is physically damaged or destroyed,
upon the written request of Borrower, Bank shall release the net cash proceeds from insurance
received by Bank pursuant to this Section 8.5 to Borrower as a result of such damage or destruction
to the extent necessary for the repair, refurbishing or replacement of such Equipment,
provided
,
that
, each of the following conditions is satisfied: (i) no Event of
Default shall exist or have occurred and be continuing at the time immediately before or after
giving effect to such release, (ii) such proceeds shall be used solely to repair, refurbish or
replace the property so damaged or destroyed (free and clear of any security interests, liens,
claims or other encumbrances), (iii) the repair, refurbishing or replacement of the property so
damaged or destroyed shall be commenced as soon as reasonably practicable and shall be diligently
pursued to satisfactory completion, (iv) the proceeds shall be held by Bank as cash collateral for
the Obligations and shall be disbursed from such cash collateral from time to time as needed
and/or, at Banks option, released by Bank directly to the contractor, subcontractor, materialmen,
laborers, engineers, architects and other Persons rendering services or materials to repair,
refurbish or replace the property so damaged or destroyed, (v) the amount of the insurance proceeds
and Borrowers unrestricted cash available for such purposes are sufficient in Banks reasonable
determination, to allow Borrower to effect such repair, refurbishing or replacement in a
satisfactory manner, (vi) the repair, refurbishing or replacement to which the proceeds are applied
shall cause the Equipment so damaged or destroyed to be of at least equal value and substantially
the same character as prior to such damage or destruction, (vii) the casualty shall have resulted
in payment of Three Hundred Thousand Dollars ($300,000.00) in insurance proceeds or less, and
(viii) such repair, refurbishing or replacement can, in the good faith estimate of Bank, be
completed prior to the end of the then current term of this Agreement. Upon completion of the work
and payment in full therefor, or upon the failure to commence, or diligently to continue the work
or the replacement of the Collateral, Bank may, at Banks option and after prior notice to
Borrower, either apply the amount of any such proceeds then or thereafter in the possession of Bank
to the payment of the Obligations or hold such proceeds as cash collateral for the Obligations,
provided
,
that
, nothing contained herein shall limit the right of Bank to apply any
or all of such proceeds to the Obligations at any time an Event of Default shall exist or have
occurred and be continuing. Bank
53
is granted a power of attorney by Borrower with full power of substitution to file any proof
of loss in Borrowers or Banks name, to endorse Borrowers name on any check, draft or other
instrument evidencing insurance proceeds, and to take any action or sign any document to pursue any
insurance loss claim. Such power being coupled with an interest is irrevocable.
9.
Security Agreement
.
9.1
Security Interest
.
(a) As security for the payment and performance of any and all Obligations and the performance
of all obligations and covenants of Borrower to Bank and its Affiliates, whether hereunder and
under the other Loan Documents, Swap Agreements between Bank or any Affiliate of Bank and Borrower
or otherwise, certain or contingent, now existing or hereafter arising, which are now, or may at
any time or times hereafter be owing by Borrower to Bank or any of Banks Affiliates, Borrower
hereby grants to Bank (for itself and its Affiliates) a continuing security interest in and general
lien upon and right of set-off against, all right, title and interest of Borrower in and to the
Collateral, whether now owned or hereafter acquired by Borrower.
(b) Except as herein or by applicable law otherwise expressly provided, Bank shall not be
obligated to exercise any degree of care in connection with any Collateral in its possession, to
take any steps necessary to preserve any rights in any of the Collateral or to preserve any rights
therein against prior parties, and Borrower agrees to take such steps. In any case Bank shall be
deemed to have exercised reasonable care if it shall have taken such steps for the care and
preservation of the Collateral or rights therein as Borrower may have reasonably requested Bank to
take and Banks omission to take any action not requested by Borrower shall not be deemed a failure
to exercise reasonable care. No segregation or specific allocation by Bank of specified items of
Collateral against any liability of Borrower shall waive or affect any security interest in or Lien
against other items of Collateral or any of Banks options, powers or rights under this Agreement
or otherwise arising.
(c) Bank may at any time and from time to time, with or without notice to Borrower, (i)
transfer into the name of Bank or the name of Banks nominee any of the Collateral, (ii) notify any
Account Debtor or other obligor of any Collateral to make payment thereon direct to Bank of any
amounts due or to become due thereon and (iii) receive and direct the disposition of any proceeds
of any Collateral.
(d) Notwithstanding the foregoing, (i) no Account, Instrument, Chattel Paper or other
obligation or property of any kind due from, owed by or belonging to, a Sanctioned Person or (ii)
no lease in which the lessee is a Sanctioned Person shall be Collateral or shall be credited toward
the payment of the Obligations.
9.2
Financing Statements; Power of Attorney
. Borrower authorizes Bank at Borrowers
expense to file any financing statements and/or amendments thereto relating to the Collateral
(without Borrowers signature thereon) which Bank deems appropriate that (a) indicate the
Collateral (i) as all assets of Borrower or words of similar effect, if appropriate, regardless
of whether any particular asset comprised in the Collateral falls within the scope of
54
Article 9 of the Code, or (ii) by specific Collateral category, and (b) provide any other
information required by part 5 of Article 9 of the Code for the sufficiency or filing office
acceptance of any financing statement or amendment. Borrower irrevocably appoints Bank as its
attorney-in-fact to execute any such financing statements and/or control agreements in Borrowers
name and to perform all other acts, at Borrowers expense, which Bank deems appropriate to perfect
and to continue perfection of the security interest of Bank. Borrower hereby appoints Bank as
Borrowers attorney-in-fact to endorse, present and collect on behalf of Borrower and in Borrowers
name any draft, checks or other documents necessary or desirable to collect any amounts which
Borrower may be owed. Bank is hereby granted a license or other right to use, without charge,
Borrowers labels, patents, copyrights, rights of use of any name, trade secrets, trade names,
trademarks and advertising matter, or any Property of a similar nature, as it pertains to the
Collateral, in advertising for sale and selling any Collateral, and Borrowers rights under all
licenses and all franchise agreements shall inure to Banks benefit. The proceeds realized from the
sale or other disposition of any Collateral may be applied, after allowing two (2) Business Days
for collection, first to the reasonable costs, expenses and attorneys fees and expenses incurred
by Bank for collection and for acquisition, completion, protection, removal, storage, sale and
delivering of the Collateral; secondly, to interest due upon any of the Obligations; and thirdly,
to the principal amount of the Obligations and to any other Obligations then outstanding. If any
deficiency shall arise, Borrower shall remain jointly and severally liable to Bank therefor.
9.3
Entry
. Borrower hereby irrevocably consents to any act by Bank or its agents in
entering upon any premises for the purposes of either (a) inspecting the Collateral or (b) if an
Event of Default has occurred and is continuing, taking possession of the Collateral, and in such
event Borrower hereby waives its right to assert against Bank or its agents any claim based upon
trespass or any similar cause of action for entering upon any premises where the Collateral may be
located. Bank agrees that, if an Event of Default has not occurred and is not continuing, Bank will
provide Borrower with twenty-four (24) hours prior notice of inspections and will conduct
inspections only during normal business hours,
9.4
Other Rights
. Borrower authorizes Bank without affecting Borrowers obligations
hereunder or under any other Loan Document from time to time (a) to take from any party and hold
additional Collateral or guaranties for the payment of the Obligations or any part thereof, and to
exchange, enforce or release such collateral or guaranty of payment of the Obligations or any part
thereof and to release or substitute any endorser or guarantor or any party who has given any
security interest in any collateral as security for the payment of the Obligations or any part
thereof or any party in any way obligated to pay the Obligations or any part thereof; and (b) upon
the occurrence of any Event of Default to direct the manner of the disposition of the Collateral
and the enforcement of any endorsements, guaranties, letters of credit or other security relating
to the Obligations or any part thereof as Bank in its sole discretion may determine.
9.5
Accounts
. At any time after the occurrence and during the continuance of an Event
of Default, Bank may notify any Account Debtor of Banks security interest and may direct such
Account Debtor to make payment directly to Bank for application against the Obligations. Any such
payments received by or on behalf of Borrower at any time, whether before or after default, shall
be the property of Bank, shall be held in trust for Bank and not
55
commingled with any other assets of any Person (except to the extent they may be commingled
with other assets of Borrower in an account with Bank) and shall be immediately delivered to Bank
in the form received. Bank shall have the right to apply any proceeds of Collateral to such of the
Obligations as it may determine.
9.6
Waiver of Marshaling
. Borrower hereby waives any right it may have to require
marshaling of its assets.
9.7
Control
. Borrower will cooperate with Bank in obtaining control of, or control
agreements with respect to, Collateral for which control or a control agreement is required for
perfection of the Banks security interest under the Code.
10.
Miscellaneous
.
10.1
No Waiver, Remedies Cumulative
. No failure on the part of Bank to exercise, and
no delay in exercising, any right hereunder or under any other Loan Document shall operate as a
waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other
or further exercise thereof or the exercise of any other right. The remedies herein provided are
cumulative and are in addition to any other remedies provided by law, any Loan Document or
otherwise.
10.2
Survival of Representations
. All representations and warranties made herein
shall survive the making of the Loan hereunder and the delivery of the Note, and shall continue in
full force and effect so long as any Obligations is outstanding, there exists any commitment by
Bank to Borrower, and until this Agreement is formally terminated in writing.
10.3
Indemnity By Borrower; Expenses
. In addition to all other Obligations, Borrower
agrees to defend, protect, indemnify and hold harmless Bank and its Affiliates and all of their
respective officers, directors, employees, attorneys, consultants and agents from and against any
and all losses, damages, liabilities, obligations, penalties, fines, fees, costs and expenses
(including, without limitation, attorneys and paralegals fees, costs and expenses, and fees,
costs and expenses for investigations and experts) incurred by such indemnitees, whether prior to
or from and after the date hereof, as a result of or arising from or relating to (a) the due
diligence effort (including, without limitation, public record search, recording fees, examinations
and investigations of the properties of Borrower and Borrowers operations), negotiation,
preparation, execution and/or performance of any of the Loan Documents or of any document executed
in connection with the transactions contemplated thereby and the perfection of Banks Liens in the
Collateral, maintenance of the Loan by Bank, and any and all amendments, modifications, and
supplements of any of the Loan Documents or restructuring of the Obligations, (b) any suit,
investigation, action or proceeding by any Person (other than Borrower), whether threatened or
initiated, asserting a claim for any legal or equitable remedy against any Person under any
statute, regulation or common law principle, arising from or in connection with Banks furnishing
of funds to Borrower under this Agreement, (c) Banks preservation, administration and enforcement
of its rights under the Loan Documents and applicable law, including the reasonable fees and
disbursements of counsel for Bank in connection therewith, whether suit be brought or not and
whether incurred at trial or on appeal, and all costs of repossession, storage, disposition,
protection and collection of Collateral, (d)
56
periodic field exams, audits and appraisals performed by Bank pursuant to Section 5.5 hereof,
(e) any civil penalty or fine assessed by OFAC against Bank or any Affiliate of Bank and all
reasonable costs and expense (including counsel fees and disbursements) incurred in connection with
defense thereof by Bank or such Affiliate, as a result of the funding of Loans or the extension of
credit, the acceptance of payments due under the Loan Documents or any Swap Agreement or acceptance
of Collateral, and/or (f) any matter relating to the financing transactions contemplated by the
Loan Documents or by any document executed in connection with the transactions contemplated
thereby, other than for such loss, damage, liability, obligation, penalty, fee, cost or expense
arising from such indemnitees gross negligence or willful misconduct. If Borrower should fail to
pay any tax or other amount required by this Agreement to be paid or which may be reasonably
necessary to protect or preserve any Collateral or Borrowers or Banks interests therein, Bank may
make such payment and the amount thereof shall be payable on demand, may at Banks option be
debited against any Deposit Account of Borrower at Bank or converted to a Loan hereunder, shall
bear interest at the Default Rate from the date of demand until paid and shall be deemed to be
Obligations entitled to the benefit and security of the Loan Documents. In addition, Borrower
agrees to pay and save Bank harmless against any liability for payment of any state documentary
stamp taxes, intangible taxes or similar taxes (including interest or penalties, if any) which may
now or hereafter be determined to be payable in respect to the execution, delivery or recording of
any Loan Document or the making of any Loan, whether originally thought to be due or not, and
regardless of any mistake of fact or law on the part of Bank or Borrower with respect to the
applicability of such tax. Borrowers obligation for indemnification for all of the foregoing
losses, damages, liabilities, obligations, penalties, fees, costs and expenses of Bank shall be
part of the Obligations, secured by the Collateral, chargeable against Borrowers loan account, and
shall survive termination of this Agreement.
10.4
Notices
. Any notice or other communication hereunder or under the Note to any
party hereto or thereto shall be by hand delivery, overnight delivery via nationally recognized
overnight delivery service, facsimile with receipt confirmed, telegram, telex or registered or
certified United States mail with return receipt and unless otherwise provided herein shall be
deemed to have been given or made when delivered, telegraphed, telexed, faxed or, if sent via
United States mail, when receipt signed by the receiver, postage prepaid, addressed to the party at
its address specified below (or at any other address that the party may hereafter specify to the
other parties in writing):
|
|
|
If to Borrower:
|
|
Impax Laboratories, Inc.
|
|
|
121 New Britain Blvd.
|
|
|
Chalfont, Pennsylvania 18914
|
|
|
Attention: Mr. Arthur A. Koch, Jr.
|
|
|
Telephone No.: 215-933-0351
|
|
|
Telecopy No.: 215-933-0359
|
|
|
|
with a copy to:
|
|
Dilworth Paxson LLP
|
|
|
3200 Mellon Bank Center
|
|
|
1735 Market Street
|
|
|
Philadelphia, Pennsylvania 19103-7595
|
|
|
Attention: Roger F. Wood, Esq.
|
57
|
|
|
|
|
Telephone No. 215-575-7068
|
|
|
Telecopy No.: 215-575-7200
|
|
|
|
If to Bank:
|
|
Wachovia Bank, National Association
|
|
|
One South Broad Street
|
|
|
PA 4812
|
|
|
Philadelphia, PA 19107
|
|
|
Attention: Margaret A. Byrne, Vice President
|
|
|
Telephone No.: 267-321-6673
|
|
|
Telecopy No. 267-321-6741
|
|
|
|
with a copy to:
|
|
Wolf, Block, Schorr & Solis-Cohen LLP
|
|
|
1650 Arch Street
|
|
|
Philadelphia, PA 19103-2097
|
|
|
Attention: Richard Zucker, Esq.
|
|
|
Telephone No.: 215-977-2479
|
|
|
Telecopy No.: 215-405-3908
|
10.5
Governing Law
. This Agreement and the Loan Documents shall be deemed contracts
made under the laws of the State of the Jurisdiction and shall be governed by and construed in
accordance with the laws of said state (excluding its conflict of laws provisions if such
provisions would require application of the laws of another jurisdiction) except insofar as the
laws of another jurisdiction may, by reason of mandatory provisions of law, govern the perfection,
priority and enforcement of security interests in the Collateral.
10.6
Successors and Assigns
. This Agreement shall be binding upon and shall inure to
the benefit of Borrower and Bank, and their respective successors and assigns; provided, that
Borrower may not assign any of its rights hereunder without the prior written consent of Bank, and
any such assignment made without such consent will be void.
10.7
Counterparts; Telecopied Signatures
. This Agreement may be executed in any
number of counterparts and by different parties hereto in separate counterparts, each of which when
so executed and delivered shall be deemed an original and all of which when taken together shall
constitute but one and the same instrument. Any signature delivered by a party by facsimile
transmission shall be deemed to be an original signature hereto.
