UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form S-1
Akorn, Inc.
Louisiana
2834
72-0717400
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
2500 Millbrook Drive, Buffalo Grove, Illinois 60089
Arthur S. Przybyl
Kurt L. Kicklighter, Esq.
Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. þ
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be
made pursuant to Rule 434, please check the following
box.
o
CALCULATION OF REGISTRATION FEE
PROSPECTUS DATED
SEPTEMBER 21, 2004, SUBJECT TO COMPLETION
PROSPECTUS
Akorn, Inc.
Common Stock
This
prospectus relates to the resale of 59,442,581 shares of
our common stock by the selling stockholders identified in this
prospectus, which have been issued or reserved for issuance upon
the conversion or exercise of presently outstanding shares of
Series A 6.0% Participating Convertible Preferred
Stock, shares of Series B 6.0% Participating
Convertible Preferred Stock, warrants and convertible notes,
including shares estimated to be issuable in satisfaction of
accrued and unpaid dividends and interest on shares of preferred
stock and convertible notes, respectively, accrued through
August 31, 2004.
We
are registering 59,442,581 shares of our common stock for
resale by the selling stockholders identified in this prospectus
on pages 19 through 24. The selling stockholders may sell
the shares of common stock described in this prospectus in
public or private transactions, at prevailing market prices, or
at privately negotiated prices. The selling stockholders may
sell shares directly to purchasers or through brokers or
dealers. Brokers or dealers may receive compensation in the form
of discounts, concessions or commissions from the selling
stockholders. We will not receive any of the proceeds from the
sale of the shares by the selling stockholders. The selling
stockholders will receive all of the proceeds from the sale of
the shares and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the shares. We
will, in the ordinary course of business, receive proceeds from
the issuance of shares upon exercise of the warrants described
in this prospectus. We will pay the expenses of registration of
the sale of the shares. It is not possible at the present time
to determine the price to the public in any sale of the shares
by the selling stockholders and each selling stockholder
reserves the right to accept or reject, in whole or in part, any
proposed purchase of shares. Accordingly, the public offering
price, the amount of any applicable underwriting discounts and
commissions and the net proceeds to the selling stockholders
will be determined at the time of such sale by the selling
stockholders.
Our
common stock is traded on the OTC Bulletin Board® under the
symbol “AKRN.OB.” On September 17, 2004, the
average of the bid and asked prices of our common stock on the
OTC Bulletin Board® was $2.95.
Investing in our common stock involves risks.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus is
September , 2004
Proposed Maximum
Proposed Maximum
Amount of
Title of Securities
Amount to Be
Offering Price
Aggregate
Registration
to Be Registered
Registered(1)
Per Share(2)
Offering Price(3)
Fee
62,213,463
$2.95
$183,529,716
$23,253
(1)
This number represents the number of shares that
have been issued or are issuable upon the conversion or exercise
of the preferred stock, warrants and convertible notes described
in this Registration Statement, including shares estimated to be
issuable in satisfaction of dividends and interest accrued and
unpaid on such securities during the offering to which this
Registration Statement relates. This number is subject to
adjustment to prevent dilution resulting from stock splits,
stock dividends, the issuance of common stock or securities
convertible into or exercisable for common stock at prices below
certain thresholds or similar events. Therefore, pursuant to
Rule 416 under the Securities Act of 1933, this
Registration Statement also registers such indeterminate number
of shares as may be issuable in connection with stock splits,
stock dividends or similar events.
(2)
Estimated solely for the purpose of calculating
the amount of the registration fee pursuant to Rule 457(h)
under the Securities Act of 1933. It is not known how many
shares of common stock will be purchased under this Registration
Statement or at what price such shares will be purchased. The
offering price per share and aggregate offering price are
derived from the average of the bid and asked prices of the
common stock on September 17, 2004, as reported on the OTC
Bulletin Board®.
(3)
Estimated solely for the purpose of calculating
the registration fee pursuant to Rule 457(c) under the
Securities Act of 1933, based upon the average of the bid and
asked prices of the common stock on September 17, 2004, as
reported on the OTC Bulletin Board®, which was $2.95.
The information contained in this
prospectus is not complete and may be changed. The selling
stockholders may not sell these securities pursuant to this
prospectus until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus
is not an offer to sell these securities and it is not
soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
TABLE OF CONTENTS
You should rely only on the information
contained in this prospectus. We have not authorized anyone to
provide you with information different from that contained in
this prospectus. The selling stockholders are not offering to
sell or seeking offers to buy shares of our common stock in
jurisdictions where offers and sales are prohibited. The
information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery
of this prospectus or of any sale of our common stock.
Page
1
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76
76
F-1
PROSPECTUS SUMMARY
This summary highlights information contained
elsewhere in this prospectus. This summary does not contain all
of the information you should consider before buying shares in
this offering. You should read this entire prospectus carefully,
including “Risk Factors” and our financial statements
before making an investment decision. References in this
prospectus to “Akorn,” “us,” “we,”
“our,” or the “Company” refer to Akorn, Inc.
and its subsidiary, Akorn (New Jersey), Inc., as the context
requires.
Akorn, Inc.
Akorn, Inc. manufactures and markets diagnostic
and therapeutic pharmaceuticals in specialty areas such as
ophthalmology, rheumatology, anesthesia and antidotes, among
others. Our customers include physicians, optometrists,
wholesalers, group purchasing organizations and other
pharmaceutical companies. We are a Louisiana corporation founded
in 1971 in Abita Springs, Louisiana. In 1997, we relocated our
headquarters and certain operations to Buffalo Grove, Illinois.
We also have manufacturing facilities in Decatur, Illinois. We
have a wholly owned subsidiary named Akorn (New Jersey), Inc.
which has operations in Somerset, New Jersey. Our subsidiary is
involved in manufacturing, research and development, and
administrative activities related to our ophthalmic segment.
We classify our operations into three
identifiable business segments: ophthalmic, injectable and
contract services.
Ophthalmic Segment.
We market a line of diagnostic and therapeutic ophthalmic
pharmaceutical products. Diagnostic products, primarily used in
the office setting, include mydriatics and cycloplegics,
anesthetics, topical stains, gonioscopic solutions, angiography
dyes and others. Therapeutic products, sold primarily to
wholesalers and other national account customers, include
antibiotics, anti-infectives, steroids, steroid combinations,
glaucoma medications, decongestants/antihistamines and
anti-edema medications. Non-pharmaceutical products include
various artificial tear solutions, preservative-free lubricating
ointments, lid cleansers, vitamin supplements and contact lens
accessories.
Injectable Segment.
We market a line of specialty injectable pharmaceutical
products, including anesthesia, poison control
(antidotes) and products used in the treatment of
rheumatoid arthritis and pain management. These products are
marketed to hospitals through wholesalers and other national
account customers, as well as directly to medical specialists.
Contract Services
Segment.
We manufacture products for
third-party pharmaceutical and biotechnology customers based on
their specifications.
Government
Regulation.
Pharmaceutical
manufacturers and distributors are subject to extensive
regulation by government agencies, including the Food and Drug
Administration, or “FDA,” the Drug Enforcement
Administration, or “DEA,” the Federal Trade
Commission, or “FTC” and other federal, state and
local agencies. The federal Food, Drug and Cosmetic Act, or
“FDC Act,” the Controlled Substance Act and other
federal statutes and regulations govern or influence the
development, testing, manufacture, labeling, storage and
promotion of products that we manufacture and market. The FDA
inspects drug manufacturers and storage facilities to determine
compliance with its Current Good Manufacturing Practices, or
“cGMP,” regulations, non-compliance with which can
result in fines, recall and seizure of products, total or
partial suspension of production, refusal to approve new drug
applications and criminal prosecution. The FDA also has the
authority to revoke approval of drug products.
FDA approval is required before any drug can be
manufactured and marketed. New drugs require a New Drug
Application, or “NDA,” filing, including clinical
studies demonstrating the safety and efficacy of the drug.
Generic drugs, which are equivalents of existing, off-patent
brand name drugs, require an Abbreviated New Drug Application,
or “ANDA,” filing.
1
Business Overview
As described more fully in this prospectus, in
recent years we have experienced significant regulatory and
financial challenges. These combined challenges contributed to
circumstances that resulted in our independent registered public
accountants indicating in their report related to their audit of
our consolidated financial statements for the year ended
December 31, 2003 that there exists substantial doubt about
our ability to continue as a going concern. In response to these
challenges, we have recruited new senior management, addressed
our regulatory issues, improved our financial structure and
raised additional capital. These improvements have positioned us
for future growth and improved operating results.
In 2002 and 2003, we continued to work to correct
deviations from FDA regulatory requirements at our Decatur
facilities, some of which were first identified by the FDA in
October 2000. In March 2002, we received a letter from the
regional office of the Securities and Exchange Commission, or
“SEC,” informing us that it would recommend
enforcement action against us and that we had misstated our
income for fiscal years 2000 and 2001. We continued to address
these matters with the SEC into 2003. Also, during late 2002 and
until October 2003, we were not in compliance with the covenants
of our senior debt and from time to time negotiated
forbearances. We had substantial operating losses during these
periods, as well.
In September 2002, we appointed Mr. Arthur
S. Przybyl, an experienced executive officer, as our president,
and in February 2003 named him our chief executive officer. In
March 2003, Mr. Ronald M. Johnson, a former FDA compliance
and enforcement official, was appointed to our board of
directors. We added Messrs. Arjun C. Waney and
Jerry I. Treppel, both experienced investment managers, to
our board of directors following our October 2003 Exchange
Transaction (as defined below). Mr. Waney was one of the
investors in that transaction, and Mr. Treppel has specific
expertise in managing investments in health care and related
industries. Mr. Jeffrey A. Whitnell, an experienced
senior manager in the pharmaceutical business, became our chief
financial officer in June 2004.
Resolution of deviations identified by the FDA
has taken longer than expected although we believe that
substantial progress has been made. The FDA inspections in
2000, 2002 and 2003 identified several significant deviations.
In response, we have invested approximately $2,000,000 in
improved cleaning validation and enhanced process controls and
have developed a comprehensive corrective action plan. We have
been in regular communication with the FDA and have provided
periodic reports of our progress. The FDA’s latest
inspection of our Decatur facilities was concluded on
April 7, 2004. Several deviations were identified for which
we provided the FDA with proposed corrective actions. The FDA
has initiated no enforcement action against us or any of our
products. Rather, the FDA has notified us that another
“confirmatory” inspection will be made to determine
whether the deviations identified have been corrected. The
confirmatory inspection is anticipated to occur in the fourth
quarter of 2004. Until the FDA has confirmed that all
corrections have been made, it is highly unlikely that the FDA
will approve any of our applications for marketing of new or
revised products produced at our Decatur facilities. We believe
that we have taken appropriate corrective actions and that the
deviations will be found to have been corrected during the
FDA’s confirmatory inspection. However, there can be no
assurance that this will be the case.
According to the March 27, 2002 letter from
the SEC, we had misstated our income in 2000 and 2001 by
allegedly failing to reserve for doubtful accounts receivable
and overstating our accounts receivable balance as of
December 31, 2000. We determined the need to restate our
financial statements for 2000 and 2001, resulting in the
recording of a $7,500,000 increase to the allowance for doubtful
accounts as of December 31, 2000, which we had originally
recorded as of March 31, 2001. On September 25, 2003,
we consented to the entry of an administrative cease and desist
order with respect to these matters. The consent order also
required that we commit to do the following: (A) appoint a
special committee comprised entirely of outside directors,
(B) within 30 days after entry of the order, have the
special committee retain a qualified independent consultant
acceptable to the staff to perform a test of our material
internal controls, practices, and policies related to accounts
receivable, and (C) within 180 days, have the
consultant present his or her findings to the commission for
review to provide assurance that we are keeping accurate books
and records and have devised and maintained a system of adequate
internal
2
In 1997, we entered into a $15,000,000 revolving
credit arrangement with The Northern Trust Company, which was
increased to $25,000,000 in 1998, and subsequently increased to
$45,000,000 in 1999, subject to certain financial covenants and
secured by substantially all of our assets. We were notified of
default for failure to make payment in September 2002. Under
various forbearance agreements, this facility was modified and
extended through most of 2003 as we explored ways to restructure
our debt. As a condition of our lenders continuing to forbear
from exercising remedies against us as a result of certain
defaults under our credit agreement, we engaged AEG Partners LLC
to assist us in restructuring our credit arrangement. As
required by the lenders, on May 9, 2003, we engaged Leerink
Swann & Company, an investment banking firm, to assist
in raising additional financing and explore other strategic
alternatives for repaying the debt.
On October 7, 2003, a group of investors,
including entities controlled by Dr. John N.
Kapoor, Ph.D. and Mr. Arjun C. Waney, purchased
all of our then outstanding senior bank debt from The Northern
Trust Company, a balance of $37,731,000, at a discount. The
investors then exchanged that debt with us for Series A
6.0% Participating Convertible Preferred Stock, or
“Series A Preferred Stock,” approximately
$2,767,000 in promissory notes, warrants to purchase our common
stock, and $5,473,862 in cash from the proceeds of a new term
loan (described in the next paragraph). We recorded a $3,102,000
loss from this transaction and we also paid a portion of the
legal fees of the investors. We refer to this transaction as the
“Exchange Transaction.”
Simultaneously with the consummation of the
Exchange Transaction, we entered into a credit agreement with
LaSalle Bank National Association (“LaSalle Bank”)
providing us with $7,000,000 in term loans and a revolving line
of credit of up to $5,000,000 (the “New Credit
Facility”) to provide for working capital needs, secured by
substantially all of our assets. On August 13, 2004, we and
LaSalle Bank amended the New Credit Facility to modify certain
of the financial covenants.
On August 23, 2004, we completed a private
placement to certain investors of 141,000 shares of our
Series B 6.0% Participating Convertible Preferred Stock, or
“Series B Preferred Stock,” at a price of
$100.00 per share, convertible into common stock at a price
of $2.70 per share, with warrants to
purchase 1,566,667 additional shares of our common stock
exercisable until August 23, 2009, with an exercise price
of $3.50 per share (the “Series B
Warrants”). The net proceeds to us after payment of
investment banker fees and expenses to Leerink Swann &
Company and other transaction costs of approximately $1,056,000,
were approximately $13,044,000. Under the terms of the private
placement, we are required to file the registration statement of
which this prospectus is a part to enable the investors to
resell the shares of our common stock into which the
Series B Preferred Stock is convertible and which may be
purchased upon exercise of the Series B Warrants.
A portion of the net proceeds of the private
placement paid off the term loans from LaSalle Bank. The
remainder of the net proceeds will be used for working capital
and general corporate purposes. Among other things, the proceeds
will pay for the validation testing of our new lyophilization
facility, which is expected to become operational by
approximately late 2005 or early 2006. On August 26, 2004,
in connection with the pay off of our outstanding debt under the
New Credit Facility, we and LaSalle Bank amended the New Credit
Facility to release the guaranty of Dr. John N. Kapoor and
The John N. Kapoor Trust dated September 20, 1989 (the
“Kapoor Trust”) effective as of such date provided
that if prior to November 24, 2004 there is then pending a
petition in bankruptcy court against us or our subsidiary and
there is then existing a claim that all or any portion of the
payoff amount is a fraudulent transfer or a preferential
payment, or should otherwise be set aside, then the guaranty
shall be reinstated.
3
The Exchange Transaction, coupled with the
private placement, has substantially reduced our overall debt
from $45,755,000 as of September 30, 2003 to $10,319,000 as
of August 31, 2004, and positioned us to improve our
operating results. Although we continue to suffer operating
losses, for the eight months ended August 31, 2004, we
generated positive earnings before interest, taxes, depreciation
and amortization (“EBITDA”). Even without resolution
of the remaining issues with the FDA, we believe that our
ability to sustain historical revenue levels and positive EBITDA
is achievable. If we can resolve the remaining issues with the
FDA, we believe we will be able to manufacture new or revised
products at our Decatur facilities and enhance our revenue.
Partially because of our improving financial
condition, we have been able to structure new strategic business
alliances in an effort to enhance our growth opportunities. On
April 21, 2004, we announced the signing of a memo of
understanding with Strides Arcolab Limited, a major
pharmaceutical manufacturer based in India, to market products
for the U.S. hospital market under a joint venture. As a
result of negotiations following the execution of the memo of
understanding, we expect to enter into agreements with Strides
for the development, manufacturing and marketing of
grandfathered products, patent-challenging products and ANDA
products for the U.S. Hospital and retail markets. Strides
will be responsible for developing, manufacturing and supplying
products. We will be responsible for sales and marketing of the
products. We and Strides will each own 50% of the joint venture
company and will each appoint one of its two managers. Each will
contribute $1,250,000 in capital, to be used to finance the
preparation of ANDAs by Strides. We will also loan an additional
$1,250,000 to the joint venture company that will be advanced to
Strides to finance its capital contribution. If within a
mutually agreed time period, Strides’ manufacturing
facilities in India have not received a satisfactory cGMP
inspection by the FDA, which remains current, and twelve ANDAs
for products developed by Strides at its manufacturing
facilities in India have not been submitted to the FDA, among
other things, we will become the sole owner of the joint venture
company and the joint venture company will be entitled to draw
on a $1,250,000 letter of credit from an Indian bank that is
confirmed by a U.S. bank. On the other hand, if these
conditions are met, and if both managers agree, we and Strides
may make additional equivalent capital contributions to finance
subsequent ANDA preparation costs under a similar arrangement to
our initial capital contributions, including an additional loan
by us to the joint venture company to finance Strides’
capital contribution.
On July 21, 2004, we and FDC Limited,
India’s second largest manufacturer and marketer of
ophthalmic pharmaceutical products, announced the signing of a
purchase and supply agreement, which would provide us with an
ophthalmic finished dosage form product pipeline for exclusive
use in the U.S. and Canada.
The Offering
4
(1) We are registering the following number
of shares of common stock:
In addition to the shares listed above, we are
registering 2,770,882 shares of common stock that are
estimated to be issuable in respect of accrued and unpaid
dividends on our outstanding Series A Preferred Stock and
our Series B Preferred Stock and issuable upon the
conversion of accrued and unpaid interest on the Tranche A
Note and Tranche B Note from September 1, 2004 through
August 31, 2005. The number of shares of common stock set
forth above is subject to adjustment to prevent dilution
resulting from stock splits, stock dividends, the issuance of
common stock or securities convertible into or exercisable for
common stock at prices below certain thresholds or similar
events. Therefore, pursuant to Rule 416, we are also
registering such indeterminate number of shares as may be
issuable in connection with stock splits, stock dividends or
similar events. Other than holders of the Series B
Preferred Stock and Series B Warrants, who have direct
registration rights for this offering, each of the holders of
each of the other securities listed above have “piggy
back” registration rights for this offering.
We have reserved for issuance the shares of our
common stock identified in this prospectus. Each of the above
listed securities which are being sold by the selling
stockholders were “restricted securities” under the
Securities Act of 1933, or the “Securities Act,” prior
to this registration. The selling stockholders will determine if
and when they will sell their shares and if they will sell their
shares at the current market price or at negotiated prices at
the time of the sale. Although we have agreed to pay the
expenses related to the registration of the shares being
offered, we will not receive any proceeds from the sale of the
shares by the selling stockholders.
5
Third Quarter 2004 Accounting
Impacts
Recent events had certain accounting impacts that
will be reflected in our financial statements for the third
quarter of 2004, as described below:
6
Summary Selected Consolidated Financial
Data
Summary Financial Data
The following summary financial data is derived
from and qualified in its entirety by our financial statements.
You should read this summary financial data together with
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the audited
consolidated financial statements and unaudited financial
information and related notes beginning at page F-1 of this
prospectus.
7
RISK FACTORS
You should carefully consider the following
risk factors and all other information contained in this
prospectus before investing. Investing in our common stock
involves a high degree of risk. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently
believe are immaterial also may impair our business. If any of
the events described in the following risks occur, our business,
results of operations and financial condition could be
materially adversely affected. In addition, the trading price of
our common stock could decline due to any of the events
described in these risks, and you may lose all or part of your
investment.
Risks Related to Us
Our
Decatur, Illinois manufacturing facilities are the subject of an
FDA Warning Letter.
The FDA issued a Warning Letter to us in October
2000 following a routine inspection of our Decatur facilities.
An FDA Warning Letter is intended to provide notice to a company
of violations of the laws administered by the FDA and to elicit
voluntary corrective action. Until the violations identified in
the Warning Letter are corrected, the FDA frequently will
withhold approval of any marketing applications (ANDAs, NDAs)
submitted by the company and will share contents of the Warning
Letter with other government agencies (for example, the Veterans
Administration or Department of Defense) that may contract to
purchase products from the company. Failure to take effective
corrective actions can result in the FDA enforcement action such
as monetary fines, seizure of products, or injunction that could
suspend manufacturing and compel recall of product.
The Warning Letter addressed several deviations
from regulatory requirements identified during the inspection
and requested that we take corrective actions. Since then,
additional FDA inspections in 2002 and 2003 have found that
certain deviations continued unresolved and have identified
additional deviations. In response to the Warning Letter and
inspections, we have invested approximately $2,000,000 in
improved cleaning validation and enhanced process controls and
have developed a comprehensive corrective action plan. We have
been in regular communications with the FDA and have provided
periodic reports of our progress in making corrections. The
FDA’s latest inspection of our Decatur facilities was
concluded on April 7, 2004. Several deviations were
identified for which we provided the FDA with proposed
corrective actions. The FDA has initiated no enforcement action
against us or any of our products. Rather, the FDA has notified
us that another “confirmatory” inspection will be made
to determine whether the deviations identified have been
corrected. The confirmatory inspection is anticipated to occur
in the fourth quarter of 2004. The noncompliance of our Decatur
facilities has prevented us from developing additional products
at Decatur, some of which cannot be developed at our other
facility. The inability to fully use our Decatur facilities has
had a material adverse effect on our business, financial
condition and results of operations.
If the inspection identifies significant
deviations, the FDA may initiate enforcement action including
the following: (1) maintain the Warning Letter sanctions
and require further corrective actions, which could include a
recall of certain products; (2) seek a court-ordered
injunction which may include temporary suspension of some or all
operations, mandatory recall of certain products, potential
monetary penalties or other sanctions; or (3) seize our
products. Any of these actions could significantly impair our
ability to continue to manufacture and distribute products,
generate cash from our operations, and may result in a covenant
violation under our senior debt. Any or all of these enforcement
actions would have a material adverse effect on our liquidity
and our ability to continue as a going concern.
Unless and until we correct the FDA deviations at
our Decatur facilities, it is doubtful that the FDA will approve
any applications that may be submitted by us for products to be
manufactured in Decatur. This has adversely impacted, and is
likely to continue to adversely impact, our ability to grow
sales. See “Legal Proceedings.”
8
Our recent operating losses, working capital
deficiencies and negative cash flows from operations may
continue in the future and there can be no assurance that our
financial outlook will improve. For the six months ended
June 30, 2004 and 2003, we experienced operating losses of
$2,084,000 and $2,928,000, respectively, and for the years ended
December 31, 2003 and 2002, our operating losses were
$6,276,000 and $3,565,000, respectively. At June 30, 2004
and 2003, we had a net working capital deficit of $899,000 and
$40,099,000, respectively. We experienced negative cash flows
from operations for the year ended December 31, 2003 and
the six months ended June 30, 2004 of $1,932,000 and
$1,201,000, respectively. Our independent registered public
accountants included in their report related to their audit of
our most recent audited consolidated financial statements for
the year ended December 31, 2003 that our recurring losses
from operations in recent years, net working capital deficiency
at December 31, 2003, and our involvement in certain
ongoing governmental proceedings raise substantial doubt about
our ability to continue as a going concern. There can be no
assurance that our results of operations will improve in the
future. If our results of operations do not improve in the
future, your investment in our common stock could be negatively
affected.
A significant part of our growth strategy is to
develop the capability to manufacture lyophilized (freeze-dried)
pharmaceutical products. We have expended approximately
$18,335,000 through June 30, 2004, toward the development
of lyophilization capability at our Decatur facilities, and we
expect that significant human and financial resources will be
required to be expended prior to our realization of any benefit
from lyophilization. Management estimates that the development
of lyophilization capability at our Decatur facilities is
approximately one year from completion, in the best of
circumstances. However, there is no guarantee that we will be
successful in completing development of lyophilization
capability, or that other intervening events will not occur that
reduce or eliminate the anticipated benefits from such
capability. For instance, the market for lyophilized products
could significantly diminish or be eliminated, or new
technological advances could render the lyophilization process
obsolete, prior to our entry into the market. There can be no
assurance that we will realize the anticipated benefits from our
significant investment into lyophilization capability at our
Decatur facilities, and our failure to do so could significantly
limit our ability to grow our business in the future.
A small number of large wholesale drug
distributors account for a large portion of our gross sales,
revenues and accounts receivable. The following three
distributors, AmerisourceBergen Corporation, Cardinal Health,
Inc. and McKesson Drug Company, accounted for approximately 49%
of total gross sales and 32% of total revenues for the six
months ended June 30, 2004, and 63% of gross trade
receivables as of June 30, 2004. In addition to acting as
distributors of our products, these three companies also
distribute a broad range of health care products for many other
companies. The loss of one or more of these distributors,
together with a delay or inability to secure an alternative
distribution source for end users, could have a material
negative impact on our revenue and results of operations and
lead to a violation of debt covenants. A change in purchasing
patterns, a decrease in inventory levels, an increase in returns
of our products, delays in purchasing products and delays in
payment for products by one or more distributors also could have
a material negative impact on our revenue and results of
operations and lead to a violation of debt covenants. See
“Business — Suppliers and Customers.”
Dr. John N. Kapoor, Ph.D., our current
chairman of our board of directors and our chief executive
officer from March 2001 to December 2002, and a principal
shareholder, is affiliated with EJ Financial
9
In addition, the Kapoor Trust, Mr. Arjun C.
Waney and Argent Fund Management Ltd. collectively hold
subordinated promissory notes issued by us in the aggregate
principal amount of approximately $2,767,000 (the “2003
Subordinated Notes”). Mr. Waney, one of our directors,
serves as chairman and managing director of Argent, 52% of which
is owned by Mr. Waney. The 2003 Subordinated Notes mature
on April 7, 2006 and bear interest at prime plus 1.75%, but
interest payments are currently prohibited under the terms of
subordination arrangements with LaSalle Bank. Consequently,
Mr. Waney and Argent are also creditors of ours and their
interests may be different from yours. See “Financial
Condition and Liquidity,” and “Certain Relationships
and Related Transactions.” Potential conflicts of interest
could have a material adverse effect on our business, financial
condition and results of operations.
We may require additional funds to grow our
business. We may seek additional funds through public and
private financing, including equity and debt offerings. However,
adequate funds through the financial markets or from other
sources may not be available when needed or on terms favorable
to us. The “going concern” qualification in our
independent registered public accountants’ report related
to their audit of our most recent audited consolidated financial
statements for the year ended December 31, 2003 may
significantly limit the availability of financing sources to us.
In addition, because our common stock currently is traded on the
OTC Bulletin Board® and not listed on a national exchange
or quoted on the Nasdaq National Market, we may experience
further difficulty accessing the capital markets. Without
sufficient additional funding, we may be unable to pursue growth
opportunities that we view as essential to the expansion of our
business, including the development of lyophilization
manufacturing capability at our Decatur facilities. Further, the
terms of such additional financing, if obtained, likely will
require the granting of rights, preferences or privileges senior
to those of our common stock and result in substantial dilution
of the existing ownership interests of our common stockholders
and could include covenants and restrictions that limit our
ability to operate or expand our business in a manner that we
deem to be in our best interest.
Our strategy for growth is dependent upon our
ability to develop products that can be promoted through current
marketing and distributions channels and, when appropriate, the
enhancement of such marketing and distribution channels. We may
not meet our anticipated time schedule for the filing of ANDAs
and NDAs or may decide not to pursue ANDAs or NDAs that we have
submitted or anticipate submitting. Our internal development of
new pharmaceutical products is dependent upon the research and
10
Our success depends, in part, on our ability to
anticipate which branded pharmaceuticals are about to come off
patent and thus permit us to develop, manufacture and market
equivalent generic pharmaceutical products. Generic
pharmaceuticals must meet the same quality standards as branded
pharmaceuticals, even though these equivalent pharmaceuticals
are sold at prices that are significantly lower than that of
branded pharmaceuticals. Generic substitution is regulated by
federal and state governments, as is reimbursement for generic
drug dispensing. There can be no assurance that substitution
will be permitted for newly approved generic drugs or that such
products will be subject to government reimbursement. In
addition, generic products that third parties develop may render
our generic products noncompetitive or obsolete. There can be no
assurance that we will be able to consistently bring generic
pharmaceutical products to market quickly and efficiently in the
future. An increase in competition in the sale of generic
pharmaceutical products or our failure to bring such products to
market before our competitors could have a material adverse
effect on our business, financial condition and results of
operations.
Further, there is no proprietary protection for
most of the branded pharmaceutical products that either we or
other pharmaceutical companies sell. In addition, governmental
and cost-containment pressures regarding the dispensing of
generic equivalents will likely result in generic substitution
and competition generally for our branded pharmaceutical
products. We attempt to mitigate the effect of this substitution
through, among other things, creation of strong brand-name
recognition and product-line extensions for our branded
pharmaceutical products, but there can be no assurance that we
will be successful in these efforts.
We are currently involved in several pending or
threatened legal actions with both private parties and certain
government agencies. To the extent that our personnel must spend
time and we must expend resources to pursue or contest these
various matters, or any additional matters that may be asserted
from the time to time in the future, this represents time and
money that is not available for other actions that we might
otherwise pursue which could be beneficial to our future. In
addition, to the extent that we are unsuccessful in any legal
proceedings, the consequences could have a negative impact on
our business, financial condition and results of operations. See
“Legal Proceedings.”
We derive a significant portion of our revenues
from the sale of products manufactured by third parties,
including our competitors in some instances. There can be no
assurance that our dependence on third parties for the
manufacture of such products will not adversely affect our
profit margins or our ability to develop and deliver our
products on a timely and competitive basis. If for any reason we
are unable to obtain or retain third-party manufacturers on
commercially acceptable terms, we may not be able to distribute
certain of our products as planned. No assurance can be made
that the third-party manufacturers we use will be able to
provide us with sufficient quantities of our products or that
the products supplied to us will meet our specifications. Any
delays or difficulties with third-party
11
Our success will depend, in part, on our ability
to attract and retain key executive officers. We are
particularly dependent upon Dr. John N. Kapoor, Ph.D.,
chairman of our board of directors, and Mr. Arthur S.
Przybyl, our chief executive officer. The inability to attract
and retain key executive officers, or the loss of one or more of
our key executive officers could have a material adverse effect
on our business, financial condition and results of operations.
Our performance depends, to a large extent, on
the continued service of our key research and development
personnel, other technical employees, managers and sales
personnel and our ability to continue to attract and retain such
personnel. Competition for such personnel is intense,
particularly for highly motivated and experienced research and
development and other technical personnel. We are facing
increasing competition from companies with greater financial
resources for such personnel. There can be no assurance that we
will be able to attract and retain sufficient numbers of
highly-skilled personnel in the future, and the inability to do
so could have a material adverse effect on our business, and
financial condition and results of operations.
Risks Related to Our Industry
Federal and state government agencies regulate
virtually all aspects of our business. The development, testing,
manufacturing, processing, quality, safety, efficacy, packaging,
labeling, record keeping, distribution, storage and advertising
of our products, and disposal of waste products arising from
such activities, are subject to regulation by the FDA, the DEA,
the FTC, the Consumer Product Safety Commission, the
Occupational Safety and Health Administration and the
Environmental Protection Agency. Similar state and local
agencies also have jurisdiction over these activities.
Noncompliance with applicable regulatory requirements can result
in fines, injunctions, penalties, mandatory recalls or seizures,
suspensions of production, recommendations by the FDA against
governmental contracts and criminal prosecution. Any of these
could have a material adverse effect on our business, financial
condition and results of operations. New, modified and
additional regulations, statutes or legal interpretation, if
any, could, among other things, require changes to manufacturing
methods, expanded or revised labeling, the recall, replacement
or discontinuation of certain products, additional record
keeping and expanded documentation of the properties of certain
products and scientific substantiation. Such changes or new
legislation could have a material adverse effect on our
business, financial condition and results of operations. See
“Business — Government Regulation.”
FDA regulations.
All
pharmaceutical manufacturers, including us, are subject to FDA
regulation under the authority of the FDC Act. Under the FDC
Act, the federal government has extensive administrative and
judicial enforcement powers over the activities of
pharmaceutical manufacturers to ensure compliance with FDA
regulations. Those powers include, but are not limited to, the
authority to initiate court action to seize unapproved or
non-complying products, to enjoin non-complying activities, to
halt manufacturing operations that are not in compliance with
cGMP, to recall products, and to seek civil monetary and
criminal fines and penalties. Other enforcement activities
include refusal to approve product applications or the
withdrawal of previously approved applications. Any such
enforcement activities, including the restriction or prohibition
on sales of products we market or the halting of our
manufacturing operations could have a material adverse effect on
our business, financial condition and results of operations. In
addition, product recalls may be initiated at our discretion, or
at the request of the FDA or other government agencies having
regulatory authority for pharmaceutical products. Recalls may
occur due
12
We must obtain approval from the FDA for each
pharmaceutical product that we market.
The FDA approval process is typically lengthy and expensive, and
approval is never certain. Our new products could take a
significantly longer time than we expect to gain regulatory
approval and may never gain approval. Even if the FDA or another
regulatory agency approves a product, the approval may limit the
indicated uses for a product, may otherwise limit our ability to
promote, sell and distribute a product or may require
post-marketing studies or impose other post-marketing
obligations.
We and our third-party manufacturers are
subject to periodic inspection by the FDA to assure regulatory
compliance regarding the manufacturing, distribution, and
promotion of sterile pharmaceutical
products.
The FDA imposes stringent
mandatory requirements on the manufacture and distribution of
sterile pharmaceutical products to ensure their sterility. The
FDA also regulates drug labeling, promotion and advertising of
prescription drugs. A finding by a governmental agency or court
that we are not in compliance the FDA requirements could have a
material adverse effect on our business, financial condition and
results of operations.
If the FDA changes its regulatory position, it
could force us to delay or suspend indefinitely, our
manufacturing, distribution or sales of certain
products.
While we believe that all of
our current pharmaceuticals are lawfully marketed in the
U.S. under current FDA enforcement policies or have
received the requisite agency approvals for manufacture and
sale, such marketing authority is subject to withdrawal by the
FDA. In addition, modifications or enhancements of approved
products are in many circumstances subject to additional FDA
approvals which may or may not be granted and which may be
subject to a lengthy application process. Any change in the
FDA’s enforcement policy or any decision by the FDA to
require an approved NDA or ANDA for one of our products not
currently subject to the approved NDA or ANDA requirements or
any delay in the FDA approving an NDA or ANDA for one of our
products could have a material adverse effect on our business,
financial condition and results of operations.
A number of products we market are
“grandfathered” drugs that are permitted to be
manufactured and marketed without FDA-issued ANDAs or NDAs on
the basis of their having been marketed prior to enactment of
relevant sections of the FDC Act. The regulatory status of these
products is subject to change and/or challenge by the FDA, which
could establish new standards and limitations for manufacturing
and marketing such products, or challenge the evidence of prior
manufacturing and marketing upon which grandfathering status is
based. We are not aware of any current efforts by the FDA to
change the status of any of our grandfathered products, but
there can be no assurance that such initiatives will not occur
in the future. Any such change in the status of our
grandfathered products could have a material adverse effect on
our business, financial condition and results of operations.
We are subject to extensive DEA regulation,
which could result in our being fined or otherwise
penalized.
We also manufacture and
sell drugs which are “controlled substances” as
defined in the federal Controlled Substances Act and similar
state laws, which establishes, among other things, certain
licensing, security and record keeping requirements administered
by the DEA and similar state agencies, as well as quotas for the
manufacture, purchase and sale of controlled substances. The DEA
could limit or reduce the amount of controlled substances which
we are permitted to manufacture and market. On November 6,
2002, we entered into a Civil Consent Decree with respect to
violations alleged by the DEA relating to record keeping and
controls surrounding the storage and distribution of controlled
substances. Under the terms of the Civil Consent Decree, we,
without admitting any of the allegations in the complaint from
the DEA, agreed to pay a fine of $100,000, upgrade our security
and to remain in substantial compliance with the Comprehensive
Drug Abuse Prevention Control Act of 1970. If we do not remain
in substantial compliance during the two-year period following
the entry of the Civil Consent
13
The manufacturing and marketing of
pharmaceuticals involves an inherent risk that our products may
prove to be defective and cause a health risk. In that event, we
may voluntarily implement a recall or market withdrawal or may
be required to do so by a regulatory authority. We have recalled
products in the past and, based on this experience, believe that
the occurrence of a recall could result in significant costs to
us, potential disruptions in the supply of our products to our
customers and adverse publicity, all of which could harm our
ability to market our products. For example, in February 2003,
we recalled two products, Fluress and Flouracaine, in a
Class II Recall due to container/closure integrity problems
resulting in leaking containers. A Class II Recall means
that the use of, or exposure to, a violative product may cause
temporary or medically reversible adverse health consequences or
that the probability of serious health consequences as a result
of such use or exposure is remote. We have begun production of
Fluress and re-started distribution in September 2004.
Production and distribution of Flouracaine is expected to
commence in the fourth quarter of 2004. Delays in restarting
production and distribution of these past product recalls, or
any additional product recalls that occur in the future, could
adversely affect our revenue and cash from operations.
Although we are not currently subject to any
material product liability proceedings, we may incur material
liabilities relating to product liability claims in the future.
Even meritless claims could subject us to adverse publicity,
hinder us from securing insurance coverage in the future and
require us to incur significant legal fees and divert the
attention of the key employees from running our business.
Successful product liability claims brought against us could
have a material adverse effect on our business, financial
condition and results of operations.
We currently have product liability insurance in
the amount of $5,000,000 for aggregate annual claims with a
$50,000 deductible per incident and a $250,000 aggregate annual
deductible. However, there can be no assurance that such
insurance coverage will be sufficient to fully cover potential
claims. Additionally, there can be no assurance that adequate
insurance coverage will be available in the future at acceptable
costs, if at all, or that a product liability claim would not
have a material adverse effect on our business, financial
condition and results of operations.
From time to time, the FDA elects to permit sales
of some pharmaceuticals currently sold on a prescription basis,
without a prescription. FDA approval of the sale of our products
without a prescription would reduce demand for our competing
prescription products and, accordingly, reduce our profits.
We face significant competition from other
pharmaceutical companies, including major pharmaceutical
companies with financial resources substantially greater than
ours, in developing, acquiring, manufacturing and marketing
pharmaceutical products. The selling prices of pharmaceutical
products typically decline as competition increases. Further,
other products now in use, under development or acquired by
other pharmaceutical companies, may be more effective or offered
at lower prices than our current or future products. The
industry is characterized by rapid technological change that may
render our products obsolete, and competitors may develop their
products more rapidly than we can. Competitors may also be able
to complete the regulatory process sooner, and therefore, may
begin to market their products in advance of our products. We
believe that competition in sales of our products is based
14
We require a supply of quality raw materials and
components to manufacture and package pharmaceutical products
for ourselves and for third parties with which we have
contracted. Many of the raw materials and components used in our
products come from a single source and interruptions in the
supply of these raw materials and components could disrupt our
manufacturing of specific products and cause our sales and
profitability to decline. Further, in the case of many of our
ANDAs and NDAs, only one supplier of raw materials has been
identified. Because FDA approval of drugs requires manufacturers
to specify their proposed suppliers of active ingredients and
certain packaging materials in their applications, FDA approval
of any new supplier would be required if active ingredients or
such packaging materials were no longer available from the
specified supplier. The qualification of a new supplier could
delay our development and marketing efforts. If for any reason
we are unable to obtain sufficient quantities of any of the raw
materials or components required to produce and package our
products, we may not be able to manufacture our products as
planned, which could have a material adverse effect on our
business, financial condition and results of operations.
The patent and proprietary rights position of
competitors in the pharmaceutical industry generally is highly
uncertain, involves complex legal and factual questions, and is
the subject of much litigation. There can be no assurance that
any patent applications or other proprietary rights, including
licensed rights, relating to our potential products or processes
will result in patents being issued or other proprietary rights
secured, or that the resulting patents or proprietary rights, if
any, will provide protection against competitors who:
(1) successfully challenge our patents or proprietary
rights; (2) obtain patents or proprietary rights that may
have an adverse effect on our ability to conduct business; or
(3) are able to circumvent our patent or proprietary rights
position. It is possible that other parties have conducted or
are conducting research and could make discoveries of
pharmaceutical formulations or processes that would precede any
discoveries made by us, which could prevent us from obtaining
patent or other protection for these discoveries or marketing
products developed therefrom. Consequently, there can be no
assurance that others will not independently develop
pharmaceutical products similar to or obsoleting those that we
are planning to develop, or duplicate any of our products. Our
inability to obtain patents for, or other proprietary rights in,
our products and processes or the ability of competitors to
circumvent or obsolete our patents or proprietary rights could
have a material adverse effect on our business, financial
condition and results of operations.
Risks Related to an Investment in Our Common
Stock
Our common stock is not listed on any exchange or
on the Nasdaq Stock Market®, although it is traded on the
OTC Bulletin Board®. There can be no assurance that you
will be able to sell your shares of our common stock at any time
in the future or at all or that a more active trading market
will develop in the foreseeable future. In addition, the price
at which you may be able to sell is very unpredictable because
there are very few trades in our common stock. Because our
common stock is so thinly traded, a large block of shares traded
can lead to a dramatic fluctuation in the share price.
The sale by any of our large shareholders of a
significant portion of that shareholder’s holdings could
have a material adverse effect on the market price of our common
stock.
15
If the price per share of our common stock at the
time of exercise or conversion of any preferred stock, warrants,
options, convertible subordinated debt, or any other convertible
securities is in excess of the various exercise or conversion
prices of such convertible securities, exercise or conversion of
such convertible securities would have a dilutive effect on our
common stock. As of August 31, 2004, holders of our
convertible securities would receive 44,470,648 shares of
our common stock upon conversion and holders of our outstanding
warrants and options would receive 18,294,414 shares of our
common stock at a weighted average exercise price of
$1.69 per share. The amount of such dilution that may
result from the exercise or conversion of the foregoing,
however, cannot currently be determined as it would depend on
the difference between our common stock price and the price at
which such convertible securities were exercised or converted at
the time of such exercise or conversion. Any additional
financing that we secure likely will require the granting of
rights, preferences or privileges senior to those of our common
stock and which result in substantial dilution of the existing
ownership interests of our common shareholders.
We are authorized to issue up to a total of
5,000,000 shares of preferred stock in one or more series.
We currently have outstanding 398,172 shares of preferred
stock, and thus 4,601,828 additional shares of preferred stock
remain authorized for issuance. We issued 141,000 shares of
our Series B Preferred Stock in August 2004. Our board
of directors may determine whether to issue additional shares of
preferred stock and the terms of such preferred stock without
further action by our shareholders. If we issue additional
shares of preferred stock, it could affect your rights or reduce
the value of our common stock. In particular, specific rights
granted to future holders of preferred stock could be used to
restrict our ability to merge with or sell our assets to a third
party. These terms may include voting rights, preferences as to
dividends and liquidation, conversion and redemption rights, and
sinking fund provisions. We continue to seek capital for the
growth of our business, and this additional capital may be
raised through the issuance of additional preferred stock.
Our results of operations may vary from quarter
to quarter due to a variety of factors including, but not
limited to, the timing of the development and marketing of new
pharmaceutical products, the failure to develop such products,
delays in obtaining government approvals, including FDA approval
of applications for our products, expenditures to comply with
governmental requirements for manufacturing facilities,
expenditures incurred to acquire and promote pharmaceutical
products, changes in our customer base, a customer’s
termination of a substantial account, the availability and cost
of raw materials, interruptions in supply by third-party
manufacturers, the introduction of new products or technological
innovations by our competitors, loss of key personnel, changes
in the mix of products sold by us, changes in sales and
marketing expenditures, competitive pricing pressures,
expenditures incurred to pursue or contest pending or threatened
legal action and our ability to meet our financial covenants.
There can be no assurance that we will be successful in avoiding
losses in any future period. Such fluctuations may result in
volatility in the price of our common stock.
Trading in our common stock is subject to the
“penny stock” rules. The SEC has adopted regulations
that generally define a penny stock to be any equity security
that has a market price of less than $5.00 per share,
subject to certain exceptions. These rules require that any
broker-dealer that recommends our common stock to persons other
than prior customers and accredited investors, must, prior to
the sale, make a special written suitability determination for
the purchaser and receive the purchaser’s written agreement
to execute the transaction. Unless an exception is available,
the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the
penny stock
16
As a public company, we are subject to the
reporting requirements of the Securities Exchange Act of 1934,
or the “Exchange Act,” and the Sarbanes-Oxley Act of
2002. These requirements are extensive. The Exchange Act
requires that we file annual, quarterly and current reports with
respect to our business and financial condition. The
Sarbanes-Oxley Act requires that we maintain effective
disclosure controls and procedures and internal controls for
financial reporting. In order to maintain and improve the
effectiveness of our disclosure controls and procedures and
internal control over financial reporting, significant resources
and management oversight is required. This may divert
management’s attention from other business concerns, which
could have a material adverse effect on our business, financial
condition and results of operations.
17
CAPITALIZATION
The following table sets forth our unaudited
actual and pro forma capitalization as of June 30, 2004.
The pro forma data reflects the following transactions and
events as if they had occurred on June 30, 2004:
The table above excludes 4,418,300 shares of
common stock issuable upon exercise of options outstanding with
a weighted average exercise price of $2.40 per share and
3,043,500 shares reserved for future issuances under our
2003 Stock Option Plan. See “Management —
Executive Compensation.”
18
FORWARD-LOOKING STATEMENTS AND FACTORS
AFFECTING FUTURE RESULTS
Certain statements in this prospectus constitute
“forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act. When used in this
prospectus, the words “anticipate,”
“believe,” “estimate” and “expect”
and similar expressions are generally intended to identify
forward-looking statements. Any forward-looking statements,
including statements regarding our intent, belief or
expectations are not guarantees of future performance. These
statements involve risks and uncertainties and actual results
may differ materially from those in the forward-looking
statements as a result of various factors, including but not
limited to:
These and other factors may cause our actual
results to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance, or
achievements. You should not place undue reliance on these
forward-looking statements. We are under no obligation to update
any of the forward-looking statements after the filing of this
prospectus to conform such statements to actual results or to
changes in our expectations.
SELLING STOCKHOLDERS
We are registering 59,442,581 shares of our
common stock for resale by the selling stockholders named below.
The term “selling stockholders” includes each
stockholder named below and such stockholder’s transferees,
pledgees, donees or other successors.
Background
In this registration statement, we are
registering 5,229,185 shares of common stock issuable upon
the conversion of shares of Series B Preferred Stock, all
of which were purchased by institutional investors in a private
placement offering pursuant to subscription agreements between
us and each institutional investor dated August 18, 2004.
These selling stockholders also received Series B Warrants
to purchase an aggregate of 1,566,667 shares of common
stock, which have an exercise price of $3.50 per share of
common stock. We are registering the shares of common stock
issuable upon conversion of the shares of Series B
Preferred Stock and the shares of common stock issuable upon the
exercise of the Series B Warrants pursuant to registration
rights in each of the subscription agreements to permit the
institutional investors and their respective transferees to
resell the shares when they deem appropriate. See “Recent
Developments.”
19
In addition, we are registering
(a) 36,178,773 shares of common stock issuable upon
conversion of our Series A Preferred Stock, plus
(b) 8,453,352 shares of common stock issued or
issuable upon exercise of the Series A Warrants held by the
holders of our Series A Preferred Stock, plus
(c) 4,729,690 shares of common stock in the aggregate
issuable upon conversion or exercise of the Tranche A Note,
the Tranche B Note, the Tranche A Warrant and the
Tranche B Warrant, plus (d) 1,250,000 shares of
common stock issuable upon exercise of the AEG Warrants, plus
(e) 960,000 shares of common stock issuable upon
exercise of the Guaranty Warrants, plus
(f) 276,714 shares issuable upon exercise of the Note
Warrants, plus (g) 851,800 shares of common stock
issued upon exercise of warrants held by the Kapoor Trust. The
holders of the foregoing securities have “piggy back”
registration rights in this offering.
The following table, which reflects stockholdings
as of August 31, 2004, sets forth (1) the names of the
selling stockholders; (2) the number of shares of our
common stock held by the selling stockholders that may be
offered for resale pursuant to this prospectus; (3) the
number and percentage of shares of our common stock that the
selling stockholders beneficially own prior to the offering for
resale of any of the shares of our common stock being registered
hereby; and (4) the number and percentage of shares of
common stock to be beneficially owned by the selling
stockholders after the offering of the shares of our common
stock being registered hereby, assuming all of the shares
registered hereby are sold by the selling stockholders and
disregarding the potential indeterminable number of shares of
our common stock issuable in satisfaction of accrued and unpaid
dividends and interest on certain securities after
October 31, 2004. We will not receive any proceeds from the
resale of our common stock by the selling stockholders. We will
receive proceeds from the conversion of the warrants described
in the previous two paragraphs.
20
21
Of the shares set forth in the column
“Number of Shares Offered” in the table above the
following table sets forth each selling stockholder’s
(1) shares of common stock, (2) shares of common stock
issuable upon conversion of Series A Preferred Stock,
(3) shares of common stock issuable upon exercise of
Series A Warrants, (4) shares of common stock issuable
upon conversion of Series B Preferred Stock,
(5) shares of common stock issuable upon exercise of
Series B Warrants, and (6) shares of common stock
issuable upon conversion or exercise of warrants or any other
security convertible into shares of common stock, as applicable.
22
23
PLAN OF DISTRIBUTION
The shares of common stock offered for resale
through this prospectus may be sold by the selling stockholders
and any of their pledgees, assignees and successors-in-interest
(including successors by gift, partnership distribution or other
non-sale-related transfer effected after the date of this
prospectus), from time to time, in one or more transactions at
fixed prices, at market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices.
The selling stockholders may offer their shares of common stock
in one or more of the following transactions:
If required, we will distribute a supplement to
this prospectus to describe material changes in the terms of the
offering.
24
The shares of common stock described in this
prospectus may be sold from time to time directly by the selling
stockholders. Alternatively, the selling stockholders may from
time to time offer shares of common stock to or through
underwriters, broker/ dealers or agents. The selling
stockholders that are also broker-dealers may be
“underwriters” within the meaning of the Securities
Act. The selling stockholders and any broker or any
broker-dealers, agents or underwriters that participate with the
selling stockholders in the distribution of the shares offered
for resale through this prospectus may also be deemed to be
“underwriters” within the meaning of the Securities
Act. In these cases, any commissions received by these
broker-dealers, agents or underwriters and any profit on the
resale of the shares offered for resale through this prospectus
purchased by them may be deemed to be underwriting commissions
or discounts under the Securities Act. In addition, any profits
realized by the selling stockholders may be deemed to be
underwriting discounts and commissions under the Securities Act.
To the extent the selling stockholders may be deemed to be
underwriters, they will be subject to the prospectus delivery
requirements of the Securities Act.
The selling stockholders may from time to time
pledge or grant a security interest in some or all of the shares
and, if they default in the performance of any of their secured
obligations, the pledgees or secured parties may offer and sell
the shares of common stock from time to time under this
prospectus as it may be supplemented from time to time, or under
an amendment to this prospectus under Rule 424(b)(3) or
other applicable provisions of the Securities Act amending the
list of selling stockholders to include the pledgee, transferee
or other successors in interest as selling stockholders under
this prospectus.
The selling stockholders may also transfer the
shares of common stock in other circumstances, in which case the
transferees, pledgees or other successors in interest will be
the selling beneficial owners for purposes of this prospectus.
Any shares covered by this prospectus which
qualify for sale pursuant to Rule 144 under the Securities
Act may be sold under Rule 144 rather than pursuant to this
prospectus. The selling stockholders are not obligated to, and
there is no assurance that the selling stockholders will, sell
all or any of the shares we are registering. The selling
stockholders may transfer, devise or gift such shares by other
means not described in this prospectus.
Under the Exchange Act, any person engaged in a
distribution of our common stock may not simultaneously engage
in market-making activities with respect to our common stock for
nine business days prior to the start of the distribution. Each
selling stockholder, and any other person, who participates in a
distribution of our common stock will be subject to the Exchange
Act which may limit the timing of purchases and sales of our
common stock by such selling stockholder or any such other
person. These factors may affect the marketability of our common
stock and the ability of brokers or dealers to engage in
market-making activities.
We will pay all expenses of this registration.
These expenses include the filing fees of the SEC, fees under
state securities or “blue sky” laws, and accounting
and legal fees. We estimate that our expenses in connection with
this registration will be approximately $218,253. All expenses
for the issuance of any supplement to this prospectus will be
paid by us. The selling stockholders may pay selling commissions
or brokerage fees with respect to the sale of the resale shares
by them. Some of the selling stockholders will be indemnified by
us against certain civil liabilities under securities laws or
will be entitled to contribution in connection therewith. We
will be indemnified by some of the selling stockholders against
certain liabilities under securities laws or will be entitled to
contribution in connection therewith.
USE OF PROCEEDS
We will not receive any of the proceeds from the
sale by the selling stockholders of any of the shares of common
stock offered for resale through this prospectus. All proceeds
from the resale of the shares of our common stock offered for
resale through this prospectus will be for the accounts of the
selling stockholders. We may receive up to a total of
approximately $20,287,703 in the event that all the Series A
25
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The following table sets forth, for the fiscal
periods indicated, the high and low closing bid prices for our
common stock for the two most recent fiscal years and for the
first, second and third quarter of our current fiscal year
through September 17, 2004. Our common stock was traded on
the NASDAQ National Market under the symbol “AKRN”
until June 24, 2002. Because our Form 10-K for the
year ended December 31, 2001 contained unaudited financial
statements, our common stock was delisted from the NASDAQ
National Market on June 25, 2002, for non-compliance with
the NASDAQ National Market report filing requirements, and we
were unable to re-list on the NASDAQ National Market.
Subsequently, our common stock has been traded on the
OTC Bulletin Board® under the stock symbol
“AKRN.OB.” The market represented by the OTC Bulletin
Board® is extremely limited and the price for our common
stock traded on the OTC Bulletin Board® is not
necessarily a reliable indication of the value of our common
stock. There can be no assurance that an active trading market
will develop for our common stock after this offering, or that
our common stock will trade in the public market subsequent to
this offering. Quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent
actual transactions. Trading prices are based on information
received from the OTC Bulletin Board® and Reuters
based on all transactions reported on the OTC Bulletin
Board® and Reuters.
Trading in our common stock is subject to the
“penny stock” rules. The SEC has adopted regulations
that generally define a penny stock to be any equity security
that has a market price of less than $5.00 per share,
subject to certain exceptions. These rules require that any
broker-dealer who recommends our common stock to persons other
than prior customers and accredited investors, must, prior to
the sale, make a special written suitability determination for
the purchaser and receive the purchaser’s written agreement
to execute the transaction. Unless an exception is available,
the regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated with trading in the
penny stock market. In addition, broker-dealers must disclose
commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they
offer. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting
transactions in our common stock, which could severely limit the
market price and liquidity of our common stock.
26
As of August 31, 2004, we had
20,622,434 shares of common stock outstanding, which were
held by approximately 596 stockholders of record. This number
does not include stockholders for which shares are held in a
“nominee” or “street” name. The closing
price of our common stock on August 31, 2004 was
$3.00 per share. The transfer agent for our common stock is
Computershare Investor Services, LLC, 2 North LaSalle Street,
Chicago, Illinois 60602.
DIVIDEND POLICY
Our board of directors determines any payment of
dividends. We did not pay cash dividends in 2003 or 2002 and do
not expect to pay dividends on our common stock in the
foreseeable future. Moreover, we are currently prohibited by our
New Credit Facility from making any cash dividend payment to
holders of our common stock. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operation — Financial Condition and Liquidity.”
Any future decision with respect to dividends will depend on
future earnings, operations, capital requirements and
availability, restrictions in future financing agreements and
other business and financial considerations.
RECENT DEVELOPMENTS
On August 23, 2004, we completed a private
placement of 141,000 shares of our Series B Preferred
Stock at a price of $100.00 per share, convertible into
common stock at a price of $2.70 per share, along with
Series B Warrants to purchase approximately 1,566,667
additional shares exercisable until August 23, 2009, with
an exercise price of $3.50 per share. The net proceeds to
us after payment of investment banker fees and expenses to
Leerink Swann & Company and other transaction costs of
approximately $1,056,000, were approximately $13,044,000. A
portion of the net proceeds was used to pay off our outstanding
debt under the New Credit Facility and the remaining portion
will be used for working capital and general corporate purposes.
The shares of common stock issuable upon
conversion of our Series B Preferred Stock and exercise of
the Series B Warrants are subject to certain registration
rights as set forth in the subscription agreements with the
holders of the Series B Preferred Stock and Series B
Warrants. Under the subscription agreements, we agreed to file a
registration statement on Form S-1 with the SEC by
September 22, 2004, for purposes of registering the shares
of common stock issuable upon conversion of Series B
Preferred Stock and exercise of the Series B Warrants
(collectively, the “Registrable Securities”). This
prospectus is part of a registration statement that has been
filed to register the Registrable Securities pursuant to the
requirements of the subscription agreements. We agreed to
maintain the effectiveness of the registration statement until
the earlier of: (1) the holders of Registrable Securities
having completed the distribution of the Registrable Securities,
or (2) with respect to any holder of Registrable
Securities, the “Registration Period,” which is
defined as such time as all Registrable Securities then held by
such holder may be sold in compliance with Rule 144 under
the Securities Act, within any three-month period.
If the registration statement is not declared
effective within 120 days from August 23, 2004 (or if
the SEC issues any stop order(s) suspending the effectiveness of
the registration statement for a period of more than
60 days during such 120 day period), we will pay to
each holder an amount equal to 1.0% of the purchase price (the
“1.0% Penalty”) for the shares of Series B
Preferred Stock purchased by such holder for every 30 days
during which the registration statement is not effective, until
the earlier to occur of (1) the registration statement
becomes effective, (2) the end of the Registration Period,
or (3) the exercise by the holder of the Put Option
(defined below). If the registration statement is not declared
effective within 270 days from August 23, 2004, each
holder will have the right, for a period of 60 days
following the end of such 270 day period, to compel us to
purchase its shares of Series B Preferred Stock for cash in
an amount equal to $115 per share (the “Put
Option” and together with the 1.0% Penalty, the
“Penalty Provisions”). As a result of the Put Option,
and pursuant to SEC rules and regulations, our Series B
Preferred Stock will be reflected outside of the
shareholders’ equity section of our consolidated balance
sheet until this registration statement becomes effective or the
exercise period related to the Put Option lapses, at which date
the Series B Preferred Stock will be reclassified into
shareholders’ equity.
27
The right to receive payments in cash pursuant to
the Penalty Provisions is subordinate to our obligations under
the New Credit Facility. In place of any cash payment otherwise
due to a holder of Series B Preferred Stock pursuant to the
1.0% Penalty, we may, in our discretion, pay such holder the
number of fully paid, validly issued and non-assessable shares
of common stock equal to the number obtained by dividing the
amount of (1) the cash payment due by (2) the closing
price of our common stock, or the average of the reported
closing bid and asked prices of such common stock as determined
under the subscription agreements, on the date immediately
preceding the date such cash payment is otherwise due.
We continue to work with the FDA to correct all
deviations at our Decatur facilities. We have responded to the
findings of the FDA’s most recent inspection which
concluded on April 7, 2004 and have met with FDA officials.
The FDA has advised us that a “confirmatory”
inspection will be made to verify our corrective actions. Until
our corrections can be verified by the FDA, it is highly
unlikely the FDA will approve any marketing applications we may
submit and our ability to win government contracts may be
adversely affected. The confirmatory inspection is anticipated
to occur in the fourth quarter of 2004.
In July 2004, at our 2004 Annual Meeting of
Shareholders, our shareholders approved an increase in the
authorized number of shares of common stock to an amount
sufficient to allow conversion of our Series A Preferred
Stock and exercise of our Series A Warrants. Without that
approval, the dividend rate on our Series A Preferred Stock
would have increased to 10% per annum from 6% per
annum. Because of the increase in the authorized number of
shares, our Series A Preferred Stock became mandatorily
convertible into shares of our common stock rather than
mandatorily redeemable into cash. Accordingly, in July 2004, the
Series A Preferred Stock was recharacterized as an equity
security rather than as a debt security. The result of that
recharacterization is that (a) future dividends and
discount accretion related to the Series A Preferred Stock
will be reflected as a reduction of our earnings available to
common stockholders rather than as interest expense, and
(b) we recorded the value of the beneficial conversion
feature (resulting from the conversion price being less than the
market price of our common stock when the Series A
Preferred Stock was issued) imbedded in the Series A
Preferred Stock which, in turn, resulted in the recording of a
non-cash deemed dividend of approximately $26,410,000. This
one-time deemed dividend reduced earnings available to our
common stockholders thereby having a significant adverse impact
in reported income (loss) per share.
On April 21, 2004, we announced that we had
signed a memo of understanding with Strides Arcolab Limited, a
pharmaceutical manufacturer based in India. As a result of
negotiations following the execution of the memo of
understanding, we expect to enter into agreements with Strides
for the development, manufacturing and marketing of
grandfathered products, patent-challenging products and ANDA
products for the U.S. Hospital and retail markets. The
joint venture will operate in the form of a new Delaware limited
liability company, Akorn-Strides, LLC. Strides will be
responsible for developing, manufacturing and supplying products
under an OEM agreement between it and the joint venture company.
We will be responsible for sales and marketing of the products
under an exclusive sales and marketing agreement with the joint
venture company. We and Strides will each own 50% of the joint
venture company and will each appoint one of its two managers.
Each will contribute $1,250,000 in capital, to be used to
finance the preparation of ANDAs by Strides. We will also loan
an additional $1,250,000 to the joint venture company that will
be advanced to Strides to finance its capital contribution.
If within a mutually agreed time period,
Strides’ manufacturing facilities in India have not
received a satisfactory cGMP inspection by the FDA, which
remains current, and twelve ANDAs for products developed by
Strides at its manufacturing facilities in India under the OEM
agreement have not been submitted to the FDA, among other
things, we will become the sole owner of the joint venture
company and the joint venture company will be entitled to draw
on a $1,250,000 letter of credit from an Indian bank that is
confirmed by a U.S. bank. On the other hand, if these
conditions are met, and if both managers agree, we and Strides
may make additional equivalent capital contributions to finance
subsequent ANDA preparation costs under a similar arrangement to
our initial capital contributions, including an additional loan
by us to the joint venture company to finance Strides capital
contribution. Strides shall
28
On June 4, 2004, an agreement was reached
between us and Novadaq Technologies, Inc. related to our dispute
with Novadaq regarding the issuance of a Right of Reference to
Novadaq from us for Novadaq’s NDA and Drug Master File for
specified indications for our drug IC Green. Pursuant to the
agreement we reached, we would provide the requested Right of
Reference to Novadaq in exchange for Novadaq’s repurchase
of our holdings in Novadaq at a purchase price of $2,000,000
(U.S.). We received the proceeds in July 2004 and used the
proceeds to reduce our outstanding debt obligations. We will
report a one-time gain of approximately $1,280,000 during the
third quarter of 2004.
On July 21, 2004, we and FDC Limited,
India’s second largest manufacturer and marketer of
ophthalmic pharmaceutical products, announced the signing of a
purchase and supply agreement which would provide us with an
ophthalmic finished dosage form product pipeline for exclusive
use in the U.S. and Canada. The ophthalmic products will be
developed and manufactured for us by FDC. Under the agreement,
we will be responsible for U.S. FDA regulatory submissions
and marketing of the products directly in the U.S. Innova,
our Canadian distributor for ophthalmic products, will be
responsible for the direct marketing of these products in
Canada. FDC exports active pharmaceutical ingredients to over 45
countries, including the U.S. and Canada, and holds drug master
files and registration in both countries. Products will be
manufactured in India, and FDC is intending to submit
approximately four to six ANDAs in the first year of the
agreement.
On October 8, 2003, pursuant to the terms of
the Letter Agreement dated September 26, 2002 between us
and AEG, we terminated AEG as our consultant. On August 2
and 3, 2004, we and AEG participated in a mandatory and binding
arbitration hearing. The arbitrator took the matter under
submission and rendered his decision dated August 19, 2004,
which we received on August 23, 2004. The arbitrator’s
decision (1) directed us to pay to AEG the sum of $300,000,
plus interest of 5% per annum from October 7, 2003
(approximately $13,479), (2) directed us to issue the AEG
Warrants to purchase 1,250,000 shares of our common
stock at an exercise price of $0.75 per share, and
(3) denied AEG’s request that we pay AEG’s
attorneys’ fees and costs. As a result of the
arbitrator’s decision, we will report a one-time net gain
of approximately $295,100 in the third quarter of 2004. If AEG
decides to exercise all of the AEG Warrants, we will receive
$937,500 at an exercise price of $0.75 per share. We
determined that none of the anti-dilution provisions in our
outstanding securities were triggered by the issuance of the AEG
Warrants.
On August 31, 2004 we entered into an option
agreement with The University of Texas M.D. Anderson Cancer
Center to license a patent entitled “M-EDTA Pharmaceutical
Preparations of Uses Thereof” and related technology rights
invented by Issam I. Raad and Robert Sheretz. The option
agreement grants us an option to evaluate the patent and to
determine an appropriate regulatory pathway based on discussion
with the FDA. The patent is targeted at the prevention of
intravascular catheter-related infections and occlusions. If we
exercise our right to license the patent, we will pay an initial
license fee, fund clinicals, and pay a milestone license fee
upon FDA approval and royalties for the life of the patent.
29
BUSINESS
Overview
Akorn, Inc. manufactures and markets diagnostic
and therapeutic pharmaceuticals in specialty areas such as
ophthalmology, rheumatology, anesthesia and antidotes, among
others. Our customers include physicians, optometrists,
wholesalers, group purchasing organizations and other
pharmaceutical companies. We are a Louisiana corporation founded
in 1971 in Abita Springs, Louisiana. In 1997, we relocated our
headquarters and certain operations to Buffalo Grove, Illinois.
We also have manufacturing facilities in Decatur, Illinois. We
have a wholly owned subsidiary named Akorn (New Jersey), Inc.
which has operations in Somerset, New Jersey. Our subsidiary is
involved in manufacturing, research and development, and
administrative activities related to our ophthalmic segment.
As described more fully in this prospectus, in
recent years we have experienced significant regulatory and
financial challenges. These combined challenges contributed to
circumstances that resulted in our independent registered public
accountants indicating in their report related to their audit of
our consolidated financial statements for the year ended
December 31, 2003 that there exists substantial doubt about
our ability to continue as a going concern. In response to these
challenges, we have recruited new senior management, addressed
our regulatory issues, improved our financial structure and
raised additional capital. These improvements have positioned us
for future growth and improved operating results.
We classify our operations into three
identifiable business segments, ophthalmic, injectable and
contract services. These three segments are discussed in greater
detail below. For information regarding revenues and gross
profit for each of our segments, see Note M “Segment
Information” to our annual consolidated financial
statements beginning at page F-1 of this prospectus.
Ophthalmic Segment.
We market a line of diagnostic and therapeutic ophthalmic
pharmaceutical products. Diagnostic products, primarily used in
the office setting, include mydriatics and cycloplegics,
anesthetics, topical stains, gonioscopic solutions, angiography
dyes and others. Therapeutic products, sold primarily to
wholesalers and other national account customers, include
antibiotics, anti-infectives, steroids, steroid combinations,
glaucoma medications, decongestants/antihistamines and
anti-edema medications. Non-pharmaceutical products include
various artificial tear solutions, preservative-free lubricating
ointments, lid cleansers, vitamin supplements and contact lens
accessories. We exited the surgical products business in late
2002. The impact of the exit was not material to our financial
results.
Injectable Segment.
We market a line of specialty injectable pharmaceutical
products, including anesthesia, poison control
(antidotes) and products used in the treatment of
rheumatoid arthritis and pain management. These products are
marketed to hospitals through wholesalers and other national
account customers, as well as directly to medical specialists.
Contract Services
Segment.
We manufacture products for
third party pharmaceutical and biotechnology customers based on
their specifications.
Manufacturing.
We
have manufacturing facilities located in Decatur, Illinois and
Somerset, New Jersey. See “— Properties.” We
manufacture a diverse group of sterile pharmaceutical products,
including solutions, ointments and suspensions for our
ophthalmic and injectable segments. Our Decatur facilities
manufacture product for all three of our segments. Our Somerset
facility manufactures primarily ointment products for our
ophthalmic segment. We are also in the process of adding
freeze-dried (lyophilized) manufacturing capabilities at
our Decatur facilities and expect to use a portion of the
proceeds to us from the recent sale of our Series B
Preferred Stock to help fund validation efforts for the
lyophilization facility and to fund the development of an
internal ANDA lyophilized product pipeline. See “Recent
Developments.” However, we cannot assure you that we can
add lyophilized manufacturing capabilities to our Decatur
facilities, or that such addition, if completed, will prove to
be profitable. See “Risk Factors — Our growth
depends on our ability to timely develop additional
pharmaceutical products and manufacturing capabilities.”
30
Sales and Marketing.
While we are working to expand our proprietary product base
through internal development, the majority of our current
products are non-proprietary. We rely on our efforts in
marketing, distribution, development and low cost manufacturing
to maintain and increase market share.
Our ophthalmic segment uses a three-tiered sales
effort. Outside sales representatives sell directly to
physicians and group practices. In-house sales
(telemarketing) and customer service (catalog sales) sell
to optometrists and other customers. A national accounts group
sells to wholesalers, retail chains and other group purchasing
organizations who represent hospitals in the U.S. This
national accounts group also markets our injectable
pharmaceutical products, which we also sell through
telemarketing and direct mail activities to individual specialty
physicians and hospitals. The contract services segment markets
our contract manufacturing services through direct mail, trade
shows and direct industry contacts.
Research and
Development.
We have 21 ANDAs for
generic pharmaceuticals in various stages of development. We
filed one of these ANDAs along with an NDA in 2003. See
“— Government Regulation.” We plan to
continue to file ANDAs on a regular basis as pharmaceutical
products come off patent allowing us to compete by marketing
generic equivalents. However, unless and until our issues
pending before the FDA regarding our Decatur facilities are
favorably resolved, we believe it is doubtful that the FDA will
approve any NDAs or ANDAs we submit related to our Decatur
facilities. We believe our Somerset facility is not impacted by
the FDA issues regarding our Decatur facilities.
On February 18, 2003, we announced that we
had received FDA approval for our ANDA for Lidocaine Jelly, 2%,
a bioequivalent to Xylocaine Jelly®, a product of
AstraZeneca PLC used primarily as a topical anesthetic by
urologists and hospitals. According to industry sources, it is
estimated that the total annual U.S. market for comparable
products was approximately $30,000,000 in 2002. We manufacture
this product at our Somerset facility, and it was commercially
available in the third quarter of 2003.
On February 9, 2004, we announced we had
received FDA approval for our ANDA for Neomycin and Polymyxin B
Sulfates, and Bacitracin Zinc Ophthalmic Ointment USP. Neomycin
and Polymyxin B is bioequivalent to Neosporin®
Ophthalmic Ointment, a product of Monarch Pharmaceuticals, Inc.,
which is used primarily as an ophthalmic antibiotic ointment. We
anticipate that this product, which will be manufactured at our
Somerset facility, will be commercially available by the end of
2004.
Pre-clinical and clinical trials required in
connection with the development of pharmaceutical products are
performed by contract research organizations under the direction
of our personnel. No assurance can be given as to whether we
will file NDAs or ANDAs when anticipated, whether we will
develop marketable products based on any filings we do make, or
as to the actual size of the market for any such products, or as
to whether our participation in such market would be profitable.
See “— Government Regulation” and “Risk
Factors — Our growth depends on our ability to timely
develop additional pharmaceutical products and manufacturing
capabilities.”
We also maintain a business development program
that identifies potential product acquisition or product
licensing candidates. We have focused our business development
efforts on niche products that complement our existing product
lines and that have few or no competitors in the market.
At August 31, 2004, 16 of our full-time
employees were involved in research and development and product
licensing.
Research and development costs are expensed as
incurred. Such costs amounted to $1,465,000, $1,886,000, and
$2,598,000 for the years ended December 31, 2003, 2002 and
2001, respectively, and $712,000 and $835,000 for the six months
ended June 30, 2003 and 2004, respectively.
Patents, Trademarks, and Proprietary
Technology
We consider the protection of discoveries in
connection with our development activities important to our
business. We have sought, and intend to continue to seek, patent
protection in the U.S. and selected foreign countries where
deemed appropriate. As of August 31, 2004, we had received
six U.S. patents and had five additional U.S. patent
applications and one international patent application pending.
31
We also rely on trademarks, trade secrets,
unpatented proprietary know-how and continuing technological
innovation to maintain and develop our competitive position. We
enter into confidentiality agreements with certain of our
employees pursuant to which such employees agree to assign to us
any inventions relating to our business made by them while in
our employ. However, there can be no assurance that others may
not acquire or independently develop similar technology or, if
patents are not issued with respect to products arising from
research, that we will be able to maintain information pertinent
to such research as proprietary technology or trade secrets. See
“Risk Factors — Our patents and proprietary
rights may not adequately protect our products and
processes.”
Employee Relations
At August 31, 2004, we had
357 full-time employees, 305 of whom were employed by
Akorn, Inc. and 52 of whom were employed by our wholly owned
subsidiary, Akorn (New Jersey), Inc. We believe we enjoy good
relations with our employees, none of whom are represented by a
collective bargaining agent.
Competition
The marketing and manufacturing of pharmaceutical
products is highly competitive, with many established
manufacturers, suppliers and distributors actively engaged in
all phases of the business. Most of our competitors have
substantially greater financial and other resources, including
greater sales volume, larger sales forces and greater
manufacturing capacity. See “Risk Factors — Our
industry is very competitive.” Additionally, changes in
technology could render our products obsolete.”
The companies that compete with our ophthalmic
segment include Alcon Laboratories, Inc., Allergan
Pharmaceuticals, Inc., Ciba Vision and Bausch & Lomb,
Inc. The ophthalmic segment competes primarily on the basis of
price and service. Our ophthalmic segment purchases some
ophthalmic products from Bausch & Lomb, which is in
direct competition with us in several markets.
The companies that compete with our injectable
segment include both generic and name brand companies such as
Abbott Laboratories, Sicor, American Pharmaceutical Partners,
Elkin Sinn and American Regent. The injectable segment competes
primarily on the basis of price.
Competitors in our contract services segment
include Cook Imaging (Baxter), Chesapeake Biological
Laboratories and Ben Venue. The contract services segment
competes primarily on the basis of price and technical
capabilities. The manufacturing of products in all three
segments must be performed under government mandated cGMP.
Suppliers and Customers
No supplier of products accounted for more than
10% of our purchases in 2003, 2002 or 2001. We require a supply
of quality raw materials and components to manufacture and
package pharmaceutical products for us and for third parties
with which we have contracted. The principal components of our
products are active and inactive pharmaceutical ingredients and
certain packaging materials. Many of these components are
available from only a single source and, in the case of many of
our ANDAs and NDAs, only one supplier of raw materials has been
identified. Because FDA approval of drugs requires manufacturers
to specify their proposed suppliers of active ingredients and
certain packaging materials in their applications, FDA approval
of any new supplier would be required if active ingredients or
such packaging materials were no longer available from the
specified supplier. The qualification of a new supplier could
delay our development and marketing efforts. If for any reason
we are unable to obtain sufficient quantities of any of the raw
materials or components required to produce and package our
products, we may not be able to manufacture our products as
planned, which could have a material adverse effect on our
business, financial condition and results of operations.
32
A small number of large wholesale drug
distributors account for a large portion of our gross sales,
revenues and accounts receivable. Those distributors are:
These three wholesale drug distributors accounted
for approximately 49% of our total gross sales and 32% of our
revenues in for the six months ended June 30, 2004, and 63%
of our gross trade receivables as of June 30, 2004. The
difference between gross sales and revenue is that gross sales
do not reflect the deductions for chargebacks, rebates and
product returns. See “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Critical Accounting Policies.” The
percentages of gross sales, revenue and gross trade receivables
attributed to each of these three wholesale drug distributors as
of and for the six months ended June 30, 2004 and
June 30, 2003 and for the years ended December 31,
2003 and December 31, 2002 were as follows:
AmerisourceBergen, Cardinal and McKesson
distribute our products as well as a broad range of health care
products for many other companies. None of these distributors is
an end user of our products. If sales to any one of these
distributors were to diminish or cease, we believe that the end
users of our products would find little difficulty obtaining our
products either directly from us or from another distributor.
However, the loss of one or more of these distributors, together
with a delay or inability to secure an alternative distribution
source for end users, could have a material negative impact on
our revenue, business, financial condition and results of
operations. A change in purchasing patterns, a decrease in
inventory levels, an increase in returns of our products, delays
in purchasing products and delays in payment for products by one
or more distributors also could have a material negative impact
on our revenue, business, financial condition and results of
operations. See “Risk Factors — We depend on a
small number of distributors, the loss of any of which could
have a material adverse effect.”
Backorders
As of August 31, 2004, we had approximately
$2,514,000 of products on backorder as compared to approximately
$2,804,000 of backorders as of June 30, 2004. We anticipate
filling all current open backorders within 12 months of the
date of this prospectus.
Government Regulation
Pharmaceutical manufacturers and distributors are
subject to extensive regulation by government agencies,
including the FDA, the DEA, the FTC and other federal, state and
local agencies. The FDC Act, the Controlled Substance Act and
other federal statutes and regulations govern or influence the
development, testing, manufacture, labeling, storage and
promotion of products that we manufacture and market. The FDA
inspects drug manufacturers and storage facilities to determine
compliance with its cGMP regulations, non-compliance with which
can result in fines, recall and seizure of products, total or
partial suspension of production, refusal to approve new drug
applications and criminal prosecution. The FDA also has the
authority to revoke approval of drug products.
The FDA approval is required before any drug can
be manufactured and marketed. New drugs require an NDA filing,
including clinical studies demonstrating the safety and efficacy
of the drug. Generic drugs, which are equivalents of existing,
off-patent brand name drugs, require an ANDA filing. An ANDA
does not, for the most part, require clinical studies since
safety and efficacy have already been
33
FDA Warning Letter.
The FDA issued a Warning Letter to us in October 2000 following
a routine inspection of our Decatur facilities. An FDA Warning
Letter is intended to provide notice to a company of violations
of the laws administered by the FDA and to elicit voluntary
corrective action. Until the violations identified in the
Warning Letter are corrected, the FDA frequently will withhold
approval of any marketing applications (ANDAs, NDAs) submitted
by the company and will share contents of the Warning Letter
with government agencies (for example, the Veterans
Administration or the Department of Defense) that may contract
to purchase products from the company. Failure to take effective
corrective actions can result in FDA enforcement action such as
monetary fines, seizure of products, or injunction that could
suspend manufacturing and compel recall of product.
The Warning Letter addressed several deviations
from regulatory requirements identified during the inspection
and requested that we take corrective actions. Since then,
additional FDA inspections in 2002 and 2003 have found that
certain deviations continued unresolved and have identified
additional deviations. We have invested approximately $2,000,000
in improved cleaning validation and enhanced process controls
and have developed a comprehensive corrective action plan. We
have been in regular communications with the FDA and have
provided periodic reports of our progress in making corrections.
The FDA’s latest inspection of our Decatur facilities was
concluded on April 7, 2004. Several deviations were
identified for which we provided the FDA proposed corrective
actions. The FDA has initiated no enforcement action against us
or any of our products. Rather, the FDA has notified us that
another “confirmatory” inspection will be made to
determine whether the deviations identified have been corrected.