10.8
No Usury
. Regardless of any other provision of this Agreement, the Note or in any
other Loan Document, if for any reason the effective interest should exceed the maximum lawful
interest, the effective interest shall be deemed reduced to, and shall be, such maximum lawful
interest, and (a) the amount which would be excessive interest shall be deemed applied to the
reduction of the principal balance of the Note and not to the payment of interest, and (b) if the
loan evidenced by the Note has been or is thereby paid in fall, the excess shall be returned to the
party paying same, such application to the principal balance of the Note or the refunding of excess
to be a complete settlement and acquittance thereof.
10.9
Powers
. All powers of attorney granted to Bank are coupled with an interest and
are irrevocable.
58
10.10
Approvals; Amendments
. If this Agreement calls for the approval or consent of
Bank, such approval or consent may be given or withheld in the reasonable discretion of Bank unless
otherwise specified herein. This Agreement and the other Loan Documents may not be modified,
altered or amended, except by an agreement in writing signed by Borrower and Bank and may not be
modified in any manner adverse to a provider under any secured or guarantied Swap Agreement without
that providers prior written consent.
10.11
Participations and Assignments
. Upon prior notice to Borrower, Bank shall have
the right to enter into one or more participation with other lenders with respect to the
Obligations and to assign to one or more assignees all or a portion of its interest, rights and
obligations under the Loan Documents. Upon prior notice to Borrower of such participation or
assignment, Borrower shall thereafter furnish to such participant or assignee any information
famished by Borrower to Bank pursuant to the terms of the Loan Documents. Nothing in this Agreement
or any other Loan Document shall prohibit Bank from pledging or assigning this Agreement and Banks
rights under any of the other Loan Documents, including collateral therefor, to any Federal Reserve
Bank in accordance with applicable law.
10.12
Waiver of Certain Defenses
. To the fullest extent permitted by applicable law,
upon the occurrence of any Event of Default, neither Borrower nor anyone claiming by or under
Borrower will claim or seek to take advantage of any other law requiring Bank to attempt to realize
upon any Collateral or collateral of any surety or guarantor, or any appraisement, evaluation,
stay, extension, homestead, redemption or exemption laws now or hereafter in force in order to
prevent or hinder the enforcement of this Agreement. Borrower, for itself and all who may at any
time claim through or under Borrower, hereby expressly waives to the fullest extent permitted by
law the benefit of all such laws. All rights of Bank and all obligations of Borrower hereunder
shall be absolute and unconditional irrespective of (a) any change in the time, manner or place of
payment of, or any other term of, all or any of the Obligations, or any other amendment or waiver
of or any consent to any departure from any provision of the Loan Documents, (b) any exchange,
release or non-perfection of any other collateral given as security for the Obligations, or any
release or amendment or waiver of or consent to departure from any guaranty for all or any of the
Obligations, or (c) any other circumstance which might otherwise constitute a defense available to,
or a discharge of, Borrower or any third party, other than payment and performance in full of the
Obligations.
10.13
Integration; Final Agreement
. This Agreement and the other loan documents
represent the final agreement between the parties and may not be contradicted by evidence of prior,
contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral
agreements between the parties.
10.14
LIMITATION ON LIABILITY; WAIVER OF PUNITIVE DAMAGES
. EACH OF THE PARTIES HERETO,
INCLUDING BANK BY ACCEPTANCE HEREOF, AGREES THAT IN ANY JUDICIAL, MEDIATION OR ARBITRATION
PROCEEDING OR ANY CLAIM OR CONTROVERSY BETWEEN OR AMONG THEM (A DISPUTE) THAT MAY ARISE OUT OF OR
BE IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENT OR DOCUMENT
BETWEEN AMONG THEM OR THE OBLIGATIONS EVIDENCED HEREBY OR RELATED HERETO, IN NO EVENT SHALL ANY
PARTY HAVE A REMEDY OF, OR BE LIABLE TO THE
59
OTHER FOR, (1) INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OR (2) PUNITIVE OR EXEMPLARY
DAMAGES. EACH OF THE PARTIES HEREBY EXPRESSLY WAIVES ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY
DAMAGES THEY MAY HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY DISPUTE, WHETHER THE
DISPUTE IS RESOLVED BY ARBITRATION, MEDIATION, JUDICIALLY OR OTHERWISE.
10.15
WAIVER OF JURY TRIAL
. TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF
BORROWER BY EXECUTION HEREOF AND BANK BY ACCEPTANCE HEREOF, KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVES ANY RIGHT EACH MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED
ON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY
AGREEMENT CONTEMPLATED TO BE EXECUTED IN CONNECTION WITH THIS AGREEMENT OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY WITH RESPECT
HERETO. THIS PROVISION IS A MATERIAL INDUCEMENT TO BANK TO ENTER INTO AND ACCEPT THIS AGREEMENT.
EACH OF THE PARTIES AGREES THAT THE TERMS HEREOF SHALL SUPERSEDE AND REPLACE ANY PRIOR AGREEMENT
RELATED TO ARBITRATION OF DISPUTES BETWEEN THE PARTIES CONTAINED IN ANY LOAN DOCUMENT OR ANY OTHER
DOCUMENT OR AGREEMENT HERETOFORE EXECUTED IN CONNECTION WITH, RELATED TO OR BEING REPLACED,
SUPPLEMENTED, EXTENDED OR MODIFIED BY, THIS AGREEMENT.
10.16
Amendment and Restatement of Existing Loan Agreement
.
(a)
Amendment and Restatement
. This Agreement constitutes an amendment and complete
restatement of the Existing Loan Agreement.
(b)
No Termination; No Release. Etc
.
(i) The other Existing Loan Documents, to the extent not amended or otherwise explicitly
terminated or released in connection with the execution of this Agreement or any of the other Loan
Documents, are valid, binding and in full force and effect as of the date hereof.
(ii) Neither this Agreement nor any other Loan Document shall be deemed or construed to be a
compromise, satisfaction, novation or release of the Existing Loan Agreement or any other Existing
Loan Documents or any rights or obligations hereunder or thereunder, to the extent not amended or
otherwise explicitly terminated in connection with the execution of this Agreement or the other
Loan Documents, nor shall the credit facilities under this Agreement be deemed to be a repayment of
any of the indebtedness evidenced thereby. The credit facilities under this Agreement are amending
and restating, in accordance with the terms and conditions of this Agreement, the obligations
evidenced and secured by the Existing Loan Agreement.
60
(iii) All liens, security interests, rights and remedies granted to the lender under the
Existing Loan Agreement or any other Existing Loan Documents, to the extent not amended or
otherwise explicitly terminated in connection with the execution of this Agreement or the other
Loan Documents, are hereby ratified, confirmed and continued and shall secure the performance by
Obligors of their obligations under this Agreement and all of the other Loan Documents.
(iv) Borrower has no defense, setoff, counterclaim or challenge against the payment of any
sums owing under the Existing Loan Agreement or the other Existing Loan Documents or the
enforcement of any of the terms and conditions thereof.
(c)
Existing Loan Agreement Revolver Loans
. Loans outstanding under the Existing Loan
Agreement on the date immediately prior to the Closing Date shall be deemed Revolver Loans
outstanding under this Agreement on the Closing Date.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
61
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of
the day and year first above written.
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IMPAX LABORATORIES, INC.
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By:
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/s/ Arthur A. Koch, Jr.
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Arthur A. Koch, Jr.
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Chief Financial Officer, Senior Vice
President and Corporate Secretary
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Accepted in Philadelphia, PA:
WACHOVIA BANK, NATIONAL
ASSOCIATION
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By:
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/s/ Margaret A. Byrne
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Margaret Byrne, Vice President
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[SIGNATURE PAGE TO AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT]
SCHEDULE OF EXHIBITS
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EXHIBIT
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SECTION REFERENCE
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TITLE
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A-1
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2.1.2
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Revolver Note
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Article 3
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3.1.2(f)
(Supporting Documents)
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Borrower
Information Certificate
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Article 5
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5.6(a)
(Periodic Borrowing Base
Information)
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Borrowing
Base Certificate
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5.6(e)
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5.6(e) (Compliance and No
Default Certificates)
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Compliance and No Default
Certificates
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EXHIBIT A-1
REVOLVER NOTE
SEE ATTACHED
REVOLVER NOTE
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$35,000,000.00
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December 15, 2005
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FOR VALUE RECEIVED, the undersigned IMPAX LABORATORIES, INC., a corporation organized under the
laws of Delaware, (
Borrower
), promises to pay to the order of WACHOVIA BANK, NATIONAL ASSOCIATION
(
Bank
) at the place and times provided in the Agreement referred to below, the principal sum of
THIRTY-FIVE MILLION DOLLARS ($35,000,000.00) or the principal amount of all Revolver Loans made by
Bank from time to time pursuant to that certain Amended and Restated Loan and Security Agreement
dated as of December 15, 2005 (as amended, restated or otherwise modified, the
Agreement
) by and
between Borrower and Bank. Capitalized terms used herein and not defined herein shall have the
meanings assigned thereto in the Agreement.
The unpaid principal amount of this Revolver Note from time to time outstanding is subject to
mandatory repayment from time to time as provided in the Agreement and shall bear interest as
provided in the Agreement. All payments of principal and interest on this Revolver Note shall be
payable to Bank or the holder of this Revolver Note in lawful currency of the United States of
America in immediately available funds in the manner and location indicated in the Agreement or
wherever else Bank or such holder may specify.
This Revolver Note is entitled to the benefits of, and evidences Obligations incurred under, the
Agreement, to which reference is made for a description of the security for this Revolver Note and
for a statement of the terms and conditions on which Borrower is permitted and required to make
prepayments and repayments of principal of the Obligations evidenced by this Revolver Note and on
which such Obligations may be declared to be immediately due and payable.
This Revolver Note shall be governed, construed and enforced in accordance with the laws of the
Commonwealth of Pennsylvania, without reference to the conflicts or choice of law principles
thereof.
Borrower hereby waives all requirements as to diligence, presentment, demand of payment, protest
and (except as required by the Agreement) notice of any kind with respect to this Revolver Note.
BORROWER HEREBY AUTHORIZES AND EMPOWERS ANY ATTORNEY OR THE PROTHONOTARY OR CLERK OF ANY COURT IN
THE COMMONWEALTH OF PENNSYLVANIA, OR IN ANY OTHER JURISDICTION WHICH PERMITS THE ENTRY OF JUDGMENT
BY CONFESSION, TO APPEAR FOR BORROWER AT ANY TIME AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER
THE AGREEMENT IN ANY ACTION BROUGHT AGAINST BORROWER ON THIS NOTE OR THE LOAN DOCUMENTS AT THE SUIT
OF BANK, WITH OR WITHOUT COMPLAINT OR DECLARATION FILED, WITHOUT STAY OF EXECUTION, AS OF ANY TERM
OR TIME, AM) THEREIN TO CONFESS OR ENTER JUDGMENT AGAINST BORROWER FOR THE ENTIRE UNPAID
OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE AND ALL OTHER SUMS TO BE PAID BY BORROWER TO OR ON BEHALF
OF BANK PURSUANT TO THE TERMS HEREOF OR OF THE LOAN DOCUMENTS AND ALL ARREARAGES OF INTEREST
THEREON, TOGETHER WITH ALL COSTS AND OTHER EXPENSES AND AN ATTORNEYS COLLECTION COMMISSION OF
FIFTEEN PERCENT (15%) OF THE AGGREGATE AMOUNT OF THE FOREGOING SUMS, BUT IN
NO EVENT LESS THAN $5,000.00; AND FOR SO DOING THIS NOTE OR A COPY HEREOF VERIFIED BY AFFIDAVIT
SHALL BE A SUFFICIENT WARRANT.
THE AUTHORITY GRANTED HEREIN TO CONFESS JUDGMENT SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF BUT
SHALL CONTINUE FROM TIME TO TIME AND AT ALL TIMES UNTIL PAYMENT IN FULL OF ALL THE AMOUNTS DUE
HEREUNDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED BY COUNSEL IN CONNECTION WITH THE
EXECUTION AND DELIVERY OF THIS NOTE AND THAT IT KNOWINGLY WAIVES ITS RIGHT TO BE HEARD PRIOR TO THE
ENTRY OF SUCH JUDGMENT AND UNDERSTANDS THAT, UPON SUCH ENTRY, SUCH JUDGMENT SHALL BECOME A LIEN ON
ALL REAL PROPERTY OF BORROWER IN THE COUNTY WHERE SUCH JUDGMENT IS ENTERED AND THAT EXECUTION MAY
IMMEDIATELY BE ISSUED ON THE JUDGMENT TO GARNISH, LEVY ON OR ATTACH ANY PERSONAL PROPERTY OF
BORROWER.
BORROWER WAIVES AND RELINQUISHES ALL ERRORS, DEFECTS AND IMPERFECTIONS IN THE ENTRY OF JUDGMENT AS
AFORESAID, OR IN ANY PROCEEDING PURSUANT THERETO, AND ALL BENEFITS THAT MAY ACCRUE TO BORROWER BY
VIRTUE OF ANY LAW OR RULE OF COURT RELATING TO A STAY OF EXECUTION OR EXEMPTING ANY PROPERTY FROM
LEVY OR SALE UNDER EXECUTION.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
2
IN WITNESS WHEREOF, the undersigned has executed this Revolver Note under seal as of the day and
year first written above.
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IMPAX LABORATORIES, INC.
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By:
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/s/ Arthur A. Koch, Jr.
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Arthur A. Koch, Jr.
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Chief Financial Officer, Senior Vice
President and Corporate Secretary
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[SIGNATURE PAGE TO REVOLVER NOTE]
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COMMONWEALTH OF PENNSYLVANIA
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:
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SS.
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COUNTY OF
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:
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On this, the
day of December, 2005 before me, a Notary Public, personally appeared Arthur A.
Koch, Jr., who acknowledged himself to be the Chief Financial Officer, Senior Vice President and
Corporate Secretary of Impax Laboratories, Inc. corporation, and that he as such officer, being
authorized to do so, executed the foregoing instrument for the purposes therein contained by
signing the name of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
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Notary Public
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My commission expires:
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Exhibit 5.6(a)
BORROWING BASE CERTIFICATE
SEE ATTACHED
Exhibit 5.6(e)
COMPLIANCE AND NO DEFAULT CERTIFICATES
In accordance with the terms of the Amended and Restated Loan and Security Agreement dated
, 2005 (the Loan Agreement) by and between Wachovia Bank, National Association
and IMPAX LABORATORIES (Borrower), I hereby certify that:
1.
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I am the President [chief financial officer] of Borrower;
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2.
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The enclosed financial statements are prepared in accordance with generally accepted
accounting principles;
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3.
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No Default (as defined in the Loan Documents) or any event which, upon the giving of notice
or lapse of time or both, would constitute such a Default, has occurred.
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4.
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Borrower is in compliance with the Financial Covenant(s) set forth in the Loan Agreement, as
demonstrated by the calculations contained in the Covenant Compliance Certificate attached
hereto as Schedule 1.
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SCHEDULE 1
COVENANT COMPLIANCE CERTIFICATE
Borrower Name: IMPAX LABORATORIES INC.
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For the fiscal
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ended
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(enter text; i.e., year, quarter)
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ALL CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN IN THE LOAN
AGREEMENT.
[Insert Financial Covenant Calculations]
EXHIBIT 10.2
$75,000,000
IMPAX LABORATORIES, INC.
3.50% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2012
PURCHASE AGREEMENT
June 26, 2005
To the purchasers set forth on Schedule I hereto.