The confirmatory inspection is anticipated to occur in the
fourth quarter of 2004. The noncompliance of our Decatur
facilities has prevented us from developing additional products
at Decatur, some of which cannot be developed at our other
facility. The inability to fully use our Decatur facilities has
had a material adverse effect on our business, financial
condition and results of operations.
If the confirmatory inspection finds that
corrections have been made and no significant deviations are
identified, the FDA can be expected to remove the sanctions of
the Warning Letter and return us to a routine inspection
schedule.
If the inspection identifies significant
deviations, the FDA may initiate enforcement action including
the following: (1) maintain the Warning Letter sanctions
and require further corrective actions, which could include a
recall of certain products; (2) seek a court-ordered
injunction which may include temporary suspension of some or all
operations, mandatory recall of certain products, potential
monetary penalties or other sanctions; or (3) seize our
products. Any of these actions could significantly impair our
ability to continue to manufacture and distribute products,
generate cash from our operations, and may result in a covenant
violation under our senior debt. Any or all of these actions
would have a material adverse effect on our liquidity and our
ability to continue as a going concern.
Unless and until we correct the FDA deviations at
our Decatur facilities, it is doubtful the FDA will approve any
applications that may be submitted by us for products to be
manufactured in Decatur. This has adversely impacted, and is
likely to continue to adversely impact, our ability to grow
sales. See “Legal Proceedings.” See “Risk
Factors — Our Decatur, Illinois manufacturing
facilities are the subject of an FDA Warning Letter.”
DEA Consent Decree.
We also manufacture and distribute several controlled-drug
substances, the distribution and handling of which are regulated
by the DEA. Failure to comply with DEA regulations can result in
fines or seizure of product.
On March 6, 2002, we received a letter from
the U.S. Attorney’s Office, Central District of
Illinois, Springfield, Illinois, advising us that the DEA had
referred a matter to that office for a possible civil legal
action for alleged violations of the Comprehensive Drug Abuse
Prevention Control Act of 1970, 21 U.S.C. § 801,
et. seq. and regulations promulgated thereunder. The alleged
violations relate to record keeping and
34
Product Recalls
In February 2003, we recalled two products,
Fluress and Fluoracaine, due to container/closure integrity
problems resulting in leaking containers. The recall has been
classified by the FDA as a Class II Recall, which means
that the use of, or exposure to, a violative product may cause
temporary or medically reversible adverse health consequences or
that the probability of serious health consequences as a result
of such use or exposure is remote. We had not received any
notification or complaints from end users of the recalled
products. Because we had curtailed the production of these items
due to the container/closure integrity issues, the financial
impact to us of this recall was not material, as our customers
did not hold significant inventories of these products. We have
begun production of Fluress and re-started distribution in
September 2004. Production and distribution of Flouracaine is
expected to commence in the fourth quarter of 2004.
In March 2003, as a result of the
December 10, 2002 to February 6, 2003 FDA inspection,
we recalled twenty-four lots of product produced from the period
December 2001 to June 2002 in one of our production rooms at our
Decatur facilities. The majority of the lots recalled were for
third-party contract customer products. Subsequent to this
decision and after discussions with the FDA, eight of the
original twenty-four lots have been exempted from the recall due
to medical necessity. The recall has been classified by the FDA
as a Class II Recall. We had not received any notification
or complaints from end users of the recalled products. Due to
the passage of time between the production of these lots and the
recall, the financial impact of this recall was not material, as
our customers did not hold significant inventories of these
products.
Environment
We do not anticipate any material adverse effect
from compliance with federal, state and local provisions that
have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the
protection of the environment.
Properties
Since August 1998, our headquarters and certain
administrative offices, as well as a finished goods warehouse,
have been located in leased space at 2500 Millbrook Drive,
Buffalo Grove, Illinois. We leased approximately
24,000 square feet until June 2000 at which time we
expanded to the current occupied space of approximately
48,000 square feet.
We own a 76,000 square foot facility located
on 15 acres of land in Decatur, Illinois. This facility is
currently used for packaging, distribution, warehousing and
office space. In addition, we own a 55,000 square-foot
manufacturing facility in Decatur, Illinois. Our Decatur
facilities support all three of our segments.
Our wholly-owned subsidiary, Akorn (New Jersey),
Inc., leases approximately 35,000 square feet of space in
Somerset, New Jersey. This space is used for manufacturing,
research and development and administrative activities related
to our ophthalmic segment.
We do not have any idled manufacturing
facilities, however, the capacity utilization at both our
Decatur and Somerset facilities was approximately 62% during the
year ended December 31, 2003. We
35
We are in the process of completing an expansion
of our Decatur manufacturing facilities to add capacity to
provide lyophilization manufacturing services, a manufacturing
capability we currently do not have. Subject to among other
things, our ability to generate operating cash flow or to obtain
new financing for future operations and capital expenditures, we
anticipate the completion of the lyophilization expansion by
approximately late 2005 or early 2006. To this end, we expect to
use a portion of the proceeds we obtained from the recent sale
of our Series B Preferred Stock to help fund validation
efforts for the lyophilization facility and to fund the
development of an internal ANDA lyophilized product pipeline.
See “Recent Developments.” As of June 30, 2004,
we had spent approximately $18,335,000 on the expansion and
anticipate the need to spend approximately $2,000,000 of
additional funds (excluding capitalized interest) to complete
the expansion. The majority of the additional spending will be
focused on validation testing of the lyophilization facility as
the major capital equipment items are currently in place. Once
the lyophilization facility is validated, we will proceed to
produce stability batches to provide the data necessary to allow
the lyophilization facility to be inspected and approved by the
FDA.
Our current combined space is considered adequate
to accommodate our manufacturing needs for the foreseeable
future. We currently do not need lyophilization capabilities,
but such capabilities would give us the capability to
manufacture additional products for our contract customers and
allow us to pursue other ANDA products and to internally produce
one of our currently outsourced products.
Legal Proceedings
(1) On March 27, 2002, we received a
letter from the staff of the regional office of the SEC in
Denver, Colorado, informing us that it would recommend that the
SEC bring an enforcement action against us and seek an order
requiring us to be enjoined from engaging in certain conduct.
The staff alleged that we misstated our income for fiscal years
2000 and 2001 by allegedly failing to reserve for doubtful
accounts receivable and overstating our accounts receivable
balance as of December 31, 2000. The staff alleged that
internal control and books and records deficiencies prevented us
from accurately recording, reconciling and aging our accounts
receivable. We were also notified that certain of our former
officers, as well as a then current employee had received
similar notifications. Subsequent to the issuance of our
consolidated financial statements for the year ended
December 31, 2001, we determined the need to restate our
financial statements for 2000 and 2001, resulting in the
recording of a $7,500,000 increase to the allowance for doubtful
accounts as of December 31, 2000, which we had originally
recorded as of March 31, 2001.
On September 25, 2003, we consented to the
entry of an administrative cease and desist order to resolve the
issues arising from the staff’s investigation and proposed
enforcement action as described above. Without admitting or
denying the findings set forth therein, the consent order finds
that we failed to promptly and completely record and reconcile
cash and credit remittances, including those from our top five
customers, to invoices posted in our accounts receivable
sub-ledger. According to the findings in the consent order, our
problems resulted from, among other things, internal control and
books and records deficiencies that prevented us from accurately
recording, reconciling and aging our receivables. The consent
order finds that our 2000 Form 10-K and first quarter 2001
Form 10-Q misstated our accounts receivable balance or,
alternatively, failed to disclose the impairment of our accounts
receivable and that our first quarter 2001 Form 10-Q
inaccurately attributed the increased accounts receivable
reserve to a change in estimate based on recent collection
efforts, in violation of Section 13(a) of the Exchange Act
and rules 12b-20, 13a-1 and 13a-13 thereunder. The consent order
also finds that we failed to keep accurate books and records and
failed to devise and maintain a system of adequate internal
accounting controls with respect to our accounts receivable in
violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the
Exchange Act. The consent order does not impose a monetary
penalty against us or require any additional restatement of our
financial statements. The consent order contains an additional
commitment by us to do the following: (A) appoint a special
committee comprised entirely of outside directors,
36
(2) The FDA issued a Warning Letter to us in
October 2000 following a routine inspection of our Decatur
facilities. An FDA Warning Letter is intended to provide notice
to a company of violations of the laws administered by the FDA
and to elicit voluntary corrective action. Until the violations
identified in the Warning Letter are corrected, the FDA
frequently will withhold approval of any marketing applications
(ANDAs, NDAs) submitted by the company and will share contents
of the Warning Letter with government agencies (for instance,
the Veterans Administration or the Department of Defense) that
may contract to purchase products from the company. Failure to
take effective corrective actions can result in FDA enforcement
action such as monetary fines, seizure of products, or
injunction that could suspend manufacturing and compel recall of
product.
The October 2000 Warning Letter addressed several
deviations from regulatory requirements identified during the
inspection and requested that we take corrective actions. Since
then, additional FDA inspections in 2002 and 2003 have found
that certain deviations continued unresolved and have identified
additional deviations. We have invested approximately $2,000,000
in improved cleaning validation and enhanced process controls
and have developed a comprehensive corrective action plan. We
have been in regular communications with the FDA and have
provided periodic reports of our progress in making corrections.
The FDA’s latest inspection of our Decatur facilities was
concluded on April 7, 2004. Several deviations were
identified for which we provided the FDA proposed corrective
actions. The FDA has initiated no enforcement action against us
or any of our products. Rather, the FDA has notified us that
another “confirmatory” inspection will be made to
determine whether the deviations identified have been corrected.
The confirmatory inspection is anticipated to occur in the
fourth quarter of 2004. The noncompliance of our Decatur
facilities has prevented us from developing additional products
at Decatur, some of which cannot be developed at our other
facility. The inability to fully use our Decatur facilities has
had a material adverse effect on our business, financial
condition and results of operations.
If the confirmatory inspection finds that
corrections have been made and no significant deviations are
identified, the FDA can be expected to remove the sanctions of
the Warning Letter and return us to a routine inspection
schedule.
If the inspection identifies significant
deviations, the FDA may initiate enforcement action including
the following: (1) maintain the Warning Letter sanctions
and require further corrective actions, which could include a
recall of certain products; (2) seek a court-ordered
injunction which may include temporary suspension of some or all
operations, mandatory recall of certain products, potential
monetary penalties or other sanctions; or (3) seize our
products. Any of these actions could significantly impair our
ability to continue to manufacture and distribute products,
generate cash from our operations, and may result in a covenant
violation under our senior debt. Any or all of these actions
would have a material adverse effect on our liquidity and our
ability to continue as a going concern.
Unless and until we correct the FDA deviations at
our Decatur facilities, it is doubtful that the FDA will approve
any applications that may be submitted by us for products to be
manufactured in Decatur. This has adversely impacted, and is
likely to continue to adversely impact, our ability to grow
sales. See “Legal Proceedings,” and “Risk
Factors — Our Decatur, Illinois manufacturing
facilities are the subject of an FDA Warning Letter.”
37
(3) On December 19, 2002 and
January 22, 2003, we received demand letters regarding
claimed wrongful deaths allegedly associated with the use of
Inapsine, a drug which we produced. The total amount claimed was
$3,800,000. In July 2003, we agreed to a settlement with respect
to one of the claims alleged by these demand letters. We do not
believe that this settlement or the outcome of the second
alleged claim will have a material impact on our financial
position.
(4) On August 9, 2003, Novadaq
Technologies, Inc. notified us that it had requested arbitration
with the International Court of Arbitration related to our
dispute with Novadaq regarding the issuance of a Right of
Reference to Novadaq from us for Novadaq’s NDA and Drug
Master File for specified indications for our drug IC Green. In
its request for arbitration, Novadaq asserted that we were
obligated to provide the Right of Reference as described above
pursuant to an amendment dated September 26, 2002 to the
January 4, 2002 Supply Agreement between us and Novadaq. We
did not believe that we were obligated to provide the Right of
Reference which, if provided, would likely reduce the required
amount of time for clinical trials and reduce Novadaq’s
cost of developing a product for macular degeneration. We were
also contemplating the possible development of a separate
product for macular degeneration which, if developed, could face
competition from any product developed by Novadaq. On
June 4, 2004, an agreement was reached between us and
Novadaq, whereby we would provide the requested Right of
Reference to Novadaq in exchange for Novadaq’s repurchase
of our holdings in Novadaq at a purchase price of $2,000,000
(U.S.). We received the proceeds in July 2004 and used the
proceeds to reduce our outstanding debt obligations. We will
report a one-time gain of approximately $1,280,000 during the
third quarter of 2004.
(5) On October 8, 2003, pursuant to the
terms of the Letter Agreement dated September 26, 2002
between us and AEG, we terminated AEG as our consultant. AEG is
a restructuring firm that we engaged as a condition of our
lenders continuing to forbear from exercising remedies against
us pursuant to our credit agreement. AEG asserted that, as
consideration for its engagement as our chief restructuring
officer, it was owed a fee in the amount of $686,000 plus a
warrant to purchase 1,250,000 shares of our common
stock at $1.00 per share. AEG further asserted that the
terms of the warrant should be adjusted, pursuant to certain
anti-dilution provisions, to take into account the impact of our
Series A Preferred Stock issued in connection with the
Exchange Transaction. We disputed that AEG was owed any fee. On
January 9, 2004, AEG filed a demand for arbitration. On
August 2 and 3, 2004, we and AEG participated in a
mandatory and binding arbitration hearing. The arbitrator took
the matter under submission and rendered his decision dated
August 19, 2004, which we received on August 23, 2004.
The arbitrator’s decision (1) directed us to pay to
AEG the sum of $360,000 (less the previously paid retainer of
$60,000), plus interest of 5% per annum from
October 7, 2003 (approximately $13,479) and
(2) directed us to issue the AEG Warrants to
purchase 1,250,000 shares of our common stock at an
exercise price of $0.75 per share. As a result of the
arbitrator’s decision, we will report a one-time net gain
of approximately $295,100 in the third quarter of 2004. If AEG
decides to exercise all of the AEG Warrants, we will receive
$937,500 at an exercise price of $0.75 per share. We determined
that none of the anti-dilution provisions in our outstanding
securities were triggered by the issuance of the AEG Warrants.
(6) On February 23, 2004, we were sued
in the United States District Court for the District of Arizona
for damages resulting from the death of an Arabian show horse
allegedly injected with the drug Sarapin in the summer of 2003.
The complaint alleges that we are liable in strict products
liability, in negligence and for injury to property for
manufacturing and selling the Sarapin injected into the horse.
The complaint alleges that the Sarapin was sold at a time when
several lots of Sarapin were being recalled due to a “lack
of sterility assurances.” The complaint seeks unspecified
special, general and punitive damages against us in an amount in
excess of $75,000. We tendered the defense of the complaint to
our insurer, and the insurer has indicated that the tender will
be accepted subject to a reservation of rights as to the
punitive damage claim.
(7) On March 6, 2002, we received a
letter from the United States Attorney’s Office, Central
District of Illinois, Springfield, Illinois, advising us that
the DEA had referred a matter to that office for a possible
civil legal action for alleged violations of the Comprehensive
Drug Abuse Prevention Control Act of 1970 and regulations
promulgated under such act. The alleged violations related to
record keeping and
38
We are party to legal proceedings and potential
claims arising in the ordinary course of our business. The
amount, if any, of ultimate liability with respect to such
matters cannot be determined. Despite the inherent uncertainties
of litigation, we at this time do not believe that such
proceedings will have a material adverse impact on our financial
condition, results of operations, or cash flows.
39
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected
consolidated financial information as of and for the six months
ended June 30, 2004 and 2003, and as of and for the years
ended December 31, 2003, 2002, 2001, 2000, and 1999.
40
MANAGEMENT’S DISCUSSION AND
The following discussion and analysis of our
financial condition and results of operations should be read in
conjunction with the financial statements and related notes
beginning at page F-1. This discussion contains forward-looking
statements based upon current expectations that involve risks
and uncertainties, such as our plans, objectives, expectations
and intentions. Our actual results and the timing of certain
events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors,
including those set forth under “Risks Factors,”
“Description of Business” and elsewhere in this
prospectus. See “Forward-Looking Statements and Factors
Affecting Future Results.”
Results of Operations
Our losses from operations in recent years and
working capital deficiencies, together with the need to
successfully resolve our ongoing compliance matters with the
FDA, have raised substantial doubt about our ability to continue
as a going concern. The accompanying financial statements have
been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the
normal course of business. Accordingly, the financial statements
do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we
be unable to continue as a going concern.
On October 7, 2003, a significant threat to
our ability to continue as a going concern was resolved when we
consummated a transaction with a group of investors that
resulted in the extinguishment of our then outstanding senior
bank debt in the amount of approximately $37,731,000 in exchange
for shares of our Series A Preferred Stock, Series A
Warrants, the 2003 Subordinated Notes in the aggregate amount of
$2,767,139 and the related Note Warrants and a new credit
facility under which approximately $7,000,000 was outstanding as
of the date of the transaction and $5,473,862 of which was paid
to the investors in the transaction. See
“— Financial Condition and Liquidity.” We
used a portion of the proceeds to us from the recent sale of our
Series B Preferred Stock to pay off our New Credit
Facility. See “Recent Developments.”
Although we have refinanced our debt on a
long-term basis as described above, we continue to be subject to
financial covenants under the new debt and ongoing FDA
compliance matters that could have a material adverse effect on
us. See Note N — “Commitments and
Contingencies” to our annual financial statements beginning
at page F-1 for further description of these matters. We
are working with the FDA to favorably resolve such compliance
matters and have submitted to the FDA and continue to implement
a plan for comprehensive corrective actions at our Decatur
facilities. The FDA has advised us that a
“confirmatory” inspection will be made to verify our
corrective actions. Unless and until we correct the FDA
deviations at our Decatur facilities, it is doubtful the FDA
will approve any applications that may be submitted by us for
products to be manufactured in Decatur. The confirmatory
inspection is anticipated to occur in the fourth quarter of
2004. Our management believes that we will successfully resolve
these compliance matters with the FDA. However, there can be no
guarantee that the FDA matters will be successfully resolved.
We have added key management personnel, including
the hiring of a new chief financial officer in June 2004 and a
vice president of quality and regulations compliance in
September 2004 along with additional personnel in critical
areas. Management has reduced our cost structure, improved our
processes and systems, and implemented strict controls over
capital spending. Management believes these activities will
improve our results of operations, cash flow from operations and
our future prospects.
As a result of all of the factors cited in the
preceding paragraphs, management believes that we should be able
to sustain our operations and continue as a going concern.
However, the ultimate outcome of this uncertainty cannot be
presently determined and, accordingly, there remains substantial
doubt as to whether we will be able to continue as a going
concern.
41
Our revenues are derived from sales of diagnostic
and therapeutic pharmaceuticals by our ophthalmic segment, from
sales of diagnostic and therapeutic pharmaceuticals by our
injectable segment, and from contract services revenue.
The following table sets forth the percentage
relationships that certain items from our Consolidated
Statements of Operations bear to revenues for the six months
ended June 30, 2004 and 2003 and the years ended
December 31, 2003, 2002 and 2001.
Consolidated revenues increased 5.2% for the six
months ended June 30, 2004 compared to the same period in
2003.
Ophthalmic segment revenues increased 22.7%,
primarily due to the strong sales in our diagnostic and
therapeutic segments, as well as to a timing issue in the first
quarter of 2003. Customer purchases of angiography and ointment
products in the fourth quarter of 2002, resulted in surplus
customer inventory during the first half of 2003, resulting in
lower sales that half. Injectable segment revenues decreased
42.2% year-to-date due to lower volumes of rheumatology and
anesthesia products resulting from the release of significant
rheumatology and antidote product backorders in the 2003 period.
Injectable segment revenues for the first six months of 2004 are
at a consistent rate, which we believe will continue for the
remainder of 2004. Contract services revenues increased by 58.3%
reflecting a moderate recovery towards pre-2001 revenue levels
which have not been experienced since, due, we believe mainly to
customer concerns about the status of the ongoing FDA compliance
matters at our Decatur facilities, as well as the temporary
closure for aseptic processing of a production room at these
facilities in 2003.
We anticipate that revenues from all of our
product segments are not likely to substantially grow unless and
until the issues surrounding the FDA review of our Decatur
facilities are favorably resolved. The FDA compliance matters
are not anticipated to be resolved prior to the end of the
fourth quarter of 2004; however, no assurance can be made that
these matters will be resolved by such time, or ever. The
production of Fluress and Flouracaine, two of our opthalmic
products, were suspended in April 2003 pending development of a
new container closure system for those products. We have begun
production of Fluress and re-started distribution September
2004. Production and distribution of Flouracaine is expected to
commence in the fourth quarter of 2004.
42
Year-to-date consolidated gross margin was 32.3%
for 2004, compared with a gross margin of 29.5% in the same
period a year ago. The increase in sales volume and margins
across our ophthalmic and contract services segments and certain
reserve reductions more than offset the decrease in the higher
margin antidote and rheumatology product sales.
Selling, general and administrative, or
“SG&A,” expenses decreased 20.9%, to $6,150,000
from $7,773,000, for the year-to-date period ended June 30,
2004 as compared to the same period in 2003. The key components
of this decrease were due mainly to the elimination of legal and
consulting costs associated with the restructuring of our senior
debt in 2003.
Amortization and write-down of intangibles
year-to-date through June 30, 2004 increased 266.4%, to
$2,560,000 from $699,000 in the same period in 2003. The
2004 year-to-date results include impairment charges
totaling approximately $1,851,000 related to licenses for
products, which we recognize, after a thorough product review of
historical and projected earnings, may not be sellable at
amounts and prices that would support the related intangible
asset.
Research and development, or “R&D,”
expenses decreased 14.7%, to $712,000 from $835,000, from the
year-to-date period ended June 30, 2004 as compared to the
same period in 2003 due to scaled back activities from
historical levels pending resolution of the FDA Warning Letter.
Interest and other expense for the six month
period ending June 30, 2004 increased 115.8% in 2004, to
$2,713,000 from $1,257,000 for the same period in 2003. The
majority of this increase is due to Series A Preferred
Stock dividends and discount accretion totaling $563,000 in the
2004 period, which had been charged to interest expense pending
an amendment to our articles of incorporation to increase the
authorized number of common stock shares to 150,000,000, a
number sufficient to allow for the conversion of our
Series A Preferred Stock and exercise of related
Series A Warrants. This approval was received at our annual
meeting held on July 8th, 2004. As a result, future dividends
and accretion on our Series A Preferred Stock will be
recorded as an adjustment to equity. Our Series A Preferred
Stock was issued in October 2003. Additionally, the 2004 period
also had increased debt discount amortization related to the
2003 Subordinated Notes.
For the six months ending June 30, 2004, we
recorded state taxes payable of $2,000 in 2004 versus a net tax
benefit of $171,000 relating to anticipated state income tax
refunds for the same period in 2003.
We reported a net loss of $4,799,000 or
$0.24 per weighted average share for the six months ended
June 30, 2004, versus a $4,014,000 net loss or
$0.20 per weighted average share for the same period in
2003. The increase in net loss was due primarily to the increase
in interest expense and write off of intangible assets somewhat
offset by the increase in revenues driven by product volume
which favorably impacted gross margins, and lower SG&A
expenditures.
Consolidated revenues decreased 11.5% for the
year ended December 31, 2003 compared to the prior year.
Ophthalmic segment revenues decreased 11.9%, or $3,523,000,
partially due to the temporary suspension throughout 2003 of
production of Fluress and Flouracaine due to leaking containers,
as well as increased customer purchases of angiography and
ointment products in the fourth quarter of 2002, which resulted
in surplus customer inventory and lower sales during the first
half of 2003. Injectable segment revenues decreased 6.3%, or
$822,000 for 2003, reflecting the lower volumes of anesthesia
and antidote products partially offset by sales of our newly
introduced product, Lidocaine Jelly. Contract services revenues
decreased by 17.9%, or $1,583,000, for 2003, due mainly to
customer concerns about the status of the ongoing FDA compliance
matters at our Decatur facilities, as well as the temporary
closure of an aseptic production room at that same facility in
2003.
The chargeback and rebate expense for the year
ended December 31, 2003 declined to $12,836,000 from
$15,418,000 in 2002, due to a general decrease in volume and the
increase in the product sales mix of lower chargeback and rebate
percentage items.
43
The 2003 consolidated gross margin of $12,148,000
was 26.7% for 2003 as compared to a gross margin of $20,537,000,
or 39.9% for 2002. The gross profit by each of our segments also
decreased due to the decrease in volume across all revenue
categories as well as increased costs and reduced capacity
associated with the resolution of our current FDA compliance
matters.
SG&A expenses decreased 18.1%, to $15,544,000
from $18,988,000, for the year ended December 31, 2003 as
compared to the same period in 2002. Included in 2002 results
was a $545,000 asset impairment charge related to the
abandonment of construction-in-progress projects. Excluding this
charge, SG&A decreased by 15.7% mainly due to lower
personnel and marketing costs. Also included in SG&A, the
provision, net of recoveries, for bad debts was a
$471,000 net recovery in 2003, as actual recoveries and
reduced reserve requirements exceeded write-offs and newly
identified collectibility concerns. The bad debt expense net of
recoveries for 2002 was a net $55,000 recovery.
Amortization and write down of intangibles for
2003 decreased 56.2% to $1,415,000 from $3,228,000 in 2002. The
results for 2002 include impairment charges of $1,559,500
related to the Johns Hopkins patent settlement and $257,000
related to licenses for products, which we recognized, after a
thorough product review of historical and projected earnings,
may not be sellable at amounts and prices that would support the
related intangible asset.
R&D expense decreased 22.3% in 2003, to
$1,465,000 from $1,886,000 for the year ended December 31,
2002, due to refocusing resources away from R&D activities
to resolve issues related to FDA compliance.
Interest and other expense for 2003 was
$6,220,000, a 97.6%, or $3,072,000 increase compared to the
prior year, reflecting a $3,102,000 loss on the Exchange
Transaction disclosed in Note G of the financial statements
offset by lower interest rates and a lower debt balance as a
result of the Exchange Transaction.
We recorded a valuation allowance of $4,816,000
for the year ended December 31, 2003, which offset the
deferred income tax asset recorded in that period. The net
income tax benefit of $171,000 for the year relates to state tax
refunds. The net income tax provision of $6,239,000 for the same
period in 2002 includes a $9,216,000 deferred income tax
valuation allowance established against deferred income tax
assets recorded in 2002 and in prior periods.
We reported a net loss of $12,325,000 or
$0.62 per weighted average share for the year ended
December 31, 2003, versus $12,952,000 or $0.66 per
weighted average share for the prior year. The decrease in net
loss was due primarily to the impact of the deferred income tax
valuation allowance established in 2002 against previously
recorded income tax assets, as well as reduced SG&A, R&D
and interest expenses offset by lower sales, gross profit and
the loss on the Exchange Transaction in 2003.
Consolidated revenues increased 23.8% for the
year ended December 31, 2002 compared to the prior year.
Results for 2002 exclude shipments made at or near the end of
the year for which shipping terms are FOB destination and,
accordingly, revenue is not recognized until delivery occurs.
The revenue related to these shipments recognized in the first
quarter of 2003 was $601,000. Prior year revenues reflect
virtually all shipments to customers during the applicable year
as virtually all sales terms were FOB shipping point.
Ophthalmic segment revenues increased 74.7%, or
$12,643,000, primarily reflecting lower charges related to
chargebacks and returns in 2002 as compared to 2001, and, to a
lesser extent, increased angiography and ointment product sales.
The 2002 sales mix reflects our shift in sales and marketing
efforts within our ophthalmic segment to those key product lines
that generate higher margins. Injectable segment revenues
increased 34.3%, or $3,314,000, for the year ended
December 31, 2002, compared to the same period in 2001,
primarily due to the lower level of chargebacks and returns and
a 52% increase in anesthesia and antidote product sales in 2002.
Contract services revenues decreased 40.7%, or $6,083,000, for
the year ended December 31, 2002, compared to the same
period in 2001, due mainly to customer concerns about the status
of the ongoing FDA issues at our Decatur facilities.
44
Consolidated gross margin of $20,537,000 for the
year ended December 31, 2002 was an increase of 39.9% from
$6,398,000, or 15.4% from the prior year, due primarily to the
aforementioned increase in revenues in 2002 as compared to 2001,
as well as a sizable increase in the reserve for slow-moving,
unsaleable and obsolete inventory items recorded in 2001 that
was not repeated in 2002. Improvements in gross margin also
resulted from our continued focus on shifting the product mix to
higher gross margin products in the angiography, antidote and
ointment product lines.
SG&A expenses decreased 18.6% from
$22,515,000 in 2001 to $18,988,000 in 2002 due to a higher
2001 net provision for bad debts and a 2001 restructuring
charge of $1,117,000 consisting primarily of severance and lease
costs. These 2001 costs were somewhat offset by a $545,000 asset
impairment charge in 2002 related to abandoned construction
projects and higher legal and marketing expenditures in 2002.
The net bad debt provision in 2001 was $4,480,000 versus a net
recovery in 2002 of $55,000 resulting from our increased efforts
during 2002 to collect past due receivables.
Amortization and write-down of intangibles in
2002 increased 31.3% to $3,228,000 from $2,459,000 in 2001. The
2002 results include impairment charges of $1,559,500 related to
the Johns Hopkins patent settlement and $257,000 related to
licenses for products, which we recognized, after a thorough
product review of historical and projected earnings, may not be
sellable at amounts and prices that would support the related
intangible asset. The 2001 results include similar intangible
asset impairment charges of $965,000.
R&D expense decreased 27.4% for the year
reflecting our scaled back research activities to preserve
capital and to focus on strategic product niches such as
controlled substances and ophthalmic products which we believe
will add greater value. The lower level of R&D in 2002 also
reflects our refocusing of resources away from R&D to
resolve issues regarding FDA compliance.
Interest expense of $3,150,000 was 16.4% lower
than the $3,768,000 recorded in 2001, due to a lower debt
balance and lower interest rates in 2002.
An income tax provision of $6,239,000 was
recorded for 2002, compared to an income tax benefit of
$9,780,000 recorded in 2001. The 2002 income tax provision
primarily relates to the valuation allowance of $9,216,000
recorded during 2002. In performing our analysis of whether a
valuation allowance to reduce the deferred income tax asset was
necessary, we considered both negative and positive evidence,
which could be objectively verified. Based upon this analysis,
the negative evidence, primarily the three consecutive years of
operating losses, outweighed the positive evidence in
determining the amount of the deferred income tax assets that is
more likely than not to be realized. Based upon our analysis, we
established a valuation allowance to reduce our net deferred
income tax assets to zero.
Net loss for 2002 was $12,952,000, or
$0.66 per share, compared to a net loss of $15,146,000, or
$0.78 per share, for the prior year. The improvement in
revenue and gross profit was offset by the increase in the
provision for income taxes reflecting the reduction of deferred
income tax assets to zero.
Financial Condition and Liquidity
As of June 30, 2004, we had a net working
capital deficiency of $899,000 versus a deficit of $1,364,000 at
December 31, 2003, and a deficit of $30,564,000 at
December 31, 2002. The large 2002 deficit was due to
the current classification of our now-retired debt.
During the six-month period ended June 30,
2004, we used $1,201,000 in cash from operations, primarily due
to increases in accounts receivables and inventories, offset in
part by an increase in accounts payable. Investing activities
during the six month period ended June 30, 2004 included
$501,000 of capital expenditures primarily related to the
lyophilized pharmaceuticals manufacturing line expansion. We
expect to spend no more than $1,000,000 in capital expenditures
in the second half of 2004. Financing activities added
$1,484,000 in cash during the six month period ended
June 30, 2004 primarily through the increase of our
revolving credit line.
45
During the six month period ended June 30,
2003, we had $612,000 in cash provided from operations,
primarily due to a decrease in accounts receivables and
inventories as well as an increase in accounts payable.
Investing activities during the same period included $903,000 of
capital expenditures primarily related to the lyophilized
pharmaceuticals manufacturing line expansion. Financing
activities used $73,000 in cash during the six month period
ended June 30, 2003.
During the year ended December 31, 2003, we
used $1,932,000 in cash from operations, as the net loss for the
year was partially offset by reductions in inventory. Investing
activities, which included the purchase of equipment, required
$1,743,000 in cash and included $1,504,000 related to the
lyophilized pharmaceuticals manufacturing line expansion.
Financing activities provided $3,529,000 in cash primarily for
borrowings on our line of credit. The balance on our line of
credit with our primary lender was $1,500,000 at
December 31, 2003.
On October 7, 2003, we entered into the
Exchange Transaction, pursuant to which a group of investors
purchased all of our then outstanding senior bank debt from The
Northern Trust Company, a balance of $37,731,000, at a discount
and exchanged such debt with us for (1) 257,172 shares
of our Series A Preferred Stock, (2) our subordinated
2003 Subordinated Notes in the aggregate principal amount of
approximately $2,767,000, (3) Series A Warrants to
purchase an aggregate of 8,572,400 shares of our common
stock with an exercise price of $1.00 per share, and
(4) $5,473,862 in cash from the proceeds of the term loans
under the New Credit Facility described in the following
paragraph. We issued the 2003 Subordinated Notes and cash to
(a) the Kapoor Trust, the sole trustee and sole beneficiary
of which is Dr. Kapoor, the chairman of our board of
directors and the holder of a significant position in our stock,
(b) Mr. Arjun C. Waney, a director and the holder
of a significant position in our stock, and (c) Argent Fund
Management Ltd., for which Mr. Waney serves as chairman and
managing director and 52% of which is owned by Mr. Waney.
We also issued to the holders of the 2003 Subordinated Notes,
our Notes Warrants to purchase an aggregate of
276,714 shares of common stock with an exercise price of
$1.10 per share. We paid a portion of the legal fees of the
investors.
Simultaneously with the consummation of the
Exchange Transaction, we entered into the New Credit Facility
with LaSalle Bank which provided us with $7,000,000 in term
loans and a revolving line of credit of up to $5,000,000 to
provide for working capital needs, secured by substantially all
of our assets. Our obligations under the New Credit Facility
were guaranteed by Dr. Kapoor and the Kapoor Trust, and
irrevocable standby letters of credit were posted by
Dr. Kapoor and Mr. Waney. In exchange for the guaranty
and the irrevocable standby letters of credit, we issued
Guaranty Warrants to purchase 880,000 and 80,000 shares of
common stock to the Kapoor Trust and Mr. Waney,
respectively, at an exercise price of $1.10 per share, and
agreed to issue to each of them, on each anniversary of the date
of the consummation of the Exchange Transaction, warrants to
purchase an additional number of shares of common stock. On
August 26, 2004, in connection with the pay off of our
outstanding debt under the New Credit Facility, we and LaSalle
Bank amended the New Credit Facility to release the
Dr. Kapoor and the Kapoor Trust guaranty effective as of
such date provided that if prior to November 24, 2004 there
is then pending a petition in bankruptcy court against us or our
subsidiary and there is then existing a claim that all or any
portion of the payoff amount is a fraudulent transfer or a
preferential payment, or should otherwise be set aside, then the
guaranty shall be reinstated. See, “— New Credit
Facility.” In addition, on August 27, 2004, LaSalle
Bank cancelled each of the irrevocable standby letters of credit
posted by Dr. Kapoor and Mr. Waney. As a result of the
release of the guaranty and the cancellation of the irrevocable
standby letters of credit, none of the guarantors are entitled
to additional warrants.
The primary impact of the Exchange Transaction
and New Credit Facility on our liquidity and capital resources
was as follows:
46
As of June 30, 2004, we had approximately
$1,373,000 of undrawn availability under the New Credit Facility
with LaSalle Bank. By August 31, 2004, primarily as a
result of the Series B Preferred Stock private placement,
described more fully in the following paragraphs, and the use of
a portion of the related net proceeds to pay off debt, our
undrawn availability was $5,000,000.
On August 23, 2004, we completed a private
placement to certain investors of 141,000 shares of our
Series B Preferred Stock at a price of $100.00 per
share, convertible into our common stock at a price of
$2.70 per share, along with Series B Warrants to
purchase 1,566,667 additional shares of our common stock
exercisable until August 23, 2009, with an exercise price
of $3.50 per share. The net proceeds to us after payment of
investment banker fees and expenses to Leerink Swann &
Company and other transaction costs of approximately $1,056,000,
were approximately $13,044,000. A portion of the net proceeds to
us was used to pay off our outstanding debt under the New Credit
Facility and the remaining portion will be used for working
capital and general corporate purposes.
The shares of common stock issuable upon
conversion of the Series B Preferred Stock and exercise of
the Series B Warrants are subject to certain registration
rights as set forth in the subscription agreements with the
holders of the Series B Preferred Stock and Series B
Warrants. Under the subscription agreements, we agreed to file a
registration statement on Form S-1 with the SEC by
September 22, 2004, for purposes of registering the shares
of common stock issuable upon conversion of Series B
Preferred Stock and exercise of the Series B Warrants
(collectively, the “Registrable Securities”). This
prospectus is part of the registration statement that has been
filed to register the Registrable Securities pursuant to the
requirements of the subscription agreements. We agreed to
maintain the effectiveness of the registration statement until
the earlier of: (1) the holders of Registrable Securities
having completed the distribution of the Registrable Securities
described in the registration statement, or (2) with
respect to any holder of Registrable Securities, the
“Registration Period,” which is defined as such time
as all Registrable Securities then held by any holder may be
sold in compliance with Rule 144 under the Securities Act,
within any three-month period.
If the registration statement is not declared
effective within 120 days from August 23, 2004 (or if
the SEC issues any stop order(s) suspending the effectiveness of
the registration statement for a period of more than
60 days during such 120 day period), we will pay to
each holder the 1.0% Penalty, which is an amount equal to 1.0%
of the purchase price for the shares of Series B Preferred
Stock purchased by such holder for every 30 days during
which the registration statement is not effective, until the
earlier to occur of (1) the registration statement becomes
effective, (2) the end of the Registration Period, or
(3) the exercise by the holder of the Put Option. If the
registration statement is not declared effective within
270 days from August 23, 2004, under the Put Option,
each holder will have the right, for a period of
47
The right to receive payments in cash pursuant to
either the 1.0% Penalty or the Put Option is subordinate to our
obligations under the New Credit Facility. In place of any cash
payment otherwise due to a holder of Series B Preferred
Stock pursuant to the 1.0% Penalty, we may, in our discretion,
pay such holder the number of fully paid, validly issued and
non-assessable shares of common stock equal to the number
obtained by dividing the amount of (1) the cash payment due
by (2) the closing price of our common stock, or the
average of the reported closing bid and asked prices of such
common stock as determined under the subscription agreement, on
the date immediately preceding the date such cash payment is
otherwise due.
We believe that our remaining line of credit,
funds retained from the issuance of our Series B Preferred
Stock and cash flow from operations will be sufficient to
operate our business for the next twelve months. However, we may
have to explore opportunities to raise additional capital to
fund future growth opportunities. Such additional financing may
not be available when needed or on terms favorable to us and our
shareholders. Any such additional financing, if obtained, will
likely require the granting of rights, preferences or privileges
senior to those of our common stock and result in additional
dilution of the existing ownership interests of our shareholders.
As described above, we entered into the New
Credit Facility with LaSalle Bank in October 2003. The New
Credit Facility consisted of a $5,500,000 term loan and a
$1,500,000 term loan, as well as a revolving line of credit of
up to $5,000,000 secured by substantially all of our assets. The
New Credit Facility matures on October 7, 2005. Each of the
term loans bore interest at prime plus 1.75% and required
principal payments of $195,000 per month commencing
October 31, 2003. Each of the term loans was fully paid off
in conjunction with the issuance of our Series B Preferred
Stock in August 2004. The revolving line of credit bears
interest at prime plus 1.50%.
Availability under the revolving line of credit
is determined by the sum of (1) 80% of eligible accounts
receivable, (2) 30% of raw material, finished goods and
component inventory excluding packaging items, not to exceed
$2,500,000, and (3) the difference between 90% of the
forced liquidation value of machinery and equipment ($4,092,000)
and the sum of $1,750,000 and the outstanding balance under the
$1,500,000 term loan. The New Credit Facility contains certain
restrictive covenants including but not limited to certain
financial covenants such as minimum EBITDA levels, Fixed Charge
Coverage Ratios, Senior Debt to EBITDA ratios and Total Debt to
EBITDA ratios. If we are not in compliance with the covenants of
the New Credit Facility, LaSalle Bank has the right to declare
an event of default and all of the outstanding balances owed
under the New Credit Facility would become immediately due and
payable.
We negotiated an amendment to the New Credit
Facility effective December 31, 2003, that clarified
certain covenant computations and waived certain technical
violations. The New Credit Facility also contains subjective
covenants providing that we would be in default if, in the
judgment of the lenders, there is a material adverse change in
our financial condition. Because the New Credit Facility also
requires us to maintain our deposit accounts with LaSalle Bank,
the existence of these subjective covenants, pursuant to EITF
Abstract No. 95-22, require that we classify outstanding
borrowings under the revolving line of credit as a current
liability.
On August 13, 2004, we entered into the
First Amendment to the New Credit Facility (the “First
Amendment”). Among other things, the First Amendment
amended certain of our financial covenants and LaSalle Bank
agreed to waive certain events of default arising out of our
noncompliance with certain of our obligations. Certain financial
conditions in the Kapoor Trust guaranty were also amended as a
result of the First Amendment.
48
On August 26, 2004, we entered into the
Second Amendment to the New Credit Facility (the “Second
Amendment”), which released the Kapoor Trust guaranty and
eliminated certain event of default provisions that were related
to the Kapoor Trust guaranty. In addition, on August 27,
2004, LaSalle Bank cancelled each of the irrevocable standby
letters of credit posted by Dr. Kapoor and Mr. Waney.
In 2001, we entered into a Convertible Bridge
Loan and Warrant Agreement with the Kapoor Trust (the
“Convertible Note Agreement”), which was
subsequently amended in connection with the loan we obtained
from NeoPharm, Inc. described below. Under the terms of the
Convertible Note Agreement, the Kapoor Trust agreed to
provide us two separate promissory notes in the amounts of
$3,000,000, the Tranche A Note, which was received on
July 13, 2001, and $2,000,000, the Tranche B Note,
which was received on August 16, 2001. Each of the
Tranche A Note and Tranche B Note, which are
subordinate to the New Credit Facility, bear interest at prime
plus 3% and are due December 20, 2006. Interest payments
are currently prohibited under the terms of a subordination
arrangement with LaSalle Bank. The Tranche A Note and
Tranche B Note allow for conversion of the debt plus
interest into shares of our common stock at a price of $2.28 and
$1.80 per share of common stock, respectively. As part of
the consideration provided to the Kapoor Trust for the loans, we
issued the Kapoor Trust the Tranche A Warrant to purchase
1,000,000 shares of our common stock at an exercise price
of $2.85 per share, and the Tranche B Warrant to
purchase 667,000 shares of our common stock at a exercise
price of $2.25 per share, each of which are exercisable at
any time on or before December 20, 2006.
In December 2001, we entered into a $3,250,000
five-year loan with NeoPharm, Inc. (“NeoPharm”) to
fund our efforts to complete our lyophilization facility located
in Decatur (the “NeoPharm Note”). The NeoPharm Note
was executed in conjunction with a Processing Agreement that
provides NeoPharm with the option of securing at least 15% of
the capacity of our lyophilization facility each year.
Dr. Kapoor, the chairman of our board of directors, was
also chairman of the board of directors of NeoPharm and holds a
substantial stock position in NeoPharm, as well as in our stock.
In September 30, 2003, we defaulted under the NeoPharm Note
as a result of our failure to remove all FDA Warning Letter
sanctions related to our Decatur facilities by June 30,
2003. We also defaulted under the Convertible
Note Agreement as a result of a cross-default to the
NeoPharm Note.
In connection with the Exchange Transaction, the
Kapoor Trust and NeoPharm waived all existing defaults under
their respective agreements and entered into amended agreements
dated October 7, 2003. As a result of these amendments,
interest on the NeoPharm Note accrues at 1.75% above LaSalle
Bank’s prime rate. Interest payments on each of
Tranche A Note, Tranche B Note and the NeoPharm Note
are currently prohibited under the terms of a subordination
arrangement with LaSalle Bank. The amended NeoPharm Note also
requires us to make quarterly payments of $150,000 beginning on
the last day of the calendar quarter during which all
indebtedness under the New Credit Facility has been paid. All
remaining amounts owed under the amended NeoPharm Note are
payable at maturity on December 20, 2006. The amendment we
entered into with Kapoor Trust did not change the interest rate
or the maturity date of either the Tranche A Note or the
Tranche B Note.
As part of the Exchange Transaction, we issued
the 2003 Subordinated Notes to the Kapoor Trust, Mr. Waney
and Argent Fund Management, Ltd. The 2003 Subordinated Notes
mature on April 7, 2006 and bear interest at prime plus
1.75%, but interest payments are currently prohibited under the
terms of subordination arrangements with LaSalle Bank. The 2003
Subordinated Notes are subordinate to the New Credit Facility
and the Amended NeoPharm Note but senior to the Tranche A
Note and Tranche B Note. We also issued to the holders of
the 2003 Subordinated Notes, the Note Warrants to purchase an
aggregate of 276,714 shares of our common stock with an
exercise price of $1.10 per share.
Other
Indebtedness
In June 1998, we entered into a $3,000,000
mortgage agreement with Standard Mortgage Investors, LLC, of
which there were outstanding borrowings of $1,468,000 at
June 30, 2004. The principal balance is
49
Series A
Preferred Stock and Series A Warrants
The Series A Preferred Stock accrues
dividends at a rate of 6.0% per annum, which rate is fully
cumulative, accrues daily and compounds quarterly. While the
dividends could be paid in cash at our option, such dividends
are currently being deferred. Such dividends were $368,600
through December 31, 2003, and $797,300 for the six months
ended June 30, 2004. All shares of Series A Preferred
Stock have liquidation rights in preference over junior
securities, including our common stock, and have certain
anti-dilution protections. The Series A Preferred Stock and
unpaid dividends are convertible at any time into a number of
shares of common stock equal to the quotient obtained by
dividing (x) $100 per share plus any accrued and unpaid
dividends on that share by (y) $0.75, as such numbers may be
adjusted from time to time pursuant to the terms of our articles
of incorporation, as amended. All shares of our Series A
Preferred Stock shall convert to shares of our common stock on
the earlier to occur of (i) October 8, 2006 and
(ii) the date on which the closing price per share of our
common stock for at least 20 consecutive trading days
immediately preceding such date exceeds $4.00 per share.
Until our shareholders approved the increase in our authorized
shares of our common stock at our 2004 annual meeting of
shareholders, our Series A Preferred Stock was also
redeemable in October 2011.
The initially recorded amount of the
Series A Preferred Stock was $5,174,000 below its stated
value of $100 per share. Until July 2004, when our
shareholders approved the increase in our authorized shares of
our common stock, we had been accreting this difference over the
time period from issuance to the mandatory redemption date in
October 2011.
Pursuant to FASB No. 150 —
“Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” as
amended, the Series A Preferred Stock was originally
reflected as a liability because of its mandatory redemption
feature. That characterization remained as of June 30,
2004. As such, accretion as described above and dividends have
been reflected as interest expense in the statement of
operations through July 2004. As a result of the
shareholders’ approval of the increase to our authorized
shares of common stock, the July 2004 carrying value of the
Series A Preferred Stock was reclassified into
shareholders’ equity and future accretion and dividends
will be reflected as adjustments to accumulated deficit and will
also impact income (loss) available to common shareholders.
Additionally, and in accordance with EITF Abstract
No. 00-27, we also recorded in July 2004, the value of the
conversion option imbedded at issuance in each share of
Series A Preferred Stock, subject to limitations described
in the EITF. That value, approximately $22,040,000, reduced the
carrying value of the Series A Preferred Stock to near
$141,000 with the offsetting increase to our common stock. The
carrying value of the Series A Preferred Stock was then
adjusted to its full aggregated stated value, plus unpaid
dividends (approximately $26,410,000), with a charge directly to
accumulated deficit. That charge will not impact net earnings
for the third quarter of 2004, but will substantially reduce
earnings available to common shareholders and earnings per share
for that period.
The Series A Warrants issued in connection
with the Exchange Transaction are exercisable at any time on or
before October 7, 2006. The Series A Warrants
outstanding as of August 31, 2004 are exercisable in the
aggregate for 8,155,733 shares of common stock at an
exercise price of $1.00 per share. Assuming all of the
Series A Warrants are exercised with cash at the current
exercise price, we would receive $8,155,733 upon such exercise.
The exercise price of the Series A Warrants is adjustable
from time to time pursuant to the anti-dilution provisions.
During the second quarter of 2004, as permitted under the
provisions of the Series A Warrants, 416,667 warrants were
exercised on a cashless basis for 297,619 shares of common
stock.
Series B
Preferred Stock and Series B Warrants
On August 23, 2004, we completed a private
placement of 141,000 shares of our Series B Preferred
Stock at a price of $100.00 per share, convertible into
common stock at a price of $2.70 per share, along
50
AEG
Warrants
On August 31, 2004, we issued the AEG
Warrants to AEG, which are exercisable for 1,250,000 shares
of our common stock. The AEG Warrants have an exercise price of
$0.75 per share of our common stock and are exercisable at
any time on or before August 31, 2008, after which time
they expire. Assuming all of the AEG Warrants are exercised with
cash at the current exercise price, we would receive $937,500
upon such exercise. The exercise price of the AEG Warrants is
adjustable from time to time pursuant to applicable
anti-dilution provisions.
Guaranty
Warrants
Simultaneously with the consummation of the
Exchange Transaction, we entered into the New Credit Facility
with LaSalle Bank which provided us with $7,000,000 in term
loans and a revolving line of credit of up to $5,000,000 to
provide for working capital needs, secured by substantially all
of our assets. Our obligations under the New Credit Facility
were guaranteed by Dr. Kapoor and the Kapoor Trust, and
Mr. Waney. In exchange for each guaranty, we issued
Guaranty Warrants to purchase 880,000 and
80,000 shares of common stock to the Kapoor Trust and
Mr. Waney, respectively, at an exercise price of
$1.10 per share. Assuming all of the Guaranty Warrants are
exercised with cash at the current exercise price, we would
receive $1,056,000 upon such exercise. The exercise price of the
Guaranty Warrants is adjustable from time to time pursuant to
applicable anti-dilution provisions.
Other
Matters
FDA Compliance
Matters
We continue to be subject to potential claims by
the FDA. We have submitted to the FDA and have implemented a
plan for comprehensive corrective actions at our Decatur
facilities and are seeking to resolve our ongoing compliance
matters. However, an unfavorable outcome may have a material
impact on our operations and our financial condition, results of
operations and/or cash flows and may constitute a covenant
violation under the New Credit Facility, any or all of which
could have a material adverse effect on our liquidity and
ability to continue as a going concern.
Facility
Expansion
We are in the process of completing an expansion
of our Decatur facilities to add capacity to provide
lyophilization manufacturing services. We do not presently
possess this manufacturing capability. Subject to our ability to
generate sufficient operating cash flow or to obtain new
financing for future operations and capital expenditures, we
anticipate the completion of the lyophilization expansion by
approximately late 2005 or early 2006. As of June 30, 2004,
we had spent approximately $18,335,000 on the expansion and
anticipate the need to spend approximately $2,000,000 of
additional funds (excluding capitalized interest) to complete
the expansion. The majority of the additional spending will be
focused on validation testing of the lyophilization facility as
the major capital equipment items are currently in place. Once
the lyophilization facility is validated, we will proceed to
produce stability batches to provide the data necessary to allow
the lyophilization facility to be inspected and approved by the
FDA. Our lyophilization manufacturing facility is not subject to
current FDA non-compliance claims.
51
Strategic
Business Alliances
On April 21, 2004, we announced that we had
signed a memo of understanding with Strides Arcolab Limited, a
pharmaceutical manufacturer based in India. As a result of
negotiations following the execution of the memo of
understanding, we expect to enter into agreements with Strides
for the development, manufacturing and marketing of
grandfathered products, patent-challenging products and ANDA
products for the U.S. Hospital and retail markets.
The joint venture will operate in the form of a
new Delaware limited liability company, Akorn-Strides, LLC (the
“Joint Venture Company”). Strides will be responsible
for developing, manufacturing and supplying products under an
OEM Agreement between it and the Joint Venture Company. We will
be responsible for sales and marketing of the products under an
exclusive Sales and Marketing Agreement with the Joint Venture
Company. We and Strides will each own 50% of the Joint Venture
Company and will each appoint one of its two managers. Each will
contribute $1,250,000 in capital, to be used to finance the
preparation of ANDAs by Strides. We will also loan an additional
$1,250,000 to the Joint Venture Company that will be advanced to
Strides to finance its capital contribution.
Under the OEM Agreement, these funds will be paid
to Strides to finance the preparation, development and filing
with the FDA of ANDAs for generic drugs based on a mutually
agreed development schedule. The Joint Venture Company will have
exclusive rights to FDA approved generic drugs within the United
States hospital, medical clinic, physician group and other
wholesale drug markets.
If within a mutually agreed time period,
Strides’ manufacturing facilities in India have not
received a satisfactory cGMP inspection by the FDA, which
remains current, and twelve ANDAs for products developed under
the OEM Agreement have not been submitted to the FDA, we will
have certain special rights. We will become the sole owner of
the Joint Venture Company and the Joint Venture Company will be
entitled to draw on a $1,250,000 letter of credit from an Indian
bank that is confirmed by a U.S. bank. On the other hand,
if these conditions are met, and if both managers agree, we and
Strides may make additional equivalent capital contributions to
finance subsequent ANDA preparation costs under a similar
arrangement to our initial capital contributions, including an
additional loan by us to the Joint Venture Company to finance
Strides capital contribution. Strides shall repay such advances
by crediting the Joint Venture Company an amount equal to 35% of
all payments due for products provided under the OEM Agreement.
Under the Sales and Marketing Agreement we will
market, advertise and fulfill FDA approved generic drugs in the
United States supplied to the Joint Venture Company by Strides
under the OEM Agreement. We will be required to achieve, with
respect to each generic drug, a minimum market share in the
Unites States in order to preserve our exclusive marketing
rights. We will be paid a commission on the sales of these drugs.
On July 21, 2004, we and FDC Limited,
India’s second largest manufacturer and marketer of
ophthalmic pharmaceutical products, announced the signing of a
purchase and supply agreement which would provide us with an
ophthalmic finished dosage form product pipeline for exclusive
use in the U.S. and Canada. The ophthalmic products will be
developed and manufactured for us by FDC. Under the agreement,
we will be responsible for U.S. FDA regulatory submissions
and marketing of the products directly in the U.S. Innova,
our Canadian distributor for ophthalmic products, will be
responsible for the direct marketing of these products in
Canada. FDC exports active pharmaceutical ingredients to over
45 countries, including the U.S. and Canada, and holds drug
master files and registration in both countries. Products will
be manufactured in India, and FDC is intending to submit
approximately four to six ANDAs in the first year of the
agreement.
On August 31, 2004, we entered into an
option agreement with The University of Texas M.D. Anderson
Cancer Center to license a patent entitled “M-EDTA
Pharmaceutical Preparations of Uses Thereof” and related
technology rights invented by Issam I. Raad and Robert Sheretz.
The option agreement grants us an option to evaluate the patent
and to determine an appropriate regulatory pathway based on
discussion with the FDA. The patent is targeted at the
prevention of intravascular catheter-
52
Contractual Obligations
The following table details our future
contractual obligations as of December 31, 2003. Our
ability to satisfy these obligations is primarily dependent upon
our ability to generate sufficient working capital or to obtain
additional financing.
Since December 31, 2003, we have paid off
long-term debt of $8,123,000 before its scheduled maturity in
2005 and 2006 and the Series A Preferred Stock effectively
became convertible into common stock rather than redeemable.
Additionally, we issued 141,000 shares of our Series B
Preferred Stock, which, if the registration statement of which
this prospectus is a part, is not declared effective within
270 days from August 23, 2004, will be redeemable at
115% of stated value, which equals in the aggregate $16,215,000,
if the holder so elects.
Selected Quarterly Financial Data
53
Critical Accounting Policies
Revenue
Recognition
We recognize revenue upon the shipment of goods
or upon the delivery of goods, depending on the sales terms.
Revenue is recognized when all of our obligations have been
fulfilled and collection of the related receivable is probable.
We record a provision at the time of sale for estimated
chargebacks, rebates and product returns. Additionally, we
maintain an allowance for doubtful accounts and slow moving and
obsolete inventory. These provisions and allowances are analyzed
and adjusted, if necessary, at each balance sheet date.
Allowance for
Chargebacks and Rebates
We maintain an allowance for chargebacks and
rebates. These allowances are reflected as a reduction of
accounts receivable.
We enter contractual agreements with certain
third parties such as hospitals and group-purchasing
organizations to sell certain products at predetermined prices.
The parties have elected to have these contracts administered
through wholesalers. When a wholesaler sells products to one of
the third parties that is subject to a contractual price
agreement, the difference between the price to the wholesaler
and the price under contract is charged back to us by the
wholesaler. We track sales and submitted chargebacks by product
number for each wholesaler. Utilizing this information, we
estimate a chargeback percentage for each product. We reduce
gross sales and increase the chargeback allowance by the
estimated chargeback amount for each product sold to a
wholesaler. We reduce the chargeback allowance when we process a
request for a chargeback from a wholesaler. Actual chargebacks
processed can vary materially from period to period.
We obtain wholesaler inventory reports to aid in
analyzing the reasonableness of the chargeback allowance. We
assess the reasonableness of our chargeback allowance by
applying the product chargeback percentage based on historical
activity to the quantities of inventory on hand per the
wholesaler inventory reports and an estimate of in-transit
inventory that is not reported on the wholesaler inventory
reports at the end of the period. In the first quarter of 2004,
we obtained better information from the wholesalers to estimate
the amount of in-transit inventory, which lowered our estimate
of in-transit inventory. This resulted in us recognizing
approximately $500,000 less in chargeback expense in the first
quarter of 2004. We intend to use this new information on a
going forward basis to estimate in-transit inventory.
Additionally, in the second quarter of 2004, we, in accordance
with our policy, reduced our estimate of the percentage amount
of wholesaler inventory that will ultimately be sold to a third
party that is subject to a contractual price agreement. This
reduction was made in reaction to a six quarter trend of such
sales being below our previous estimates, thereby confirming
that the reduced percentage was other than temporary. This
estimate change resulted in approximately $480,000 less in
chargeback expense in the second quarter of 2004. We intend to
use this revised estimate on a going forward basis until
historical trends indicate that additional revisions should be
made. Also, we do not expect any other significant changes in
our chargeback estimates during 2004.
Similarly, we maintain an allowance for rebates
related to contract and other programs with certain customers.
The rebate allowance also reduces gross sales and accounts
receivable by the amount of the estimated rebate amount when we
sell our products to its rebate-eligible customers. Rebate
percentages vary by product and by volume purchased by each
eligible customer. We track sales by product number for each
eligible customer and then apply the applicable rebate
percentage, using both historical trends and actual experience
to estimate its rebate allowance. We reduce gross sales and
increase the rebate allowance by the estimated rebate amount for
each product sold to an eligible customer. We reduce the rebate
allowance when we process a customer request for a rebate. At
each balance sheet date, we evaluate the allowance against
actual rebates processed and such amount can vary materially
from period to period.
The recorded allowances reflect our current
estimate of the future chargeback and rebate liability to be
paid or credited to the wholesaler under the various contracts
and programs. For the six months ended
54
We also maintain an allowance for estimated
product returns. This allowance is reflected as a reduction of
accounts receivable balances. We evaluate the allowance balance
against actual returns processed. In addition to considering in
process product returns and assessing the potential implications
of historical product return activity, we also consider the
wholesaler’s inventory information to assess the magnitude
of unconsumed product that may result in a product return to us
in the future. Actual returns processed can vary materially from
period to period. For the six-months ended June 30, 2004
and 2003, we recorded a provision for product returns of
$1,182,000 and $1,337,00, respectively. For the years ended
December 31, 2003, 2002, and 2001 we recorded a provision
for product returns of $2,085,000, $2,574,000, and $4,103,000,
respectively. The allowance for potential product returns was
$1,283,000, $1,077,000 and $1,166,000 at June 30, 2004,
December 31, 2003 and 2002, respectively.
We maintain an allowance for doubtful accounts,
which reflects trade receivable balances owed to us that are
believed to be uncollectible. This allowance is reflected as a
reduction of accounts receivable balances. In estimating the
allowance for doubtful accounts, we have:
For the six month periods ended June 30,
2004 and 2003, we recorded a net benefit for doubtful accounts
of $65,000 and $342,000, respectively, as actual recoveries and
reduced reserve requirements exceeded write-offs and newly
identified collectibility concerns. For the years ended
December 31, 2003, 2002 and 2001, we recorded a provision
(recovery) for doubtful accounts of ($471,000), ($55,000),
and $4,480,000, respectively. The allowance for doubtful
accounts was $722,000, $609,000, and $1,200,000 as of
June 30, 2004, December 31, 2003 and 2002,
respectively. As of June 30, 2004, we had a total of
$976,000 of past due gross accounts receivable. We perform
monthly a detailed analysis of the receivables due from our
wholesaler customers and provide a specific reserve against
known uncollectible items for each of the wholesaler customers.
We also include in the allowance for doubtful accounts an amount
that we estimate to be uncollectible for all other customers
based on a percentage of the past due receivables. The
percentage reserved increases as the age of the receivables
increases. Of the recorded allowance for doubtful accounts of
$722,000 as of June 30, 2004, the portion related to the
wholesaler customers is $466,000 with the remaining $256,000
reserve for all other customers.
55
We maintain an allowance for discounts, which
reflects discounts available to certain customers based on
agreed upon terms of sale. This allowance is reflected as a
reduction of accounts receivable. We evaluate the allowance
balance against actual discounts taken. For the six months ended
June 30, 2004 and 2003, we recorded a provision for
discounts of $331,000 and $358,000, respectively. For the years
ended December 31, 2003, 2002 and 2001, we recorded a
provision for discounts of $689,000, $1,014,000 and $886,000,
respectively. The allowance for discounts was $152,000, $94,000
and $172,000 as of June 30, 2004, December 31, 2003
and 2002, respectively.
We maintain an allowance for slow-moving and
obsolete inventory. For finished goods inventory, we estimate
the amount of inventory that may not be sold prior to its
expiration or is slow moving based upon recent sales activity by
unit and wholesaler inventory information. We also analyze our
raw material and component inventory for slow moving items. For
the six month periods ended June 30, 2004 and 2003, we
recorded a provision for slow-moving and obsolete inventory of
$685,000 and $408,000, respectively. For the years ended
December 31, 2003, 2002 and 2001, we recorded a provision
for inventory obsolescence of $940,000, $838,000, and
$1,830,000, respectively. The allowance for inventory
obsolescence was $904,000, $917,000 and $1,206,000 as of
June 30, 2004, December 31, 2003 and 2002,
respectively.
Deferred income taxes are provided in the
financial statements to account for the tax effects of temporary
differences resulting from reporting revenues and expenses for
income tax purposes in periods different from those used for
financial reporting purposes. We record a valuation allowance to
reduce the deferred tax assets to the amount that is more likely
than not to be realized. In performing our analysis of whether a
valuation allowance to reduce the deferred tax asset is
necessary, we considered both negative and positive evidence.
Based upon this analysis, the negative evidence outweighed the
positive evidence in determining the amount of the deferred tax
assets that is more likely than not to be realized. Based upon
our analysis, beginning with the September 30, 2002
deferred tax assets, we have established a valuation allowance
to reduce the deferred tax assets to zero. The 2002 expense of
$9,216,000 related to establishing the deferred tax assets
valuation allowance has been recorded in the income tax
provision (benefit).
Intangibles consist primarily of product
licensing and other such costs that are capitalized and
amortized on the straight-line method over the lives of the
related license periods or the estimated life of the acquired
product, which range from 17 months to 18 years.
Accumulated amortization at June 30, 2004,
December 31, 2003 and 2002 was $11,195,000, $9,958,000 and
$8,543,000, respectively. We periodically assess the impairment
of intangibles based on several factors, including estimated
fair market value and anticipated cash flows. On July 3,
2002, we settled a License Agreement dispute with JHU/ APL (See
Note N — “Commitments and
Contingencies” to the consolidated financial statements) on
two licensed patents. As a result of the resolved dispute, we
recorded an asset impairment charge of $1,559,500 in the second
quarter of 2002, representing the net value of the asset
recorded on the balance sheet less the $300,000 payment abated
by JHU/ APL and the $125,000 payment received from JHU/ APL.
During the third quarter of 2002, we recorded an
impairment charge of $257,000 related to the product license
intangible assets for the products Sublimaze, Inapsine,
Paradrine and Dry Eye test. In the first half of 2004, we
recorded impairment charges of $1,849,000 related to certain
other licenses. In each case of impairment, we determined that
projected profitability on the products was not sufficient to
support the carrying value of the intangible asset. The
recording of this charge reduced the carrying value of the
intangible assets related to these product licenses to zero.
56
Recent Accounting Pronouncements
In April 2002, the FASB issued
SFAS No. 145 “Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections.” This statement updates,
clarifies and simplifies existing accounting pronouncements.
SFAS No. 145 rescinds SFAS No. 4,
“Reporting Gains and Losses from Extinguishments of
Debt”, which required all gains and losses from
extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in APB Opinion No. 30
will now be used to classify those gains and losses.
SFAS No. 64, “Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements”, amended
SFAS No. 4, is no longer necessary because
SFAS No. 4 has been rescinded. SFAS No. 145
amends SFAS No. 13 “Accounting for Leases”,
to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions. Certain
provisions of SFAS No. 145 are effective for fiscal
years beginning after May 15, 2002, while other provisions
are effective for transactions occurring after May 15,
2002. The adoption of SFAS No. 145 has not had a
material impact on our financial statements but did have an
impact on the classification of the loss from extinguishment of
debt resulting from the Exchange Transaction in 2003.
In December 2002, the FASB issued
SFAS No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure, an amendment
of FASB Statement No. 123.” This Statement amends
SFAS No. 123, “Accounting for Stock-Based
Compensation”, to provide alternative methods of transition
for a voluntary change to the fair value method of accounting
for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of
SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements. We adopted the revised
disclosure requirements in 2003.
In January 2003 the FASB issued Interpretation
No. 46. (“FIN 46”), “Consolidation of
Variable Interest Entities” with the objective of improving
financial reporting by companies involved with variable interest
entities. A variable interest entity is a corporation,
partnership, trust, or other legal structure used for business
purposes that either (a) does not have equity investors
with sufficient voting rights to direct decisions about the
entity, or (b) has equity investors that do not provide
sufficient financial resources for the equity to support its
activities. Historically, entities generally were not
consolidated unless the entity was controlled through voting
interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company
is subject to a majority of risk of loss from the variable
interest entity’s activities or entitled to receive a
majority of the entity’s residual returns, or both. A
company that consolidates a variable interest entity is called
the “primary beneficiary” of that entity. FIN 46
also requires disclosures about variable interest entities that
a company is not required to consolidate but in which it has
significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities
created after January 1, 2003. The consolidation
requirements of FIN 46 apply to existing entities in the
first fiscal year or interim period beginning after
June 15, 2003. Also, certain disclosure requirements apply
to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
We determined that FIN 46 will not have an impact on our
financial condition, results of operations or cash flows.
In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how entities classify
and measure in their statement of financial position certain
financial instruments with characteristics of both liabilities
and equity. The provisions of SFAS 150 are effective for
financial statements entered into or modified after May 31,
2003. As a result of SFAS No. 150, we had reflected
our Series A Preferred Stock issued as part of the Exchange
Transaction as a long-term liability until approval by our
shareholders of the increase in our authorized capital stock in
July 2004.
57
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
We are subject to market risk associated with
changes in interest rates. As previously disclosed, all debt
under our credit arrangement with The Northern Trust Company,
which bore interest at prime plus 3.0%, was retired as part of
the Exchange Transaction in 2003. Our variable interest rate
debt as of June 30, 2004 bore interest at rates from prime
plus 1.50% to prime plus 3.0%. We estimate that a change of 1.0%
in our variable rate debt (some of which was paid off in August
2004) from the interest rates in effect at June 30, 2004
would result in a $200,000 pre-tax change in annual interest
expense.
Our financial instruments consist mainly of cash,
accounts receivable, accounts payable and debt. The carrying
amounts of these instruments, except debt, approximate fair
value due to their short-term nature. The carrying amounts of
our bank borrowings under our debt instruments approximate fair
value because the interest rates are reset periodically to
reflect current market rates.
The fair value of the debt obligations
approximated the recorded value as of June 30, 2004.
58
MANAGEMENT
Directors and Executive Officers
Set forth below is certain information regarding
our directors and executive officers. Each of the directors
listed below was elected to our board of directors at our annual
meeting of shareholders held on July 8, 2004, to serve
until our next annual meeting of shareholders and until his
successor is elected and qualified. See “Security Ownership
of Certain Beneficial Owners and Management,” below for
information pertaining to the stock ownership of the named
individuals.
Mr. Ellis is the chairman of the Audit
Committee and has been determined by our board of directors to
be independent and to be an audit committee financial expert.
Mr. Waney is the chairman of Compensation Committee and
Mr. Treppel is the chairman of the Nominating and Corporate
Governance Committee.
John N.
Kapoor, Ph.D.
Dr. Kapoor has
served as the chairman of our board of directors since May 1995
and from December 1991 to January 1993. Dr. Kapoor served
as our chief executive officer from March 2001 to December 2002.
Dr. Kapoor also served as our acting chairman of our board
of directors from April 1993 to May 1995 and as our chief
executive officer from May 1996 to November 1998.
Dr. Kapoor serves as chairman of the board of directors of
Option Care, Inc. (an infusion services and supplies company)
and was chief executive officer of Option Care, Inc. from August
1993 to April 1996. Dr. Kapoor is the president of EJ
Financial Enterprises, Inc. (a health care consulting and
investment company) and served as chairman of the board of
directors of NeoPharm, Inc. (a biopharmaceutical company) from
July 1990 to June 2004, and currently serves on the board of
directors of NeoPharm, Inc. Dr. Kapoor is the chairman of
the board of directors of each of First Horizon Pharmaceutical
Corporation (a distributor of pharmaceuticals), Introgen
Therapeutics, Inc. (a gene therapy company), and Duska
Therapeutics, Inc. (a biopharmaceutical company).
Arthur S. Przybyl.
Mr. Przybyl has served as our chief executive officer since
February 2003 and as a director since his appointment by our
board of directors in November 2003. Previously, since September
2002, Mr. Przybyl served as our president and chief
operating officer. Mr. Przybyl joined us in August 2002 as
senior vice president sales and marketing. Prior to joining us,
Mr. Przybyl served as president and chief executive officer
for Hearing Innovations Inc., an innovative, start-up developer
of medical devices for the profoundly deaf and tinnitus markets,
and prior to that, he served as president and chief operating
officer for Bioject, Inc., a NASDAQ company specializing in
needle-free technology. Mr. Przybyl was also a director of
Novadaq Technologies, Inc., a privately held research company,
until July 2004.
Jeffrey A. Whitnell.
Mr. Whitnell has served as our vice president, finance and
chief financial officer since June 2004. He was also appointed
secretary and treasurer in August 2004. Before joining us,
Mr. Whitnell served as vice president of finance and
treasurer with Ovation Pharmaceuticals, a specialty
pharmaceutical company. Prior to joining Ovation Pharmaceuticals
in June 2002, Mr. Whitnell worked for
59
Jerry I. Treppel.
Mr. Treppel was appointed as director by our board of
directors in November 2003. Mr. Treppel is the managing
member of Wheaten Capital Management LLC, a capital management
company focusing on investment in the health care sector. Over
the past 15 years, Mr. Treppel was an equity research
analyst focusing on the specialty pharmaceuticals and generic
drug sectors at several investment banking firms including Banc
of America Securities, Warburg Dillon Read LLC (now UBS), and
Kidder, Peabody & Co. He previously served as a
healthcare services analyst at various firms, including Merrill
Lynch & Co. He also held administrative positions in
the healthcare services industry early in his career.
Mr. Treppel is a current member of the board of directors
of Able Laboratories Inc., a generic drug company and of Cangene
Corporation, a Canadian biotechnology company. Mr. Treppel
holds a BA in Biology from Rutgers College in New Brunswick,
N.J., an MHA in Health Administration from Washington University
in St. Louis, Mo., and an MBA in Finance from New York
University. Mr. Treppel has been a Chartered Financial
Analyst (CFA) since 1988.
Arjun C. Waney.
Mr. Waney was appointed as director by our board of
directors in November 2003. Mr. Waney is managing director
and principal shareholder of Argent Fund Management Ltd., a
UK-based fund management firm that manages First Winchester
Investments, an offshore fund specializing in
U.S. equities. Mr. Waney has over 30 years
experience in the U.S. capital markets in connection with
various investment funds. In 1965, he founded Import Cargo Inc.
and Cost Less Imports Inc., multi-store retail operations in the
U.S. and Europe, respectively, that were sold in succession to
Pier 1 Imports Inc. In 1973, Mr. Waney founded Beeba’s
Creations Inc., now known as Nitches Inc., a U.S. apparel
importer and wholesaler that went public in 1982.
Jerry N. Ellis.
Mr. Ellis has served as a director since 2001.
Mr. Ellis is an adjunct professor in the Department of
Accounting at The University of Iowa. Mr. Ellis was a
consultant to Arthur Andersen, LLP from 1994 to 2000 and a
partner at Arthur Andersen in the Dallas, Madrid and Chicago
offices from 1973 to 1994. Mr. Ellis is a director of First
Horizon Pharmaceutical Corporation (a distributor of
pharmaceuticals).
Ronald M. Johnson.
Mr. Johnson was appointed a director by the board of
directors in May 2003. Mr. Johnson is currently Executive
Vice President of Quintiles Consulting, a company which provides
consulting services to pharmaceutical, medical device, biologic
and biotechnology industries in their efforts to meet FDA
regulatory requirements. Before joining Quintiles Consulting in
1997, Mr. Johnson spent 30 years with the FDA, holding
various senior level positions primarily in the compliance and
enforcement areas.
60
Executive Compensation
The following table summarizes the compensation
paid by us for services rendered during the years ended
December 31, 2003, 2002 and 2001 to each person who, during
2003, served as our chief executive officer and to each other of
our executive officers whose total annual salary and bonus for
2003 exceeded $100,000 (each, a “Named Executive
Officer”).
Summary Compensation Table
61
Option Grants In Last Fiscal Year
The following table sets forth certain
information with respect to stock options granted to each of the
Named Executive Officers during the fiscal year ended
December 31, 2003, including the potential realizable value
over the five-year term of the options, based on assumed rates
of stock appreciation of 5% and 10% of the market price of the
underlying security on the date of grant, compounded annually.
These assumed rates of appreciation comply with the rules of the
SEC and do not represent our estimate of future stock price.
Actual gains, if any, on stock option exercises will be
dependent on the future performance of our common stock. All
options were issued pursuant to our Amended and Restated 1988
Incentive Compensation Program.
The following table sets forth certain
information with respect to the Named Executive Officers
concerning unexercised stock options held as of
December 31, 2003. There were no option exercises by the
Named Executive Officers during the fiscal year ended
December 31, 2003.
AGGREGATED OPTION VALUES
Employment Agreements
In September 2001, Mr. Pothast received and
accepted an employment offer letter for the position of our vice
president finance and chief financial officer. His offer letter
provided for an annual salary of $135,000 (to be increased to
$150,000 following our first full quarter of positive operating
income), a discretionary bonus of up to 30% of his base salary,
a grant of options to purchase 75,000 shares of our
common stock, severance for six months of his base salary if he
was terminated without cause, and other customary benefits for
our employees. Mr. Pothast resigned from his positions with
us in June 2004.
In January 2003, Mr. Przybyl received and
accepted an employment offer letter for the position of our
chief executive officer. His offer letter provides for an annual
salary of $260,000, a discretionary bonus of up to 50% of his
base salary, a grant of options to
purchase 50,000 shares of our common stock, severance
for one year at his base salary if he is terminated without
cause, and other customary benefits for our employees. In
connection with his serving as our chief executive officer, we
have provided to Mr. Przybyl supplemental indemnity
assurances with respect to any claims associated with his
execution, filing and submission chief executive officer
certifications of SEC reports for periods preceding his direct
supervision of financial and accounting matters.
In June 2004, Mr. Whitnell received and
accepted an employment offer letter for the position of our vice
president, finance and chief financial officer. His offer letter
provides for an annual salary of $180,000,
62
We currently have no other employment agreements
in place.
Compensation Committee Interlocks and Insider
Participation
Messrs. Waney, Treppel and Ellis currently
comprise the Compensation Committee and are each independent,
non-employee directors. None of our executive officers served as
a director or member of (i) the compensation committee of
another entity in which one of the executive officers of such
entity served on our Compensation Committee, (ii) the board
of directors of another entity in which one of the executive
officers of such entity served on our Compensation Committee, or
(iii) the compensation committee of any other entity in
which one of the executive officers of such entity served as a
member of our board of directors, during the year ended
December 31, 2003.
Compensation of Directors
Each director who is not one of our salaried
officers receives a fee for his services as a director of
$2,500 per regular meeting of the board of directors,
$500 per telephone meeting and $500 per committee
meeting, plus reimbursement of his expenses related to those
services.
All of our directors participate in our 2003
Stock Option Plan, pursuant to which each of our directors is
granted an option to acquire 10,000 shares of our common
stock on the day after each annual meeting of shareholders at
which he is elected to serve as a director. Any director
appointed between annual meetings is entitled to receive a pro
rata portion of an option to acquire 10,000 shares. Options
granted under the 2003 Stock Option Plan vest immediately and
expire five years from the date of grant. Upon joining our board
of directors in 2001, under our 1991 Stock Option Plan for
Directors, Mr. Ellis was granted an option to acquire
20,000 shares. The option exercise price for all options
granted under the plan is the fair market value of the shares
covered by the option at the time of the grant.
63
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND
As of August 31, 2004, the following persons
were directors and Named Executive Officers or others with
beneficial ownership of five percent or more of our common
stock. The information set forth below has been determined in
accordance with Rule 13d-3 under the Exchange Act based
upon information furnished to us or to the SEC by the persons
listed. Unless otherwise noted in the footnotes to the table,
each person has sole voting and investment power as to all of
the shares owned. The address of each person is 2500 Millbrook
Drive, Buffalo Grove, Illinois 60089 unless otherwise specified.
64
65
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Dr. John N. Kapoor, Ph.D., our current
chairman of our board of directors and our chief executive
officer from March 2001 to December 2002, and a principal
shareholder, is affiliated with EJ Financial Enterprises, Inc.,
a health care consulting investment company. EJ Financial is
involved in the management of health care companies in various
fields, and Dr. Kapoor is involved in various capacities
with the management and operation of these companies. The John
N. Kapoor Trust, the beneficiary and sole trustee of which is
Dr. Kapoor, is a principal shareholder of each of these
companies. As a result, Dr. Kapoor does not devote his full
time to our business. Although such companies do not currently
compete directly with us, certain companies with which EJ
Financial is involved are in the pharmaceutical business.
Discoveries made by one or more of these companies could render
our products less competitive or obsolete. In addition, one of
these companies, NeoPharm, Inc. of which Dr. Kapoor is
Chairman and a major stockholder, recently entered into a loan
agreement with us. We also owe EJ Financial $255,500 in
consulting fees and expense reimbursements from 2001 through
August 31, 2004. No payments have previously been made to
EJ Financial in respect of this amount payable. We owed the
Kapoor Trust $233,700 in consulting fees and expenses from 2001
through August 31, 2004, which we paid in September 2004.
See “Financial Condition and Liquidity,” and
“Risk Factors — Certain of our directors are
subject to conflicts of interest.” Further, the Kapoor
Trust has loaned us $5,000,000 resulting in Dr. Kapoor
becoming one of our major creditors as well as a major
shareholder.