Dear Sirs and Mesdames:
Impax Laboratories, Inc., a Delaware corporation (the COMPANY), confirms its agreement with
respect to the proposed issuance and sale to the several purchasers named in Schedule I hereto
(each, a PURCHASER and collectively, the PURCHASERS) of $75,000,000 principal amount of the
Companys 3.50% Convertible Senior Subordinated Debentures Due 2012 (the SECURITIES) to be issued
pursuant to the provisions of an Indenture to be dated as of June 27, 2005 (the INDENTURE)
between the Company and HSBC Bank USA, National Association, as Trustee (the TRUSTEE). The
Securities will be convertible into shares (the UNDERLYING SECURITIES) of common stock, par value
$.01 per share, of the Company (the COMMON STOCK).
The Securities are being issued and sold to the Purchasers in compliance with an exemption from
registration under the Securities Act of 1933, as amended (the SECURITIES ACT).
Pursuant to the terms of the Securities and the Indenture, the Securities may be resold or
otherwise transferred only if the resale or transfer is hereinafter registered under the Securities
Act or an exemption from registration under the Securities Act is available. The Purchasers and
their permitted transferees will be entitled to the benefits of a Registration Rights Agreement
dated as of the Closing Date (as defined herein) among the Company and the Purchasers (the
REGISTRATION RIGHTS AGREEMENT and collectively with this Agreement, the Indenture and the
Securities, the TRANSACTION DOCUMENTS).
1. Representations and Warranties. The Company represents and warrants to, and agrees with, the
Purchasers that, except as disclosed in the disclosure schedule attached to this Purchase Agreement
(the DISCLOSURE SCHEDULE), the Exchange Act Documents (as defined in Section 1(a) of this
Purchase Agreement) or the 8-K Filing (as defined in Section 6(k) of this Purchase Agreement):
(a) Each document, if any, filed with the Securities and Exchange Commission (the COMMISSION)
pursuant to the Securities Exchange Act of 1934, as amended (the EXCHANGE ACT), since January 1,
2003 (collectively, the EXCHANGE ACT DOCUMENTS) complied in all material respects with the
requirements of the Exchange Act and the applicable rules and regulations of the Commission
thereunder and, when taken together, do not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The Company has been duly incorporated, is validly existing as a corporation in good standing
under the laws of the State of Delaware, has the corporate power and authority to own its property
and to conduct its business as described in the Exchange Act Documents and is duly qualified as a
foreign corporation to transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires such qualification, except
to the extent that the failure to be so qualified or be in good standing would not have a Material
Adverse Effect. As used in this Agreement, MATERIAL ADVERSE EFFECT means any material adverse
effect on the business, assets, results of operations or condition (financial or otherwise) of the
Company or on the transactions contemplated hereby and in the Transaction Documents or on the
authority or ability of the Company to perform its obligations contemplated hereby or thereby.
(c) The Company has no direct or indirect subsidiaries.
(d) This Agreement has been duly authorized, executed and delivered by the Company and constitutes
the legal, valid and binding obligations of the Company, enforceable against it in accordance with
its terms, subject to applicable bankruptcy, insolvency, fraudulent conveyance or transfer,
reorganization, moratorium and similar laws affecting creditors rights and remedies generally, and
to general principles of equity, including principles of materiality, commercial reasonableness,
good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or
in equity) and except that rights to indemnification and contribution thereunder may be limited by
federal or state securities laws or public policy relating thereto that have not been previously
waived (collectively, the ENFORCEABILITY EXCEPTIONS).
(e) The authorized capital stock of the Company conforms in all material respects to the
description thereof contained in Section 1(e) of the Disclosure Schedule, and which description
conforms in all material respects to the rights in the instruments defining the same.
2
(f) The shares of Common Stock outstanding prior to the issuance of the Securities have been duly
authorized and are validly issued, fully paid and non-assessable.
(g) The Securities have been duly authorized and, when executed and authenticated in accordance
with the provisions of the Indenture and delivered to and paid for by the Purchasers in accordance
with the terms of this Agreement, will be valid and binding obligations of the Company, enforceable
in accordance with their terms, subject to the Enforceability Exceptions, and will be entitled to
the benefits of the Indenture and the Registration Rights Agreement.
(h) The Underlying Securities issuable upon conversion of the Securities have been duly authorized
and reserved and, when issued upon conversion of the Securities in accordance with the terms of the
Securities, will be validly issued, fully paid and non-assessable, and the issuance of the
Underlying Securities will not be subject to any preemptive or similar rights.
(i) Except for the registration rights contained in (A) the Registration Rights Agreement and (B)
(i) the Strategic Alliance Agreement dated June 27, 2001, between Teva Pharmaceuticals Curacao,
N.V. and Impax Laboratories, Inc. (ii) the Registration Rights Agreement dated as of June 27, 2001
by and between Impax Laboratories, Inc. and Teva Pharmaceuticals Curacao, N.V., and (iii) the
Registration Rights Agreement dated as of May 7, 2003 by and among the Company and the investors
named therein, the Company has not granted or agreed to grant to any person any rights (including
piggy-back registration rights) to have any securities of the Company registered with the
Commission or any other governmental authority that have not been satisfied or waived.
(j) Except for the Stockholders Agreement dated December 14, 1999 by and among Global
Pharmaceutical Corporation (known now as Impax Laboratories, Inc.) and the investors named therein,
as amended by Amendment No. 1 thereto dated as of March 23, 2000, there are no voting agreements,
voting trusts, proxies or other agreements or understandings with respect to the voting of any
capital stock of the Company of which the Company is a party.
(k) Each of the Indenture and the Registration Rights Agreement has been duly authorized, executed
and delivered by, and is a valid and binding agreement of, the Company enforceable in accordance
with its terms, subject to the Enforceability Exceptions.
(l) The execution and delivery by the Company of, and the performance by the Company of its
obligations under, the Transaction Documents will not contravene in any material respect any
provision of
3
applicable law or the certificate of incorporation or by-laws of the Company or any agreement or
other instrument binding upon the Company that is material to the Company for which a waiver or
consent has not been obtained, or any judgment, order or decree of any governmental body, agency or
court having jurisdiction over the Company, and no consent, approval, authorization or order of, or
qualification with, any governmental body or agency is required for the performance by the Company
of its obligations under the Transaction Documents, except such as may be required by the
securities or Blue Sky laws of the various states in connection with the offer and sale of the
Securities and by Federal and state securities laws with respect to the obligations of the Company
under the Registration Rights Agreement or as may be required by the National Association of
Securities Dealers, Inc. (NASD) or such the failure of which to obtain would not, individually or
in the aggregate, have a Material Adverse Effect.
(m) Since September 30, 2004, there has been no change or development that has had a Material
Adverse Effect. The Company has not taken any steps to seek protection pursuant to any bankruptcy
law nor does the Company have knowledge that its creditors intend to initiate involuntary
bankruptcy proceedings or knowledge of any fact which would reasonably lead a creditor to do so.
The Company is not as of the date hereof, and after giving effect to the transactions contemplated
hereby to occur at the Closing, will not be Insolvent. For purposes hereof, INSOLVENT shall have
the meaning specified in Section 271 of Article 10 of the New York Debtor and Creditor Law, as the
same has been construed by case law in existence as of the date hereof. All Indebtedness of the
Company as of May 31, 2005 is disclosed on Section 1(m) of the Disclosure Schedule. There has been
no material change in the Indebtedness since such date.
(n) The Company is not in violation of its certificate of incorporation or by-laws or in default in
the performance of any obligation, agreement, covenant or condition contained in any indenture,
loan agreement, mortgage, lease or other agreement or instrument that is material to the Company to
which the Company is a party or by which the Company or its properties or assets is subject or
bound, except for such defaults that would not, individually or in the aggregate, have a Material
Adverse Effect.
(o) There are no legal or governmental proceedings, orders, judgments, writs, injunctions, decrees
or demands pending or, to the Companys knowledge, threatened to which the Company is a party or to
which any of the properties or assets of the Company is subject or bound other than proceedings,
orders, judgments, writs, injunctions, decrees or
4
demands that would not, individually or in the aggregate, have a Material Adverse Effect.
(p) To the Companys knowledge, the Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants
(ENVIRONMENTAL LAWS), (ii) has received all permits, licenses or other approvals required of it
under applicable Environmental Laws to conduct its business, (iii) is in compliance with all
material terms and conditions of any such permit, license or approval, (iv) is in compliance with
any provisions of the Employee Retirement Income Security Act of 1974, as amended, (ERISA) or the
rules and regulations promulgated thereunder and (v) is in compliance with any provisions of the
U.S. Foreign Corrupt Practices Act of 1977, as amended, (the FOREIGN CORRUPT PRACTICE ACT) or the
rules and regulations promulgated thereunder, except, with respect to clauses (i) through (v),
where such noncompliance with Environmental Laws, failure to receive required permits, licenses or
other approvals, or noncompliance with ERISA or the Foreign Corrupt Practices Act or failure to
comply with the terms and conditions of such permits, licenses or approvals, would not,
individually or in the aggregate, have a Material Adverse Effect
(q) There are no costs or liabilities to the Company associated with Environmental Laws (including,
without limitation, any capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third parties) which would,
individually or in the aggregate, have a Material Adverse Effect.
(r) The Company is not, and after giving effect to the issuance and sale of the Securities and the
application of the proceeds thereof as contemplated in Section 3 hereof will not be, required to
register as an investment company as such term is defined in the Investment Company Act of 1940,
as amended.
(s) Neither the Company nor any of its affiliates (as defined in Rule 501(b) of Regulation D under
the Securities Act, each an AFFILIATE) has directly, or through any agent, (i) sold, offered for
sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in
the Securities Act) which is or will be integrated with the sale of the Securities in a manner that
would require the registration under the Securities Act of the Securities or
(ii) offered, solicited offers to buy or sold the Securities by any form of general solicitation or
general advertising (as those terms are used in Regulation D under the Securities Act) or in any
manner
5
involving a public offering within the meaning of Section 4(2) of the Securities Act.
(t) Subject to compliance by the Purchasers with the representations and warranties set forth in
Section 7, it is not necessary in connection with the offer, sale and delivery of the Securities to
the Purchasers in the manner contemplated by this Agreement to register the Securities under the
Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended.
(u) The Securities satisfy the requirements set forth in Rule 144A(d)(3) under the Securities Act.
(v) The books, records and accounts of the Company in all material respects accurately and fairly
reflect, in reasonable detail, the transactions in, and dispositions of, the assets of, and the
results of operations of, the Company. The Company maintains a system of accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed in accordance with
managements general or specific authorization, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (iii) access to assets is permitted only in
accordance with managements general or specific authorization and (iv) the recorded accountability
for assets is compared with existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(w) The Company owns or possesses, or has the right to use, all material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures), trademarks, service
marks, trade names and approved FDA new drug applications, approved abbreviated new drug
applications and approved new animal drug applications currently employed or required by it in
connection with the business currently conducted by it, or as currently proposed to be conducted,
as described in the Exchange Act Documents, except such as the failure to so own or possess or have
the right to use would not have, individually or in the aggregate, a Material Adverse Effect. To
the Companys knowledge, there are no valid and enforceable United States patents that are
infringed by the business currently conducted by the Company, or as currently proposed to be
conducted by the Company, as described in the Exchange Act Documents and which infringement would
have a Material Adverse Effect. The Company is not aware of any basis for a finding that the
Company does not have valid title or license rights to the patents and patent applications
referenced in the Exchange Act Documents as owned or licensed by the Company. To the
6
Companys knowledge, the Company is not subject to any judgment, order, writ, injunction or decree
of any court or any Federal, state, local, foreign or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, or any arbitrator, nor has it
entered into or are a party to any contract, which restricts or impairs the use of any of the
foregoing which would, individually or in the aggregate, have a Material Adverse Effect. The
Company is not aware of any prior art that may render any patent application owned by the Company
which has not been disclosed to the United States Patent and Trademark Office and which would,
individually or in the aggregate, have a Material Adverse Effect. The Company has not received any
written notice of infringement of or conflict with asserted rights of any third party with respect
to the business currently conducted by them as described in the Exchange Act Documents and which
would, individually or in the aggregate, have a Material Adverse Effect.
(x) Other than with respect to Environmental Laws and ERISA (which are governed by Section 1(p))
the Company has such permits, licenses, consents, exemptions, franchises, authorizations and other
approvals (each, an AUTHORIZATION) of, and has made all filings with and notices to, all
appropriate federal, state, local or foreign governmental or regulatory authorities and self
regulatory organizations and all courts and other tribunals, as are necessary to own, lease,
license and operate its respective properties and to conduct its business, except to the extent the
failure to have any such Authorization or to make any such filing or notice would not, individually
or in the aggregate, have a Material Adverse Effect. Each such Authorization is valid and in full
force and effect and the Company is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies having jurisdiction with
respect thereto, and no event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or, after notice or lapse of time or
both, would allow, revocation, suspension or termination of any such Authorization or results or,
after notice or lapse of time or both, would result in any other impairment of the rights of the
holder of any such Authorization except to the extent such failure to be valid and in full force
and effect or to be in compliance, the occurrence of any such event or the presence of any such
restriction would not, individually or in the aggregate, have a Material Adverse Effect.
(y) There are no outstanding subscriptions, rights, warrants, options, calls, convertible
securities, commitments of sale or liens granted or issued by the Company relating to or entitling
any person to purchase or otherwise to acquire any shares of the capital stock of the Company,
except for options granted to directors and employees of the Company in the ordinary course of
business since December 31, 2003.
7
(z) The financial statements included or incorporated by reference in the Exchange Act Documents,
together with related schedules and notes, present fairly in all material respects the financial
position, results of operations and changes in financial position of the Company on the basis
stated therein at the respective dates or for the respective periods to which they apply; such
statements and related schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data set forth in the Exchange Act
Documents are, in all material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
(aa) There are no existing or, to the Companys knowledge, threatened labor disputes with the
employees of the Company which would, individually or in the aggregate, have a Material Adverse
Effect.
(bb) The Companys manufacturing, distribution and marketing practices are in compliance with all
applicable laws, rules, regulations, orders, licenses, judgments, writs, injunctions, or decrees,
including, without limitation, laws and regulations administered by the United States Food and Drug
Administration (the FDA) and the Drug Enforcement Administration (DEA) and comparable
regulatory agencies in each country in which the Companys products are marketed, except for such
noncompliances that would not, individually or in the aggregate, have a Material Adverse Effect.
(cc) The Company has not and will not use the services of any person debarred under the provisions
of the Generic Drug Enforcement Act of 1992, 21 U.S.C. Section 335(a)(b). None of the Companys
officers or employees has been convicted of a felony under federal law for conduct relating to the
development, approval or regulation of any product subject to the Federal Food, Drug, and Cosmetic
Act or the Controlled Substances Act.
(dd) There are no rulemaking or similar proceedings before the FDA or comparable Federal, state,
local or foreign government bodies which involves the Company, which, if the subject of an action
unfavorable to the Company, would, individually or in the aggregate, have a Material Adverse
Effect.
(ee) The Company has not received any written communication notifying the Company as to the
termination or threatened termination or modification or threatened modification of any consulting,
licensing, marketing, research and development, cooperative or any similar agreement described in
the Exchange Act Documents.
8
(ff) The statements relating to legal matters or proceedings, as specified on Section 1(ff) of the
Disclosure Schedule, fairly summarize in all material respects such matters or proceedings as of
the date hereof.
(gg) Neither the Company, nor to the Companys knowledge, any of its officers, directors or
affiliates has taken, directly or indirectly, any action designed to or which has constituted the
stabilization or manipulation of the price of the Common Stock or any security convertible into or
exchangeable or exercisable for Common Stock to facilitate the sale or resale of any of the
Securities.