On March 21, 2001, in consideration of
Dr. Kapoor assuming the positions of our president and
interim chief executive officer, the compensation committee of
our board of directors agreed to issue Dr. Kapoor 500,000
options under the Amended and Restated Akorn, Inc. 1988
Incentive Compensation Program in lieu of cash compensation.
In 2001, we entered into the Convertible
Note Agreement with the Kapoor Trust. Under the terms of
the Convertible Note Agreement, the Kapoor Trust agreed to
provide us two separate tranches of funding in the amounts of
$3,000,000 represented by the Tranche A Note, which was
received on July 13, 2001, and $2,000,000 represented by
the Tranche B Note, which was received on August 16,
2001. Each of the Tranche A Note and Tranche B Note,
which are subordinate to the New Credit Facility, bear interest
at prime plus 3% and are due December 20, 2006. Interest
payments are currently prohibited under the terms of a
subordination arrangement with LaSalle Bank. The Tranche A
Note and Tranche B Note allow for
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In December 2001, we entered into a $3,250,000
five-year loan with NeoPharm, Inc. (“NeoPharm”) to
fund our efforts to complete our lyophilization facility located
in Decatur (the “NeoPharm Note”). The NeoPharm Note
was executed in conjunction with a Processing Agreement that
provides NeoPharm with the option of securing at least 15% of
the capacity of our lyophilization facility each year.
Dr. Kapoor, the chairman of our board of directors, was
also chairman of the board of directors of NeoPharm and holds a
substantial stock position in NeoPharm, as well as in our stock.
In September 30, 2003, we defaulted under the NeoPharm Note
as a result of our failure to remove all FDA Warning Letter
sanctions related to our Decatur facilities by June 30,
2003. We also defaulted under the Convertible
Note Agreement as a result of a cross-default to the
NeoPharm Note.
In connection with the Exchange Transaction, the
Kapoor Trust and NeoPharm waived all existing defaults under
their respective agreements and entered into amended agreements
dated October 7, 2003. As a result of these amendments,
interest on the NeoPharm Note accrues at 1.75% above LaSalle
Bank’s prime rate. Interest payments on each of
Tranche A Note, Tranche B Note and the NeoPharm Note
are currently prohibited under the terms of a subordination
arrangement with LaSalle Bank. The amended NeoPharm Note also
requires us to make quarterly payments of $150,000 beginning on
the last day of the calendar quarter during which all
indebtedness under the New Credit Facility has been paid. All
remaining amounts owed under the amended NeoPharm Note are
payable at maturity on December 20, 2006. The amendment we
entered into with Kapoor Trust did not change the interest rate
or the maturity date of either the Tranche A Note or the
Tranche B Note.
As part of the Exchange Transaction, we issued
the 2003 Subordinated Notes to the Kapoor Trust, Mr. Waney
and Argent Fund Management, Ltd. The 2003 Subordinated Notes
mature on April 7, 2006 and bear interest at prime plus
1.75%, but interest payments are currently prohibited under the
terms of subordination arrangements with LaSalle Bank. The 2003
Subordinated Notes are subordinate to the New Credit Facility
and the Amended NeoPharm Note but senior to the Tranche A
Note and Tranche B Note. We also issued to the holders of
the 2003 Subordinated Notes, the Note Warrants to purchase an
aggregate of 276,714 shares of our common stock with an
exercise price of $1.10 per share.
In 2003, we paid approximately $115,000 for
consulting fees to Quintiles, Inc., a firm at which
Mr. Johnson, one of our directors, is employed.
Until July 2004, we had an ownership interest in
Novadaq Technologies, Inc. of 4,132,000 common shares,
representing approximately 16.9% of the outstanding stock of
Novadaq. Previously, we had entered into a marketing agreement
with Novadaq, which was terminated in early 2002. We received,
as part of the termination settlement, the aforementioned shares
and entered into an agreement with Novadaq to be the exclusive
future supplier of Indocyanine Green for use in Novadaq’s
diagnostic procedures. We also had the right to appoint one
individual to the board of directors of Novadaq.
Mr. Przybyl, our chief executive officer, served in this
capacity until July 2004.
DESCRIPTION OF CAPITAL STOCK AND CONVERTIBLE
SECURITIES
Our articles of incorporation authorize us to
issue up to 150,000,000 shares of common stock, no par
value per share, and up to 5,000,000 shares of preferred
stock, $1.00 par value per share. As of August 31,
2004, there were outstanding 20,622,434 shares of our
common stock, 257,172 shares of our Series A Preferred
Stock, and 141,000 shares of our Series B Preferred
Stock. As of August 31, 2004, our Series A
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Our common stock is traded on the OTC Bulletin
Board® under the symbol “AKRN.OB.” Our
Series A Preferred Stock and our Series B Preferred
Stock are not listed or traded on any securities exchange or
established trading market.
The following summary description of our capital
stock is qualified in its entirety by reference to our restated
articles of incorporation and our by-laws, copies of which are
filed as exhibits to the registration statement of which this
prospectus forms a part.
Common Stock
Except in cases where a separate vote of the
holders of our Series A Preferred Stock or the holders of
our Series B Preferred Stock is required by law or the
articles of amendment governing our Series A Preferred
Stock or Series B Preferred Stock (see
“— Preferred Stock — Voting
Rights” below), the holders of our common stock vote
together as a single class with the holders of our Series A
Preferred Stock and the holders of our Series B Preferred
Stock on all matters submitted to a shareholder vote and all
such matters also require the approval of our common
shareholders and the holders of Series A Preferred Stock,
also voting as a single class.
Each holder of our common stock is entitled to
one vote for each share of common stock held of record on all
matters as to which our common shareholders are entitled to
vote. Each holder of our Series A Preferred Stock and each
holder of our Series B Preferred Stock is entitled to a
number of votes equal to the number of shares of our common sock
into which its shares of preferred stock can be converted. As of
August 31, 2004, the outstanding shares of our
Series A Preferred Stock and Series B Preferred Stock
represented in the aggregate 66.8% of our total outstanding
voting power. For further information regarding the voting
rights of holders of our Series A Preferred Stock and
Series B Preferred Stock, see “— Preferred
Stock — Voting Rights” below.
Holders of our common stock may not cumulate
votes for the election of directors.
Holders of our common stock are entitled to
dividends at such times and amounts as our board of directors
may determine, subject to (1) the dividend preferences and
dividend participation rights accorded to the holders of our
Series A Preferred Stock and Series B Preferred Stock
(see “— Preferred Stock —
Dividends” below), (2) our redemption obligations with
respect to our Series A Preferred Stock (see
“— Preferred Stock — Redemption”
below) and (3) any similar or other rights accorded to, or
obligations with respect to, any additional series of preferred
stock which be issued from time to time by our board of
directors.
We have not paid any dividends on our common
stock since 1991 and do not anticipate paying any cash dividends
on our common stock in the foreseeable future. Moreover, we are
currently prohibited by our credit facility from making any cash
dividend payments on our common stock.
In the event of a voluntary or involuntary
liquidation, dissolution or winding up of our company, prior to
any distributions to the holders of our common stock, our
creditors and the holders of our Series A Preferred Stock
and Series B Preferred Stock will receive any payments to
which they are entitled. After
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Shares of our common stock are not redeemable;
have no redemption, sinking fund, conversion or preemptive
rights; and are not subject to further calls or assessments by
the company under state statutes or otherwise.
Preferred Stock
Our board of directors has the authority, without
the approval of our shareholders, to issue shares of preferred
stock out of our authorized shares of preferred stock. Our board
of directors may issue such shares in one or more series and may
fix the number of shares and the rights, preferences and
limitations of each series. Among the matters with respect to
preferred stock that may be determined by our board of directors
are dividend rights, redemption rights and price, the terms of a
sinking fund, if any, the amount payable in the event of any
voluntary liquidation, dissolution or winding up of our affairs,
conversion rights, and voting powers.
Pursuant to this authority, our board of
directors in October 2003 designated and authorized the issuance
of 257,172 shares of our Series A Preferred Stock (all
of which were issued and are outstanding as of August 31,
2004), and in August 2004 designated and authorized the issuance
of 170,000 shares of our Series B Preferred Stock
(141,000 of which were issued and are outstanding as of
August 31, 2004). The following is a summary description of
certain provisions of our Series A Preferred Stock and
Series B Preferred Stock. For further information regarding
our Series A Preferred Stock, see the articles of
amendment, dated October 3, 2003, to our articles of
incorporation, and for further information regarding our
Series B Preferred Stock, see the articles of amendment,
dated August 20, 2004, to our articles of incorporation. A
copy of each of these documents is filed as an exhibit to the
registration statement of which this prospectus forms a part.
Each holder of our Series A Preferred Stock
is entitled to a number of votes equal to the number of shares
of our common stock into which the holder’s Series A
preferred shares can be converted (see
“— Conversion Rights” below). Holders of our
Series A Preferred Stock vote together as a class with the
holders of our common stock on all matters submitted to a
shareholder vote, except in cases where a separate vote of the
holders of our Series A Preferred Stock is required by law
or by the articles of amendment governing our Series A
Preferred Stock. The articles of amendment governing our
Series A Preferred Stock provide that we cannot, without
the approval of the holders of at least 50.1% of our outstanding
Series A Preferred Stock, (i) issue any additional
Series A Preferred Stock or other securities senior to or
ranking equally with our Series A Preferred Stock,
(ii) amend our articles of incorporation or by-laws to
adversely alter the rights of our Series A Preferred Stock,
(iii) effect a change of control of our company, or
(iv) effect a reverse stock split of our Series A
Preferred Stock.
Each holder of our Series B Preferred Stock
is entitled to a number of votes equal to the number of shares
of our common stock into which the holder’s Series B
preferred shares can be converted (see
“— Conversion Rights” below). Holders of our
Series B Preferred Stock vote together as a class with the
holders of our Series A Preferred Stock and the holders of
our common stock on all matters submitted to a shareholder vote,
except in cases where a separate vote of the holders of our
Series A Preferred Stock or Series B Preferred Stock
is required by law or by the articles of amendment governing our
Series A Preferred Stock or Series B Preferred Stock,
as the case may be. The articles of amendment governing our
Series B Preferred Stock provide that we cannot, without
the approval of the holders of at least 50.1% of our outstanding
Series B Preferred Stock, (i) issue any additional
Series A Preferred Stock, Series B Preferred Stock or
other securities senior to or ranking equally with our
Series B Preferred Stock,
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The holders of our Series A Preferred Stock
and Series B Preferred Stock are entitled to payment of the
dividends described below in preference to and in priority over
any dividends payable with respect to our common stock. No
dividend payments or other distributions are permitted with
respect to our common stock unless all accrued dividends on our
preferred stock have been paid, sufficient funds for payments of
dividends for the current period on our preferred stock have
been set aside for payment, and all redemption obligations with
respect to our Series A Preferred Stock have been
discharged. Moreover, we are currently prohibited by our credit
facility from making any cash dividend payments on our preferred
stock.
Our Series A Preferred Stock accrues
dividends at a rate of 6.0% per annum, which rate is fully
cumulative, accrues daily and compounds quarterly. If at any
time we do not have a sufficient number of shares of our common
stock authorized and reserved for issuance upon conversion of
all of our outstanding Series A Preferred Stock, our
Series A Preferred Stock will accrue dividends at a rate of
10.0% per annum until such time as a sufficient number of
shares of our common stock are authorized and reserved for
issuance. At our option, dividends may be either paid in cash or
added to accrued and unpaid dividends.
Our Series B Preferred Stock accrues
dividends at a rate of 6.0% per annum, which rate is fully
cumulative, accrues daily and compounds quarterly. If at any
time we do not have a sufficient number of shares of our common
stock authorized and reserved for issuance upon conversion of
all of our outstanding Series B Preferred Stock, our
Series B Preferred Stock will accrue dividends at a rate of
10.0% per annum until such time as a sufficient number of
shares of our common stock are authorized and reserved for
issuance. At our option, dividends may be either paid in cash or
added to accrued and unpaid dividends.
In the event dividends are to be paid with
respect to our common stock, each holder of our Series A
Preferred Stock and each holder of our Series B Preferred
Stock will be entitled to receive, as additional dividends, an
amount equal to the dividends that such holder would have
received had such holder converted its Series A Preferred
Stock or Series B Preferred Stock into shares of our common
stock immediately prior to the record date for such common stock
dividend. These dividend participation rights in favor of our
Series A and Series B Preferred Stock may have the
effect of discouraging or effectively preventing the payment of
dividends with respect to our common stock.
Each share of our Series A Preferred Stock
is convertible by the holder thereof at any time into a number
of shares of our common stock equal to the quotient obtained by
dividing (x) $100 plus any accrued but unpaid dividends on
such share by (y) $0.75, as such numerator and denominator
may be adjusted from time to time pursuant to the anti-dilution
provisions of the articles of amendment governing our
Series A Preferred Stock.
All outstanding shares of our Series A
Preferred Stock will automatically convert into shares of our
common stock on the earlier to occur of (i) October 8,
2006, or (ii) the date on which the closing price
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Each share of our Series B Preferred Stock
is convertible by the holder thereof at any time into a number
of shares of our common stock equal to the quotient obtained by
dividing (x) $100 plus any accrued but unpaid dividends on
such share by (y) $2.70, as such numerator and denominator
may be adjusted from time to time pursuant to the anti-dilution
provisions of the articles of amendment governing our
Series B Preferred Stock.
We have the option of converting all shares of
our Series B Preferred Stock into shares of our common
stock on any date after August 23, 2009 as to which the
closing price per share of our common stock for at least the 20
consecutive trading days immediately preceding such date exceeds
$5.00 per share.
Subject to certain limitations, on
October 31, 2011, we are required to redeem all outstanding
shares of our Series A Preferred Stock for an amount equal
to $100 per share (as such amount may be adjusted from time
to time for stock splits, recapitalizations and similar events
with respect to our Series A Preferred Stock), plus all
accrued but unpaid dividends on such share. Subject to the
holders’ conversion rights, we also have the option of
redeeming all, but not less than all, of our outstanding
Series A Preferred Stock at the same price, on and after
October 9, 2006.
We are not required, and do not have the right,
to redeem any shares of our Series B Preferred Stock.
Our Series A Preferred Stock and
Series B Preferred Stock rank equally vis-à-vis one
another, and rank senior to our common stock, with respect to
the payment of dividends and distributions and the distribution
of assets upon our liquidation, winding up or dissolution. With
respect to those matters, our Series A Preferred Stock and
Series B Preferred Stock rank junior to any class or series
of capital stock that may in the future be issued by the
company, the terms of which specifically provide that such stock
ranks senior to the Series A Preferred Stock and
Series B Preferred Stock.
Our Series A Preferred Stock and
Series B Preferred Stock also enjoy certain anti-dilution
protections.
Warrants and Convertible Notes
As of August 31, 2004,
16,938,804 shares of the common stock registered pursuant
to this registration statement represent shares of our common
stock that may be issued upon the exercise or conversion of
warrants and convertible notes. The following descriptions of
these warrants and convertible notes are only summaries of the
instruments governing these warrants and convertible notes and
are qualified in their entirety by reference to such
instruments, each of which is incorporated by reference as an
exhibit to this registration statement.
As of August 31, 2004, our outstanding
Series A Warrants were exercisable for
8,155,733 shares of our common stock. The Series A
Warrants have an exercise price of $1.00 per share of our
common stock and are exercisable at any time on or before
October 7, 2006, after which time they expire. The exercise
price per share of our common stock of the Series A
Warrants is adjustable from time to time pursuant to the
anti-dilution provisions set forth in the applicable warrant
agreement.
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As of August 31, 2004, our outstanding
Series B Warrants were exercisable for
1,566,667 shares of our common stock. The Series B
Warrants have an exercise price of $3.50 per share of our
common stock and are exercisable at any time on or before
August 23, 2009, after which time they expire. The exercise
price per share of our common stock of the Series B
Warrants is adjustable from time to time pursuant to the
anti-dilution provisions set forth in the applicable warrant
agreement.
As of August 31, 2004, we had outstanding
$3,000,000 principal amount of our Tranche A Note, which
was convertible into 1,667,382 shares of our common stock
as of such date, including unpaid interest accrued through
August 31, 2004. The Tranche A Note bears interest at
the prime rate plus 3% per annum. The Tranche A Note
converts into our common stock at a rate of $2.28 per
share, and is convertible at any time on or before July 12,
2006, after which time the Tranche A Note matures and the
conversion rights terminate. Accrued and unpaid interest on the
Tranche A Note is capitalized into principal and thus the
number of shares into which the Tranche A Note is
convertible increases as unpaid interest accrues.
As of August 31, 2004, we had outstanding
$2,000,000 principal amount of our Tranche B Note, which
was convertible into 1,395,308 shares of our common stock
as of such date, including unpaid interest accrued through
August 31, 2004. The Tranche B Note bears interest at
the prime rate plus 3% per annum. The Tranche B Note
converts into our common stock at a rate of $1.80 per
share, and is convertible at any time on or before July 12,
2006, after which time the Tranche B Note matures and the
conversion rights terminate. Accrued and unpaid interest on the
Tranche B Note is capitalized into principal and thus the
number of shares into which the Tranche B Note is
convertible increases as unpaid interest accrues.
As of August 31, 2004, our outstanding
Tranche A Warrants were exercisable for
1,000,000 shares of our common stock and our Tranche B
Warrants were exercisable for 667,000 shares of our common
stock. The Tranche A Warrants have an exercise price of
$2.85 per share and the Tranche B Warrants have an
exercise price of $2.25 per share of our common stock and
are exercisable at any time on or before July 12, 2006,
after which time they expire. The exercise price per share of
our common stock of the Tranche A Warrants and
Tranche B Warrants, respectively, is adjustable from time
to time pursuant to the anti-dilution provisions set forth in
the applicable common stock purchase warrant.
As of August 31, 2004, our outstanding AEG
Warrants were exercisable for 1,250,000 shares of our
common stock. The AEG Warrants have an exercise price of
$0.75 per share of our common stock and are exercisable at
any time on or before August 31, 2008, after which time
they expire. The exercise price per share of our common stock of
the AEG Warrants is adjustable from time to time pursuant to the
anti-dilution provisions set forth in the governing stock
purchase warrant.
As of August 31, 2004, our outstanding Note
Warrants were exercisable for 276,714 shares of our common
stock. The Note Warrants have an exercise price of
$1.10 per share of our common stock and are exercisable at
any time on or before October 7, 2006, after which time
they expire. The exercise price per share of our common stock of
the Note Warrants is adjustable from time to time pursuant to
the anti-dilution provisions set forth in the applicable warrant
agreement.
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As of August 31, 2004, our outstanding
Guaranty Warrants were exercisable for 960,000 shares of
our common stock. The Guaranty Warrants have an exercise price
of $1.10 per share of our common stock and are exercisable
at any time on or before October 7, 2006, after which time
they expire. The exercise price per share of our common stock of
the Guaranty Warrants is adjustable from time to time pursuant
to the anti-dilution provisions set forth in the applicable
warrant agreement.
Stock Options
As of August 31, 2004, we had options
outstanding to purchase an aggregate 4,418,300 shares of
our common stock at an average exercise price of $2.40. All
options expire 10 years from the date of grant, unless our
board of directors or its duly appointed committee sets an
earlier expiration date at the time of grant.
Effect of Authorized and Unissued Capital
Stock
Although an attempted takeover of our company is
made unlikely by virtue of the ownership or control by our board
of directors and management of more than 50% of the total voting
power of our capital stock, one of the effects of the existence
of authorized but unissued shares of our common stock and
undesignated shares of our preferred stock may be to enable our
board of directors to make more difficult or to discourage an
attempt to obtain control of our company by means of a merger,
tender offer, proxy contest or otherwise, and thereby to protect
the continuity of our management. If, in the exercise of its
fiduciary obligations, our board of directors were to determine
that a takeover proposal is not in our company’s best
interest, such shares could be issued by our board of directors
without shareholder approval in one or more transactions that
might prevent or make more difficult or costly the completion of
the takeover transaction by diluting the voting or other rights
of the proposed acquiror or insurgent shareholder group, by
creating a substantial voting block in institutional or other
hands that might undertake to support the position of our
incumbent board of directors, by effecting an acquisition that
might complicate or preclude the takeover, or otherwise. Our
articles of incorporation grant our board of directors broad
power to establish the rights and preferences of our authorized
and unissued preferred stock, one or more series of which could
be issued that would entitle the holders thereof to:
The issuance of shares of preferred stock
pursuant to our board of directors’ authority described
above may adversely effect the rights of the holders of our
common stock.
Certain Provisions of Louisiana Law
Although an attempted takeover of our company is
made unlikely by virtue of the ownership or control by our board
of directors and management of more than 50% of the total voting
power of our capital stock, the provisions of Louisiana law
described below may have the effect of making more difficult, or
discouraging, an acquisition of our company deemed undesirable
by our board of directors. The
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Louisiana’s control share acquisition
statute (La. R.S. 12:135
et seq
.) provides that any
shares acquired by a person or group in an acquisition that
causes such person or group to have the power to direct the
exercise of voting power in the election of directors in excess
of 20%, 33 1/3% or 50% thresholds shall have only such
voting power as shall be accorded by the holders of all shares
other than “interested shares” at a meeting called for
the purpose of considering the voting power to be accorded to
such shares. “Interested shares” include all shares as
to which the acquiror, any officer of the company and any
director of the company who is also an employee of the company
may exercise or direct the exercise of voting power. If a
meeting of shareholders is held to consider the voting rights to
be accorded to the acquiror and the shareholders do not vote to
accord voting rights to such shares, a company may have the
right to redeem the shares held by the acquiror for their fair
value.
The statute may have the effect of making more
difficult, or discouraging, an acquisition of our company deemed
undesirable by our board of directors, although, as noted above,
an attempted takeover of our company is made unlikely by virtue
of the ownership or control by our board of directors and
management of more than 50% of the total voting power of our
capital stock.
The control share acquisition statute permits the
articles of incorporation or by-laws of a company to exclude
from the statute’s application acquisitions occurring after
the adoption of the exclusion. Our by-laws do contain such an
exclusion; however, our board of directors or shareholders, by
an amendment to our by-laws, could reverse this exclusion.
Louisiana’s fair price protection statute
(La. R.S. 12:132
et seq.
) is designed to discourage any
party from (i) acquiring direct or indirect control of 10%
or more of the voting power of certain Louisiana corporations
(including our company) in the first step of a transaction and
then, in a second step, squeezing out the remaining shareholders
for a lower price or less favorable form of consideration, or
(ii) engaging in other inequitable practices. Unless the
second-step transaction meets certain requirements as to price
and terms and satisfies other procedural requirements, the
statute permits the second-step transaction to be accomplished
only if it is recommended by the company’s board of
directors and approved by a supermajority vote of:
These supermajority voting requirements apply
unless:
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The supermajority voting requirements also do not
apply, and the entire statute is, in effect, made inapplicable,
if the company’s board of directors has exempted the
acquiring shareholder and its affiliates from the application of
those requirements before the first-step transaction.
The fair price protection statute is designed to
prevent a purchaser from utilizing two-tier pricing and similar
inequitable tactics in an attempted takeover. Without the fair
price protection statute, a purchaser who acquired control of
our company in the first step of a transaction could more easily
compel the remaining shareholders in the second-step transaction
to accept a lower price or less desirable form of consideration
than that given to our other shareholders. The statute
encourages potential purchasers to extend their offers to all
shareholders and to negotiate the transaction with our board of
directors prior to acquiring a substantial amount of our stock.
The statute may make it more costly for a
purchaser to acquire control of our company because it requires
higher percentage requirements for shareholder approval, and may
cause the purchaser to pay a higher price to other shareholders.
Thus, the statute may discourage such purchases, particularly
those for less than all of our outstanding shares, and may
therefore deprive at least some of our shareholders of an
opportunity to sell their stock at attractive prices.
Pursuant to the authority granted by the
Louisiana fair price protection statute, our board of directors
has irrevocably exempted from the statute’s supermajority
voting requirements, and therefore has made the statute
inapplicable to, transactions involving:
In each case, this action was taken by our board
because the exempted parties required the action to be taken as
a condition to their initial investments in our company.
Transfer Agent and Registrar
The transfer agent and registrar for our common
stock is Computershare Investor Services, LLC. We serve as
transfer agent and registrar for our Series A Preferred
Stock and Series B Preferred Stock.
LEGAL MATTERS
The validity of the shares of common stock being
offered hereby will be passed upon for us by Jones, Walker,
Waechter, Poitevent, Carrère & Denègre,
L.L.P., New Orleans, Louisiana.
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EXPERTS
Our financial statements as of and for the year
ended December 31, 2003, included in this prospectus and in
the registration statement have been audited by BDO Seidman,
LLP, independent registered public accountants, and are included
in reliance upon such report given upon the authority of said
firm as experts in auditing and accounting. Such report contains
an explanatory paragraph regarding our ability to continue as a
going concern.
The financial statements as of December 31,
2002 and for the years ended December 31, 2002 and 2001
included in this prospectus and registration statement have been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their report
appearing elsewhere in this registration statement (which report
expresses an unqualified opinion and includes an explanatory
paragraph relating to our ability to continue as a going
concern), and is included in reliance upon such report given
upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on
Form S-1 under the Securities Act, relating to the shares
of common stock being offered by this prospectus, and reference
is made to such registration statement. This prospectus
constitutes the prospectus of Akorn, Inc., filed as part of the
registration statement, and it does not contain all information
in the registration statement, as certain portions have been
omitted in accordance with the rules and regulations of the SEC.
We are subject to the informational requirements
of the Exchange Act, which requires us to file reports, proxy
statements and other information with the SEC. Such reports,
proxy statements and other information may be inspected at
public reference room of the SEC at Judiciary Plaza,
450 Fifth Street N.W., Washington D.C. 20549. Copies of
such material can be obtained from the facility at prescribed
rates. Please call the SEC toll free at 1-800-SEC-0330 for
information about its public reference room. Because we file
documents electronically with the SEC, you may also obtain this
information by visiting the SEC’s website at
http://www.sec.gov or our website at http://www.akorn.com.
Information contained in our web site is not part of this
prospectus.
Our statements in this prospectus about the
contents of any contract or other document are not necessarily
complete. You should refer to the copy of our contract or other
document we have filed as an exhibit to the registration
statement for complete information.
You should rely only on the information
incorporated by reference or provided in this prospectus. We
have not authorized anyone else to provide you with different
information. The selling stockholders are not making an offer of
these securities in any state where the offer is not permitted.
You should not assume that the information in this prospectus is
accurate as of any date other than the date on the front of the
document. We furnish our stockholders with annual reports
containing audited financial statements.
76
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTANTS
Board of Directors and Shareholders
We have audited the accompanying consolidated
balance sheets of Akorn, Inc. and Subsidiary as of
December 31, 2003 and the related consolidated statements
of operations, shareholders’ equity, and cash flows for the
year then ended. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit 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. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides 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 Akorn, Inc. and Subsidiary
at December 31, 2003 and the results of their operations
and cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As described in Note A to the consolidated
financial statements, the Company has suffered recurring losses
from operations in recent years, has a net working capital
deficiency at December 31, 2003, and is involved in certain
ongoing governmental proceedings that raise substantial doubt
about its ability to continue as a going concern.
Management’s plans in regards to these matters are also
described in Note A. The financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
BDO Seidman, LLP
Chicago, Illinois
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Akorn, Inc.:
We have audited the accompanying consolidated
financial statements of Akorn, Inc. and subsidiary (the
“Company”) as of December 31, 2002, and for each
of the two years in the period ended December 31, 2002, as
listed in the Index to Financial Statements at page F-1. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with
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. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial
statements present fairly, in all material respects, the
financial position of Akorn, Inc. and subsidiary at
December 31, 2002, and the results of their operations and
their cash flows for each of the two years in the period ended
December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying consolidated financial
statements for the year ended December 31, 2002 have been
prepared assuming that the Company will continue as a going
concern. As discussed in Notes A and N to the consolidated
financial statements, the Company’s losses from operations
in recent years, working capital deficiency as of
December 31, 2002, the need to refinance or extend its debt
on a long-term basis and the need to successfully resolve the
ongoing governmental proceedings, raise substantial doubt about
its ability to continue as a going concern. Management’s
plans concerning these matters are also described in
Note A. The consolidated financial statements do not
include any adjustments that might result from the outcome of
this uncertainty.
Deloitte & Touche LLP
Chicago, Illinois
F-3
AKORN, INC.
CONSOLIDATED BALANCE SHEETS
See notes to the consolidated financial
statements.
F-4
AKORN, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
See notes to the consolidated financial
statements.
F-5
AKORN, INC.
See notes to the consolidated financial
statements.
F-6
AKORN, INC.
See notes to the consolidated financial
statements.
F-7
AKORN, INC.
Business:
Akorn,
Inc. and its wholly owned subsidiary, Akorn (New Jersey), Inc.
(collectively, the “Company”) manufacture and market
diagnostic and therapeutic pharmaceuticals in specialty areas
such as ophthalmology, rheumatology, anesthesia and antidotes,
among others. Customers, including physicians, optometrists,
wholesalers, group purchasing organizations and other
pharmaceutical companies, are served primarily from three
operating facilities in the United States.
Basis of
Presentation:
The Company’s
losses from operations in recent years and working capital
deficiencies, together with the need to successfully resolve its
ongoing compliance matters with the Food and Drug Administration
(“FDA”), have raised substantial doubt about the
Company’s ability to continue as a going concern. The
accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of
business. Accordingly, the financial statements do not include
any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
On October 7, 2003, a significant threat to
the Company’s ability to continue as a going concern was
resolved when the Company consummated a transaction with a group
of investors that resulted in the extinguishment of the
Company’s then outstanding senior bank debt in the amount
of approximately $37,731,000 in exchange for shares of the
Company’s convertible preferred stock, warrants to purchase
shares of the Company’s common stock, subordinated
promissory notes in the aggregate amount of $2,767,139 and a new
credit facility under which approximately $7,000,000 was
outstanding as of the date of the transaction, $5,473,862 of
which was paid to the investors in the transaction. For more
information regarding this transaction, see
Note G — “Financing Arrangements”.
While the Company generated positive cash flow
from operating activities in 2002 it used $1,932,000 in cash
from operations in 2003. As of December 31, 2003, the
Company had $218,000 in cash and cash equivalents and had
approximately $3.5 million of undrawn availability under
its new line of credit. The Company believes that the new line
of credit, together with cash generated from operations, will be
sufficient to meet the cash requirements for operating the
Company’s business, although there can be no assurance of
this sufficiency.
Although the Company has refinanced its debt on a
long-term basis as described above, it continues to be subject
to ongoing FDA compliance matters that could have a material
adverse effect on the Company. See Note N —
“Commitments and Contingencies” for further
description of these matters. The Company is working with the
FDA to favorably resolve such compliance matters and has
submitted to the FDA and continues to implement a plan for
comprehensive corrective actions at its Decatur, Illinois
facility. On February, 11, 2004, the FDA began an
inspection of the Decatur facility. This inspection is still
ongoing as of March 2004. The management of the Company believes
that the Company will successfully resolve these compliance
matters with the FDA. In addition, if the Company is enjoined
from further violations, including a temporary suspension of
some or all operations of the Decatur facility, management
believes it will be able to successfully manage through this
situation. There can be no guarantee that the FDA matters will
be successfully resolved, and if the Company is not successful
in doing so, there remains substantial doubt about the
Company’s ability to continue as a going concern.
The Company has added key management personnel,
including the appointment in early 2003 of a new chief executive
officer and additional personnel in critical areas. Management
has reduced the Company’s cost structure, improved the
Company’s processes and systems and implemented strict
controls over capital spending. Management believes these
activities will continue to improve the Company’s results
of operations, cash flow from operations and its future
prospects.
F-8
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As a result of all of the factors cited in the
preceding paragraphs, management of the Company believes that
the Company should be able to sustain its operations and
continue as a going concern. However, the ultimate outcome of
this uncertainty cannot be presently determined and,
accordingly, there remains substantial doubt as to whether the
Company will be able to continue as a going concern.
Consolidation:
The
accompanying consolidated financial statements include the
accounts of Akorn, Inc. and its wholly owned subsidiary, Akorn
(New Jersey) Inc. Intercompany transactions and balances have
been eliminated in consolidation.
Use of Estimates:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ materially from those estimates. Significant estimates
and assumptions for the Company relate to the allowance for
doubtful accounts, the allowance for chargebacks, the allowance
for rebates, the reserve for slow-moving and obsolete
inventories, the allowance for product returns, the allowance
for discounts, the carrying value of intangible assets and the
carrying value of deferred income tax assets.
Revenue Recognition:
The Company recognizes product sales for its ophthalmic and
injectable business segments upon the shipment of goods for
customers whose terms are FOB shipping point. The Company has
certain customers whose terms are FOB destination point and
recognizes revenue upon delivery of the product to these
customers. Revenue is recognized when all obligations of the
Company have been fulfilled and collection of the related
receivable is probable.
The Contract Services segment, which produces
products for third party customers, based upon their
specification, at a pre-determined price, also recognizes sales
upon the shipment of goods or upon delivery of the product as
appropriate. Revenue is recognized when all obligations of the
Company have been fulfilled and collection of the related
receivable is probable.
Provision for estimated doubtful accounts,
chargebacks, rebates, discounts and product returns is made at
the time of sale and is analyzed and adjusted, if necessary, at
each balance sheet date.
Cash Equivalents:
The Company considers all highly liquid investments with
maturity of three months or less, when purchased, to be cash
equivalents.
Accounts Receivable:
The nature of the Company’s business inherently involves,
in the ordinary course, significant amounts and substantial
volumes of transactions and estimates relating to allowances for
doubtful accounts, product returns, chargebacks, rebates and
discounts given to customers. This is a natural circumstance of
the pharmaceutical industry and not specific to the Company and
inherently lengthens the collection process. Depending on the
product, the end-user customer, the specific terms of national
supply contracts and the particular arrangements with the
Company’s wholesaler customers, certain rebates,
chargebacks and other credits are deducted from the
Company’s accounts receivable. The process of claiming
these deductions depends on wholesalers reporting to the Company
the amount of deductions that were earned under the respective
terms with end-user customers (which, in turn, depends on which
end-user customer with different pricing arrangements might be
entitled to a particular deduction). This process can lead to
“partial payments” against outstanding invoices as the
wholesalers take the claimed deductions at the time of payment.
F-9
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Unless otherwise noted, the provisions and
allowances for the following customer deductions are reflected
in the accompanying financial statements as reductions of
revenues and trade accounts receivable, respectively.
Chargebacks and
Rebates:
The Company enters
contractual agreements with certain third parties such as
hospitals and group-purchasing organizations to sell certain
products at predetermined prices. The parties have elected to
have these contracts administered through wholesalers that buy
the product from the Company. When a wholesaler sells products
to one of the third parties that is subject to a contractual
price agreement, the difference between the price paid to the
Company by the wholesaler and the price under contract is
charged back to the Company by the wholesaler. The Company
tracks sales and submitted chargebacks by product number for
each wholesaler. Utilizing this information, the Company
estimates a chargeback percentage for each product. The Company
reduces gross sales and increases the chargeback allowance by
the estimated chargeback amount for each product sold to a
wholesaler. The Company reduces the chargeback allowance when it
processes a request for a chargeback from a wholesaler. Actual
chargebacks processed can vary materially from period to period.
Management obtains certain wholesaler inventory
reports to aid in analyzing the reasonableness of the chargeback
allowance. The Company assesses the reasonableness of its
chargeback allowance by applying the product chargeback
percentage based on historical activity to the quantities of
inventory on hand per the wholesaler inventory reports.
Similarly, the Company maintains an allowance for
rebates related to contract and other programs with certain
customers. Rebate percentages vary by product and by volume
purchased by each eligible customer. The Company tracks sales by
product number for each eligible customer and then applies the
applicable rebate percentage, using both historical trends and
actual experience to estimate its rebate allowance. The Company
reduces gross sales and increases the rebate allowance by the
estimated rebate amount when the Company sells its products to
its rebate-eligible customers. The Company reduces the rebate
allowance when it processes a customer request for a rebate. At
each balance sheet date, the Company evaluates the allowance
against actual rebates processed and such amount can vary
materially from period to period.
The recorded allowances reflect the
Company’s current estimate of the future chargeback and
rebate liability to be paid or credited to its wholesaler
customers under the various contracts and programs. For the
years ended December 31, 2003, 2002 and 2001, the Company
recorded chargeback and rebate expense of $12,836,000,
$15,418,000, and $28,655,000, respectively. The allowance for
chargebacks and rebates was $4,804,000 and $4,302,000 as of
December 31, 2003 and 2002.
Product Returns:
Certain of the Company’s products are sold with the
customer having the right to return the product within specified
periods and guidelines for a variety of reasons, including but
not limited to pending expiration dates. Provisions are made at
the time of sale based upon tracked historical experience, by
customer in some cases. In evaluating month end allowance
balances, the Company considers actual returns to date that are
in process, the expected impact of product recalls and the
wholesaler’s inventory information to assess the magnitude
of unconsumed product that may result in a product return to the
Company in the future. Actual returns processed can vary
materially from period to period. For the years ended
December 31, 2003, 2002, and 2001 the Company recorded a
provision for product returns of $2,085,000, $2,574,000, and
$4,103,000, respectively. The allowance for potential product
returns was $1,077,000 and $1,166,000 at December 31, 2003
and 2002, respectively.
F-10
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Doubtful Accounts:
Provisions for doubtful accounts, which reflects trade
receivable balances owed to the Company that are believed to be
uncollectible, are recorded as a component of selling general
and administrative expenses. In estimating the allowance for
doubtful accounts, the Company has:
For the years ended December 31, 2003, 2002
and 2001, the Company recorded a provision (recovery) for
doubtful accounts of ($471,000), ($55,000), and $4,480,000,
respectively. The allowance for doubtful accounts was $609,000,
and $1,200,000 as of December 31, 2003 and 2002,
respectively. As of December 31, 2003, the Company had a
total of $2,118,000 of past due gross accounts receivable, of
which $506,000 was over 60 days past due. The Company
performs monthly a detailed analysis of the receivables due from
its wholesaler customers and provides a specific reserve against
known uncollectible items for each of the wholesaler customers.
The Company also includes in the allowance for doubtful accounts
an amount that it estimates to be uncollectible for all other
customers based on a percentage of the past due receivables. The
percentage reserved increases as the age of the receivables
increases. Of the recorded allowance for doubtful accounts as of
December 31, 2003 of $609,000, the portion related to the
wholesaler customers is $385,000 with the remaining $224,000
reserve for all other customers.
Discounts:
Cash
discounts are available to certain customers based on agreed
upon terms of sale. The Company evaluates the discount reserve
balance against actual discounts taken. For the years ended
December 31, 2003, 2002 and 2001, the Company recorded a
provision for discounts of $689,000, $1,014,000 and $886,000
respectively. Prior to 2001, the Company did not grant
discounts. The allowance for discounts was $94,000 and $172,000
as of December 31, 2003 and 2002, respectively.
Inventories:
Inventories are stated at the lower of cost (average cost
method) or market (see Note D —
“Inventories”). The Company maintains an allowance for
slow-moving and obsolete inventory. For finished goods
inventory, the Company estimates the amount of inventory that
may not be sold prior to its expiration or is slow moving based
upon recent sales activity by unit and wholesaler inventory
information. The Company also analyzes its raw material and
component inventory for slow moving items. For the years ended
December 31, 2003, 2002 and 2001, the Company recorded a
provision for inventory obsolescence of $940,000, $838,000, and
$1,830,000, respectively. The allowance for inventory
obsolescence was $917,000 and $1,206,000 as of December 31,
2003 and 2002, respectively.
Intangibles:
Intangibles consist primarily of product licensing and other
such costs that are capitalized and amortized on the
straight-line method over the lives of the related license
periods or the estimated life of the acquired product, which
range from 17 months to 18 years. Accumulated
amortization at December 31, 2003 and 2002 was $9,958,000
and $8,543,000 respectively. Amortization Expenses was
$1,415,000, $1,411,000 and $1,494,000 for the years ending
December 31, 2003, 2002 and
F-11
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
2001, respectively. The Company regularly
assesses the impairment of intangibles based on several factors,
including estimated fair market value and anticipated cash
flows. In 2002, the Company recorded impairment charges on
certain intangible assets (see Note R — “Asset
Impairment Charges”).
The amortization expense of acquired intangible
assets, absent any further impairments, for each of the five
years ending December 31, 2008 will be as follows (in
thousands):
Property, Plant and
Equipment:
Property, plant and
equipment is stated at cost, less accumulated depreciation.
Depreciation is provided using the straight-line method in
amounts considered sufficient to amortize the cost of the assets
to operations over their estimated service lives or lease terms.
The average estimated service lives of buildings, leasehold
improvements, furniture and equipment, and automobiles are
approximately 30, 10, 10, and 5 years,
respectively. Depreciation Expense was $3,058,000, $3,098,000
and $2,799,000 for 2003, 2002 and 2001, respectively.
Net Loss Per Common
Share:
Basic net loss per common share
is based upon weighted average common shares outstanding.
Diluted net loss per common share is based upon the weighted
average number of common shares outstanding, including the
dilutive effect, if any, of stock options, warrants and
convertible securities using the treasury stock and if converted
methods. However, due to net losses in each of the last three
years, the Company had no dilutive stock options, warrants or
convertible securities. Antidilutive shares excluded from the
computation of diluted net loss per share include 8,053,000,
7,528,000 and 7,412,000 for 2003, 2002 and 2001, respectively,
related to options, warrants and convertible debt. Additionally,
for 2003 antidilutive shares include 45,349,000 related to
warrants and the convertible preferred stock issued in the
Exchange Transaction.
Stock Based
Compensation:
The Company applies the
intrinsic-value-based method of accounting prescribed by
Accounting Principles Board (“APB”) Opinion
No. 25, “Accounting for Stock Issued to
Employees” to account for its fixed-plan stock options.
Under this method, compensation expense is recorded on the date
of grant only if the current market price of the underlying
stock exceeds the exercise price. Statement of Financial
Accounting Standards (“SFAS”) No. 123,
“Accounting for Stock-Based Compensation”, established
accounting and disclosure requirements using a fair-value-based
method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has
elected to continue to apply the intrinsic-value-based method of
accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123. The Company accounts for
the plans under APB Opinion No. 25, under which no
compensation cost has been recognized for the stock option
awards to employees, since the exercise price of the options
granted is equal to the market value on the date of the grant.
See Note J — “Stock Options and Employee
Stock Purchase Plan”.
F-12
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Had compensation cost for the Company’s
stock-based compensation plans been determined based on
SFAS No. 123, the Company’s loss and net loss per
share for the years ended December 31, 2003, 2002 and 2001
would have been the pro forma amounts indicated below (in
thousands, except per share amounts):
Income Taxes:
Deferred income tax assets and liabilities are determined based
on differences between financial reporting and tax bases of
assets and liabilities, and net operating loss and other tax
credit carryforwards. These items are measured using the enacted
tax rates and laws that will be in effect when the differences
are expected to reverse. The Company records a valuation
allowance to reduce the deferred income tax assets to the amount
that is more likely than not to be realized.
Fair Value of Financial
Instruments:
The Company’s
financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and term debt. The fair
values of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short
maturity of these instruments. The carrying amounts of the
Company’s bank and subordinated borrowings approximate fair
value because the interest rates are reset periodically to
reflect current market rates.
Reclassifications:
Certain prior year amounts have been reclassified to conform to
2003’s presentation.
Note C — Allowance for Customer
Deductions
The activity in various allowance accounts is as
follows (in thousands):
F-13
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The components of inventories are as follows (in
thousands):
In addition to the above, the Company has prepaid
for future deliveries of inventories from its vendors of
$648,000 and $65,000 as of December 31, 2003 and 2002,
respectively. The Company maintains an allowance for excess and
obsolete inventory. The activity in this account is as follows:
In the first quarter of 2002, the Company
received an equity ownership in Novadaq Technologies, Inc.,
(“Novadaq”), of 4,000,000 common shares (representing
approximately 16.4% of the outstanding shares) as part of the
settlement between the Company and Novadaq (See Note
N — “Commitments and Contingencies”). The
Company had previously advanced $690,000 to Novadaq for
development costs and recorded these advances as an intangible
asset. Based on the settlement, the Company has reclassified
these advances as an Investment in Novadaq.
In the fourth quarter of 2002, the Company
received an additional 132,000 shares of Novadaq, valued at
$23,000 which was recorded as a gain in 2002 pursuant to a
pre-existing agreement with another third party.
F-14
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Property, plant and equipment consists of the
following (in thousands):
Construction in progress represents capital
expenditures principally related to the Company’s
lyophilization project that will enable the Company to perform
processes in-house, which are currently being performed by a
sub-contractor. The Company capitalized interest expense related
to the lyophilization project of $1,166,000 and $1,150,000 in
2003 and 2002, respectively. Subject to the Company’s
ability to generate sufficient operating cash flow or obtain new
financing for future operations and capital expenditures, the
Company anticipates completion of the lyophilization project
(principally including only validation of the process as of
December 31, 2003) in the first half of 2005. Future costs
are estimated to be $1.0 million excluding capitalized
interest. The Company can make no assurances that it will be
able to complete this project within its estimated timeframe or
at all, and if not, material impairment charges may be required.
In the third quarter of 2002, the Company recorded a charge of
$545,000 in Selling General & Administrative expense to
write off abandoned construction projects and dispose of certain
other fixed assets.
F-15
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note G — Financing
Arrangements
The Company’s long-term debt consists of (in
thousands):
Maturities of debt are as follows (in thousands):
In December 1997, the Company entered into a
$15,000,000 revolving credit agreement with The Northern Trust
Company (“Northern Trust”), which was increased to
$25,000,000 on June 30, 1998 and to $45,000,000 on
December 28, 1999. Borrowings under this credit agreement
were secured by substantially all of the assets of the Company
and bore floating interest rates that were 7.25% at
September 30, 2003 and December 31, 2002, respectively.
The Company went into default under the Northern
Trust credit agreement in 2002 and thereafter operated under an
agreement under which Northern Trust would agree to forbear from
exercising its remedies (the “Forbearance Agreement”)
and the Company acknowledged its then-current default. The
Forbearance Agreement provided for borrowings and was extended
on numerous occasions in 2003.
On October 7, 2003, a group of investors
(the “Investors”) purchased all of the Company’s
then outstanding senior bank debt from The Northern Trust
Company, a balance of $37,731,000, at a discount and exchanged
such debt with the Company (the “Exchange
Transaction”) for (i) 257,172 shares of
Series A 6.0% Participating Convertible Preferred Stock of
the Company (“Series A Preferred Stock”),
(ii) subordinated promissory notes in the aggregate
principal amount of $2,767,139 (the “2003 Subordinated
Notes”), (iii) warrants to purchase an aggregate of
8,572,400 shares of the Company’s common stock with an
exercise price of $1.00 per share (“Series A
Warrants”), and (iv) $5,473,862 in cash from the
proceeds of the term loan under the New Credit Facility
described in a following paragraph.
F-16
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The 2003 Subordinate Notes and cash were issued
by the Company to (a) The John N. Kapoor Trust dtd 9/20/89
(the “Kapoor Trust”), the sole trustee and sole
beneficiary of which is Dr. John N. Kapoor, the
Company’s Chairman of the Board of Directors and the holder
of a significant stock position in the Company, (b) Arjun
Waney, a newly-elected director and the holder of a significant
stock position in the Company, and (c) Argent Fund
Management Ltd., for which Mr. Waney serves as Chairman and
Managing Director and 51% of which is owned by Mr. Waney.
The Company also issued to the holders of the 2003 Subordinated
Notes warrants to purchase an aggregate of 276,714 shares
of common stock with an exercise price of $1.10 per share
(“Note Warrants”).
As a result of the Exchange Transaction, the
Company recorded transaction costs of approximately
$3.1 million. The transaction costs consisted principally
of cash and securities owed to restructuring and investment
banking professionals that provided services directly related to
the extinguishments.
In accounting for the Exchange Transaction, the
Company first reduced the carrying amount of the Northern Trust
debt by the cash paid to Investors. The remaining carrying value
was then allocated among the three securities issued to fully
extinguish the debt based on the relative fair values of those
securities. Accordingly, the Series A Preferred Stock, the
2003 Subordinated Notes and the Series A Warrants were
initially recorded at $20,874,000, $2,046,000 and $9,337,000,
respectively, before, in the case of the 2003 Subordinated
Notes, the discount described below and before, in the case of
the stock securities, related issuance costs of $480,000. The
fair value of the Series A Warrants was estimated by the
Company using the same method and estimates as described for the
warrants issued with the 2003 Subordinated Notes. All
unexercised warrants expire on October 7, 2006.
Simultaneously with the consummation of the
Exchange Transaction, the Company entered into a credit
agreement with LaSalle Bank National Association (“LaSalle
Bank”) providing the Company with $7,000,000 of term loans
and a revolving line of credit of up to $5,000,000 to provide
for working capital needs (collectively, the “New Credit
Facility”) secured by substantially all of the assets of
the Company. The obligations of the Company under the New Credit
Facility have been guaranteed by the Kapoor Trust and Arjun
Waney. In exchange for this guaranty, the Company issued
additional warrants (“Guarantee Warrants”) to purchase
880,000 and 80,000 shares of common stock to the Kapoor
Trust and Arjun Waney, respectively, and has agreed to issue to
each of them, on each anniversary of the date of the
consummation of the Exchange Transaction, warrants to purchase
an additional number of shares of common stock equal to 0.08
multiplied by the principal dollar amount of the Company’s
indebtedness then guaranteed by them under the New Credit
Facility. The warrants issued in exchange for these guarantees
have an exercise price of $1.10 per share.
The New Credit Facility with LaSalle Bank
consists of a $5,500,000 term loan A, a $1,500,000 term
loan B (collectively, the “Term Loans”) as well
as a revolving line of credit of up to $5,000,000 (the
“Revolver”) secured by substantially all of the assets
of the Company. The New Credit Facility matures on
October 7, 2005. The Term Loans bear interest at prime plus
1.75% (5.75% at December 31, 2003) and require principal
payments of $195,000 per month commencing October 31,
2003, with the payments first to be applied to term loan B.
The Revolver bears interest at prime plus 1.50% (5.50% as of
December 31, 2003). Availability under the Revolver is
determined by the sum of (i) 80% of eligible accounts
receivable, (ii) 30% of raw material, finished goods and
component inventory excluding packaging items, not to exceed
$2.5 million and (iii) the difference between 90% of
the forced liquidation value of machinery and equipment
($4,092,000) and the sum of $1,750,000 and the outstanding
balance under term loan B. The availability as of
December 31, 2003 was $3,500,000. The New Credit Facility
contains certain restrictive covenants including but not limited
to certain financial covenants such as minimum EDITDA levels,
Fixed Charge Coverage Ratios, Senior Debt to EBITDA ratios and
Total Debt to EBITDA ratios. The Company has negotiated an
amendment to the New Credit Facility effective December 31,
2003 that will clarify certain covenant computations and waive
certain technical violations.
F-17
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The New Credit Facility also contains subjective
covenants providing that the Company would be in default if, in
the judgment of the lenders, there is a material adverse change
in the financial condition of the Company. Because the New
Credit Facility also requires the Company to maintain its
deposit accounts with LaSalle Bank, the existence of these
subjective covenants, pursuant to EITF Abstract No. 95-22,
requires that the Company classify outstanding borrowings under
the Revolver as a current liability.
On July 12, 2001 the Company entered into a
$5,000,000 convertible subordinated debt transaction with the
Kapoor Trust. The transaction is evidenced by a Convertible
Bridge Loan and Warrant Agreement (the “Convertible
Note Agreement”) in which the Kapoor Trust agreed to
provide two separate tranches of funding in the amounts of
$3,000,000 (“Tranche A Note” which was received
on July 13, 2001) and $2,000,000 (“Tranche B
Note” which was received on August 16, 2001). As part
of the consideration provided to the Kapoor Trust for the
convertible subordinated debt, the Company issued the Kapoor
Trust two warrants which allow the Kapoor Trust to
purchase 1,000,000 shares of common stock at a price
of $2.85 per share (“Tranche A Warrants”)
and another 667,000 shares of common stock at a price of
$2.25 per share (“Tranche B Warrants”). The
convertible exercise price for each warrant represented a 25%
premium over the share price at the time of the Kapoor
Trust’s commitment to provide the convertible subordinated
debt. All unexercised warrants expire on December 20, 2006.
Under the terms of the Convertible
Note Agreement, the convertible subordinated debt bears
interest at prime plus 3.0% (7.0% as of December 31, 2003)
and is due on December 20, 2006. As similarly provided
under the subordination agreement with the Northern Trust,
interest cannot be paid on the convertible subordinated debt
until the repayment of all amounts under the New Credit
Facility. The convertible feature of the convertible
subordinated debt, as amended, allows for immediate conversion
of the subordinated debt plus interest into common stock of the
Company, at a price of $2.28 per share of common stock for
Tranche A Note and $1.80 per share of common stock for
Tranche B Note.
The Company, in accordance with APB Opinion
No. 14, recorded the convertible subordinated debt and
related warrants as separate securities. The fair value of the
Tranche A Warrants and the Tranche B Warrants was
estimated on the date of issuance using the Black-Scholes option
pricing model with the following assumptions: (i) dividend
yield of 0%, (ii) expected volatility of 79%,
(iii) risk free rate of 4.75%, and (iv) expected life
of 5 years. As a result, the Company assigned a value of
$1,516,000 to the warrants and recorded this amount as
additional paid in capital. Furthermore, in accordance with
Emerging Issues Task Force (“EITF”) Abstract
No. 00-27, the Company has also computed and recorded a
separate amount related to the “intrinsic” value of
the conversion option related to the debt. This calculation
determines the value of the excess value of the common stock
issuable upon conversion over the recorded value of the debt.
This value was determined to be $1,508,000 and was recorded as
additional paid in capital. The remaining $1,976,000 was
recorded as long-term debt. The resultant debt discount of
$3,024,000, equivalent to the value assigned to the warrants and
the “intrinsic” value of the convertible debt, is
being amortized and charged to interest expense over the life of
the subordinated debt. Additionally, as the accrued interest on
the convertible subordinated debt is also convertible into
common stock, it may also result in separately recordable
beneficial conversion amounts. Such amounts would be recorded if
the price of the Company’s common stock is lower than the
conversion rate when the interest is accrued. The beneficial
conversion feature amount related to interest was $0 and
$114,000 in 2003 and 2002, respectively, and was recorded as an
increase to paid in capital and as additional debt discount
amortizable over the remaining term of the convertible
subordinated debt. Related debt discount amortization was
$588,000, $519,000 and $431,000 in 2003, 2002 and 2001,
respectively.
In December 2001, the Company entered into a
$3,250,000 five-year loan with NeoPharm, Inc.
(“NeoPharm”) to fund the Company’s efforts to
complete its lyophilization facility located in Decatur,
Illinois (the “Neopharm Note”). Under the terms of the
Neopharm Note, dated December 20, 2001,
F-18
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
interest accrued at the initial rate of 3.6% and
was reset quarterly based upon NeoPharm’s average return on
its cash and readily tradable long and short-term securities
during the previous calendar quarter (2.5% at December 31,
2003). The principal and accrued interest was due and payable on
or before maturity on December 20, 2006. The note provided
that the Company will use the proceeds of the loan solely to
validate and complete the lyophilization facility located in
Decatur, Illinois. The Neopharm Note is subordinated to the
Company’s senior debt but is senior to the Company’s
subordinated debt owed to the Kapoor Trust. The note was
executed in conjunction with a Processing Agreement that
provides NeoPharm with the option of securing at least 15% of
the capacity of the Company’s lyophilization facility each
year. Dr. John N. Kapoor, the Company’s chairman is
also chairman of NeoPharm and holds a substantial stock position
in NeoPharm as well as in the Company. In September 30,
2003, the Company defaulted under the NeoPharm Note as a result
of its failure to remove all FDA warning letter sanctions
related to the Company’s Decatur, Illinois facilities by
June 30, 2003.
Contemporaneous with the completion of the
NeoPharm Note between the Company and NeoPharm, the Company
entered into an agreement with the Kapoor Trust, which amended
the Convertible Note Agreement. The amendment extended the
maturity of the Convertible Note Agreement to terminate
concurrently with the NeoPharm Note on December 20, 2006.
The amendment also made it possible for the Kapoor Trust to
convert the interest accrued on the $3,000,000 tranche, as well
as interest on the $2,000,000 tranche after the original
maturity of the Tranche B note, into common stock of the
Company. Previously, the Kapoor Trust could only convert the
interest accrued on the $2,000,000 tranche through the original
maturity of the Tranche B note. In September 30, 2003,
the Company defaulted under the Convertible Note Agreement
as a result of a cross-default to the NeoPharm Note.
In connection with the Exchange Transaction,
NeoPharm waived all existing defaults under the NeoPharm Note
and the Company and NeoPharm entered into an Amended and
Restated Promissory Note dated October 7, 2003 (the
“Amended NeoPharm Note”). Interest under the Amended
NeoPharm Note accrues at 1.75% above LaSalle Bank’s prime
rate (5.75% as of December 31, 2003), but interest payments
are currently prohibited under the terms of a subordination
arrangement between LaSalle Bank and NeoPharm. The Amended
NeoPharm Note also requires the Company to make quarterly
payments of $150,000 beginning on the last day of the calendar
quarter during which all indebtedness under the New Credit
Facility has been paid. All remaining amounts owed under the
Amended NeoPharm Note are payable at maturity on
December 20, 2006. The Amended NeoPharm Note is
subordinated to the Company’s bank debt under the New
Credit Facility and is senior to the Company’s debt to the
Kapoor Trust and to the 2003 Subordinated Notes.
In connection with the Exchange Transaction, the
Kapoor Trust waived all existing defaults under the Convertible
Note Agreement and the Company and the Kapoor Trust entered into
an amendment to the Convertible Note Agreement. That amendment
did not change the interest rate or the maturity date of the
loans made under the Convertible Note Agreement. The debt owed
under the Convertible Note Agreement is subordinated to the
Company’s bank debt under the New Credit Facility, the
subordinated debt under the Amended NeoPharm Note and the 2003
Subordinated Notes issued in connection with the Exchange
Transaction.
As part of the Exchange Transaction, the Company
issued the 2003 Subordinated Notes to the Kapoor Trust, Arjun
Waney and Argent Fund Management, Ltd. The 2003 Subordinated
Notes mature on April 7, 2006 and bear interest at prime
plus 1.75% (5.75% as of December 31, 2003), but interest
payments are currently prohibited under the terms of a
subordination arrangement between LaSalle Bank and the
Note Holders. The 2003 Subordinated Notes are subordinated
to the New Credit Facility and the Amended NeoPharm Note but
senior to Convertible Note Agreement with the Kapoor Trust. The
F-19
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company also issued to the holders of the 2003
Subordinated Notes the Note Warrants to purchase an aggregate of
276,714 shares of common stock with an exercise price of
$1.10 per share. All unexercised Note Warrants expire on
October 7, 2006. The Company, in accordance with APB
Opinion No. 14, recorded the initial issuance of the 2003
Subordinated Debt and Note Warrants as separate securities. The
fair value of the Note Warrants was estimated on the date of
issuance using the modified Black-Scholes option pricing model
with the following assumptions: (i) dividend yield of 0%,
(ii) expected volatility of 127.5%, (iii) risk free
rate of 2.19%, and (iv) expected life of 3 years. As a
result, the Company assigned a value of $336,000 to Note
Warrants and recorded this amount in shareholders’ equity
and as a discount, along with the spread between the face value
of the debt and its initial recorded value as described above,
on the 2003 Subordinated Notes. Related debt discount
amortization was $61,000 as of December 31, 2003.
In June 1998, the Company entered into a
$3,000,000 mortgage agreement with Standard Mortgage Investors,
LLC of which there were outstanding borrowings of $1,623,000 and
$1,917,000 at December 31, 2003 and 2002, respectively. The
principal balance is payable over 10 years, with the final
payment due in June 2007. The mortgage note bears an interest
rate of 7.375% and is secured by the real property located in
Decatur, Illinois.
As part of the Exchange Transaction, the Company
recorded $1,627,000 as deferred financing costs, including the
value of the Guarantee Warrants. This amount is being amortized
as a component of interest expense over the life of the related
debt. Amortization in 2003 was $345,000.
Note H — Series A
Preferred Stock
The Series A Preferred Stock accrues
dividends at a rate of 6.0% per annum, which rate is fully
cumulative, accrues daily and compounds quarterly, provided that
in the event stockholder approval authorizing sufficient shares
of common stock to be authorized and reserved for conversion of
all of the Series A Preferred Stock and Series A
Warrants issued in connection with the Exchange Transaction
(“Stockholder Approval”) has not been received by
October 7, 2004, such rate is to increase to 10.0% until
Stockholder Approval has been received and sufficient shares of
common stock are authorized and reserved. While the dividends
could be paid in cash at the Company’s option, such
dividends are currently being deferred and added to the
Series A Preferred Stock balance. Subject to certain
limitations, on October 31, 2011, the Company is required
to redeem all shares of Series A Preferred Stock for an
amount equal to $100 per share, as may be adjusted from
time to time as set forth in the Articles of Amendment to the
Articles of Incorporation (the “Articles of
Incorporation”) of the Company (the “Stated
Value”), plus all accrued but unpaid dividends on such
share. Shares of Series A Preferred Stock have liquidation
rights in preference over junior securities, including the
common stock, and have certain anti-dilution protections. The
Series A Preferred Stock and unpaid dividends are
convertible at any time into a number of shares of common stock
equal to the quotient obtained by dividing (x) the Stated
Value plus any accrued but unpaid dividends by (y) $0.75,
as such numbers may be adjusted from time to time pursuant to
the terms of the Articles of Incorporation. Provided that
Stockholder Approval has been received and sufficient shares of
common stock are authorized and reserved for conversion, all
shares of Series A Preferred Stock shall convert to shares
of common stock on the earlier to occur of
(i) October 8, 2006 and (ii) the date on which
the closing price per share of common stock for at least
20 consecutive trading days immediately preceding such date
exceeds $4.00 per share.
Holders of Series A Preferred Stock have
full voting rights, with each holder entitled to a number of
votes equal to the number of shares of common stock into which
its shares can be converted. Holders of Series A Preferred
Stock and common stock shall vote together as a single class on
all matters submitted to a shareholder vote, except in cases
where a separate vote of the holders of Series A Preferred
Stock is required by law or by the Articles of Incorporation.
The Articles of Incorporation provide that the Company cannot
take certain actions, including (i) issuing additional
Series A Preferred Stock or
F-20
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
securities senior to or on par with the
Series A Preferred Stock, (ii) amending the
Company’s Articles of Incorporation or By-laws to alter the
rights of the Series A Preferred Stock,
(iii) effecting a change of control or (iv) effecting
a reverse split of the Series A Preferred Stock, without
the approval of the holders of 50.1% of the Series A
Preferred Stock.
After the Exchange Transaction, the Investors
hold approximately 75% of the aggregate voting rights
represented by outstanding shares of common and Series A
Preferred Stock. After the Exchange Transaction and assuming the
exercise of all outstanding conversion rights, warrants and
options to acquire common stock, the Investors would hold
approximately 77% of the common stock, on a fully-diluted basis.
Prior to the Exchange Transaction, the Investors held
approximately 35% of the outstanding voting securities and would
have held approximately 42% of the common stock on a
fully-diluted basis.
The initially recorded amount of the
Series A Preferred Stock, as described in Note G, was
$5,174,000 below its stated value. The Company is accreting this
difference over the time period from issuance to the mandatory
redemption date of October 31, 2011. Accretion in 2003 was
$220,000.
Pursuant to FASB No. 150 —
“Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity”, as
amended, the Series A Preferred Stock is currently
reflected as a liability because of its mandatory redemption
feature. As such, accretion as described above and dividends are
reflected as interest expense in the statement of operations for
2003. Should Stockholder Approval be obtained to effectively
allow conversion of the Series A Preferred Stock into
common stock, the then-carrying value of the Series A
Preferred Stock will be reclassified into shareholders’
equity and future accretion and dividends will be reflected as
adjustments to retained earnings and will also impact income
(loss) available to common stockholders. Additionally, upon
Shareholder Approval, and in accordance with EITF Abstract
No. 00-27, the Company will also the record the value of
the conversion option imbedded in the Series A Preferred
Stock, subject to limitations described in the EITF. The value
of the beneficial conversion feature was computed as $37,418,000
as of the Exchange Transaction date. That amount, however, will
be limited to the recorded value of the Series A Preferred
Stock on the Exchange Transaction date ($20,874,000). The then
resulting carrying value of the Series A Preferred Stock
will then be adjusted to its full aggregated stated value, plus
unpaid dividends, with a charge directly to retained earnings.
That charge will not impact net earnings for the period it is
recorded, but will substantially reduce earnings available to
common stockholders for that period. Management expects to
receive Shareholder Approval at the Company’s next meeting
of shareholders tentatively scheduled in the 2nd quarter of
2004.
Note I — Leasing
Arrangements
The Company leases real and personal property in
the normal course of business under various operating leases,
including non-cancelable and month-to-month agreements. Payments
under these leases were $1,562,000, $1,838,000, and $1,841,000
for the years ended December 31, 2003, 2002 and 2001,
respectively.
F-21
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a schedule, by year, of future
minimum rental payments required under non-cancelable operating
leases (in thousands):
Note J — Stock Options and
Employee Stock Purchase Plan
Under the 1988 Incentive Compensation Program
(the “Incentive Program”) which expired
November 2, 2003, any officer or key employee of the
Company is eligible to receive options as designated by the
Company’s Board of Directors. As of December 31, 2003,
4,600,000 shares of the Company’s Common Stock are
reserved for issuance under the Incentive Program. The exercise
price of the options granted under the Incentive Program may not
be less than 50 percent of the fair market value of the
shares subject to the option on the date of grant, as determined
by the Board of Directors. All options granted under the
Incentive Program during the years ended December 31, 2003,
2002 and 2001 have exercise prices equivalent to the market
value of the Company’s common stock on the date of grant.
Options granted under the Incentive Program generally vest over
a period of three years and expire within a period of five
years. The Company’s Board of Directors have approved a new
2003 Stock Option Plan under which 135,000 options have been
granted. These options have been granted subject to the approval
of this plan by the Company’s shareholders.
Under the 1991 Stock Option Plan for Directors
(the “Directors’ Plan”), which expired in
December 7, 2001, persons elected as directors of the
Company were granted nonqualified options at the fair market
value of the shares subject to option on the date of the grant.
Options granted under the Directors’ Plan vested
immediately and expire five years from the date of grant. The
Company’s Board of Directors have approved a new 2003 Stock
Option Plan under which 85,000 options have been granted. These
options have been granted subject to the approval of this plan
by the Company’s shareholders.
F-22
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
A summary of the status of the Company’s
stock options as of December 31, 2003, 2002 and 2001 and
changes during the years ended December 31, 2003, 2002 and
2001 is presented below (shares in thousands):
The fair value of each option granted during the
year ended December 31, 2003 is estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions: (i) dividend yield of 0%,
(ii) expected volatility of 104%, (iii) risk-free
interest rate of 4.0% and (iv) expected life of
5 years.
The fair value of each option granted during the
year ended December 31, 2002 is estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions: (i) dividend yield of 0%,
(ii) expected volatility of 86%, (iii) risk-free
interest rate of 4.4% and (iv) expected life of
5 years.
The fair value of each option granted during the
year ended December 31, 2001 is estimated on the date of
grant using the Black-Scholes option pricing model with the
following assumptions: (i) dividend yield of 0%,
(ii) expected volatility of 79%, (iii) risk-free
interest rate of 4.4% and (iv) expected life of
5 years.
F-23
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes information about
stock options outstanding at December 31, 2003 (shares in
thousands):
The Company applies APB Opinion No. 25 and
related interpretations in accounting for its plans.
Accordingly, no compensation expense has been recognized for its
stock option plans.
The Akorn, Inc. Employee Stock Purchase Plan
permits eligible employees to acquire shares of the
Company’s common stock through payroll deductions not
exceeding 15% of base wages, at a 15% discount from market
price. A maximum of 1,000,000 shares of the Company’s
common stock may be acquired under the terms of the Plan. New
shares issued under the plan approximated 127,000 in 2003,
99,000 in 2002, and 44,000 in 2001.
Note K — Income Taxes
The income tax provision (benefit) consisted of
the following (in thousands):
F-24
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Income tax expense (benefit) differs from the
“expected” tax expense (benefit) computed by applying
the U.S. Federal corporate income tax rate of 34% to income
before income taxes as follows (in thousands):
Net deferred income tax assets at
December 31, 2003 and 2002 include (in thousands):
The Company records a valuation allowance to
reduce the deferred income tax assets to the amount that is more
likely than not to be realized. In performing its analysis of
whether a valuation allowance to reduce the deferred income tax
asset was necessary, the Company considered both negative and
positive evidence. Based upon this analysis, the negative
evidence outweighed the positive evidence in determining the
amount of the net deferred income tax assets that is more likely
than not to be realized. Based upon its analysis, the Company
established a valuation allowance to reduce the net deferred
income tax assets to zero. The Company’s net operating loss
carry forwards of approximately $30.9 million expiring from
2021 through 2023.
Note L — Retirement
Plan
All employees who have attained the age of 21 are
eligible for participation in the Company’s 401(k) Plan.
The plan-related expense recognized for the years ended
December 31, 2003, 2002 and 2001 totaled $198,000, $242,000
and $234,000, respectively. The employer’s matching
contribution is a percentage of the amount contributed by each
employee and is funded on a current basis.
F-25
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note M — Segment
Information
The Company classifies its operations into three
business segments, Ophthalmic, Injectable and Contract Services.
The Ophthalmic segment manufactures, markets and distributes
diagnostic and therapeutic pharmaceuticals. The Injectable
segment manufactures, markets and distributes injectable
pharmaceuticals, primarily in niche markets. The Contract
Services segment manufactures products for third party
pharmaceutical and biotechnology customers based on their
specifications. The Company’s basis of accounting in
preparing its segment information is consistent with that used
in preparing its consolidated financial statements.
Selected financial information by industry
segment is presented below (in thousands):
The Company manages its business segments to the
gross profit level and manages its operating and other costs on
a company-wide basis. Intersegment activity at the gross profit
level is minimal. The Company does not identify assets by
segment for internal purposes, as certain manufacturing and
warehouse facilities support more than one segment.
Note N — Commitments and
Contingencies
(i) On March 27, 2002, the Company
received a letter informing it that the staff of the regional
office of the Securities and Exchange Commission
(“SEC”) in Denver, Colorado, would recommend to the
SEC that it bring an enforcement action against the Company and
seek an order requiring the Company to be enjoined from engaging
in certain conduct. The staff alleged that the Company misstated
its income for fiscal years 2000 and 2001 by allegedly failing
to reserve for doubtful accounts receivable and overstating its
accounts receivable balance as of December 31, 2000. The
staff alleged that internal control and books and records
deficiencies prevented the Company from accurately recording,
reconciling and aging its accounts receivable. The Company also
learned that certain of its former officers, as well as a then
current employee had received similar notifications. Subsequent
to the issuance of the Company’s consolidated financial
statements for the year ended December 31, 2001, management
of the Company determined it needed to restate the
Company’s financial statements for 2000 and 2001 to record
a $7.5 million increase to the allowance for doubtful
accounts as of December 31, 2000, which it had originally
recorded as of March 31, 2001.
F-26
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
On September 25, 2003, the Company consented
to the entry of an administrative cease and desist order to
resolve the issues arising from the staff’s investigation
and proposed enforcement action as described above. Without the
Company admitting or denying the findings set forth therein, the
consent order finds that the Company failed to promptly and
completely record and reconcile cash and credit remittances,
including those from its top five customers, to invoices posted
in its accounts receivable sub-ledger. According to the findings
in the consent order, the Company’s problems resulted from,
among other things, internal control and books and records
deficiencies that prevented the Company from accurately
recording, reconciling and aging its receivables. The consent
order finds that the Company’s 2000 Form 10-K and
first quarter 2001 Form 10-Q misstated its account
receivable balance or, alternatively, failed to disclose the
impairment of its accounts receivable and that its first quarter
2001 Form 10-Q inaccurately attributed the increased
accounts receivable reserve to a change in estimate based on
recent collection efforts, in violation of Section 13(a) of
the Exchange Act and rules 12b-20, 13a-1 and 13a-13 thereunder.
The consent order also finds that the Company failed to keep
accurate books and records and failed to devise and maintain a
system of adequate internal accounting controls with respect to
its accounts receivable in violation of
Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
The consent order does not impose a monetary penalty against the
Company or require any additional restatement of the
Company’s financial statements. The consent order contains
an additional commitment by the Company to do the following:
(A) appoint a special committee comprised entirely of
outside directors, (B) within 30 days after entry of
the order, have the special committee retain a qualified
independent consultant (“consultant”) acceptable to
the staff to perform a test of the Company’s material
internal controls, practices, and policies related to accounts
receivable, and (C) within 180 days, have the
consultant present his or her findings to the commission for
review to provide assurance that the Company is keeping accurate
books and records and has devised and maintained a system of
adequate internal accounting controls with respect to the
Company’s accounts receivables. On October 27, 2003,
the recently appointed special committee engaged Jefferson
Wells, International (“Jefferson Wells”) to serve as
consultant in this capacity. On February 6, 2004, Jefferson
Wells reported its findings to the special committee, such
findings being that the Company has made the necessary personnel
changes and procedural improvements required to maintain control
over the accounts receivable process and establish the necessary
reserves. Jefferson Wells report was delivered to the SEC on
February 13, 2004
(ii) In October 2000, the FDA issued a
warning letter to the Company following the FDA’s routine
cGMP inspection of the Company’s Decatur manufacturing
facilities. An FDA warning letter is intended to provide notice
to a company of violations of the laws administered by the FDA.
Its primary purpose is to elicit voluntary corrective action.
The letter warns that if voluntary action is not forthcoming,
the FDA may use other legal means to compel compliance. These
include seizure of products and/or injunction of the company and
responsible individuals. The October, 2000 warning letter
addressed several deviations from regulatory requirements
including general documentation and cleaning validation issues
and requested corrective actions be undertaken by the Company.
The Company initiated corrective actions and responded to the
warning letter. Subsequently, the FDA conducted another
inspection in late 2001 and identified additional deviations
from regulatory requirements including cleaning validation and
process control issues. This led to the FDA leaving the warning
letter in place and issuing a Form 483 to document its
findings. While no further correspondence was received from the
FDA, the Company responded to the inspectional findings. This
response described the Company’s plan for addressing the
issues raised by the FDA and included improved cleaning
validation, enhanced process controls and approximately
$2.0 million of capital improvements. In August 2002, the
FDA conducted an inspection of the Decatur facility and
identified deviations from cGMPs. The Company responded to these
observations in September 2002. In response to the
Company’s actions, the FDA conducted another inspection of
the Decatur facility during the period from December 10,
2002 to February 6, 2003. This inspection identified
deviations from regulatory requirements including the manner in
which the Company processes and investigates manufacturing
F-27
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
discrepancies and failures, customer complaints
and the thoroughness of equipment cleaning validations.
Deviations identified during this inspection had been raised in
previous FDA inspections. The Company has responded to these
latest findings in writing and in a meeting with the FDA in
March 2003. The Company set forth its plan for implementing
comprehensive corrective actions and has provided progress
report to the FDA on April 15, May 15 and
June 15, 2003.
The Company is working with FDA to favorably
resolve such compliance matters and has submitted to the FDA and
continues to implement a plan for comprehensive corrective
actions at its Decatur, Illinois facility. On February 11,
2004, the FDA began a reinspection of the Decatur facility. This
inspection is still ongoing at the time of this filing.
Upon completion of the reinspection, the FDA may
take any of the following actions: (i) find that the
Decatur facility is in substantial compliance; (ii) require
the Company to undertake further corrective actions, which could
include a recall of certain products, and then conduct another
inspection to assess the success of those efforts;
(iii) seek to enjoin the Company from further violations,
which may include temporary suspension of some or all operations
and potential monetary penalties; or (iv) take other
enforcement action which may include seizure of Company
products. At this time, it is not possible to predict the
FDA’s course of action.
The Company believes that unless and until the
issues identified by the FDA have been successfully corrected
and the corrections have been verified through reinspection, it
is doubtful that the FDA will approve any NDAs or ANDAs that may
be submitted by the Company for products to be manufactured at
its Decatur facility. This has adversely impacted, and is likely
to continue to adversely impact, the Company’s ability to
grow sales. However, the Company believes that unless and until
the FDA chooses option (iii) or (iv), the Company will be
able to continue manufacturing and distributing its current
product lines.
If the FDA chooses option (iii) or (iv),
such action could significantly impair the Company’s
ability to continue to manufacture and distribute its current
product line and generate cash from its operations and could
result in a covenant violation under the Company’s senior
debt, any or all of which would have a material adverse effect
on the Company’s liquidity and its ability to continue as a
going concern. Any monetary penalty assessed by the FDA also
could have a material adverse effect on the Company’s
liquidity.
(iii) On August 9, 2003, Novadaq
Technologies Inc. (“Novadaq”) notified the Company
that it had requested arbitration with the International Court
of Arbitration (“ICA”) related to a dispute between
the Company and Novadaq regarding the issuance of a Right of
Reference to Novadaq from Akorn for Novadaq’s NDA and Drug
Master File (“DMF”) for specified indications for
Akorn’s drug IC Green. In its request for arbitration,
Novadaq asserts that Akorn is obligated to provide the Right of
Reference as described above pursuant to an amendment dated
September 26, 2002 to the January 4, 2002 Supply
Agreement between the two companies. Akorn does not believe it
is obligated to provide the Right of Reference which, if
provided, would likely reduce the required amount of time for
clinical trials and reduce Novadaq’s cost of developing a
product for macular degeneration. The Company also is
contemplating the possible development of a separate product for
macular degeneration which, if developed, could face competition
from any product developed by Novadaq. Even if the Right of
Reference is provided, the approval process for such a product
is expected to take several years. On October 17, 2003, the
ICA notified the Company that it decided that this matter shall
proceed to arbitration. The arbitration has been scheduled for
the week of June 7, 2004. The Company is in the process of
preparing for arbitration on this matter and will defend itself
vigorously.
In connection with the request for arbitration
described above, on August 22, 2003, Novadaq filed a
lawsuit and a Notice of Emergency Motion in the Circuit Court of
Cook County, Illinois, County
F-28
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Department, Chancery Division for interim relief
related to the issuance of the Right of Reference from Akorn to
Novadaq. On September 22, 2003, Akorn and Novadaq entered
into an Agreed Order whereby Akorn would provide the requested
Right of Reference to Novadaq. The Agreed Order terminates upon
the settlement of the dispute between the parties or in the
event that the final disposition of the arbitration filed with
the ICA results in a final decision against Novadaq or a failure
to hold that Novadaq has a right to the Right of Reference.
(iv) On October 8, 2003, the Company,
pursuant to the terms of the Letter Agreement dated
September 26, 2002 between the Company and AEG Partners
LLC, as amended (the “AEG Letter Agreement”),
terminated its consultant AEG Partners LLC (“AEG”).
AEG contends that, as a result of the Exchange Transaction, the
Company must pay it a “success fee” consisting of
$686,000 and a warrant to purchase 1,250,000 shares of
the Company’s common stock at $1.00 per share, and
adjust the terms of the warrant, pursuant to certain
anti-dilution provisions, to take into account the impact of the
convertible Series A Preferred Stock issued in connection
with the Exchange Transaction. The Company disputes that AEG is
owed this success fee. Pursuant to the AEG Letter Agreement, the
Company and AEG are trying to resolve the dispute. If this
fails, the AEG Letter Agreement provides for mandatory and
binding arbitration. On January 9, 2004, AEG filed a demand
for arbitration. A single arbitrator has been chosen, but no
arbitration date has been set. The Company is in the process of
preparing for arbitration and will vigorously defend itself and
assert any appropriate counterclaims in regards to this matter.