(hh) The Company has filed all Federal, state, local and foreign tax returns which are required to
be filed through the date hereof (except where the failure to so file would not have a material
adverse effect on the Company), which returns are true and correct in all material respects, or
have received extensions thereof, and have paid all taxes shown on such returns and all assessments
received by them to the extent that the same are material and have become due. To the Companys
knowledge, there are no tax audits or investigations pending, which if adversely determined, would,
individually or in the aggregate, have a Material Adverse Effect.
(ii) The Company is insured against such losses and risks and in such amounts as are customary in
the businesses in which it is engaged or currently proposes to engage including, but not limited
to, insurance covering clinical trial liability, product liability and real or personal property
owned or leased against theft, damage, destruction, act of vandalism and all other risks
customarily insured against. All policies of insurance and fidelity or surety bonds insuring the
Company or the Companys businesses, assets, employees, officers and directors are in full force
and effect. The Company is in compliance with the terms of such policies and instruments in all
material respects. The Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that would not,
individually or in the aggregate, have a Material Adverse Effect. Since January 1, 2003, the
Company has not been denied any insurance coverage which it has sought or for which it has applied.
(jj) The Company has good and marketable title in fee simple to all real property and good and
valid title to all personal property it purports to own, in each case free and clear of all liens,
encumbrances and defects except such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such property by the Company. Any real
property and buildings held under lease by the Company is held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere with
9
the use made and proposed to be made of such property and buildings by the Company.
(kk) There is no document, contract or other agreement of a character required to be filed with the
Commission under the Exchange Act which is not filed as required by the Exchange Act or the rules
and regulations of the Commission thereunder. Each description of a contract, document or other
agreement in the Exchange Act Documents fairly reflects in all material respects the material terms
of the underlying document, contract or agreement. Each material agreement described in the
Exchange Act Documents or incorporated by reference is in full force and effect and is valid and
enforceable by and against the Company in accordance with its terms.
(ll) Anything in this Agreement or elsewhere herein to the contrary notwithstanding, it is
understood and acknowledged by the Company (i) that none of the Purchasers have been asked to
agree, nor has any Purchaser agreed, to desist from purchasing or selling, long and/or short,
securities of the Company, or derivative securities based on securities issued by the Company or
to hold the Securities for any specified term and (ii) that any Purchaser, and counter parties in
derivative transactions to which any such Purchaser is a party, directly or indirectly, presently
may have a short position in the Common Stock. The Company further understands and acknowledges
that one or more Purchasers may engage in hedging activities at various times during the period
that the Securities are outstanding.
(mm) The Company confirms that, after giving effect to the 8-K Filing (as defined below), neither
it nor, to its knowledge, any officer, director or agent of the Company has provided any of the
Purchasers or their respective agents or counsel with any information that constitutes in the
Companys reasonable determination material, nonpublic information. The Company understands and
confirms that each of the Purchasers will rely on the foregoing representations in effecting
transactions relating to the Securities. All written disclosure provided to the Purchasers
regarding the Company, its business and the transactions contemplated hereby, including the
Schedules to this Agreement, furnished by or on behalf of the Company, taken as a whole, are true
and correct and do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading, except that at the request of the
Purchasers, the Company has not disclosed to the Purchasers information concerning the financial
condition, results of operations and cash flows of the Company as of and for the year ended
December 31, 2004 and as of and for the three months ended March 31, 2005. The Company acknowledges
and agrees that no Purchaser makes or
10
has made any representations or warranties with respect to the transactions contemplated hereby
other than those specifically set forth in Section 7.
2. Agreements to Sell and Purchase. On the basis of the representations and warranties contained in
this Agreement and subject to its terms and conditions, the Company hereby agrees to sell to the
several Purchasers, and each Purchaser, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees, severally and not jointly, to
purchase from the Company the respective principal amount of Securities set forth in Schedule I
hereto opposite its name at a purchase price of 100% of the principal amount thereof (the PURCHASE
PRICE).
3. Delivery of Proceeds. The proceeds to be delivered on the Closing Date (as defined in Section 4
hereof) in the aggregate amount of $75,000,000 (less the expenses of Highbridge International LLC
(the LEAD PURCHASER) payable pursuant to Section 6(b) hereof, as set forth on a schedule to be
provided by the Lead Purchaser to the Company prior to the Closing) shall be used only to satisfy
the payment obligations arising from the acceleration of the Companys 1.25% Convertible Senior
Subordinated Debentures due April 1, 2024, which satisfaction shall be effective simultaneously
with the Closing.
4. Payment and Delivery. Payment for the Securities shall be made to, or as directed by, the
Company in Federal or other funds immediately available in New York City against delivery of such
Securities for the respective accounts of the several Purchasers at 10:00 a.m., New York City time,
on June 27, 2005, or at such other time on the same or such other date as shall be mutually
agreeable to the Company and the Lead Purchaser. The time and date of such payment are hereinafter
referred to as the CLOSING DATE.
The Securities shall be in definitive form or global form, as specified by the Lead Purchaser, and
registered in such names and in such denominations as the applicable Purchaser shall request in
writing not later than one full Business Day prior to the Closing Date. The Securities shall be
delivered to each Purchaser on the Closing Date for the account of such Purchaser, with any
transfer taxes, if any, payable in connection with the transfer of the Securities to the Purchasers
duly paid, against payment of the Purchase Price therefor.
5. Conditions to the Purchasers Obligations. The several obligations of the Purchasers to purchase
and pay for the Securities on the Closing Date are subject to the following conditions:
(a) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date:
(i) there shall not have occurred any downgrading, nor shall any notice have been given of any
intended or potential downgrading or of any review for a possible change that does not
11
indicate the direction of the possible change, in the rating accorded the Company or any of the
Companys securities or in the rating outlook for the Company by any nationally recognized
statistical rating organization, as such term is defined for purposes of Rule 436(g)(2) under the
Securities Act; and
(ii) there shall not have occurred any event that has a Material Adverse Effect.
(b) The Purchasers shall have received on the Closing Date a certificate, dated the Closing Date
and signed by an executive officer of the Company, to the effect set forth in Section 5(a)(i) and
to the effect that the representations and warranties of the Company contained in this Agreement
are true and correct as of the Closing Date and that the Company has complied with all of the
agreements and satisfied all of the conditions on its part to be performed or satisfied hereunder
on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the best of his or her knowledge
as to the matters set forth in
Section 5(a)(i) or as to proceedings threatened.
(c) The Purchasers shall have received on the Closing Date an opinion of (1) Blank Rome LLP,
counsel for the Company, dated the Closing Date, to the effect set forth in Exhibit A-1 and (2)
Sonnenschein Nath & Rosenthal, special FDA counsel for the Company, dated the Closing Date, to the
effect set forth in Exhibit A-2. Such opinions shall be rendered to the Purchasers at the request
of the Company and shall so state therein.
(d) The lock-up agreements, each substantially in the form of Exhibit B hereto, between the
Purchasers and certain executive officers and directors of the Company relating to sales and
certain other dispositions of shares of common stock or certain other securities, delivered to the
Purchasers on or before the date hereof, shall be in full force and effect on the Closing Date.
(e) The Company will cause the Securities to be eligible for trading on the Private Offering,
Resales and Trading through Automatic Linkages (PORTAL) system of the NASD.
(f) The Purchasers shall have received on the Closing Date the consent of Wachovia Bank, N.A. in
the form attached hereto as Exhibit C.
6. Covenants of the Company. In further consideration of the agreements of the Purchasers contained
in this Agreement, the Company covenants with each Purchaser as follows:
12
(a) The Company will endeavor to qualify the Securities for offer and sale under the securities or
Blue Sky laws of such jurisdictions as you shall reasonably request, provided, however, that the
Company shall not be required to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it is not so
qualified or to subject itself to taxation in respect of doing business in any jurisdiction in
which it is otherwise not so subject.
(b) Whether or not the transactions contemplated in this Agreement are consummated or this
Agreement is terminated, the Company shall pay or cause to be paid all expenses incident to the
performance of its obligations under this Agreement, including: (i) the fees, disbursements and
expenses of the Companys counsel and the Companys accountants, if applicable, in connection with
the issuance and sale of the Securities and all other fees or expenses in connection with the
preparation of the Transaction Documents and all amendments and supplements thereto, (ii) all costs
and expenses related to the transfer and delivery of the Securities to the Purchasers, including
any transfer or other taxes payable thereon, (iii) the fees and expenses, if any, incurred in
connection with the admission of the Securities for trading in PORTAL or any appropriate market
system, (iv) the costs and charges of the Trustee and any transfer agent, registrar or depositary,
(v) the cost of the preparation, issuance and delivery of the Securities, (vi) the legal fees and
expenses of the Lead Purchaser incurred in connection with the negotiation, due diligence and
documentation of the Transaction Documents and the transactions contemplated hereby and thereby
(PURCHASER EXPENSES) and (vii) all other cost and expenses incident to the performance of the
obligations of the Company hereunder for which provision is not otherwise made in this Section. The
Lead Purchaser may, on the Closing Date, reduce its portion of the Purchase Price by the amount of
Purchaser Expenses less any Purchaser Expenses paid by the Company prior to the Closing Date
provided, that if the schedule described in Section 3 is not delivered to the Company at the time
set forth therein, the Company shall pay the expenses and fees specified therein within five
Business Days of its delivery.
(c) Neither the Company nor any Affiliate will sell, offer for sale or solicit offers to buy or
otherwise negotiate in respect of any security (as defined in the Securities Act) which could be
integrated with the sale of the Securities in a manner which would require the registration under
the Securities Act of the Securities.
(d) The Company will not solicit any offer to buy or offer or sell the Securities or the Underlying
Securities by means of any form of general solicitation or general advertising (as those terms are
used in
13
Regulation D under the Securities Act) or in any manner involving a public offering within the
meaning of Section 4(2) of the Securities Act.
(e) While any of the Securities or the Underlying Securities remain restricted securities within
the meaning of the Securities Act, the Company will make available, upon request, to any seller of
such Securities the information specified in Rule 144A(d)(4) under the Securities Act, unless the
Company is then subject to Section 13 or 15(d) of the Exchange Act.
(f) The Company will use its commercially reasonable efforts to permit the Securities to be
designated PORTAL securities in accordance with the rules and regulations adopted by the NASD
relating to trading in PORTAL.
(g) During the period of two years after the Closing Date, the Company will not, and will not
permit any of its affiliates under its control (as defined in Rule 144 under the Securities Act) to
resell any of the Securities or the Underlying Securities which constitute restricted securities
under Rule 144 that have been reacquired by any of them.
(h) The Company will not take any action prohibited by Regulation M under the Exchange Act in
connection with the distribution of the Securities contemplated hereby.
(i) The Company hereby agrees that, without the prior written consent of the Lead Purchaser (on
behalf of the Purchasers), it will not, during the period ending 60 days after the date hereof, (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or
dispose of, directly or indirectly, any shares of common stock of the Company or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in clause (i) or (ii)
above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise.
The foregoing sentence shall not apply to the following issuances (the EXCLUDED ISSUANCES) (A) to
the sale of the Securities under this Agreement or the issuance of the Underlying Securities, (B)
to the issuance by the Company of any shares of Common Stock upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof, provided that the terms of
such option, warrant or convertible security relating to any purchase, exercise or conversion price
thereunder, the number of securities issuable thereunder or any time period relating to the
exercise or conversion thereunder are not
14
amended, modified or changed on or after the date hereof, (C) to the grant of any option or
issuance of any stock, restricted stock or stock appreciation right or other stock-linked security
under any employee equity or employee equity-linked plan of the Company that exist as of the date
hereof or that is approved by the independent members of the Companys Board of Directors; (D) in
connection with any bona-fide merger or acquisition as approved by the Companys Board of
Directors; provided that any issuance by the Company of shares of Common Stock is not to raise cash
to fund such merger or acquisition; (E) in connection with any bona-fide strategic agreement, joint
venture agreement, limited liability company agreement or similar agreement entered into with any
supplier, manufacturer, distributor or customer that is approved by the Companys Board of
Directors, the primary purpose of which is not to raise cash; (F) to shares of Common Stock or
other equity securities or equity linked securities of the Company pursuant to a bona fide firm
commitment underwritten public offering with gross proceeds to the Company of at least $30 million
with a nationally or regionally recognized underwriter; or (G) the filing of a registration
statement to permit sales of the Companys common stock by Teva Pharmaceuticals Curacao, N.V.;
provided, however, that in the case of any dispositions pursuant to (D) or (E), the transferee, in
each case, agrees to be bound by the terms of the previous sentence.
(j) The Company shall apply the Purchase Price only as specified in Section 3 hereof.
(k) On or before 8:30 a.m., New York time, on the first business day following the date of this
Agreement, the Company shall file a Current Report on Form 8-K describing the terms of the
transactions contemplated by the Transaction Documents in the form required by the 1934 Act and
attaching the material Transaction Documents (including, without limitation, this Agreement, the
Indenture, the form of the Debenture and the Registration Rights Agreement) as exhibits to such
filing (including all attachments, the 8-K FILING). From and after the filing of the 8-K Filing
with the Commission, no Purchaser shall be in possession of any material, nonpublic information
received from the Company or any of its officers, directors, employees or agents, that is not
disclosed in the 8-K Filing. Subject to the foregoing, neither the Company nor any Purchaser shall
issue any press releases or any other public statements with respect to the transactions
contemplated hereby; provided, however, that the Company shall be entitled, without the prior
approval of any Purchaser, to make any press release or other public disclosure with respect to
such transactions (i) in substantial conformity with the 8-K Filing and contemporaneously therewith
or (ii) as, in the reasonable judgment of the Company or its counsel, is required by applicable law
or regulations or applicable stock exchange rules (provided that in the case of
15
clause (i) each Purchaser shall be provided by the Company with a draft of such press release or
other public disclosure prior to its release). Notwithstanding the foregoing, the Company shall not
publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing
with the Commission or any regulatory agency or the applicable stock exchange, without the prior
written consent of such Purchaser, except (i) for disclosure thereof in the 8-K Filing or
Registration Statement or similar disclosure as required in future Commission filings or (ii) as
required by applicable law or regulations or applicable stock exchange rules or any order of any
court or other governmental agency, in which case the Company shall use its reasonable best efforts
to provide such Purchaser with prior notice of such disclosure.
7. Representations and Warranties of Purchasers. Each Purchaser, severally and not jointly,
represents and warrants to, and agrees with, the Company that:
7.1 Authorization; Enforceability. Such Purchaser is duly and validly organized, validly existing
and in good standing under the laws of the jurisdiction of its incorporation or organization with
the requisite corporate power and authority to purchase the Securities being purchased by it
hereunder and to execute and deliver this Agreement and the other Transaction Documents to which it
is a party. This Agreement constitutes, and upon execution and delivery thereof, each other
Transaction Document to which such Purchaser is a party will constitute, such Purchasers valid and
legally binding obligation, enforceable in accordance with its terms, subject to the Enforceability
Exceptions.
7.2 Investment Intent. Such Purchaser is acquiring the Securities being purchased by it hereunder
solely for its own account, and not with a present view to the public resale or distribution of all
or any part thereof, except pursuant to sales that are registered under, or are exempt from the
registration requirements of, the Securities Act.
7.3 Information. Such Purchaser has had access to all of the filings of the Company that are filed
on the EDGAR system prior to the date hereof. To the extent requested by such Purchaser, the
Company has, prior to the date hereof, provided such Purchaser with information regarding the
business, operations and financial condition of the Company, and has, prior to the date hereof,
granted to such Purchaser the opportunity to ask questions of and receive satisfactory answers from
representatives of the Company, its officers, directors, employees and agents concerning the
Company and materials relating to the terms and conditions of the
16
purchase and sale of the Securities hereunder, and based thereon, such Purchaser believes it can
make an informed decision with respect to its investment in the Securities. Neither such
information nor any other investigation conducted by such Purchaser or its representatives shall
modify, amend or otherwise affect such Purchasers right to rely on the Companys representations
and warranties contained in this Agreement.