(v) On October 14, 2003, Leerink
Swann & Co., Inc. (“Leerink”) filed a
complaint in the Supreme Court of the State of New York alleging
a breach of contract for the payment of fees by the Company for
investment banking services. Leerink alleged the Company was
obligated to pay $1,765,032 pursuant to a written agreement
dated May 8, 2003 between Leerink and the Company (the
“Leerink Agreement”). The Company disputed that
Leerink was owed $1,765,032. On December 5, 2003, Leerink
and the Company reached a settlement where, among other things,
the Company paid $750,000 to Leerink, and the Company and extend
the Leerink Agreement for an additional year. As a result of the
settlement, the above mentioned complaint was dismissed on
December 8, 2003.
(vi) On February 23, 2004, the Company
was sued in the United States District Court for the District of
Arizona for damages resulting from the death of an Arabian show
horse allegedly injected with the drug Sarapin in the summer of
2003. The complaint alleges that the Company is liable in strict
products liability, in negligence and for injury to property for
manufacturing and selling the Sarapin injected into the horse.
The complaint alleges that the Sarapin was sold at a time when
several lots of Sarapin were being recalled due to a “lack
of sterility assurances.” The complaint seeks unspecified
special, general and punitive damages against the Company in an
amount in excess of $75,000. The Company tendered the defense of
the complaint to its insurer, and the insurer has indicated that
the tender will be accepted subject to a reservation of rights
as to the punitive damage claim.
(vii) The Company was party to a License
Agreement with Johns Hopkins University Applied Physics Lab
(“JHU/APL”) effective April 26, 2000, and amended
effective July 15, 2001. Pursuant to the License Agreement,
the Company licensed two patents from JHU/APL for the
development and commercialization of a diagnosis and treatment
for age-related macular degeneration (“AMD”) using
Indocyanine Green (“ICG”). In July 2001, this license
agreement was amended such that the Company relinquished the
international rights to the two patents in exchange for a
reduced financial obligation. The Company delivered research and
development equipment in lieu of a $100,000 payment for a
recorded gain of $51,000 upon transfer of the equipment. The
Company retained the exclusive rights in the United States of
America. A dispute arose between the Company and JHU/APL
concerning the License Agreement. Specifically, JHU/APL
challenged the Company’s performance required by
December 31, 2001 under the License Agreement and alleged
that the Company was in breach of the License Agreement. The
Company denied JHU/APL’s allegations and contended that it
had performed in
F-29
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
accordance with the terms of the License
Agreement. As a result of the dispute, on March 29, 2002,
the Company commenced a lawsuit in the U.S. District Court
for the Northern District of Illinois, seeking declaratory and
other relief against JHU/APL. On July 3, 2002, the Company
reached an agreement with JHU/APL with regard to the dispute
that had risen between the two parties. The Company and JHU/APL
mutually agreed to terminate their license agreement. As a
result, the Company no longer has any rights to the JHU/APL
patent rights as defined in the License Agreement. In exchange
for relinquishing its rights to the JHU/APL patent rights, the
Company received an abatement of the $300,000 due to JHU/APL at
March 31, 2002 and a payment of $125,000 to be received by
August 3, 2002. The Company also has the right to receive
15% of all cash payments and 20% of all equity received by
JHU/APL from any license of the JHU/APL patent rights less any
cash or equity returned by JHU/APL to such licensee. The
combined total of all such cash and equity payments are not to
exceed $1,025,000. The $125,000 payment is considered an advance
towards cash payments due from JHU/APL and will be credited
against any future cash payments due the Company as a result of
JHU/APL’s licensing efforts. As a result of the resolved
dispute above, the Company recorded an asset impairment charge
of $1,559,500 in the second quarter of 2002. The impairment
amount represents the net value of the asset recorded on the
balance sheet of the Company less the $300,000 payment abated by
JHU/APL and the $125,000 payment from JHU/APL. The $125,000
payment was received on August 3, 2002.
In the fourth quarter of 2002, the Company
learned that JHU/APL had licensed their two patents related to
AMD to Novadaq. In connection with the settlement of a prior
dispute with Novadaq in January 2002 (as discussed below), the
Company had previously acquired an equity interest in Novadaq.
Pursuant to the settlement with JHU/APL, the Company is entitled
to 20% of all equity received by JHU/APL from any license of the
patent rights. Therefore, the Company received an additional
132,000 shares of Novadaq, valued at $23,000 which was
recorded as a gain in the fourth quarter of 2002.
(viii) On March 6, 2002, the Company
received a letter from the United States Attorney’s Office,
Central District of Illinois, Springfield, Illinois, advising
the Company that the Drug Enforcement Agency (“DEA”)
had referred a matter to that office for a possible civil legal
action for alleged violations of the Comprehensive Drug Abuse
Prevention Control Act of 1970, 21 U.S.C. & 801,
et. seq. and regulations promulgated under the Act. The alleged
violations relate to record keeping and controls surrounding the
storage and distribution of controlled substances. On
November 6, 2002, the Company entered into a Civil Consent
Decree with the DEA. Under terms of the Consent Decree, the
Company, without admitting any of the allegations in the
complaint from the DEA, has agreed to pay a fine of $100,000,
upgrade its security system and to remain in substantial
compliance with the Comprehensive Drug Abuse Prevention Control
Act of 1970. If the Company does not remain in substantial
compliance during the two-year period following the entry of the
civil consent decree, the Company, in addition to other possible
sanctions, may be held in contempt of court and ordered to pay
an additional $300,000 fine.
The Company is a party in other legal proceedings
and potential claims arising in the ordinary course of its
business. The amount, if any, of ultimate liability with respect
to such matters cannot be determined. Despite the inherent
uncertainties of litigation, management of the Company at this
time does not believe that such proceedings will have a material
adverse impact on the financial condition, results of
operations, or cash flows of the Company.
F-30
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note O — Supplemental Cash Flow
Information (in thousands)
Note P — Recent Accounting
Pronouncements
In April 2002, the FASB issued
SFAS No. 145 “Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13,
and Technical Corrections.” This statement updates,
clarifies and simplifies existing accounting pronouncements.
SFAS No. 145 rescinds SFAS No. 4,
“Reporting Gains and Losses from Extinguishments of
Debt”, which requires all gains and losses from
extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in APB Opinion No. 30
will now be used to classify those gains and losses.
SFAS No. 64, “Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements”, amended
SFAS No. 4, is no longer necessary because
SFAS No. 4 has been rescinded. SFAS No. 145
amends SFAS No. 13 “Accounting for Leases”,
to require that certain lease modifications that have economic
effects similar to sale-leaseback transaction be accounted for
in the same manner as sale-leaseback transactions. Certain
provisions of SFAS No. 145 are effected for fiscal
years beginning after May 15, 2002, while other provisions
are effected for transactions occurring after May 15, 2002.
The adoption of SFAS No. 145 has not had a material
impact on the Company’s financial statements but did have
an impact on the classification of the net gain from
extinguishment of debt resulting from the Exchange Transaction
in 2003.
In June 2002, the FASB issued
SFAS No. 146, “Accounting for Costs Associated
with Exit or Disposal Activities”. SFAS No. 146
requires the Company to recognize costs associated with exit or
disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. The Company
adopted SFAS No. 146 in 2003. The adoption of this
standard did not have a material effect on its financial
statements.
In December 2002, the FASB issued
SFAS No. 148, “Accounting for Stock-Based
Compensation — Transition and Disclosure, an amendment
of FASB Statement No. 123”. This Statement amends FASB
Statement No. 123, “Accounting for Stock-Based
Compensation”, to provide alternative methods of transition
for a voluntary change to the fair value method of accounting
for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement
No. 123 to
F-31
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
require prominent disclosure in both annual and
interim financial statements. The Company adopted the revised
disclosure requirements in 2003.
In November 2002, the FASB issued Interpretation
No. 45 (“FIN 45”), Guarantor’s
Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness to Others, an interpretation
of FASB Statements No. 5, 57 and 107 and a rescission of
FASB Interpretation No. 34. This Interpretation elaborates
on the disclosure to be made by a guarantor in its interim and
annual financial statements about its obligations under
guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee,
a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the
Interpretation applicable to guarantees issued or modified after
December 31, 2002 and did not have a material effect on the
Company’s financial statements.
In January, 2003, the FASB issued Interpretation
No. 46 (“FIN 46”), “Consolidation of
Variable Interest Entities”, with the objective of
improving financial reporting by companies involved with
variable interest entities. A variable interest entity is a
corporation, partnership, trust, or other legal structure used
for business purposes that either (a) does not have equity
investors with sufficient voting rights to direct decisions of
the entity, or (b) has equity investors that do not provide
sufficient financial resources for the equity to support its
activities. Historically, entities generally were not
consolidated unless the entity was controlled through voting
interests. FIN 46 changes that by requiring a variable
interest entity to be consolidated by a company if that company
is subject to a majority of risk of loss from the variable
interest entity’s activities or entitled to receive a
majority of the entity’s residual returns, or both. A
company that consolidates a variable interest entity is called
the “primary beneficiary” of that entity. FIN 46
also requires disclosures about variable interest entities that
a company is not required to consolidate but in which it has
significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities
created after January 1, 2003. The consolidation
requirements of FIN 46 apply to existing entities in the
first fiscal year or interim period beginning after
June 15, 2003. Also, certain disclosure requirements apply
to all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established.
The Company has determined that FIN 46 will not have an
impact on its financial condition, results of operations or cash
flows.
On December 17, 2003, the Staff of the SEC
issued Staff Accounting Bulletin No. 104 (SAB 104),
Revenue Recognition, which supercedes SAB 101, Revenue
Recognition in Financial Statements. SAB 104’s primary
purpose is to rescind accounting guidance contained in
SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of EITF 00-21,
“Accounting for Revenue Recognition in Financial Statements
Frequently Asked Questions and Answers (the FAQ) issued with
SAB 101 that had been codified in SEC Topic 13,
Revenue Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. The adoption of SAB 104 did
not materially affect our revenue recognition policies, nor our
results of operations, financial position or cash flows.
In April 2003, FASB issued Statement of Financial
Accounting Standards No. 149,
Amendment of
Statement 133 on Derivative Instruments and Hedging
Activities
(“SFAS 149”). SFAS 149 amends
and clarifies accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and
for hedging activities under SFAS 133. SFAS 149 is
effective for contracts and hedging relationships entered into
or modified after June 30, 2003. The Company adopted the
provisions of SFAS 149 effective June 30, 2003 and
such adoption did not have a material impact on its consolidated
financial statements since the Company has not entered into any
derivative or hedging transactions.
In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.
SFAS 150 establishes standards for how entities classify
and measure in their statement of financial position certain
financial instruments with characteristics of both
F-32
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
liabilities and equity. The provisions of
SFAS 150 are effective for financial statements entered
into or modified after May 31, 2003. As a result of
SFAS No. 150, the Company has reflected the
Series A Preferred Stock issued as part of the Exchange
Transaction as a long-term liability until approval by the
Company’s shareholders.
Note Q — Customer and Supplier
Concentration
AmeriSource Health Corporation
(“AmeriSourceBergen”), Cardinal Health, Inc.
(“Cardinal”) and McKesson Drug Company
(“McKesson”) are all distributors of the
Company’s products, as well as suppliers of a broad range
of health care products. The percentage impact that these
customers had on the Company’s business as of and for the
years ended as indicated is as follows:
No other customer accounted for more than 10% of
gross sales, net revenues or gross trade receivables for the
indicated dates and periods.
If sales to either AmerisourceBergen, Cardinal or
McKesson were to diminish or cease, the Company believes that
the end users of its products would find little difficulty
obtaining the Company’s products either directly from the
Company or from another distributor.
No supplier of products accounted for more than
10% of the Company’s purchases in 2003, 2002 or 2001. The
Company requires a supply of quality raw materials and
components to manufacture and package pharmaceutical products
for itself and for third parties with which it has contracted.
The principal components of the Company’s products are
active and inactive pharmaceutical ingredients and certain
packaging materials. Many of these components are available from
only a single source and, in the case of many of the
Company’s ANDAs and NDAs, only one supplier of raw
materials has been identified. Because FDA approval of drugs
requires manufacturers to specify their proposed suppliers of
active ingredients and certain packaging materials in their
applications, FDA approval of any new supplier would be required
if active ingredients or such packaging materials were no longer
available from the specified supplier. The qualification of a
new supplier could delay the Company’s development and
marketing efforts. If for any reason the Company is unable to
obtain sufficient quantities of any of the raw materials or
components required to produce and package its products, it may
not be able to manufacture its products as planned, which could
have a material adverse effect on the Company’s business,
financial condition and results of operations.
Note R — Asset Impairment
Charges
In the third quarter of 2002, the Company
recorded an impairment charge of $545,000 in selling, general
and administration expenses, to write-off abandoned construction
projects and dispose of certain other fixed assets in its
Ophthalmic segment.
During the third quarter of 2002, the Company
recorded an impairment charge of $257,000 related to the product
license intangible assets for the products Sublimaze, Inapsine,
Paradrine and Dry Eye test in its Injectable segment. The
Company determined that projected profitability on the products
was not sufficient to support the carrying value of the
intangible asset. The recording of this charge reduced the
carrying value of the intangible assets related to these product
licenses to zero. The charge is reflected in the amortization
and write down of intangibles category of the consolidated
statement of operations.
F-33
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In the second quarter of 2002, the Company
settled a dispute with JHU/APL regarding a license agreement and
the associated patent (See Note N — “Commitments
and Contingencies” in the notes to the consolidated
financial statements) with a net carrying value of $1,559,500
which was written-off as an impaired intangible asset during the
second quarter in its Ophthalmic segment.
In May 2001, the Company discontinued one of its
products due to uncertainty of product availability from a
third-party manufacturer, rising manufacturing costs and delays
in obtaining FDA approval to manufacture the product in-house.
The Company recorded an asset impairment charge of $1,170,000
related to manufacturing equipment specific to the product
during the first quarter of 2001 in its Ophthalmic Segment in
SG&A. Additionally, $240,000 of unamortized product
acquisition intangible asset was written off.
In November 2001, the Company decided to no
longer sell one of its products due to unavailability of raw
material at a competitive price and declining market share. The
Company recorded an asset impairment charge of $725,000 related
to the remaining balance of the product acquisition intangible
asset during the fourth quarter of 2001 in its Ophthalmic
Segment.
Note S — Restructuring
Charges
During 2001, the Company adopted a restructuring
program to properly size its operations to then current business
conditions. These actions were designed to reduce costs and
improve operating efficiencies. The program included, among
other items, severance of employees, plant-closing costs related
to the Company’s San Clemente, CA sales office and
rent for unused facilities under lease in San Clemente and
Lincolnshire, IL. The restructuring, affecting all three
business segments, reduced the Company’s workforce by 50
employees, primarily sales and manufacturing related,
representing 12.5% of the total workforce. Activities previously
executed in San Clemente have been relocated to the
Company’s headquarters.
The restructuring program costs are included in
selling, general and administrative expenses in the accompanying
consolidated statement of operations and resulted in a charge to
operations of approximately $1,117,000 consisting of severance
costs of $398,000, lease costs of $625,000 and other costs of
$94,000. At December 31, 2003, there is no amount remaining
in accruals for restructuring. Approximately $589,000 of the
restructuring accrual was paid by December 31, 2001
($181,000 severance, $314,000 lease costs, $94,000 other) and
the remainder was paid by June 30, 2002, except for
$176,000 in lease costs that continued through February 2003.
F-34
AKORN, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
See notes to condensed consolidated financial
statements.
F-35
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
See notes to condensed consolidated financial
statements.
F-36
AKORN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
See notes to condensed consolidated financial
statements.
F-37
AKORN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note A — Business and Basis of
Presentation
Business:
Akorn,
Inc. and its wholly owned subsidiary, Akorn (New Jersey), Inc.
(collectively, the “Company”) manufacture and market
diagnostic and therapeutic pharmaceuticals in specialty areas
such as ophthalmology, rheumatology, anesthesia and antidotes,
among others. Customers, including physicians, optometrists,
wholesalers, hospitals and other pharmaceutical companies, are
served primarily from three operating facilities in the United
States.
Basis of
Presentation:
The Company’s
losses from operations in recent years and working capital
deficiencies, together with the need to successfully resolve its
ongoing compliance matters with the Food and Drug Administration
(“FDA”), have raised substantial doubt about the
Company’s ability to continue as a going concern. The
accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business
although the report of our independent auditors as of and for
the year ended December 31, 2003 expressed substantial
doubt as to the Company’s ability to continue as a going
concern. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities
that might be necessary should the Company be unable to continue
as a going concern.
On October 7, 2003, a significant threat to
the Company’s ability to continue as a going concern was
resolved when the Company consummated a transaction with a group
of investors that resulted in the extinguishment of the
Company’s then outstanding senior bank debt in the amount
of approximately $37,731,000 in exchange for shares of the
Company’s Series A 6% Participating Convertible
Preferred Stock, warrants to purchase shares of the
Company’s common stock, subordinated promissory notes in
the aggregate amount of $2,767,139 and cash in the amount of
$5,473,862 which was obtained from a new credit facility
obtained by the Company. For more information regarding this
transaction, see Note H — “Financing
Arrangements.”
As of June 30, 2004, the Company had
approximately $1.3 million of undrawn availability under
its new line of credit. The Company believes that the new line
of credit, together with cash generated from operations, will be
sufficient to meet the cash requirements for operating the
Company’s business for the next twelve months, although
there can be no assurance of this sufficiency. At this time, the
Company is exploring opportunities to raise additional capital
to fund future growth opportunities.
Although the Company has refinanced its debt on a
long-term basis as described above, it continues to be subject
to financial covenants under the new debt and to ongoing FDA
compliance matters that could have a material adverse effect on
the Company. See Note L — “Commitments and
Contingencies” for further description of these matters.
The Company is working with the FDA to favorably resolve such
compliance matters and has submitted to the FDA and continues to
implement a plan for comprehensive corrective actions at its
Decatur, Illinois facilities. The FDA completed inspection of
the Decatur facilities on April 7, 2004. The Company has
responded to the findings from this inspection and has been
meeting with the FDA to discuss these responses and the status
of the Decatur facilities. As a result of these meetings, the
Company will be subject to a confirmatory inspection to verify
the Company’s corrective actions on the previous
inspection. The result of the last inspection remains open,
pending this confirmatory inspection. The confirmatory
inspection is anticipated to occur in the fourth quarter of
2004. The management of the Company believes that the Company
will successfully resolve these compliance matters with the FDA.
However, there can be no guarantee that the FDA matters will be
successfully resolved.
The Company has added key management personnel,
including the hiring of a new chief financial officer in June
2004 along with additional personnel in critical areas.
Management has reduced the
F-38
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Company’s cost structure, improved the
Company’s processes and systems, and implemented strict
controls over capital spending. Management believes these
activities will improve the Company’s results of
operations, cash flow from operations and its future prospects.
As a result of all of the factors cited in the
preceding paragraphs, management believes that the Company
should be able to sustain its operations and continue as a going
concern. However, the ultimate outcome of this uncertainty
cannot be presently determined and, accordingly, there remains
substantial doubt as to whether the Company will be able to
continue as a going concern.
Consolidation:
The
accompanying unaudited condensed consolidated financial
statements include the accounts of Akorn, Inc. and Akorn (New
Jersey) Inc. Intercompany transactions and balances have been
eliminated in consolidation. These financial statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial
information and accordingly do not include all the information
and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements.
Adjustments:
In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included in these financial statements. Operating
results for the six-month period ended June 30, 2004 are
not necessarily indicative of the results that may be expected
for a full year. For further information, refer to the
consolidated financial statements and footnotes for the year
ended December 31, 2003, included in the Company’s
Annual Report on Form 10-K.
Note B — Use of Estimates
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ materially from those estimates.
Significant estimates and assumptions for the Company relate to
the allowance for doubtful accounts, the allowance for
chargebacks, the allowance for rebates, the reserve for
slow-moving and obsolete inventory, the allowance for product
returns, the carrying value of intangible assets and the
carrying value of deferred income tax assets.
Note C — Stock Based
Compensation
The Company applies APB Opinion No. 25
“Accounting for Stock Issued to Employees” in
accounting for options granted to its employees under its stock
option programs and applies Statement of Financial Accounting
Standards No. 123 “Accounting for Stock Issued
Employees” (“SFAS 123”) for disclosure
purposes only. The SFAS 123 disclosures include pro forma
net income (loss) and earnings (loss) per share as if the fair
value-based method of accounting had been used.
F-39
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
If compensation for employee options had been
determined based on SFAS 123, the Company’s pro forma
net income (loss) and pro forma net income (loss) per share for
the six months ended June 30, would have been as follows:
Note D — Revenue
Recognition
The Company recognizes product sales for its
ophthalmic and injectable business segments upon the shipment of
goods for customers whose terms are FOB shipping point. The
Company has certain customers whose terms are FOB destination
point and recognizes revenue upon delivery of the product to
these customers. Revenue is recognized when all obligations of
the Company have been fulfilled and collection of the related
receivable is probable.
The Contract Services segment, which produces
products for third party customers, based upon their
specifications, at a pre-determined price, also recognizes sales
upon the shipment of goods or upon delivery of the product as
appropriate. Revenue is recognized when all obligations of the
Company have been fulfilled and collection of the related
receivable is probable.
Provision for estimated doubtful accounts,
chargebacks, rebates, discounts and product returns is made at
the time of sale and is analyzed and adjusted, if necessary, at
each balance sheet date.
Note E — Accounts Receivable
Allowances
The nature of the Company’s business
inherently involves, in the ordinary course, significant amounts
and substantial volumes of transactions and estimates relating
to allowances for doubtful accounts, product returns,
chargebacks, rebates and discounts given to customers. This is a
natural circumstance of the pharmaceutical industry and not
specific to the Company and inherently lengthens the collection
process. Depending on the product, the end-user customer, the
specific terms of national supply contracts and the particular
arrangements with the Company’s wholesaler customers,
certain rebates, chargebacks and other credits are deducted from
the Company’s accounts receivable. The process of claiming
these deductions depends on wholesalers reporting to the Company
the amount of deductions that were earned under the respective
terms with end-user customers (which in turn depends on which
end-user customer, with different pricing arrangements might be
entitled to a particular deduction). This process can lead to
“partial payments” against outstanding invoices as the
wholesalers take the claimed deductions at the time of payment.
Unless otherwise noted, the provisions and
allowances for the following customer deductions are reflected
in the accompanying financial statements as reductions of
revenues and trade accounts receivable, respectively.
F-40
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Chargebacks and Rebates
The Company enters contractual agreements with
certain third parties such as hospitals and group-purchasing
organizations to sell certain products at predetermined prices.
The parties have elected to have these contracts administered
through wholesalers that buy the product from the Company. When
a wholesaler sells products to one of the third parties that is
subject to a contractual price agreement, the difference between
the price paid to the Company by the wholesaler and the price
under contract is charged back to the Company by the wholesaler.
The Company tracks sales and submitted chargebacks by product
number for each wholesaler. Utilizing this information, the
Company estimates a chargeback percentage for each product. The
Company reduces gross sales and increases the chargeback
allowance by the estimated chargeback amount for each product
sold to a wholesaler. The Company reduces the chargeback
allowance when it processes a request for a chargeback from a
wholesaler. Actual chargebacks processed can vary materially
from period to period.
Management obtains certain wholesaler inventory
reports to aid in analyzing the reasonableness of the chargeback
allowance. The Company assesses the reasonableness of its
chargeback allowance by applying the product chargeback
percentage based on historical activity to the quantities of
inventory on hand per the wholesaler inventory reports and an
estimate of in-transit inventory that is not reported on the
wholesaler inventory reports at the end of the period. In the
first quarter of 2004, the Company obtained more precise
information from the wholesalers to estimate the amount of
in-transit inventory, which lowered its estimate of in-transit
inventory. This resulted in the Company recognizing
approximately $500,000 less in chargeback expense in the first
quarter of 2004. The Company intends to use this new information
on a going forward basis as a more accurate estimate of
in-transit inventory. Additionally, in the second quarter of
2004, the Company, in accordance with its policy, reduced its
estimate of the percentage amount of wholesaler inventory that
will ultimately be sold to a third party that is subject to a
contractual price agreement. This reduction was made in reaction
to a six quarter trend of such sales being below the
Company’s previous estimates, thereby confirming that the
reduced percentage was other than temporary. This estimate
change resulted in approximately $480,000 less in chargeback
expense in the second quarter of 2004. The Company intends to
use this revised estimate on a going forward basis until
historical trends indicate that additional revisions should be
made. Also, the Company does not expect any other significant
changes in its chargeback estimates during 2004.
Similarly, the Company maintains an allowance for
rebates related to contract and other programs with certain
customers. Rebate percentages vary by product and by volume
purchased by each eligible customer. The Company tracks sales by
product number for each eligible customer and then applies the
applicable rebate percentage, using both historical trends and
actual experience to estimate its rebate allowance. The Company
reduces gross sales and increases the rebate allowance by the
estimated rebate amount when the Company sells its products to
its rebate-eligible customers. The Company reduces the rebate
allowance when it processes a customer request for a rebate. At
each balance sheet date, the Company analyzes the allowance for
rebates against actual rebates processed and makes necessary
adjustments as appropriate. Actual rebates processed can vary
materially from period to period.
The recorded allowances reflect the
Company’s current estimate of the future chargeback and
rebate liability to be paid or credited to the wholesaler under
the various contracts and programs. For the six months ended
June 30, 2004 and 2003, the Company recorded chargeback and
rebate expense of $6,420,000 and $6,305,000, respectively. The
allowance for chargebacks and rebates was $3,666,000 and
$4,804,000 as of June 30, 2004 and December 31, 2003,
respectively.
Product Returns
Certain of the Company’s products are sold
with the customer having the right to return the product within
specified periods and guidelines for a variety of reasons,
including but not limited to pending
F-41
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
expiration dates. Provisions are made at the time
of sale based upon tracked historical experience, by customer in
some cases. In evaluating month-end allowance balances, the
Company considers actual returns to date that are in process,
the expected impact of product recalls and the wholesaler’s
inventory information to assess the magnitude of unconsumed
product that may result in a product return to the Company in
the future. Actual returns processed can vary materially from
period to period. For the six month period ending June 30,
2004 and 2003, the Company recorded a provision for product
returns of $1,182,000 and $1,337,000, respectively. The
allowance for potential product returns was $1,283,000 and
$1,077,000 at June 30, 2004 and December 31, 2003,
respectively.
Doubtful Accounts
Provisions for doubtful accounts, which reflect
trade receivable balances owed to the Company that are believed
to be uncollectible, are recorded as a component of selling,
general and administrative expense. In estimating the allowance
for doubtful accounts, the Company has:
For the six months ending June 30, 2004 and
2003, we recorded a net benefit for doubtful accounts of
$427,000 and $348,000, respectively, as recoveries and reduced
reserve requirements exceeded write-offs and newly identified
collectibility concerns. The allowance for doubtful accounts was
$722,000 and $609,000 as of June 30, 2004 and
December 31, 2003, respectively. As of June 30, 2004,
we had a total of $976,000 of past due gross accounts
receivable. Included in this total is a credit balance of
$243,000, which represents wholesaler chargeback deductions that
are over 60 days past due. We perform monthly a detailed
analysis of the receivables due from our wholesaler customers
and provides a specific reserve against known uncollectible
items for each of the wholesaler customers. We also include in
the allowance for doubtful accounts an amount that we estimate
to be uncollectible for all other customers based on a
percentage of the past due receivables. The percentage reserved
increases as the age of the receivables increases. Of the
recorded allowance for doubtful accounts of $722,000, the
portion related to major wholesaler customers is $466,000 with
the remaining $256,000 reserve for all other customers.
Discounts
Cash discounts are available to certain customers
based on agreed upon terms of sale. The Company evaluates the
discount reserve balance against actual discounts taken. For the
six months ending June 30, 2004 and 2003, the Company
recorded a provision for cash discounts of $331,000 and $358,000,
F-42
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
respectively. The allowance for discounts was
$152,000 and $94,000 as of June 30, 2004 and
December 31, 2003, respectively.
Note F — Inventories
The components of inventories are as follows (in
thousands):
Inventory at June 30, 2004 and
December 31, 2003 is reported net of reserves for
slow-moving, unsaleable and obsolete items of $904,000 and
$917,000, respectively, primarily related to finished goods. For
the six months ended June 30, 2004 and 2003, the Company
recorded a provision of $685,000 and $408,000, respectively.
Note G — Property, Plant and
Equipment
Property, plant and equipment consists of the
following (in thousands):
Construction in progress primarily represents
capital expenditures related to the Company’s
Lyophilization project that is intended to enable the Company to
perform processes in-house that are currently being performed by
a sub-contractor. For the six month periods ended June 30,
2004 and 2003, the Company capitalized interest expense related
to the Lyophilization project of $173,000 and $602,000,
respectively. Subject to the Company’s ability to generate
sufficient operating cash flow or obtain new financing for
future operations and capital expenditures, the Company
anticipates completion of the lyophilization project
(principally including validation testing of the process as of
June 30, 2004) in late 2005 or early 2006. Future costs are
estimated to be $2.0 million excluding capitalized
interest. The Company can make no assurances that it will be
able to complete this project within its estimated timeframe, or
at all, or that material impairment charges will not be required
if such completion does not occur as anticipated.
F-43
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Note H — Financing
Arrangements
The Company’s long-term debt consists of (in
thousands):
In December 1997, the Company entered into a
$15,000,000 revolving credit agreement with The Northern Trust
Company (“Northern Trust”), which was increased to
$25,000,000 on June 30, 1998 and to $45,000,000 on
December 28, 1999. Borrowings under this credit agreement
were secured by substantially all of the assets of the Company
and bore floating interest rates that were 7.25% at
June 30, 2003.
The Company went into default under the Northern
Trust credit agreement in 2002 and thereafter operated under an
agreement under which Northern Trust would agree to forbear from
exercising its remedies (the “Forbearance Agreement”)
and the Company acknowledged its then-current default. The
Forbearance Agreement provided for additional borrowings and was
extended on numerous occasions in 2003.
On October 7, 2003, a group of investors
(the “Investors”) purchased all of the Company’s
then outstanding senior bank debt from Northern Trust, a balance
of $37,731,000, at a discount and exchanged such debt with the
Company (the “Exchange Transaction”) for
(i) 257,172 shares of Series A 6.0% Participating
Convertible Preferred Stock of the Company (“Series A
Preferred Stock”), (ii) subordinated promissory notes
in the aggregate principal amount of approximately $2,767,139
(the “2003 Subordinated Notes”), (iii) warrants
to purchase an aggregate of 8,572,400 shares of the
Company’s common stock with an exercise price of
$1.00 per share (“Series A Warrants”), and
(iv) $5,473,862 in cash from the proceeds of the term loan
under the New Credit Facility described in a following
paragraph. The 2003 Subordinated Notes and cash were issued by
the Company to (a) The John N. Kapoor Trust dtd 9/20/89
(the “Kapoor Trust”), the sole trustee and sole
beneficiary of which is Dr. John N. Kapoor, the
Company’s Chairman of the Board of Directors and the holder
of a significant stock position in the Company, (b) Arjun
Waney, a newly-elected director and the holder of a significant
stock position in the Company, and (c) Argent Fund
Management Ltd., for which Mr. Waney serves as Chairman and
Managing Director and 51% of which is owned by Mr. Waney.
The Company also issued to the holders of the 2003 Subordinated
Notes warrants to purchase an aggregate of 276,714 shares
of common stock with an exercise price of $1.10 per share
(“Note Warrants”).
As a result of the Exchange Transaction, the
Company recorded transaction costs of approximately
$3.1 million. The transaction costs consisted principally
of cash and securities owed to restructuring and
F-44
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
investment banking professionals that provided
services directly related to the extinguishment of the Northern
Trust debt.
In accounting for the Exchange Transaction, the
Company first reduced the carrying amount of the Northern Trust
debt by the cash paid to Investors. The remaining carrying value
was then allocated among the three securities issued to fully
extinguish the debt based on the relative fair values of those
securities. Accordingly, the Series A Preferred Stock, the
2003 Subordinated Notes and the Series A Warrants were
initially recorded at $20,874,000, $2,046,000 and $9,337,000,
respectively, before, in the case of the 2003 Subordinated
Notes, the discount described below and before, in the case of
the stock securities, related issuance costs of $480,000. The
fair value of the Series A Warrants was estimated by the
Company using the same method and estimates as described for the
warrants issued with the 2003 Subordinated Notes. All
unexercised warrants expire on October 7, 2006.
Simultaneously with the consummation of the
Exchange Transaction, the Company entered into a credit
agreement with LaSalle Bank National Association (“LaSalle
Bank”) providing the Company with $7,000,000 of term loans
and a revolving line of credit of up to $5,000,000 to provide
for working capital needs (collectively, the “New Credit
Facility”) secured by substantially all of the assets of
the Company. The obligations of the Company under the New Credit
Facility have been guaranteed by the Kapoor Trust and Arjun
Waney. In exchange for this guaranty, the Company issued
additional warrants (“Guarantee Warrants”) to
purchase 880,000 and 80,000 shares of common stock to
the Kapoor Trust and Arjun Waney, respectively, and has agreed
to issue to each of them, on each anniversary of the date of the
consummation of the Exchange Transaction, warrants to purchase
an additional number of shares of common stock equal to 0.08
multiplied by the principal dollar amount of the Company’s
indebtedness then guaranteed by them under the New Credit
Facility. The warrants issued in exchange for these guarantees
have an exercise price of $1.10 per share.
The New Credit Facility with LaSalle Bank
consists of a $5,500,000 term loan A, a $1,500,000 term
loan B (collectively, the “Term Loans”) as well
as a revolving line of credit of up to $5,000,000 (the
“Revolver”) secured by substantially all of the assets
of the Company. The New Credit Facility matures on
October 7, 2005. The Term Loans bear interest at prime plus
1.75% (5.75% at June 30, 2004) and require principal
payments of $195,000 per month commencing October 31,
2003, with the payments first to be applied to term loan B.
The Revolver bears interest at prime plus 1.50% (5.50% as of
June 30, 2004). Availability under the Revolver is
determined by the sum of (i) 80% of eligible accounts
receivable, (ii) 30% of raw material, finished goods and
component inventory excluding packaging items, not to exceed
$2,500,000 and (iii) the difference between 90% of the
forced liquidation value of machinery and equipment ($4,092,000
as of August 18, 2003) and the sum of $1,750,000 and the
outstanding balance under term loan B. The availability as
of June 30, 2004 was $1,323,000. The New Credit Facility
contains certain restrictive covenants including but not limited
to certain financial covenants such as minimum EBITDA levels,
Fixed Charge Coverage Ratios, Senior Debt to EBITDA ratios and
Total Debt to EBITDA ratios. We had negotiated an amendment to
the New Credit Facility effective December 31, 2003 to
clarify certain covenant computations and waive certain
technical violations. Certain financial covenants were further
amended and the time for compliance with certain non-financial
covenants was extended under an amendment entered into with
LaSalle Bank on August 13, 2004. The New Credit Facility
also contains subjective covenants providing that the Company
would be in default if, in the judgment of the lenders, there is
a material adverse change in the financial condition of the
Company. Because the New Credit Facility also requires the
Company to maintain its deposit accounts with LaSalle, the
existence of these subjective covenants, pursuant to EITF
Abstract No. 95-22, requires that the Company classify
outstanding borrowings under the Revolver as a current liability.
In 2001, the Company entered into a $5,000,000
convertible subordinated debt agreement with the Kapoor Trust
(“Convertible Note Agreement”). Under the terms
of the Convertible Note Agreement, the
F-45
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
convertible subordinated debt bears interest at
prime plus 3.0% (7.0% as of June 30, 2004), is due on
December 20, 2006 and was issued with detachable warrants
to purchase approximately 1,667,000 shares of common stock.
Interest cannot be paid on the convertible subordinated debt
until the repayment of all amounts under the New Credit
Facility. The convertible feature of the convertible
subordinated debt, as amended, allows the Kapoor Trust to
immediately convert the subordinated debt plus interest into
common stock of the Company, at a price of $2.28 per share
of common stock for Tranche A and $1.80 per share of
common stock for Tranche B.
The Company, in accordance with APB Opinion
No. 14, recorded the convertible subordinated debt and
related warrants as separate securities. Furthermore, in
accordance with Emerging Issues Task Force (“EITF”)
Abstract No. 00-27, the Company has also computed and
recorded a separate amount related to the “intrinsic”
value of the conversion option related to the debt. The
resultant debt discount of $3,024,000, equivalent to the value
assigned to the warrants and the “intrinsic” value of
the convertible debt, is being amortized and charged to interest
expense over the life of the subordinated debt. Additionally, as
the accrued interest on the convertible subordinated debt is
also convertible into common stock, it may also result in
separately recordable beneficial conversion amounts. Such
amounts would be recorded if the price of the Company’s
common stock is higher than the conversion rate when the
interest is accrued. In the second quarter 2004, the Company
reclassified approximately $105,000 of debt to equity in
recognition of the beneficial conversion on the convertible
subordinated debt.
In December 2001, the Company entered into a
$3,250,000 five-year loan with NeoPharm, Inc.
(“NeoPharm”) to fund the Company’s efforts to
complete its lyophilization facility located in Decatur,
Illinois (the “Neopharm Note”). The Neopharm Note was
executed in conjunction with a Processing Agreement that
provides NeoPharm with the option of securing at least 15% of
the capacity of the Company’s lyophilization facility each
year. Dr. John N. Kapoor, the Company’s chairman holds
a substantial stock position in NeoPharm as well as in the
Company. In September 30, 2003, the Company defaulted under
the NeoPharm Note as a result of its failure to remove all FDA
warning letter sanctions related to the Company’s Decatur,
Illinois facilities by June 30, 2003. The Company also
defaulted under the Trust Agreement as a result of a
cross-default to the NeoPharm Note.
In connection with the Exchange Transaction, the
Kapoor Trust and NeoPharm waived all existing defaults under
their respective agreements and entered into amended agreements
dated October 7, 2003. Interest under the amended NeoPharm
Note accrues at 1.75% above LaSalle Bank’s prime rate
(5.75% as of June 30, 2004). Interest payments under both
agreements are currently prohibited under the terms of a
subordination arrangement with LaSalle Bank. The amended
NeoPharm Note also requires the Company to make quarterly
payments of $150,000 beginning on the last day of the calendar
quarter during which all indebtedness under the New Credit
Facility has been paid. All remaining amounts owed under the
amended NeoPharm Note are payable at maturity on
December 20, 2006. The Kapoor Trust amendment did not
change the interest rate or the maturity date of the loans under
the Convertible Note Agreement.
As part of the Exchange Transaction, the Company
issued the 2003 Subordinated Notes to the Kapoor Trust, Arjun
Waney and Argent Fund Management, Ltd. The 2003 Subordinated
Notes mature on April 7, 2006 and bear interest at prime
plus 1.75% (5.75% as of June 30, 2004), but interest
payments are currently prohibited under the terms of a
subordination arrangement between LaSalle Bank and the
Note Holders. The 2003 Subordinated Notes are subordinated
to the New Credit Facility and the amended NeoPharm Note but
senior to the Convertible Note Agreement. The Company also
issued to the holders of the 2003 Subordinated Notes the Note
Warrants to purchase an aggregate of 276,714 shares of
common stock with an exercise price of $1.10 per share. All
unexercised Note Warrants expire on October 7, 2006. The
Company, in accordance with APB Opinion No. 14, recorded
the initial issuance of the 2003 Subordinated Notes and Note
Warrants as separate securities. The fair value of the Note
Warrants was estimated on the date of issuance using the
modified Black-Scholes option pricing model
F-46
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
with the following assumptions: (i) dividend
yield of 0%, (ii) expected volatility of 127.5%,
(iii) risk free rate of 2.19%, and (iv) expected life
of 3 years. As a result, the Company assigned a value of
$336,000 to Note Warrants and recorded this amount in
shareholders’ equity and as a discount, along with the
spread between the face value of the debt and its initial
recorded value as described above, on the 2003 Subordinated
Notes. Related debt discount amortization for the six month
period ended June 30, 2004 was $176,000.