7.4 Restrictions on Transfer. (a) Such Purchaser is a qualified institutional buyer as defined in
Rule 144A under the Securities Act (a QIB) and an institutional accredited investor within the
meaning of Regulation D under the Securities Act. Each Purchaser, severally and not jointly, agrees
with the Company that it will not solicit offers for, or offer or sell, such Securities by any form
of general solicitation or general advertising (as those terms are used in Regulation D under the
Securities Act) or in any manner involving a public offering within the meaning of Section 4(2) of
the Securities Act. Each Purchaser, severally and not jointly, agrees to offer, sell or otherwise
transfer the Securities, prior to the date which is two years after the Closing Date, only (a) to
the Company or any parent or subsidiary thereof, (b) for so long as the Securities are eligible for
resale pursuant to Rule 144A, to a person it reasonably believes is a QIB that purchases for its
own account or for the account of a QIB to which notice is given that the transfer is being made in
reliance on Rule 144A, (c) pursuant to a registration statement which has been declared effective
under the Securities Act, or (d) pursuant to another available exemption from the registration
requirements of the Securities Act and applicable state securities or blue sky laws, subject to
the Companys and the Trustees right prior to any such offer, sale or transfer pursuant to clause
(d) to require the delivery of an opinion of counsel, certification and/or other information
reasonably satisfactory to each of them, and in each of the foregoing cases, a certificate of
transfer in the form specified in the Indenture and the Securities is completed and delivered by
the transferor to the Trustee.
(b) Such Purchaser (i) agrees that it will only sell the Securities or other securities of the
Company in a transaction that complies in all material respects with applicable federal and state
securities laws, (ii) agrees that it will not sell or otherwise dispose of or transfer the
Securities or other securities of the Company or any interest therein in a transaction that is part
of a plan or scheme to evade the registration requirements of the Securities Act and (iii)
acknowledges and agrees that notwithstanding the effectiveness of a registration
17
statement covering the Securities, the Securities will remain restricted securities until such
Securities have been sold pursuant to (x) an effective registration statement or (y) Rule 144, and
such Purchaser will remain responsible for compliance with applicable federal and state securities
laws in connection with any resale by the Purchaser of the Securities.
(c) Such Purchaser understands that the Company is relying on the representations of such Purchaser
set forth in this Section 7.4 in order to determine compliance with applicable securities laws in
connection with the sale of the Securities to such Purchaser.
7.5 Legend. Such Purchaser understands that the certificates representing the Securities may bear a
restrictive legend reflecting the transfer restrictions set forth above.
7.6 Reliance on Exemptions. Such Purchaser understands that the Securities are being offered and
sold to it in reliance upon specific exemptions from the registration requirements of federal and
state securities laws and that the Company is relying upon the truth and accuracy of the
representations and warranties of such Purchaser set forth in this Section 7 in order to determine
the availability of such exemptions and the eligibility of such Purchaser to acquire the
Securities.
7.7 Non-Affiliate Status. Such Purchaser is not an Affiliate of the Company. Such Purchasers
investment in the Securities is not for the purpose of acquiring, directly or indirectly, control
of, and it has no intent to acquire or exercise control of, the Company or to influence the
decisions or policies of the Board of Directors.
8. Indemnity. (a) The Company agrees to indemnify and hold harmless each Purchaser, each person, if
any, who controls any Purchaser within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, and each affiliate of any Purchaser within the meaning of Rule 405
under the Securities Act (each, an INDEMNIFIED PERSON) from and against any and all losses,
claims, damages, penalties, fees and liabilities, including, without limitation, the reasonable
legal fees and other reasonable expenses of one counsel (in addition to any local counsel) incurred
(irrespective of whether any such indemnitee is a party to the action for which indemnification
hereunder is sought) in connection with any suit, action or proceeding or any claim (collectively,
Losses), as incurred, as a result of, or arising out of or relating to (a) any misrepresentation
or breach of any representation or warranty made by the Company in the Transaction Documents, (b)
any breach of any covenant,
18
agreement or obligation of the Company contained in any Transaction Document or
(c) any cause of action, suit or claim brought or made against such Indemnified Person by a third
party (including for these purposes a derivative action brought on behalf of the Company) and
arising out of or resulting from the execution, delivery or performance by the Company of the
Transaction Documents or any other certificate, instrument or document contemplated hereby or
thereby; provided that the Company shall not be required to indemnify any of the Indemnified
Persons to the extent Losses arise or result from a material misrepresentation or material breach
of any representation or warranty made by such Purchaser or other Indemnified Person contained in
the Transaction Documents, or a material breach of any covenant, agreement or obligation by such
Purchaser or other Indemnified Person contained in the Transaction Documents.
(b) If any suit, action, proceeding (including any governmental or regulatory investigation), claim
or demand shall be brought or asserted against any Indemnified Person, such Indemnified Person
shall promptly notify the Company in writing, and the Company shall have the right to retain one
counsel (in addition to any local counsel) reasonably satisfactory to the Indemnified Person to
represent the Indemnified Person and any others the Company may designate in such proceeding and
shall pay the reasonable fees and expenses of such counsel related to such proceeding; provided,
however, that failure to so notify the Company shall not relieve such Company from any liability
hereunder except to the extent the Company is prejudiced as a result thereof. In any such
proceeding, any Indemnified Person shall have the right to retain its own counsel, but the fees and
expenses of such counsel shall be at the expense of such Indemnified Person unless (i) Company and
the Indemnified Person shall have mutually agreed to the contrary, (ii) the Company has failed
within a reasonable time to retain counsel reasonably satisfactory to the Indemnified Person or
(iii) the named parties in any such proceeding (including any impleaded parties) include both the
Company and the Indemnified Person, the Company proposes to have the same counsel represent it and
the Indemnified Person, and representation of both parties by the same counsel would, in the
opinion of counsel for the Indemnified Person, constitute a conflict of interest. It is understood
that the Company shall reimburse all such reasonable fees and expenses actually incurred (upon
delivery to the Company of reasonable documentation therefor setting forth such expenses in
reasonable detail) unless a bona fide dispute exists with respect to such expenses. The Company
shall not be liable for any settlement of any proceeding effected without its written consent, but
if settled with such consent or if there be a final, non-appealable judgment for the plaintiff, the
Company agrees to indemnify any Indemnified Person from and against any Liabilities by reason of
such settlement or judgment. The Company shall not, without the prior written consent of the
Indemnified Person, effect any settlement of any pending or threatened proceeding in respect of
which any Indemnified Person is a party, unless such settlement includes an unconditional release
of such Indemnified
19
Person from all liability on claims that are the subject matter of such proceeding and no admission
of fault on the part of the Indemnified Person.
(c) The remedies provided for in this Section 8 are not exclusive and shall not limit any rights or
remedies that may otherwise be available to any Indemnified Person at law or in equity.
(d) The indemnity provisions contained in this Section 8 and the representations, warranties and
other statements of the Company contained in this Agreement shall remain operative and in full
force and effect regardless of
(i) any termination of this Agreement, (ii) any investigation made by or on behalf of any
Purchaser, any person controlling any Purchaser or any affiliate of any Purchaser or by or on
behalf of the Company, its officers, directors or any person controlling the Company and (iii)
acceptance of and payment for any of the Securities.
9. Termination. The Purchasers may terminate this Agreement by notice given to the Company executed
by the Lead Purchaser (except in the case of clauses (i) and (v), which termination right may be
exercised by each Purchaser as to itself but not the other Purchasers), if prior to the Closing
Date (i) in the good faith judgment of a Purchaser a Material Adverse Effect shall have occurred
between the date hereof and the Closing Date, (ii) trading in securities generally on the New York
Stock Exchange, Inc., the American Stock Exchange or the Nasdaq National Market shall have been
suspended or materially limited, (iii) a material disruption in securities settlement, payment or
clearance services in the United States shall have occurred, (iv) any moratorium on commercial
banking activities shall have been declared by United States or New York State authorities, (v)
there shall have been (A) an outbreak or escalation of hostilities between the United States and
any foreign power, or (B) an outbreak or escalation of any other insurrection or armed conflict
involving the United States or any other national or international calamity or emergency, or (C)
any material change in the financial markets of the United States which, in the case of (A), (B) or
(C) above and in the judgment of a Purchaser, makes it impracticable or inadvisable to proceed with
the transactions contemplated by this Agreement or (vi) the failure of the Company to satisfy the
conditions set forth in Section 5 of this Agreement on or before June 30, 2005.
10. Effectiveness. This Agreement shall become effective upon the execution and delivery hereof by
the parties hereto.
If this Agreement shall be terminated by the Purchasers, or any of them, because of any failure or
refusal on the part of the Company to comply with the terms or to fulfill any of the conditions of
this Agreement, or if for any reason the Company shall be unable to perform its obligations under
this Agreement, the Company will reimburse the Purchasers or such Purchasers as have so terminated
this Agreement with respect to themselves, severally, for all out-of-pocket
20
expenses (including the fees and disbursements of their counsel) reasonably incurred by such
Purchasers in connection with this Agreement or the issuance of Securities contemplated hereunder.
11. Rights of Participation. (a) In the event that, within one year from the Closing Date, the
Company proposes to issue equity securities or other securities exchangeable or exercisable for or
convertible into equity securities (other than Excluded Issuances), the Company shall offer the
Lead Purchaser the opportunity to purchase such securities, on the same terms and conditions as
those offered to all other purchasers and pursuant to documentation reasonably satisfactory to the
Company and the Lead Purchaser.
(b) (i) The Company shall deliver to the Lead Purchaser a written notice (the OFFER NOTICE) of
any proposed or intended issuance or sale or exchange (the OFFER) of the securities being offered
(the OFFERED SECURITIES) pursuant to Section 11(a) above, which Offer Notice shall (x) identify
and describe the Offered Securities, (y) describe the price and other terms upon which they are to
be issued, sold or exchanged, and the number or amount of the Offered Securities to be issued, sold
or exchanged and (z) offer to issue and sell to or exchange with such Purchasers the Offered
Securities.
(ii) To accept an Offer, in whole or in part, such Purchaser must deliver a written notice to the
Company prior to the end of the fifth Business Day after such Purchasers receipt of the Offer
Notice if the Purchaser enters into a confidentiality agreement in form and substance reasonably
satisfactory to the Company relating to the Offer, or the second Business Day after such
Purchasers receipt of the Offer Notice if the Purchaser does not enter into a confidentiality
agreement in form and substance reasonably satisfactory to the Company relating to the Offer, (the
OFFER PERIOD), setting forth the portion of the Offered Securities, if any, that the Lead
Purchaser elects to purchase (the NOTICE OF ACCEPTANCE); provided, however, if the Lead Purchaser
desires to accept an offer for less than all of the Offered Securities, it may only accept an Offer
for 50% or less of the Offered Securities.
(iii) The Company shall have ten Business Days from the expiration of the Offer Period above to
offer, issue, sell or exchange all or any part of such Offered Securities as to which a Notice of
Acceptance has not been given by the Purchasers during the Offer Period (the REFUSED SECURITIES),
only upon terms and conditions (including, without limitation, unit prices and interest rates) that
are not more favorable to the acquiring person or
21
persons or less favorable to the Company than those set forth in the Offer Notice.
(iv) In the event the Company shall propose to sell less than all the Refused Securities (any such
sale to be in the manner and on the terms specified in Section 11(b)(iii) above), then the Lead
Purchaser may, at its sole option and in its sole discretion, reduce the number or amount of the
Offered Securities specified in its Notice of Acceptance to an amount that shall be not less than
the number or amount of the Offered Securities that such Purchaser elected to purchase pursuant to
Section 11(b)(ii) above multiplied by a fraction, (i) the numerator of which shall be the number or
amount of Offered Securities the Company actually proposes to issue, sell or exchange (including
Offered Securities to be issued or sold to such Purchaser pursuant to Section 11(b)(iii) above
prior to such reduction) and (ii) the denominator of which shall be the original amount of the
Offered Securities. In the event that such Purchaser so elects to reduce the number or amount of
Offered Securities specified in its Notice of Acceptance, the Company may not issue, sell or
exchange more than the reduced number or amount of the Offered Securities unless and until such
securities have again been offered to the Lead Purchaser in accordance with Section 11(b)(i) above.
(v) Upon the closing of the issuance, sale or exchange of all or less than all of the Offered
Securities, the Lead Purchaser shall acquire from the Company, and the Company shall issue to the
Lead Purchaser within a reasonable period of time, the number or amount of Offered Securities
specified in the Notices of Acceptance, as reduced pursuant to Section 11(b)(iv) above if the
Purchasers have so elected, upon the terms and conditions specified in the Offer. The purchase by
the Purchasers of any Offered Securities is subject in all cases to the preparation, execution and
delivery by the Company and the Purchasers, within a reasonable period of time, of a purchase
agreement relating to such Offered Securities reasonably satisfactory in form and substance to the
Purchasers and their respective counsel.
(vi) Any Offered Securities not acquired by the Purchasers or other persons in accordance with this
Section 11(b) above may not be issued, sold or exchanged until they are again offered to the
Purchasers under the procedures specified in this Agreement.
12. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the
Company and the Purchasers, any controlling persons
22
referred to herein and their respective successors and assigns; provided, that the rights and
obligations of the Lead Purchaser with respect to the rights of participation set forth in Section
11 of this Purchase Agreement may not be assigned to any party, other than a successor to the
entire business of the Lead Purchaser, without the prior written consent of the Company; provided,
further, that the rights and obligations of the Company pursuant to this Purchase Agreement may not
be assigned to any party other than a successor to the entire business of the Company.
13. Notices. All notices and other communications hereunder shall be in writing and shall be deemed
to have been duly given if mailed by registered or certified mail, postage prepaid, return receipt
requested, or otherwise delivered by hand or by messenger.
Notices to the Purchasers shall be given at the address as set forth on Schedule I hereto, with a
copy to (solely for informational purposes):
Schulte Roth & Zabel LLP 919 Third Avenue New York, New York 10022
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|
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|
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|
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Telephone: (212) 756-2000
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|
|
Facsimile: (212) 593-5955
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|
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|
|
Attention: Eleazer Klein, Esq.
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|
Notices to the Company shall be given to the Company at:
IMPAX Laboratories, Inc.
3735 Castor Avenue
Philadelphia, PA 19124
Attention: Mr. Barry R. Edwards
Chief Executive Officer
Facsimile: (215) 289-5932
with a copy to (solely for informational purposes):
Blank Rome LLP
One Logan Square
Philadelphia, PA 19103-6998
Attention: Ronald Fisher, Esq.
Facsimile: (215) 832-5479
14. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall
be an original, with the same effect as if the signatures thereto and hereto were upon the same
instrument.
23
15. Severability. If any provision of this Agreement becomes or is declared by a court of competent
jurisdiction to be illegal, unenforceable, or void, portions of such provision, or such provision
in its entirety, to the extent necessary, shall be severed from this Agreement and the balance of
this Agreement shall be enforceable in accordance with its terms.
16. Amendment and Waivers. Any term of this Agreement may be amended and the observance of any term
of this Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company and the Lead
Purchaser.
17. Entire Agreement. This Agreement constitutes the full and entire understanding and agreement
among the parties with regard to the subjects hereof. Neither this Agreement nor any term hereof
may be amended, waived, discharged or terminated other than by a written instrument signed by the
party against whom enforcement of any such amendment, waiver, discharge, or termination is sought.
18. Survival. The respective representations, warranties, covenants and agreements of the Company
and the Purchasers set forth in or made pursuant to this Agreement will remain in full force and
effect and will survive delivery of and payment for the Securities sold hereunder and any
termination of this Agreement.
19. Independence of Purchasers. The obligations of each Purchaser under any Transaction Document
are several and not joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other Purchaser under any
Transaction Document. Nothing contained herein or in any other Transaction Document, and no action
taken by the Purchasers pursuant hereto or thereto, shall be deemed to constitute the Purchasers as
a partnership, an association, a joint venture or any other kind of entity, or create a presumption
that the Purchasers are in any way acting in concert or as a group with respect to such obligations
or the transactions contemplated by the Transaction Documents. The Purchasers represent and warrant
that they are not acting in concert or as a group with respect to such obligations or the
transactions contemplated by the Transaction Documents and confirm that they have or legal counsel
has on their behalf independently participated in the negotiation of the transaction contemplated
hereby. Each Purchaser shall be entitled to independently protect and enforce its rights,
including, without limitation, the rights arising out of this Agreement or out of any other
Transaction Documents, and it shall not be necessary for any Purchaser to be joined as an
additional party in any proceeding for such purpose.
20. Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF NEW YORK. To the fullest extent permitted by
24
applicable law, the Company hereby irrevocably submits to the non-exclusive jurisdiction of any New
York State court or Federal court sitting in the County of New York in respect of any suit, action
or proceeding arising out of or relating to the provisions of this Agreement and irrevocably agree
that all claims in respect of any such suit, action or proceeding may be heard and determined in
any such court. The parties hereto hereby waive, to the fullest extent permitted by applicable law,
any objection that they may now or hereafter have to the laying of venue of any such suit, action
or proceeding brought in any such court, and any claim that any such suit, action or proceeding
brought in any such court has been brought in an inconvenient forum. TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES
NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION WITH OR
ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.
21. Headings. The headings of the sections of this Agreement have been inserted for convenience of
reference only and shall not be deemed a part of this Agreement.
[Remainder of Page Intentionally Left Blank.]
25
Very truly yours,
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IMPAX LABORATORIES, INC.
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By:
|
/s/ Barry R. Edwards
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|
Name:
|
Barry R. Edwards
|
|
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|
Title:
|
Chief Executive Officer
|
|
Accepted as of the date hereof
PURCHASERS:
HIGHBRIDGE INTERNATIONAL LLC
By: Highbridge Capital Management, LLC
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|
|
|
|
|
|
|
|
By:
|
/s/ Adam J. Chill
|
|
|
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Name:
|
Adam J. Chill
|
|
|
|
Title:
|
Managing Director
|
|
SCHEDULE I
|
|
|
|
|
PURCHASER
|
|
|
|
NAME AND ADDRESS
|
|
SECURITIES TO BE PURCHASED
|
|
Highbridge International LLC
c/o Highbridge Capital Management, LLC
9 West 57th Street, 27th Floor
New York, NY 10019
Attn: Ari J. Storch / Adam J. Chill
Tel: (212) 287-4720
|
Fax: (212) 751-0755
|
|
$
|
75,000,000
|
and
Attn: Andrew Martin
Tel: (212) 287-4735
Fax: (212) 755-4250
|
|
|
|
|
|
|
|
|
|
Residence: Cayman Islands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
75,000,000
|
|
|
|
|
|
EXHIBIT A-1
OPINION OF BLANK, ROME LLP
The opinion of Blank, Rome LLP, to be delivered pursuant to Section 5(c) of the Purchase Agreement
shall be to the effect that:
A. The Company is validly existing as a corporation in good standing under the laws of the State of
Delaware.
B. The Company is duly qualified to do business as a foreign corporation and is in good standing in
the Commonwealth of Pennsylvania and the State of California.
C. The Company has the corporate power and authority to enter into and perform its obligations
under each of the Purchase Agreement, the Registration Rights Agreement, the Indenture and the
Securities.
D. Each of the Purchase Agreement, the Registration Rights Agreement and the Indenture has been
duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company,
enforceable against the Company in accordance with its terms.
E. The Securities have been duly authorized by the Company and, when executed and authenticated in
accordance with the provisions of the Indenture, and delivered to and paid for by the Purchasers,
in each case in accordance with the terms of the Purchase Agreement, will be valid and binding
obligations of the Company, enforceable against the Company in accordance with their terms.
F. The Underlying Securities reserved for issuance upon conversion of the Securities have been duly
authorized and reserved and, when issued upon conversion of the Securities in accordance with the
terms of the Securities, will be validly issued, fully paid and non-assessable, and the issuance of
the Underlying Securities will not be subject to any preemptive or similar rights of any
stockholder under the General Corporation Law of the State of Delaware (the GCL), the Companys
Restated Certificate of Incorporation, as amended (the Certificate of Incorporation), or the
Companys By-Laws (the By-Laws), or by any contract listed in Annex A to this opinion letter.
G. The execution and delivery by the Company of, and the performance by the Company of its
obligations under, the Purchase Agreement, the Indenture, the Registration Rights Agreement and the
Securities will not contravene in any material respect any provision of applicable law or the
Certificate of
Incorporation or By-Laws of the Company or any agreement or other instrument binding upon the
Company that is listed in Annex A to this opinion letter, or, to such counsels knowledge, any
judgment, order or decree of any governmental body, agency or court having jurisdiction over the
Company; and no consent, approval, authorization or order of, or qualification with, any
governmental body or agency under the GCL, any law, rule or regulation of the State of New York, or
any federal law, rule or regulation of the United States, is required for the performance by the
Company of its obligations under the Purchase Agreement, the Indenture, the Registration Rights
Agreement or the Securities, except such as may be required by the securities or blue sky laws of
the various states in connection with the offer and sale of the Securities and by U.S. federal and
state securities laws with respect to the Companys obligations under the Indenture and the
Registration Rights Agreement.
H. To such counsels knowledge, the Company is not, and after giving effect to the offering and
sale of the Securities and the application of the proceeds thereof as described in Section 3 of the
Purchase Agreement will not be, required to register as an investment company as such term is
defined in the Investment Company Act of 1940, as amended.
I. Based on the representations, warranties and agreements of the Company in Sections 1(s), 1(t),
1(u), 6(c) and 6(d) of the Purchase Agreement and of the Purchasers in Section 7 of the Purchase
Agreement, it is not necessary in connection with the offer, sale and delivery of the Securities to
the Purchasers under the Purchase Agreement to register the Securities under the Securities Act of
1933 or to qualify the Indenture under the Trust Indenture Act of 1939, it being understood that no
opinion is expressed as to any subsequent resale of any Security or Underlying Security.
2
EXHIBIT A-2
OPINION OF SONNENSCHEIN NATH & ROSENTHAL
The opinion of Sonnenschein Nath & Rosenthal to be delivered pursuant to
Section 5(c) of the Purchase Agreement shall be to the effect that:
A. To the best of such counsels knowledge, except as disclosed in
Section 1(w) of the Purchase Agreement, the Company possesses all approvals, certificates,
registrations, authorizations and permits issued by the FDA, or any other federal or state agencies
or bodies engaged in the regulation of pharmaceuticals, necessary to conduct its business, except
for such approvals, certificates, registrations, authorizations or permits the absence of which to
maintain would not have a material adverse effect on the Company.
B. To the best of such counsels knowledge, the Company has not received any notice of proceedings
relating to the revocation or modification of any such approval, certificate, registration,
authorization or permit which, singly or in the aggregate, if the subject of any unfavorable
decision, ruling or finding, would have a material adverse effect on the Company.
C. To the best of such counsels knowledge, except as disclosed in
Section 1(bb) of the Purchase Agreement, the Company is in compliance with all applicable federal
laws, regulations, orders and decrees governing its business as prescribed by the FDA or any other
federal agencies or bodies engaged in the regulation of pharmaceuticals, except where noncompliance
would not singly, or in the aggregate, have a material adverse effect on the Company.
D. To the best of such counsels knowledge, all bioavailability studies undertaken to support
approval of the Companys products for commercialization have been conducted in compliance with all
applicable federal laws, orders or regulations in all material respects.
E. To the best of such counsels knowledge, no filing or submission to the FDA or any other federal
or state regulatory body, that is intended to be the basis for any approval, contains any material
omission or material false information.
EXHIBIT B
[FORM OF LOCK-UP LETTER]
June ___, 2005
Highbridge International LLC
c/o Highbridge Capital Management, LLC
9 West 57th Street, 27th Floor
New York, NY 10019
Dear Sirs and Mesdames:
The undersigned understands that you propose to enter into a Purchase Agreement (the PURCHASE
AGREEMENT) with IMPAX Laboratories, Inc., a Delaware corporation (the COMPANY), providing for
the issuance by the Company (the OFFERING) to Highbridge International LLC and such other
Purchasers identified therein (collectively, the PURCHASERS) of the Companys Convertible Senior
Subordinated Debentures Due 2012 (the SECURITIES). The Securities will be convertible into shares
of common stock, par value $.01, of the Company (the COMMON STOCK).
To induce the Purchasers to enter into the Purchase Agreement, the undersigned hereby agrees that,
without the prior written consent of Highbridge International LLC on behalf of the Purchasers, it
will not, during the period commencing on the date hereof and ending 60 days after the Closing Date
(as defined in the Purchase Agreement), (1) offer, pledge, sell, contract to sell, sell any option
or contract to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares
of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock
or (2) enter into any swap or other arrangement that transfers to another, in whole or in part, any
of the economic consequences of ownership of the Common Stock, whether any such transaction
described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Securities to the Purchasers pursuant to the Purchase Agreement, (b) transactions relating to
shares of Common Stock or other securities acquired in open market transactions after the
completion of the
Offering, (c) exercises of options or warrants to purchase Common Stock, (d) dispositions of Common
Stock as a bona fide gift, (e) dispositions by will or the laws of descent or distribution, or (f)
dispositions to members of the undersigneds immediate family; provided, however, that in the case
of any dispositions pursuant to (d), (e) or (f) the transferee, in each case, agrees to be bound by
the terms of this Lock-Up Agreement.
In addition, the undersigned agrees that, without the prior written consent of Highbridge
International LLC on behalf of the Purchasers, it will not, during the period commencing on the
date hereof and ending 60 days after the Closing Date, make any demand for or exercise any right
with respect to, the registration of any shares of Common Stock or any security convertible into or
exercisable or exchangeable for Common Stock other than in connection with the filing by the
Company of a Registration Statement on Form S-8. The undersigned also agrees and consents to the
entry of stop transfer instructions with the Companys transfer agent and registrar against the
transfer of the undersigneds shares of Common Stock except in compliance with the foregoing
restrictions. The undersigned further agrees to suspend any existing trading plans or other
arrangements pursuant to Rule 10b5-1 (a 10b5-1 PLAN) under the Securities Exchange Act of 1934,
as amended, during the period commencing on the date hereof and ending 60 days after the Closing
Date. Notwithstanding the restrictions contained in the previous sentence, the undersigned shall be
permitted subsequent to the date hereof to enter into a 10b5-1 Plan, provided that the undersigned
hereby expressly agrees to suspend any trading or other transactions pursuant to such 10b5-1 Plan
during the period commencing on the date hereof and ending 60 days after the Closing Date.
The undersigned understands that the Company and the Purchasers are relying upon this Lock-Up
Agreement in purchasing the Securities provided for in the Purchase Agreement. The undersigned
further understands that this Lock-Up Agreement is irrevocable and shall be binding upon the
undersigneds heirs, legal representatives, successors and assigns.
2
DISCLOSURE SCHEDULE
SECTION 1(A):
The Company filed the following amendments to its reports filed with the Commission since January
1, 2003:
Form 10-Q/A filed on March 16, 2005 Form 10-Q/A filed on November 17, 2004 Form 10-Q/A filed on
November 16, 2004 Form 10-Q/A filed on May 26, 2004 Form 10-Q/A filed on May 12, 2004 Form 10-Q/A
filed on May 28, 2003 Form 10-Q/A filed on May 22, 2003
Also, see disclosure under section 1(z).
SECTION 1(E):
Authorized Capital Stock
Our authorized capital stock consists of 75,000,000 shares of common stock, $.01 par value per
share, and 2,000,000 shares of preferred stock, $.01 par value per share. As of December 31, 2003,
there were 53,307,136 shares of our common stock and 75,000 shares of Series 2 preferred stock
outstanding. On January 30, 2004, holders of the Series 2 preferred stock converted 75,000 shares
of Series 2 preferred stock into 1,500,000 shares of our common stock.
Common Stock
The shares of common stock currently outstanding are validly issued, fully paid and non-assessable.
Subject to the rights of the holders of shares of preferred stock outstanding, if any, holders of
shares of our common stock:
o are entitled to receive dividends when and as declared by the board of directors from legally
available funds;
o are entitled, upon our liquidation, dissolution or winding up, to a pro rata distribution of the
assets and funds available for distribution to stockholders;
o are entitled to one vote per share on all matters on which stockholders generally are entitled to
vote; and
o do not have preemptive rights to subscribe for additional shares of common stock or securities
convertible into shares of common stock.
Only holders of common stock vote on all matters brought for the stockholders approval, except as
otherwise required by law and subject to the
voting rights of the holders of any outstanding shares of preferred stock. As of February 27, 2004,
no shares of preferred stock were outstanding.
Preferred Stock
Our restated certificate of incorporation provides that we may, by vote of our board of directors,
issue preferred stock in one or more series having the rights, preferences, privileges and
restrictions thereon, including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number of shares
constituting any series or designation of such series without further vote or action by the
stockholders. The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of us without further action by the stockholders and may adversely
affect the voting and other rights of the holders of common stock. The issuance of preferred stock
with voting and conversion rights may adversely affect the voting power of the holders of common
stock, including the loss of voting control to others.
SECTION 1(L):
Consent and waiver of Wachovia Bank, National Association (Wachovia) is required under the Loan
and Security Agreement, as amended, between Wachovia (as successor to Congress Financial
Corporation) and the Company, which consent and waiver shall be obtained as a condition to the
consummation of the transactions contemplated by the Purchase Agreement to which this Disclosure
Agreement is attached.
Consents and waivers pursuant to the documentation entered into in connection with the Companys
1.25% Convertible Senior Subordinated Debentures due April 1, 2024, which consents and waivers will
not be required upon the satisfaction of said Debentures as contemplated pursuant to Section 3 of
the Purchase Agreement to which this Disclosure Schedule is attached.
SECTION 1(M):
See disclosure under section 1(n).
All Indebtedness as of December 31, 2004 and as of May 31, 2005:
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|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
May 31, 2005
|
|
|
|
(in thousands)
|
|
$95 million 1.25% convertible senior subordinated debentures due 2024
|
|
$
|
95,000
|
|
|
$
|
95,000
|
|
|
|
|
|
|
|
|
8.17% loan payable to Cathay Bank in 83 monthly installments of $19,540
commencing June 28, 2001, through May 27, 2008, with a balance of
$2,332,117 due on June 28, 2008
|
|
|
2,350
|
|
|
|
2,332
|
|
7.50% loan payable to Cathay Bank in 83 monthly installments of $24,629
commencing November 14, 2001, through October 13, 2008, with a balance
of $3,120,740 due on November 14, 2008
|
|
|
3,146
|
|
|
|
3,121
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
May 31, 2005
|
|
|
|
(in thousands)
|
|
Loan payable to Wachovia N.A. in 60 monthly installments of $52,500
commencing December 1, 2002, through November 30, 2007, at prime
interest rate plus 1.5% (the interest rate at 12/31/04 was 6.75%)
|
|
|
2,470
|
|
|
|
2,129
|
|
|
|
|
|
|
|
|
|
|
$
|
7,966
|
|
|
$
|
7,582
|
|
Less: Current portion of long-term debt
|
|
|
(923
|
)
|
|
|
(923
|
)
|
|
|
|
|
|
|
|
|
|
$
|
7,043
|
|
|
$
|
6,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term credit facility
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
107,043
|
|
|
$
|
107,582
|
|
|
|
|
|
|
|
|
SECTION 1(N):
As a result of the Companys receipt of a notice of default from a holder of more than 25%
aggregate principal amount of its outstanding 1.250% Convertible Senior Subordinated Debentures due
2024 (the Debentures), based upon the Companys failure to file its Annual Report on Form 10-K
for the year ended December 31, 2004, and the Companys failure to file such report by June 21,
2005, the Trustee under the Indenture relating to the Debentures or holders of 25% in aggregate
principal amount of the outstanding Debentures may declare immediately due and payable the entire
$95.0 million principal amount, and premium, if any, of the Debentures and any interest accrued
thereon.
The Debenture default has also resulted in a default under the Companys existing credit agreement
with Wachovia Bank.
SECTION 1(O):
See the Companys filings on Form 8-K filed with the Commission and disclosure under section 1(ff).
SECTION 1(V):
See the disclosure concerning material weaknesses in Exhibit 99.5 to the draft Form 8-K report
previously provided.
SECTION 1(W):
See section 1(ff) below.
SECTION 1(Y):
Warrants to purchase 741,503 shares of Common Stock issued to investors pursuant to Common Stock
and Warrant Purchase Agreement dated May 6, 2003 between the Company and the purchasers listed
therein.
$95.0 million in aggregate principal amount of 1.250% convertible senior subordinated debentures
due 2024, issued on April 5, 2004.
Stock Option Plans approximately 6,020,000 options outstanding to purchase Common Stock under the
Companys various plans. There remain options available under our stock option plans for future
grant covering approximately 1.3 million additional shares.
SECTION 1(Z):
Depending upon the guidance received by the Company from the Office of the Chief Accountant of the
Commission and the advice of the Companys auditors concerning the Companys recognition of
revenues related to its strategic alliance agreement with a subsidiary of Teva Pharmaceutical
Industries Ltd., it is possible that the Companys financial statements included in its quarterly
reports on Form 10-Q for the quarters ended March 31, June 30 and September 30, 2004 will be
restated.
SECTION 1(FF):
See section 1(o) above. The material pending litigation involving the Company is as follows:
Patent Litigation
There has been substantial litigation in the pharmaceutical, biological, and biotechnology
industries with respect to the manufacture, use, and sale of new products that are the subject of
conflicting patent rights. One or more patents cover most of the brand name controlled-release
products for which we are developing generic versions. Under the Hatch-Waxman Amendments, when a
drug developer files an ANDA for a generic drug, seeking approval before expiration of a patent
which has been listed with the FDA as covering that brand name product the developer must certify
that its product will not infringe on the listed patent(s) and/or that the listed patent is invalid
or unenforceable. That certification must also be provided to the patent holder, who may challenge
the developers certification of non-infringement, invalidity or unenforceability by filing a suit
for patent infringement within 45 days of the patent holders receipt of such certification. If the
patent holder files suit, the FDA can review and approve the ANDA, but is prevented from granting
final marketing approval of the product until a final judgment in the action has been rendered, or
30 months from the date the certification was received, whichever is sooner. Should a patent holder
commence a lawsuit with respect to an alleged patent infringement by us, the uncertainties inherent
in patent litigation make the outcome of such litigation difficult to predict. The delay in
obtaining FDA approval to market our product candidates as a result of litigation, as well as the
expense of such litigation, whether or not we are successful, could have a material adverse effect
on our results of operations and financial position. In addition, there can be no assurance that
any patent litigation will be resolved prior to the 30-month period. As a result, even if the FDA
were to approve a
product upon expiration of the end of the 30-month period, we may elect not to commence marketing
that product if patent litigation is still pending.
Lawsuits have been filed against us in connection with fourteen of our Paragraph IV filings. The
outcome of such litigation is difficult to predict because of the uncertainties inherent in patent
litigation.
ASTRAZENECA AB ET AL. V. IMPAX: THE OMEPRAZOLE CASES
In May 2000, AstraZeneca AB and four of its related companies filed suit against us in the U.S.
District Court in Wilmington, Delaware claiming that the Companys submission of an ANDA for
Omeprazole Delayed Release Capsules, 10 mg and 20 mg, constitutes infringement of six U.S. patents
relating to AstraZenecas Prilosec product. The action seeks an order enjoining us from marketing
Omeprazole Delayed Release Capsules, 10 mg and 20 mg until February 4, 2014, and reimbursement for
costs and attorney fees associated with this litigation.
In February 2001, AstraZeneca and the same related companies filed the same suit against us in the
same federal court in Delaware for infringement, based upon the Companys amendment to its ANDA
adding 40 mg strength Omeprazole Delayed Release Capsules.
AstraZeneca filed similar lawsuits against nine other generic pharmaceutical companies (Andrx,
Genpharm, Cheminor, Kremers, LEK, Eon, Mylan, Apotex, and Zenith). Due to the number of these
cases, a multidistrict litigation proceeding, In re Omeprazole 10 mg, 20 mg, and 40 mg Delayed
Released Capsules Patent Litigation, MDL-1291, has been established to coordinate pre-trial
proceedings. Both lawsuits filed by AstraZeneca against the Company have been transferred to the
multidistrict litigation jurisdiction.
Early in the multidistrict litigation, the trial court ruled that one of the six patents-in-suit
was not infringed by the sale of a generic omeprazole product and that certain other patents were
invalid. These rulings effectively eliminated four patents from the trial of these infringement
cases, although AstraZeneca may appeal these rulings as part of the overall appeal process in the
case.
On October 11, 2002, after a trial involving Andrx, Genpharm, Cheminor, and Kremers, the trial
judge handling the multidistrict litigation ruled on AstraZenecas complaints that three of these
four defendants (First Wave Defendants) infringed the remaining patents-in-suit. The trial judge
ruled that three of the First Wave defendants, Andrx, Genpharm, and Cheminor, infringed the
remaining two patents asserted by AstraZeneca in its complaints, and that those patents are valid
until 2007. In the same ruling, the trial court ruled that the remaining First Wave Defendant,
Kremers, did not infringe either of the remaining two patents. Kremers formulation was held to
differ from the formulation used by the other First Wave Defendants in several respects. In
mid-December 2003, the U.S. Court of Appeals for the Federal Circuit affirmed the October 2002
ruling in all respects. Subsequent petitions for rehearing have been denied.
The formulation that we employ in manufacturing its generic equivalent of omeprazole has not been
publicly announced. Our formulation has elements that resemble those of other First Wave Defendants
in certain respects, but it also has elements that differ. The Company believes that it has
defenses to AstraZenecas claims of infringement, but the opinion rendered by the trial court in
the First Wave cases makes the outcome of AstraZenecas litigation against us is uncertain.
In August 2003, the court issued an order dismissing four of the patents-in-suit, three with
prejudice. On September 30, 2003, as a result of the courts dismissal, AstraZeneca served each of
the Second Wave Defendants, including IMPAX, with an amended complaint. In October 2003, we filed
an answer to the amended complaint in which we asserted a new counterclaim with antitrust
allegations. The counterclaim will be severed, and proceedings relating to it will be stayed until
after trial of the patent infringement case.
In December 2003, the trial court entered a new scheduling order governing pre-trial proceedings
relating to the Second Wave Defendants, including us. The schedule for completion of the litigation
in the Second Wave, including AstraZenecas litigation against the Company, now provides that all
fact and expert discovery is complete. AstraZenecas expert reports on issues as to which it bears
the burden of proof, including issues of alleged infringement, were served on February 17, 2004.
Our responsive expert reports were served on July 12, 2004. Astras reply reports were served in
early September 2004, prior to the launch of our commercial product.
The December 2003 scheduling order was amended most recently in August 2004. The amended scheduling
order also allows for the filing of summary judgment motions beginning in March 2005. The Company
has filed two motions for summary judgment against AstraZeneca: one alleging that the
patents-in-suit are invalid under 35 U.S.C. Sect. 102(b) due to public usage of the invention prior
to the filing of the patents; the other alleging that our ANDA products do not infringe any claim
of the patents-in-suit. AstraZeneca did not file any summary judgment motions against the Company.
Briefing on the summary judgment motions has yet to be completed, and we do not have any timetable
by which decisions on the summary judgment motions should be expected.
This matter is pending before Judge Jones of the Southern District of New York, together with
AstraZenecas patent infringement cases against four other defendants who have separately filed
ANDAs seeking approval from the FDA to market omeprazole drug products. The case remains in
discovery pretrial proceedings. No trial date has yet been set. The Company intends to defend
vigorously. The amended scheduling order states that no further extensions of time shall be granted
to the parties.
In conjunction with our strategic partner, Teva, we recently have initiated a commercial launch of
certain omeprazole products which were the subject of its ANDA application and which are at issue
in this litigation. If we are not ultimately successful in establishing invalidity or
non-infringement, the court may award monetary damages associated with the commercial sale of our
omeprazole products. Pursuant to the Strategic Alliance Agreement with Teva,
however, Teva is responsible for indemnifying the Company with respect to any such monetary
damages, provided certain conditions are met.
On January 4, 2005, AstraZeneca moved to amend its Complaint against the Company to add claims of
willful infringement and for enhanced damages on the basis of this commercial launch. The Company
and AstraZeneca subsequently reached a stipulation that was approved by the Court allowing the
Amended Complaint to be filed. On February 14, 2005, the Company filed its answer and counterclaims
to the Amended Complaint. Among the Companys counterclaims are a number of claims for relief under
federal antitrust law, including claims arising under Section 2 of the Sherman Act, and claims
seeking declaratory judgment that the patents are not infringed and are unenforceable.
AVENTIS PHARMACEUTICALS INC., ET AL. V. IMPAX: THE FEXOFENADINE CASES
On March 25, 2002, Aventis Pharmaceuticals Inc., Merrell Pharmaceuticals Inc., and Carderm Capital
L.P. (collectively referred to as Aventis) sued the Company in the U.S. District Court for the
District of New Jersey (Civil Action No. 02-CV-1322) alleging that IMPAXs proposed fexofenadine
and pseudoephedrine hydrochloride tablets, containing 60 mg of fexofenadine and 120 mg of
pseudoephedrine hydrochloride, infringe U.S. Patent Nos. 6,039,974; 6,037,353; 5,738,872;
6,187,791; 5,855,912; and 6,113,942. On November 7, 2002, Aventis filed an amended complaint, which
added an allegation that IMPAXs Fexofenadine and Pseudoephedrine Hydrochloride 60 mg/120 mg
Extended Release Tablet product infringes U.S. Patent No. 6,399,632. Aventis seeks an injunction
preventing us from marketing its Fexofenadine and Pseudoephedrine Hydrochloride 60 mg/120 mg
Extended Release Tablet product until the patents-in-suit have expired, and an award of damages for
any commercial manufacture, use, or sale of our Fexofenadine and Pseudoephedrine Hydrochloride 60
mg/120 mg Extended Release Tablet product, together with costs and attorneys fees. The Company
believes that it has defenses to the claims made by Aventis based on noninfringement and
invalidity.
Aventis has also filed a suit against Barr Laboratories, Inc., Mylan Pharmaceuticals, Inc., Dr.
Reddys Pharmaceuticals and Teva Pharmaceuticals USA, Inc. in New Jersey asserting the same patent
infringement against these defendants proposed Fexofenadine and Pseudoephedrine or Fexofenadine
products. Our case has been consolidated for trial with the Barr, Mylan, Dr. Reddy and Teva cases.
On March 25, 2004, Aventis and AMR filed a complaint and first amended complaint against the
Company and Ranbaxy, alleging infringement of two additional patents relating to the process for
making the active pharmaceutical ingredient, fexofenadine hydrochloride. These patents, United
States Patent Nos. 5,581,011 and 5,750,703, are owned by AMR and exclusively licensed to Aventis.
On July 23, 2003, we filed Summary Judgment motions for non-infringement of U.S. Patent Nos.
6,039,974, 6,113,942, and 5,855,912; and for non-infringement and invalidity of U.S. Patent No.
5,738,872. On June 29, 2004, the court granted the Companys Motions for Summary Judgment of
Non-infringement of the `912 and `942 patents and denied the Companys Motion
for Summary Judgment of Non-infringement of the `974 patent. At the same time, the court ordered
that a ruling on the Companys motion for Summary Judgment for the Non-infringement and invalidity
of the `872 patent was reserved pending a Markman hearing held on September 9, 2004 to assist the
court in construing the patents product-by-process claims. On October 4, 2004, Judge Greenaway
construed the claims of the fifth patent in favor of us and the other defendants. The parties
submitted further briefs regarding the invalidity of the `872 patent in light of the courts claim
construction. On May 16, 2005, Judge Greenway granted Summary Judgment of invalidity on the 872
patent . We will have the opportunity to file additional summary judgment motions and to assert
both non-infringement and invalidity of the remaining patents (if necessary) at trial.
According to the current scheduling order, fact discovery is scheduled to close on June 30, 2005
and expert discovery will close on December 14, 2005. No trial date has been set.
PURDUE PHARMA L.P. ET AL. V IMPAX: THE OXYCODONE CASES
On April 11, 2002, Purdue Pharma and related companies filed a complaint in the U.S. District Court
for the Southern District of New York alleging that IMPAXs submission of ANDA No. 76-318 for 80 mg
oxycodone tablets infringes three patents owned by Purdue. The Purdue patents are U.S. Patent Nos.
5,508,042, 5,549,912 and 5,656,295; all directed to controlled release opioid formulations. On
September 19, 2002, Purdue filed a second Infringement Complaint regarding our 40 mg oxycodone
generic product. On October 9, 2002, Purdue filed a third Infringement Complaint regarding our 10
mg and 20 mg oxycodone generic products. We filed its answer and counterclaims in each case on
October 3, 2003. On November 25, 2003, Purdue submitted their reply to our counterclaims. Purdue is
seeking, among other things, a court order preventing us from manufacturing, using or selling any
drug product that infringes the subject Purdue patents.
Purdue previously sued Boehringer Ingelheim/Roxane, Endo and Teva on the same patents. One or more
of these defendants may resolve the invalidity issues surrounding the Purdue patents prior to when
our case goes to trial. The Boehringer Ingelheim/Roxane suit is stayed. The Endo action was tried
in June 2003. In January 2004, the judge in the Endo action ruled that the three patents in suit,
the same patents that Purdue has asserted against the Company, are unenforceable because they were
inequitably procured and enjoined their enforcement. Purdue appealed that ruling to the Court of
Appeals for the Federal Circuit. We were granted Summary Judgment on January 10, 2005, dismissing
Purdues charges of infringement and holding the patents to be unenforceable, based on the Endo
decision.
The Company commenced shipping Oxycodone 80mg in March 2005.
On June 7, 2005, the Court of Appeals for the Federal Circuit affirmed the District Courts ruling
that the patents in suit were unenforceable due to inequitable conduct. Purdue has stated that they
intend to file a Petition for Re-hearing En Banc. If the Endo decision is ultimately reversed, and
Purdue were to prevail in litigation against us, we would be liable for Purdues damages, up to its
lost profits from our infringing sales. If the infringement were found to be willful, our damages
could be increased by up to three times.
IMPAX V. AVENTIS PHARMACEUTICALS, INC.: THE RILUZOLE CASE
In June 2002, we filed suit against Aventis Pharmaceuticals, Inc. in the U.S. District Court in
Wilmington, Delaware, seeking a declaration that the filing of an ANDA to engage in a commercial
manufacture and/or sale of Riluzole
50 mg Tablets for treatment of patients with amyotrophic lateral scleroses (ALS) does not infringe
claims of Aventis U.S. Patent No. 5,527,814 (`814 patent) and a declaration that this patent is
invalid.
In response to our complaint, Aventis filed counterclaims for direct infringement and inducement of
infringement of the `814 patent. In December 2002, the district court granted Aventis Motion for
Preliminary Injunction and enjoined us from infringing, contributory infringing, or inducing any
other person to infringe Claims 1, 4 or 5 of the `814 patent by selling, offering for sale,
distributing, marketing or exporting from the United States any pharmaceutical product or compound
containing riluzole or salt thereof for the treatment of ALS.
The trial was completed on October 30, 2003, and post-trial briefing was completed in December
2003. On January 30, 2004, the court denied our Motion for Summary Judgment on inequitable conduct
and, on February 5, 2004, the court denied our Motion for Summary Judgment on non-infringement of
certain claims. In September 2004, the court ruled the `814 patent is valid, enforceable and
infringed by our proposed generic riluzole product. On March 11, 2005, Aventis submitted to the
court a proposed form of final judgment in favor of Aventis, reflecting the courts prior rulings
that claims 1 through 5 of the `814 patent are not invalid or unenforceable, and that our proposed
manufacture and sale of riluzole would induce infringement of claims 1 through 5 of the `814
patent. On March 16, 2005, the Federal District Court entered final judgment. We filed a Notice of
Appeal on March 21, 2005.
If we are not ultimately successful in proving invalidity or unenforceability, there is a
substantial likelihood that the court will enter a permanent injunction enjoining us from marketing
Riluzole 50 mg Tablets for the treatment of ALS in the United States until the expiration of the
`814 patent (June 18, 2013). If we are ultimately successful in proving either defense, the
preliminary injunction would be set aside and the Company would be permitted to market its Riluzole
50 mg Tablet product for the treatment of ALS in the United States.
ABBOTT LABORATORIES V. IMPAX: THE FENOFIBRATE TABLET CASES
In January 2003, Abbott Laboratories and Fournier Industrie et Sante and a related company filed
suit against the Company in the U.S. District Court in Wilmington, Delaware claiming that our
submission of an ANDA for Fenofibrate
Tablets, 160 mg, constitutes infringement of two U.S. patents owned by Fournier and exclusively
licensed to Abbott, relating to Abbotts Tricor tablet product.
In March 2003, Abbott and Fournier filed a second action against IMPAX in the same court making the
same claims against our 54 mg Fenofibrate Tablets. These cases were consolidated in April 2003.
In September 2003, Abbott and Fournier filed a third action against the Company in the U.S.
District Court in Wilmington, Delaware, claiming that our submission of its ANDA for 54 mg and 160
mg Fenofibrate Tablets constitutes infringement of a third patent recently issued to Fournier and
exclusively licensed to Abbott. This action was also consolidated with the two previously
consolidated actions in December 2003. In January 2004, Abbott and Fournier filed a fourth action
relating to our 54 mg and 160 mg Fenofibrate Tablets based upon a claim of infringement of a fourth
patent. The asserted patents are U.S. Patent Nos. 6,652,881, 6,589,552, 6,277,405 and 6,074,670.
All four cases were consolidated in March 2004. This matter was consolidated for trial with the
Abbott Laboratories v. Teva Pharmaceuticals USA, Inc. matter, an action before the same judge
involving similar claims of patent infringement by Teva and similar defenses.
Fact and expert discovery in the consolidated cases closed in November 2004. A claim construction
hearing was held on February 28, 2005. On March 7, 2005, the District Court dismissed U.S. Patent
No. 6,074,670 from the lawsuit. On March 18, 2005, we moved to amend and supplement its answer to
assert antitrust counterclaims. A Markman claims construction ruling issued on April 22, 2005.
On May 6, 2005, the court issued a ruling on summary judgment and other motions. The Court (1)
denied our motion for a separate trial and to stay discovery on the willful infringement claim; (2)
granted IMPAXs motion for partial summary judgment of non- infringement due to the lack of at
least 20% by weight of a hydrophilic polymer; (3) granted our motion for partial summary judgment
of non-infringement of U.S. Patent No. 6,074,670 (the motion having been made before the March 7
dismissal). The Court also granted in part our motion for partial summary judgment of
non-infringement of U.S. Patent No. 6,652,881 and some claims of U.S. Patent No. 6,277,405 and U.S.
Patent No. 6,589,552 insofar as Abbott claims infringement by the doctrine of equivalents, but
denied summary judgment as to literal infringement claims.
At the pretrial conference held on May 9, 2005, the court permitted the inequitable conduct defense
to be added for trial, and stayed consideration of the amendment to add the antitrust claim. On May
20, 2005, Plaintiffs moved to voluntarily dismiss the complaints and also the Companys and Tevas
declaratory judgment counterclaims for lack of subject matter jurisdiction based upon a proposed
covenant not to sue the defendants with respect to the patents-in-suit. By agreement between the
parties, the patent claims will be dismissed. The Companys motion to supplement and amend its
answers to assert antitrust counterclaims remains pending.
ALZA CORPORATION V. IMPAX: THE OXYBUTYNIN CASE
On September 4, 2003, Alza Corporation (Alza) filed a lawsuit against IMPAX in the U.S. District
Court for the Northern District of California alleging patent infringement of one patent, U.S.
Patent No. 6,124,355, related to our filing of an ANDA for a generic version of Ditropan XL
(Oxybutynin Chloride) Tablets, 5 mg, 10 mg, and 15 mg. Alza seeks an injunction, a declaration of
infringement, attorneys fees and costs. On October 24, 2003, we filed its Answer to the Complaint,
which included defenses to the infringement claim, and counterclaimed for patent non-infringement
and invalidity. On March 11, 2005, the Court issued an order construing the claims of the patent in
suit. In so doing, the Court adopted the claim construction involving the same patent that was
issued on December 7, 2004, in Alza Corp. v. Mylan Labs. et al., Civil Action No. 1:03CV61, which
is currently pending in the United States District Court for the Northern District of West
Virginia. The litigation is ongoing.
On October 24, 2003, we filed a lawsuit against Alza in the U.S. District Court for the Northern
District of California seeking a declaratory judgment that four Alza patents relating to our filing
of an ANDA for a generic version of Ditropan XL (Oxybutynin Chloride) Tablets, 5 mg, 10 mg, and 15
mg are invalid and/or not infringed by the commercial manufacture, use, offer for sale, sale, or
importation of our product. On November 17, 2003, Alza moved to dismiss the Companys complaint for
lack of subject matter jurisdiction based on Alzas argument that there is no case or controversy
between the parties with respect to these four patents. On April 19, 2004, the Court denied Alzas
motion. On May 18, 2004, the Court ordered the entry of a stipulation of dismissal based on a
covenant not to sue issued by Alza to the Company with respect to the four Alza patents in that
case.
SHIRE LABORATORIES INC. V IMPAX: THE GENERIC ADDERALL XR CASE
On December 29, 2003, Shire Laboratories, Inc., a subsidiary of Shire Pharmaceuticals Group, PLC,
filed a lawsuit against the Company in the U.S. District Court for the District of Delaware
alleging patent infringement on U.S. Patent Nos. 6,322,819 and 6,605,300 related to filing of an
ANDA to market a generic version of Adderall XR 30 mg capsules. We filed its answer on January 20,
2004, denying infringement and contesting the validity of both patents. Discovery in this matter is
complete. A Markman claim construction ruling was issued on February 9, 2005. The Parties submitted
expert reports on March 16, 2005 for the issues on which they bear the burden of proof. Shire now
concedes that it is unable to prove literal infringement based upon the courts claim construction.
Rebuttal reports were due on April 6, 2005. On February 25, 2005, we moved to amend its answer to
allege inequitable conduct with respect to both patents-in-suit, which motion was granted
Shire filed a new suit against us on January 13, 2005, No. 05-20 (GMS), asserting the same two
patents as in the first suit. The second complaint relates to an amendment to our ANDA in which we
added 5 mg, 10 mg, 15 mg, 20 mg and 25 mg dosage strengths. A scheduling conference took place on
April 11, 2005, when it was decided that the two actions would be consolidated for trial.
Discovery in the second action is proceeding. The court has authorized the Company to file a
summary judgment brief on September 12, 2005, regarding (1) non-infringement of U.S. Patent Nos.
6,322,819 and 6,605,300, and (2) no willful infringement. Fact discovery in the second matter is to
be completed by August 1, 2005. A seven-day bench trial is scheduled to begin on February 23, 2006.
BIOVAIL LABORATORIES INC. V IMPAX: THE GENERIC WELLBUTRIN XL CASE
On March 7, 2005, Biovail Laboratories Inc., a subsidiary of Biovail Corporation, commenced patent
litigation against us in the United States District Court, Eastern District of Pennsylvania
(Philadelphia), alleging patent infringement on U.S. Patent No. 6,096,341 related to our filing for
a generic version of Wellbutrin XL 150 mg. The Company has submitted its ANDA filing with the FDA
under Paragraph IV of the Hatch-Waxman Amendments, stating that it believes its generic versions of
Wellbutrin XL 150 and 300 mg tablets do not infringe Biovails listed patents or that the listed
patents are invalid or unenforceable. In April 2005, Biovail amended its suit against the Company
relating to a subsequent filing of the 300 mg dosage strength asserting the same patent as in the
earlier complaint. On May 11, 2005, the Company filed its answer to the amended complaint, which
included defenses to the infringement claim. Fact discovery is scheduled to close on December 2,
2005. No trial date has been set.
Other Litigation
STATE OF CALIFORNIA V. IMPAX
On August 7, 2003, IMPAX received an Accusation from the Department of Justice, Bureau of Narcotic
Enforcement, State of California (BNE), alleging that we failed to maintain adequate controls to
safeguard precursors from theft or loss regarding our pseudoephedrine product in January 2003. We
contested the allegations in the Accusation and entered into discussions with the State of
California, Department of Justice, to bring resolution to this matter. The Company has implemented
a number of remedial measures aimed at improving the security and accountability of precursor
substances used by the Company and regulated by the California Department of Justice, Bureau of
Narcotic Enforcement. In March 2004, following a theft of pseudoephedrine from our facilities, the
BNE filed an Amended Accusation, again alleging that the Company failed to maintain adequate
controls to safeguard precursors from theft or loss regarding our pseudoephedrine product. In May
2004, a Notice of Hearing was received from BNE, which set the hearing of this matter, should one
be necessary, for October 18 and October 19, 2004.
On October 11, 2004 we entered into a Stipulation with the BNE regarding our California Precursor
Business Permit #201, applicable to the our facility located at 31153 San Antonio Street, Hayward,
California. Pursuant to the Stipulation, Permit #201 is provisionally suspended, with such
suspension stayed, for a period of two (2) years, in which the Company must comply with the terms
and conditions of the Stipulation. The Stipulation provides: Upon
successful completion of the terms of the Stipulation for the period of time in which it is in
effect, the Companys permit will be fully restored without having been suspended.
The Stipulation resolves both the original Accusation and the Amended Accusation.
SOLVAY PHARMACEUTICALS V. IMPAX: THE CREON CASE
On April 11, 2003, Solvay Pharmaceuticals, Inc., manufacturer of the Creon line pancreatic enzyme
products, brought suit against the Company in the U.S. District Court for the District of Minnesota
claiming that we have engaged in false advertising, unfair competition, and unfair trade practices
under federal and Minnesota law in connection with the Companys marketing and sale of its Lipram
products. The suit seeks actual and consequential damages, including treble damages, attorneys
fees, injunctive relief and declaratory judgments that would prohibit the substitution of Lipram
for prescriptions of Creon. On June 6, 2003, we filed a Motion for Dismissal of Plaintiffs
Complaint, which sought to dismiss each count of Solvays complaint. On January 9, 2004, the U.S.
District Court issued a ruling on our Motion for Dismissal, dismissing two of the counts set forth
in the Complaint, including the count that sought a declaratory judgment that Lipram may not
lawfully be substituted for prescriptions of Creon. On January 26, 2004, IMPAX filed its Answer to
the Complaint and Counterclaim alleging that Solvay wrongfully interfered with IMPAXs business
relationships. On February 17, 2004, Solvay filed its Reply to our Counterclaim. Under the current
scheduling order, the discovery deadline is set for July 22, 2005, and a trial date is set for
February 1, 2006. Discovery is currently ongoing on this case. The Company believes it has defenses
to Solvays allegations and intends to pursue these defenses vigorously.
SECURITIES LITIGATION
In September 2004 and January 2005, the Company was served with several complaints filed by
shareholders in the Superior Court for Alameda County, California, all of which have since been
consolidated as case No. RG04176541, purporting to state a derivative claim on behalf of the
Company, as a nominal defendant. The complaints assert claims against all of the Companys
Directors and David S. Doll and Cornel C. Spiegler, each of whom is an Officer or Director, or
both, of IMPAX, and allege that each sold shares of the Companys common stock in June 2004 on the
basis of material nonpublic information. The complaints, asserting claims against these individuals
under California Corporations Code ss. 25402 and Californias common law, seek treble damages,
imposition of a constructive trust on the individual defendants profits, attorneys fees and costs,
and other relief as the court determines.
Our Board of Directors has appointed a Special Litigation Committee (SLC) of disinterested
directors to investigate the merits of the allegations in these complaints and to engage special
counsel to assist in such investigation. The actions have been stayed pending completion of the
SLCs investigation and report to the court. The SLC has completed its investigation and on April
22, 2005 issued its report, concluding that the allegations in the derivative
actions are without merit and that there is no likelihood that the defendants would be found liable
if the actions were to proceed and recommending that we should seek to have the actions dismissed.
The Company intends to file a motion to dismiss the action based upon the SLCs investigation and
report.
In November and December 2004, IMPAX, all of its Directors, Cornel Spiegler and David Doll were
served with several class action complaints filed in the United States District Court for the
Northern District of California, all of which have since been consolidated as case No. 04- 4808-JW.
These actions, brought on behalf of all purchasers of our stock between May 5 and November 3, 2004,
allege that the Company and the individual defendants, in violation of the antifraud provisions of
the federal securities laws, artificially inflated the market price of the stock during this period
by filing false financial statements for the first and second quarters of 2004, based upon the
Companys subsequent restatement of its results for those periods. Plaintiffs have recently filed a
consolidated amended complaint. The Company is currently preparing a motion to dismiss the amended
complaint for failure to state a claim upon which relief can be granted, which motion is required
to be filed by July 20, 2005.
LOUIS PICCONE V. IMPAX LABORATORIES. INC., an entity, and Larry Hsu, its President, individually
and in his official capacity, Superior Court of California for the County of Alameda, Case No.
HG04189310
On February 9, 2005, Louis Piccone, a former Intellectual Property attorney for the Company, sued
for retaliation in violation of the California Family Rights Act (CFRA) and the Fair Employment
and Housing Act (FEHA), alleging denial of reinstatement and failure to provide medical leave,
failure to accommodate a disability, discrimination on account of a disability, wrongful
termination in violation of public policy, breach of contract terminable only for good cause,
breach of the implied covenant of good faith and fair dealing, defamation, misrepresentation in
violation of Labor Code Section 970, fraud, and unfair business practices. The Company is in the
process of responding to the complaint. The Company intends to defend itself vigorously.
SECTION 1(KK):
Offer Letter to Arthur Koch.
Amendment dated March 16, 2005 to the Development License and Supply Agreement between Wyeth and
the Company.
Amendment dated March 25, 2005 to the Strategic Alliance Agreement dated June 27, 2001 between Teva
Pharmaceuticals Curacao NV and the Company.