In June 1998, the Company entered into a
$3,000,000 mortgage agreement with Standard Mortgage Investors.
The principal balance is payable over 10 years, with the
final payment due in June 2007. The mortgage note bears an
interest rate of 7.375% and is secured by the real property
located in Decatur, Illinois.
As part of the Exchange Transaction, the Company
recorded $1,627,000 as deferred financing costs, including the
value of the Guarantee Warrants. This amount is being amortized
as a component of interest expense over the life of the related
debt or guarantee. Amortization for the six months ended
June 30, 2004 was $698,000.
During the second quarter, as allowed under the
provisions of the Series A Warrants, 416,667 warrants were
exercised on a cashless basis for 297,619 shares of commons
stock.
Note I — Series A
Preferred Stock
The Series A Preferred Stock accrues
dividends at a rate of 6.0% per annum, which rate is fully
cumulative, accrues daily and compounds quarterly. While the
dividends could be paid in cash at the Company’s option,
such dividends are currently being deferred and added to the
Series A Preferred Stock balance. Such dividends aggregated
to $386,600 through December 31, 2003 and $797,300 for the
six months ended June 30, 2004. All shares of Series A
Preferred Stock have liquidation rights in preference over
junior securities, including the common stock, and have certain
antidilution protections. The Series A Preferred Stock and
unpaid dividends are convertible at any time into a number of
shares of common stock equal to the quotient obtained by
dividing (x) $100 per share plus any accrued but unpaid
dividends on that share by (y) $0.75, as such numbers may be
adjusted from time to time pursuant to the terms of the Articles
of Amendment. All shares of Series A Preferred Stock shall
convert to shares of common stock on the earlier to occur of
(i) October 8, 2006 and (ii) the date on which
the closing price per share of common stock for at least 20
consecutive trading days immediately preceding such date exceeds
$4.00 per share. Until the Company’s shareholders
approved certain provisions regarding the Series A
Preferred Stock (the ‘Stockholders Approval’), which
occurred in July 2004, the Series A Preferred Stock was
also mandatorily redeemable in October 2011.
Holders of Series A Preferred Stock have
full voting rights, with each holder entitled to a number of
votes equal to the number of shares of common stock into which
its shares can be converted. Holders of Series A Preferred
Stock and common stock shall vote together as a single class on
all matters submitted to a shareholder vote, except in cases
where a separate vote of the holders of Series A Preferred
Stock is required by law or by the Articles of Amendment. The
Articles of Amendment provide that the Company cannot take
certain actions, including (i) issuing additional
Series A Preferred Stock or securities senior to or on par
with the Series A Preferred Stock, (ii) amending the
Company’s Articles of Incorporation or By-laws to alter the
rights of the Series A Preferred Stock,
(iii) effecting a change of control or (iv) effecting
a reverse split of the Series A Preferred Stock, without
the approval of the holders of 50.1% of the Series A
Preferred Stock.
Immediately after the Exchange Transaction, the
Investors held approximately 75% of the aggregate voting rights
represented by outstanding shares of common stock and
Series A Preferred Stock. After the Exchange Transaction
and assuming the exercise of all outstanding conversion rights,
warrants and options
F-47
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
to acquire common stock, the Investors would hold
approximately 77% of the common stock, on a fully-diluted basis.
Prior to the Exchange Transaction, the Investors held
approximately 35% of the outstanding voting securities and would
have held approximately 42% of the common stock on a
fully-diluted basis.
The initially recorded amount of the
Series A Preferred Stock, as described in Note H, was
$5,174,000 below its stated value. The Company, up through the
Stockholders Approval date, had been accreting this difference
over the time period from issuance to the mandatory redemption
date in October 2011. Accretion for the six month period ended
June 30, 2004 was $323,000.
Pursuant to FASB No. 150 —
“Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity,” as
amended, the Series A Preferred Stock was originally
reflected as a liability because of its mandatory redemption
feature. That characterization remained as of June 30,
2004. As such, accretion as described above and dividends have
been reflected as interest expense in the statement of
operations through July 2004. As a result of the Stockholders
Approval, the July 2004 carrying value of the Series A
Preferred Stock was reclassified into shareholders’ equity
and future accretion and dividends will be reflected as
adjustments to retained earnings and will also impact income
(loss) available to common stockholders. Additionally, and in
accordance with EITF Abstract No. 00-27, the Company will
also record in July 2004 the value of the conversion option
imbedded at issuance in each share of Series A Preferred
Stock, subject to limitations described in the EITF. That value,
approximately $22.3 million, will reduce the carrying value
of the Series A Preferred Stock to near $0.2 million
with the offsetting increase to Common Stock. The carrying value
of the Series A Preferred Stock will then be adjusted to
its full aggregated stated value, plus unpaid dividends
(approximately $26.4 million), with a charge directly to
retained earnings. That charge will not impact net earnings for
the third quarter, but will substantially reduce earnings
available to common stockholders and earnings per share for that
period.
Note J — Earnings Per Common
Share
Basic net income (loss) per common share is based
upon weighted average common shares outstanding. Diluted net
income (loss) per common share is based upon the weighted
average number of common shares outstanding, including the
dilutive effect of stock options, warrants and convertible debt
using the treasury stock and if converted methods. However, for
the three and six month periods ended June 30, 2004 and
2003, the assumed exercise or conversion of any of these
securities would be anti-dilutive; and, accordingly, diluted
loss per share equals basic loss per share for each period.
The number of shares subject to warrants, options
and conversion rights excluded in each period is reflected in
the following table.
Note K — Industry Segment
Information
The Company classifies its operations into three
business segments, ophthalmic, injectable and contract services.
The ophthalmic segment manufactures, markets and distributes
diagnostic and therapeutic pharmaceuticals. The injectable
segment manufactures, markets and distributes injectable
pharmaceuticals, primarily in niche markets. The contract
services segment manufactures products for
F-48
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
third party pharmaceutical and biotechnology
customers based on their specifications. Selected financial
information by industry segment is presented below (in
thousands).
Results for 2004 include impairment charges of
approximately $1,851,000 related to licenses for certain
ophthalmic products, which the Company, based on developments
over the recent months, has concluded may not be sellable at
amounts and prices that would support the related intangible
asset.
The Company manages its business segments to the
gross profit level and manages its operating and other costs on
a company-wide basis. Intersegment activity at the gross profit
level is minimal. The Company does not identify assets by
segment for internal purposes, as certain manufacturing and
warehouse facilities support more than one segment.
Note L — Commitments and
Contingencies
(i) On March 27, 2002, the Company
received a letter informing it that the staff of the regional
office of the Securities and Exchange Commission
(“SEC”) in Denver, Colorado, would recommend to the
SEC that it bring an enforcement action against the Company and
seek an order requiring the Company to be enjoined from engaging
in certain conduct. The staff alleged that the Company misstated
its income for fiscal years 2000 and 2001 by allegedly failing
to reserve for doubtful accounts receivable and overstating its
accounts receivable balance as of December 31, 2000. The
staff alleged that internal control and books and records
deficiencies prevented the Company from accurately recording,
reconciling and aging its accounts receivable. The Company also
learned that certain of its former officers, as well as a then
current employee had received similar notifications. Subsequent
to the issuance of the Company’s consolidated financial
statements for the year ended December 31, 2001, management
of the Company determined it needed to restate the
Company’s financial statements for 2000 and 2001 to record a
F-49
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$7.5 million increase to the allowance for
doubtful accounts as of December 31, 2000, which it had
originally recorded as of March 31, 2001.
On September 25, 2003, the Company consented
to the entry of an administrative cease and desist order to
resolve the issues arising from the staff’s investigation
and proposed enforcement action as described above. Without the
Company admitting or denying the findings set forth therein, the
consent order finds that the Company failed to promptly and
completely record and reconcile cash and credit remittances,
including those from its top five customers, to invoices posted
in its accounts receivable sub-ledger. According to the findings
in the consent order, the Company’s problems resulted from,
among other things, internal control and books and records
deficiencies that prevented the Company from accurately
recording, reconciling and aging its receivables. The consent
order finds that the Company’s 2000 Form 10-K and
first quarter 2001 Form 10-Q misstated its account
receivable balance or, alternatively, failed to disclose the
impairment of its accounts receivable and that its first quarter
2001 Form 10-Q inaccurately attributed the increased
accounts receivable reserve to a change in estimate based on
recent collection efforts, in violation of Section 13(a) of
the Exchange Act and rules 12b-20, 13a-1 and 13a-13 there under.
The consent order also finds that the Company failed to keep
accurate books and records and failed to devise and maintain a
system of adequate internal accounting controls with respect to
its accounts receivable in violation of
Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act.
The consent order does not impose a monetary penalty against the
Company or require any additional restatement of the
Company’s financial statements. The consent order contains
an additional commitment by the Company to do the following:
(A) appoint a special committee comprised entirely of
outside directors, (B) within 30 days after entry of
the order, have the special committee retain a qualified
independent consultant (“consultant”) acceptable to
the staff to perform a test of the Company’s material
internal controls, practices, and policies related to accounts
receivable, and (C) within 180 days, have the
consultant present his or her findings to the commission for
review to provide assurance that the Company is keeping accurate
books and records and has devised and maintained a system of
adequate internal accounting controls with respect to the
Company’s accounts receivables. On October 27, 2003,
the recently appointed special committee engaged Jefferson
Wells, International (“Jefferson Wells”) to serve as
consultant in this capacity. On February 6, 2004, Jefferson
Wells reported its findings to the special committee, such
findings being that the Company has made the necessary personnel
changes and procedural improvements required to maintain control
over the accounts receivable process and establish the necessary
reserves. Jefferson Wells’ report was delivered to the SEC
on February 13, 2004. On May 3, 2004 the Company
announced that the Company’s stock began trading on the OTC
Bulletin Board.
(ii) In October 2000, the FDA issued a
warning letter to the Company following the FDA’s routine
Current Good Manufacturing Practices (“cGMP”)
inspection of the Company’s Decatur manufacturing
facilities. An FDA warning letter is intended to provide notice
to a company of violations of the laws administered by the FDA.
Its primary purpose is to elicit voluntary corrective action.
The letter warns that if voluntary action is not forthcoming,
the FDA may use other legal means to compel compliance. These
include seizure of products and/or injunction of the company and
responsible individuals. The October 2000 warning letter
addressed several deviations from regulatory requirements
including general documentation and cleaning validation issues
and requested corrective actions be undertaken by the Company.
The Company initiated corrective actions and responded to the
warning letter. Subsequently, the FDA conducted another
inspection in late 2001 and identified additional deviations
from regulatory requirements including cleaning validation and
process control issues. This led to the FDA leaving the warning
letter in place and issuing a Form 483 to document its
findings. While no further correspondence was received from the
FDA, the Company responded to the inspectional findings. This
response described the Company’s plan for addressing the
issues raised by the FDA and included improved cleaning
validation, enhanced process controls and approximately
$2.0 million of capital improvements. In August 2002, the
FDA conducted an inspection of the Decatur facilities and
identified deviations from cGMPs.
F-50
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company responded to these observations in
September 2002. In response to the Company’s actions, the
FDA conducted another inspection of the Decatur facilities
during the period from December 10, 2002 to
February 6, 2003. This inspection identified deviations
from regulatory requirements including the manner in which the
Company processes and investigates manufacturing discrepancies
and failures, customer complaints and the thoroughness of
equipment cleaning validations. Deviations identified during
this inspection had been raised in previous FDA inspections. The
Company has responded to these latest findings in writing and in
a meeting with the FDA in March 2003. The Company set forth its
plan for implementing comprehensive corrective actions and
provided progress reports to the FDA on April 15,
May 15 and June 15, 2003.
The Company is working with the FDA to favorably
resolve such compliance matters and has submitted to the FDA and
continues to implement a plan for comprehensive corrective
actions at its Decatur, Illinois facilities. The FDA completed
another inspection of the Decatur facilities on April 7,
2004. The Company has responded to the findings from this
inspection and has been meeting with the FDA to discuss these
responses and the status of the Decatur facilities. As a result
of these meetings, the Company will be subject to a confirmatory
inspection to verify the Company’s corrective actions on
the previous inspection. The result of the last inspection
remains open, pending this confirmatory inspection. The
confirmatory inspection is anticipated to occur in the fourth
quarter of 2004. The management of the Company believes that the
Company will successfully resolve these compliance matters with
the FDA. However, there can be no guarantee that the FDA matters
will be successfully resolved.
As a result of the confirmatory inspection, the
FDA may take either of the following actions: (i) find that
the Decatur facilities are in substantial compliance; or
(ii) require the Company to undertake further corrective
actions, and then conduct another inspection to assess the
success of those efforts. At this time, it is not possible to
predict the FDA’s course of action.
If the inspection identifies significant
deviations, the FDA may initiate enforcement action including
the following: (1) maintain the warning letter sanctions
and require further corrective actions, which could include a
recall of certain products; (2) seek a court-ordered
injunction which may include temporary suspension of some or all
operations, mandatory recall of certain products, potential
monetary penalties or other sanctions; or (3) seize our
products. Any of these actions could significantly impair our
ability to continue to manufacture and distribute products,
generate cash from our operations, and may result in a covenant
violation under our senior debt. Any or all of these actions
would have a material adverse effect on our liquidity and our
ability to continue as a going concern.
The Company believes that unless and until the
issues identified by the FDA have been successfully corrected
and the corrections have been verified through reinspection, it
is doubtful that the FDA will approve any NDAs or ANDAs that may
be submitted by the Company for products to be manufactured at
its Decatur facilities. This has adversely impacted, and is
likely to continue to adversely impact, the Company’s
ability to expand its sales through new product introductions.
However, the Company is able to continue manufacturing and
distributing its current product lines.
(iii) On August 9, 2003, Novadaq
Technologies Inc. (“Novadaq”) notified the Company
that it had requested arbitration related to a dispute between
the Company and Novadaq regarding the issuance of a Right of
Reference. The Company would have been obligated to provide a
Right of Reference under the January 4, 2002 Supply
Agreement between the two companies. The Company did not believe
it was obligated to provide the Right of Reference which, if
provided, would likely reduce the required amount of time for
clinical trials and reduce Novadaq’s cost of developing a
product for macular degeneration. The Company was also
contemplating the possible development of a separate product for
macular degeneration which, if developed, could face competition
from any product developed by Novadaq. On June 4, 2004, an
agreement was reached between the Company and Novadaq, whereby
the Company would provide the requested Right of Reference to
Novadaq in exchange for Novadaq’s repurchase of the
Company’s
F-51
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
holdings in Novadaq at a purchase price of
$2,000,000 (U.S.). Proceeds were received in July 2004 (and used
to reduce outstanding debt obligations) and a gain of
approximately $1,280,000 will be reported during the third
quarter.
(iv) On October 8, 2003, the Company,
pursuant to the terms of the Letter Agreement dated
September 26, 2002 between the Company and AEG Partners
LLC, as amended (the “AEG Letter Agreement”),
terminated its consultant AEG Partners LLC (“AEG”).
AEG contends that, as a result of the Exchange
Transaction, the Company must pay it a “success fee”
consisting of $686,000 and a warrant to
purchase 1,250,000 shares of the Company’s common
stock at $1.00 per share, and adjust the terms of the
warrant, pursuant to certain anti-dilution provisions, to take
into account the impact of the convertible Series A
Preferred Stock issued in connection with the Exchange
Transaction. The Company disputes that AEG is owed this success
fee. Pursuant to the AEG Letter Agreement, the Company and AEG
participated in a mandatory and binding arbitration hearing on
August 2 and 3, 2004. The arbitrator took the matter under
submission and is due to issue a decision by September 2,
2004.
The Company is a party in other legal proceedings
and potential claims arising in the ordinary course of its
business. The amount, if any, of ultimate liability with respect
to such matters cannot be determined. Despite the inherent
uncertainties of litigation, management of the Company at this
time does not believe that such proceedings will have a material
adverse impact on the financial condition, results of
operations, or cash flows of the Company.
Note M — Subsequent Events
On July 21, 2004 the Company and FDC Limited
(“FDC”), India’s second largest manufacturer and
marketer of ophthalmic pharmaceutical products, announced the
signing of a Purchase and Supply Agreement which would provide
the Company with an ophthalmic finished dosage form product
pipeline for exclusive use in the United States and Canada. The
ophthalmic products will be developed and manufactured for the
Company by FDC.
Under the agreement, the Company will be
responsible for U.S. FDA regulatory submissions and
marketing of the products directly in the United States. Innova,
the Company’s Canadian distributor for ophthalmic products,
will be responsible for the direct marketing of these products
in Canada. FDC exports active pharmaceutical ingredients to over
45 countries, including the United States and Canada, and holds
drug master files and registration in both countries. Products
will be manufactured in India, and FDC is intending to submit
approximately four to six ANDA’s in the first year of the
Agreement.
On August 23, 2004, the Company issued an
aggregate of 141,000 shares of Series B 6%
Participating Convertible Preferred Stock (“Series B
Preferred Stock”) at a price of $1.00 per share,
convertible into common stock at a price of $2.70 per
share, to certain investors, with warrants to
purchase 1,566,667 additional shares of common stock
exercisable until August 23, 2009, with an exercise price
of $3.50 per share (the “Series B
Warrants”). The net proceeds to the Company after payment
of investment banker fees and expenses to Leerlink and other
transaction costs of approximately $1,056,000, were
approximately $13,044,000. A portion of these proceeds were used
to payoff the LaSalle Bank Term Loans and reduce the
La Salle Bank Revolver to zero. That early pay down, and
resulting elimination of certain personal guarantees of that
debt, resulted in the write off of $245,000 of unamortized
deferred financing fees. Remaining proceeds will be used for
working capital and other general corporate purposes, including
for the validation testing of the Company’s lyophilization
facility. In accounting for the issuance of the Series B
Preferred Stock and Series B warrants, the Company recorded
additional charges directly to accumulated deficit of $6,001,830
which also reduced earnings available to common stockholders.
F-52
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Under the terms of the private placement, the
Company is required to file a registration statement to enable
the investors to resell the shares of common stock into which
the Series B Preferred Stock is convertible and which may
be purchased upon exercise of the Series B Warrants.
Pursuant to “piggyback” registration rights included
in already outstanding securities, the registration statement is
also intended to register shares of common stock into which
those outstanding securities are convertible or exercisable. The
Company will not receive any proceeds from the resale of these
shares, but may receive proceeds from the exercise of warrants
into shares to be registered.
In August 2004, the Company settled its dispute
with AEG pursuant to the arbitrator’s decision. The
settlement resulted in a cash payout of $300,000, plus interest
from October 2003, and actual issuance of warrants to
purchase 1,250,000 shares of common stock at an
exercise price of $0.75 per share (the “AEG
Warrants”). Compared to the Company’s late 2003
estimate of the cost of this settlement, the Company recorded a
net gain of $295,100 in the third quarter of 2004.
F-53
PART II
INFORMATION NOT REQUIRED IN
PROSPECTUS
The expenses in connection with the issuance and
distribution of the securities being registered in this
registration statement are set forth in the following table. The
selling security holders will bear none of the following
expenses. All amounts except the registration fee are estimated.
Section 83A(1) of the Louisiana Business
Corporation Law (“LBCL”) permits a corporation to
indemnify any person who was or is a party or is threatened to
be made a party to any action, suit, or proceeding, whether
civil, criminal, administrative, or investigative, including any
action by or in the right of the corporation, by reason of the
fact that he is or was a director, officer, employee, or agent
of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee, or agent of
another business, foreign or nonprofit corporation, partnership,
joint venture, or other enterprise, against expenses, including
attorneys’ fees, judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection
with such action, suit, or proceeding if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
Section 83A(2) of the LBCL provides that, in
case of actions by or in the right of the corporation, the
indemnity shall be limited to expenses, including
attorneys’ fees and amounts paid in settlement not
exceeding, in the judgment of the board of directors, the
estimated expense of litigating the action to conclusion,
actually and reasonably incurred in connection with the defense
or settlement of such action, and that no indemnification shall
be made in respect of any claim, issue, or matter as to which
such person shall have been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be
liable for willful or intentional misconduct in the performance
of his duty to the corporation, unless, and only to the extent
that the court shall determine upon application that, despite
the adjudication of liability but in view of all the
circumstances of the case, he is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper.
Section 83(B) of the LBCL provides that to
the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in
defense of any such action, suit or proceeding, or in defense of
any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys’ fees) actually and
reasonably incurred by him in connection therewith.
Any indemnification under Section 83A of the
LBCL, unless ordered by the court, shall be made by the
corporation only as authorized in a specific case upon a
determination that the applicable standard of conduct has been
met, and such determination shall be made:
II-1
The indemnification provided for by
Section 83 of the LBCL shall not be deemed exclusive of any
other rights to which the person indemnified is entitled under
any bylaw, agreement, authorization of shareholders or
directors, regardless of whether directors authorizing such
indemnification are beneficiaries thereof, or otherwise, both as
to action in his official capacity and as to action in another
capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee, or
agent and shall inure to the benefit of his heirs and legal
representative; however, no such other indemnification measure
shall permit indemnification of any person for the results of
such person’s willful or intentional misconduct.
Section 24 of the LBCL provides that the
articles of incorporation of a corporation may contain a
provision eliminating or limiting the personal liability of a
director or officer to the corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director or
officer, provided that such provision shall not eliminate or
limit the liability of a director or officer:
Article XII of our articles of incorporation
contains the provisions permitted by Section 24 of the LBCL.
Article V of our by-laws makes mandatory the
indemnification of any of our officers, directors, employees or
agents against any expenses, including attorneys’ fees,
judgments, fines and amounts paid in settlement actually and
reasonably incurred by him by reason of his position as our
director, officer, employee or agent or serving in such position
at our request of any business, foreign or non-profit
corporation, partnership, joint venture or other enterprise, if
he acted in good faith and in a manner that he reasonably
believed to be in, or not opposed to, the best interest of
Akorn, and, in the case of a criminal action or proceeding, with
no reasonable cause to believe that his conduct was unlawful.
However, in case of actions by or in the right of Akorn, the
indemnity shall be limited to expenses (including
attorneys’ fees and amounts paid in settlement not
exceeding, in the judgment of the Board, the estimated expense
of litigating the action to conclusion) actually and reasonably
incurred in connection with the defense or settlement of such
action.
No indemnification is permitted under
Article V of our by-laws in respect of any matter as to
which a director or officer shall have been finally adjudged by
a court of competent jurisdiction to be liable for willful or
intentional misconduct or to have obtained an improper personal
benefit, unless, and only to the extent that the court shall
determine upon application that, in view of all the
circumstances of the case, he is fairly and reasonably entitled
to indemnity for such expenses which the court shall deem proper.
Article V of our by-laws also provides that
to the extent that a director, officer, employee or agent of
Akorn has been successful on the merits or otherwise in defense
of any such action, suit or proceeding, or in defense of any
claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys’ fees) actually and
reasonably incurred by him in connection therewith.
II-2
Any indemnification under Article V of our
by-laws, unless ordered by the court, shall be made by the
corporation only as authorized in a specific case upon a
determination that the applicable standard of conduct has been
met, and such determination shall be made:
Article V of our by-laws also provides that
the expenses incurred in defending such action shall be paid by
us in advance of the final disposition of such action, upon
receipt of an undertaking by or behalf of the director, officer,
employee or agent to repay such amount, unless it shall
ultimately be determined that he is entitled to be indemnified
by us as authorized under Article V. However, our Board may
determine, by special resolution, not to have Akorn pay in
advance the expenses incurred by any person in the defense of
any such action.
Article V further provides that
indemnification granted thereunder shall not be deemed exclusive
of any other rights to which a director, officer, employee or
agent is or may become entitled, both as to action in his
official capacity and as to action in another capacity while
holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall
inure to the benefit of his heirs and legal representatives.
Article V also permits us to procure
insurance on behalf of any person who is or was our director,
officer, employee or agent, or is or was serving in such
position at our request of any business, foreign or non-profit
corporation, partnership, joint venture or other enterprise,
against any liability asserted against or incurred by him in any
such capacity, or arising out of his status as such, whether or
not we would have the power to indemnify him against such
liability under the LBCL. We maintain a directors’ and
officers’ liability insurance policy.
On October 7, 2003, we entered into the
Exchange Transaction, pursuant to which a group of investors
purchased all of our then outstanding senior bank debt from The
Northern Trust Company, a balance of $37,731,000, at a discount
and exchanged such debt with us for (1) 257,172 shares
of our Series A Preferred Stock, (2) our subordinated
2003 Subordinated Notes in the aggregate principal amount of
approximately $2,767,000, (3) Series A Warrants to
purchase an aggregate of 8,572,400 shares of our common
stock with an exercise price of $1.00 per share, and
(4) $5,473,862 in cash from the proceeds of the term loans
under the New Credit Facility described in the following
paragraph. We issued the 2003 Subordinated Notes and cash to
(a) the Kapoor Trust, the sole trustee and sole beneficiary
of which is Dr. Kapoor, the chairman of our board of
directors and the holder of a significant position in our stock,
(b) Mr. Arjun C. Waney, a director and the holder of a
significant position in our stock, and (c) Argent Fund
Management Ltd., for which Mr. Waney serves as chairman and
managing director and 52% of which is owned by Mr. Waney.
We also issued to the holders of the 2003 Subordinated Notes,
our Notes Warrants to purchase an aggregate of
276,714 shares of common stock with an exercise price of
$1.10 per share. The issuance of shares of our
Series A Preferred Stock, the Series A Warrants and
the Note Warrants was made as a private placement under
Section 4(2) of the Securities Act and/or Rule 506 of
the Securities Act.
Simultaneously with the consummation of the
Exchange Transaction, we entered into the New Credit Facility
with LaSalle Bank which provided us with $7,000,000 in term
loans and a revolving line of credit of up to $5,000,000 to
provide for working capital needs, secured by substantially all
of our assets. Our obligations under the New Credit Facility
were guaranteed by Dr. Kapoor and the Kapoor Trust, and
irrevocable standby letters of credit were posted by
Dr. Kapoor and Mr. Waney. In exchange for the guaranty
and the irrevocable standby letters of credit, we issued
Guaranty Warrants to purchase 880,000
II-3
Effective May 17, 2004, JRJAY Public
Investments, LLC (“JRJAY”) exercised Series A
Warrants to purchase 416,667 of our common stock at an
exercise price of $1.00 per share by providing us with
notice of its election to exercise the cashless exercise option
of such warrants. Election of the cashless exercise provision of
the Series A Warrants reduced the number of shares of
common stock that would otherwise be obtainable upon the
exercise of such warrants by 119,048 shares, an aggregate
value of $416,667 as of May 17, 2004. In exchange for such
reduction, and the aggregate value of the shares of common stock
represented thereby, JRJAY was issued 244,019 shares of our
common stock. The issuance of such shares was made as a private
placement under Section 4(2) of the Securities Act.
On August 23, 2004, we completed a private
placement of 141,000 shares of our Series B Preferred
Stock at a price of $100.00 per share for cash, convertible
into common stock at a price of $2.70 per share, to certain
investors, with Series B Warrants to purchase in the
aggregate 1,566,667 additional shares of our common stock
exercisable until August 23, 2009, with an exercise price
of $3.50 per share. The issuance of such shares was made as
a private placement under Section 4(2) of the Securities
Act and/or Rule 506 of the Securities Act.
On August 31, 2004, we issued the AEG
Warrants to AEG to purchase in the aggregate
1,250,000 shares of our common stock at an exercise price
of $0.75 per share. The AEG Warrants were issued in
consideration for AEG’s consulting services provided to us
in connection with the successful completion of the Exchange
Transaction, among other things. The issuance of the
AEG Warrants was made as a private placement under
Section 4(2) of the Securities Act and/or Rule 506 of
the Securities Act.
(a) Those exhibits marked with an
asterisk (*) refer to exhibits filed herewith. The other
exhibits are incorporated herein by reference, as indicated in
the following list.
II-4
II-5
II-6
II-7
We hereby undertake:
(1) To file, during any period in which
offers or sales are being made pursuant to this registration
statement, a post-effective amendment to this registration
statement:
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of
a post-effective amendment any of the securities being
registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions or otherwise, the
registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Buffalo Grove, State
of Illinois, on the 20th day of September 2004.
POWER OF ATTORNEY
We, the undersigned officers and directors of
Akorn, Inc., hereby severally constitute and appoint each of
Messrs. Arthur S. Przybyl and Jeffrey A. Whitnell as our
true and lawful attorneys-in-fact, with full power to each of
them, to sign for us in our names in the capacities indicated
below, any amendments to this Registration Statement on
Form S-1 including post-effective amendments, and to file
the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange
Commission, and generally to do all things in our names and on
our behalf in our capacities as officers and directors to enable
Akorn, Inc. to comply with the provisions of the Securities Act
of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys-in-fact
to said Registration Statement and any and all amendments
thereto.
Pursuant to the requirements of the Securities
Act of 1933, this registration statement has been signed below
by the following persons in the capacities and on the dates
indicated.
II-9
II-10
Business Trends
Issuer
Akorn, Inc.
Address and Phone Number
2500 Millbrook Drive Buffalo Grove, Illinois
60089 (847) 279-6100
OTC Bulletin Board® Trading Symbol
AKRN.OB
Website
www.akorn.com (information found on our website
is not part of this prospectus)
Securities Offered
Up to 59,442,581(1) shares of our common
stock, no par value by the selling stockholders.
Use of Proceeds
We will not receive any proceeds from the sale of
shares of our common stock covered by this prospectus. We will
receive proceeds from the exercise of the warrants described in
this prospectus.
Risk Factors
In analyzing an investment in our common stock
offered by this prospectus, you should carefully consider the
information set forth under “Risk Factors.”
(1) In July 2004, at our 2004 Annual Meeting
of Shareholders, our shareholders approved an increase in the
authorized number of shares of common stock to an amount
sufficient to allow conversion of our Series A Preferred
Stock and exercise of our Series A Warrants. Without that
approval, the dividend rate on our Series A Preferred Stock
would have increased to 10% per annum from 6% per
annum. Because of the increase in the authorized number of
shares, our Series A Preferred Stock became mandatorily
convertible into shares of our common stock rather than
mandatorily redeemable into cash. Accordingly, in July 2004, the
Series A Preferred Stock was recharacterized as an equity
security rather than as a debt security. The result of that
recharacterization is that (a) future dividends and
discount accretion related to the Series A Preferred Stock
will be reflected as a reduction of our earnings available to
common stockholders rather than as interest expense, and
(b) we recorded the value of the beneficial conversion
feature (resulting from the conversion price being less than the
market price of our common stock when the Series A
Preferred Stock was issued) imbedded in the Series A
Preferred Stock which, in turn, resulted in the recording of a
non-cash deemed dividend of approximately $26,410,000. This
one-time deemed dividend reduced earnings available to our
common stockholders, thereby having a significant adverse impact
in reported income (loss) per share.
(2) On June 4, 2004, an agreement was
reached between us and Novadaq Technologies, Inc. related to our
dispute with Novadaq regarding the issuance of a Right of
Reference to Novadaq from us for Novadaq’s NDA and Drug
Master File for specified indications for our drug IC Green.
Pursuant to the agreement we reached, we would provide the
requested Right of Reference to Novadaq in exchange for
Novadaq’s repurchase of our holdings in Novadaq at a
purchase price of $2,000,000 (U.S.). We received the proceeds in
July 2004 and used the proceeds to reduce our outstanding debt
obligations. We will report a one-time gain of approximately
$1,280,000 during the third quarter of 2004.
(3) The August 2004 issuance of our
Series B Preferred Stock and Series B Warrants
resulted in our recording net proceeds of $13,044,000, the pay
down of $7,664,000 of outstanding indebtedness under our New
Credit Facility and the write off of $245,000 of unamortized
deferred financing fees.
(4) The issuance of our Series B
Preferred Stock also resulted in a noncash deemed dividend
similar to the one described above in respect to our
Series A Preferred Stock with a similar adverse impact on
reported earnings available to our common stockholders. This
deemed dividend is equal to the value assigned to the
Series B Warrants (approximately $3,130,000) plus the value
assigned to the beneficial conversion feature imbedded in the
Series B Preferred Stock (approximately $2,872,000).
(5) In August 2004, we resolved a dispute
with AEG Partners LLC, or “AEG,” related to our
compensation of AEG in its capacity as our chief restructuring
officer in October 2003. The Letter Agreement dated
September 26, 2002, between AEG and us provided for AEG to
earn a fee, payable in cash and warrants, upon the successful
completion of a refinancing of our indebtedness. In late 2003,
we recorded our estimate of both the cash portion and the value
of the warrant portion as expenses related to the Exchange
Transaction. The resolution of the dispute resulted in a cash
payout of $300,000, plus interest from October 2003, and
issuance of the AEG Warrants at an exercise price of
$0.75 per share. Compared to our late 2003 estimate of cost
of settlement, the actual settlement resulted in a net gain of
$295,100 in the third quarter of 2004. We determined that none
of the anti-dilution provisions in our outstanding securities
were triggered by the issuance of the AEG Warrants.
Six Months Ended
June 30
Year Ended December 31
2004
2003
2003
2002
2001
$
22,736
$
21,622
$
45,491
$
51,419
$
41,545
7,338
6,379
12,148
20,537
6,398
(2,084
)
(2,928
)
(6,276
)
(3,565
)
(21,074
)
(2,713
)
(1,257
)
(6,220
)
(3,148
)
(3,852
)
(4,797
)
(4,185
)
(12,496
)
(6,713
)
(24,926
)
2
(171
)
(171
)
6,239
(9,780
)
$
(4,799
)
$
(4,014
)
$
(12,325
)
$
(12,952
)
$
(15,146
)
$
(0.24
)
$
(0.20
)
$
(0.62
)
$
(0.66
)
$
(0.78
)
(0.24
)
(0.20
)
(0.62
)
(0.66
)
(0.78
)
$
14,095
$
10,869
$
10,595
$
13,239
$
28,580
32,992
34,688
33,907
35,314
33,518
58,799
59,844
59,415
63,538
84,546
14,994
50,968
11,959
43,803
52,937
36,417
1,468
36,065
8,383
7,779
7,388
7,408
11,391
11,352
23,830
(1)
Operating income (loss) includes the following
(in thousands): (a) long-lived asset impairment charges of
(i) $1,851 in the six months ended June 30, 2004,
(ii) $2,362 in 2002 and (iii) $2,132 in 2001, and
(b) restructuring charges of $1,117 in 2001.
(2)
Interest and other expense includes the following
(in thousands): (a) loss on Exchange Transaction of $3,102
in 2003 and (b) dividends and discount accretion related to
our Series A Preferred Stock of $1,120 in the six months
ended June 30, 2004 and $589 in 2003. After the July
2004 shareholder approval relating to our Series A
Preferred Stock, such dividends and accretion do not impact net
income (loss) but will continue to impact earnings (loss) per
share.
(3)
Income tax provision (benefit) includes (in
thousands) a $9,216 charge in 2002 to establish a full valuation
allowance against our net deferred income tax assets. Such net
assets continued to be fully offset by a valuation allowance.
(4)
Current liabilities include (in thousands)
$35,870, $35,565 and $44,800 of debt in default as of
June 30, 2003, December 31, 2002 and 2001,
respectively. That debt was refinanced in 2003 as part of the
Exchange Transaction.
(5)
Long-term obligations include (in thousands)
$22,181 and $21,132 of Series A Preferred Stock as of
June 30, 2004 and December 31, 2003, respectively.
Pursuant to the July 2004 shareholder approval relating to
our Series A Preferred Stock, these securities were
reclassified into shareholders’ equity, subsequent to
June 30, 2004.
We have experienced recent operating
losses, working capital deficiencies and negative cash flows
from operations, and these losses and deficiencies may continue
in the future.
We have invested significant resources in
the development of lyophilization manufacturing capability, and
we may not realize the benefit of these efforts and
expenditures.
We depend on a small number of
distributors, the loss of any of which could have a material
adverse effect.
Certain of our directors are subject to
conflicts of interest.
We may require additional capital to grow
our business and such funds may not be available to
us.
Our growth depends on our ability to timely
develop additional pharmaceutical products and manufacturing
capabilities.
Our success depends on the development of
generic and off-patent pharmaceutical products which are
particularly susceptible to competition, substitution policies
and reimbursement policies.
We are subject to legal proceedings against
us, which may prove costly and time-consuming even if
meritless.
Our revenues depend on sales of products
manufactured by third-parties, which we cannot
control.
Dependence on key executive
officers.
We must continue to attract and retain key
personnel to be able to compete successfully.
We are subject to extensive government
regulations that increase our costs and could subject us to
fines and liabilities, prevent us from selling our products or
prevent us from operating our facilities.
We may implement product recalls and could
be exposed to significant product liability claims; we may have
to pay significant amounts to those harmed and may suffer from
adverse publicity as a result.
The FDA may authorize sales of some
prescription pharmaceuticals on a non-prescription basis, which
would reduce the profitability of our prescription
products.
Our industry is very competitive.
Additionally, changes in technology could render our products
obsolete.
Many of the raw materials and components
used in our products come from a single source.
Our patents and proprietary rights may not
adequately protect our products and processes.
There is a limited market for our common
stock.
Concentrated ownership of our common stock
creates a risk of sudden changes in our share
price.
Exercise of warrants and the conversion of
subordinated debt and preferred stock may have a substantial
dilutive effect on our common stock.
The terms of our preferred stock may reduce
the value of your common stock.
We experience significant quarterly
fluctuation of our results of operation which may increase the
volatility of our stock price.
“Penny Stock” rules may make
buying or selling our common stock difficult.
The requirements of being a public company
may strain our resources and distract management.
•
The July 8, 2004 approval by our
shareholders that effectively allowed our Series A
Preferred Stock to become convertible, which resulted in the
recharacterization of those securities as equity instruments
rather than as debt instruments (See Note I —
Series A Preferred Stock in the Notes to Consolidated
Financial Statements beginning at page F-1);
•
The August 23, 2004 issuance of
141,000 shares of our Series B Preferred Stock for net
proceeds of $13,044,000;
•
The use of a portion of the proceeds of the
August 23, 2004 issuance of Series B Preferred Stock
to pay down indebtedness under our New Credit Facility and the
resulting cancellation of certain guarantees related to such
indebtedness; and
•
The August 31, 2004 issuance of the AEG
Warrants.
June 30, 2004
Actual
Pro Forma
(In thousands,
except share data)
$
—
$
3,859
$
3,627
$
—
5,245
—
3,541
3,541
1,468
1,468
3,250
3,250
1,968
1,968
19,099
10,227
22,181
—
—
26,552
—
13,044
26,748
51,656
13,278
16,485
(32,638
)
(64,997
)
7,388
42,740
$
48,668
$
52,967
•
The factors described in this prospectus under
the heading “Risk Factors” beginning on page 8;
•
Our ability to resolve our FDA compliance issues
at our Decatur, Illinois facilities;
•
Our ability to avoid defaults under debt
covenants;
•
Our ability to generate cash from operations
sufficient to meet our working capital requirements;
•
Our ability to continue as a going concern and to
obtain additional funding to operate and grow our business;
•
The effects of federal, state and other
governmental regulation of our business;
•
Our success in developing, manufacturing and
acquiring new products;
•
Our ability to bring new products to market and
the effects of sales of such products on our financial results;
•
The effects of competition from generic
pharmaceuticals and from other pharmaceutical companies;
•
Availability of raw materials needed to produce
our products; and
•
Other factors referred to in this prospectus.
Shares Beneficially Owned
Shares Beneficially Owned
Prior to the Offering(3)
After the Offering(4)
No. of Shares
Name(1)
Offered(2)
Number
Percentage
Number
Percentage
1,250,000
1,250,000
5.71
%
—
*
43,503
150,105
*
106,250
*
469,962
932,221
4.42
%
458,500
2.17
%
1,740,126
1,754,194
7.84
%
—
*
2,409,877
2,428,420
10.54
%
—
*
2,002,510
2,020,095
9.02
%
—
*
144,593
145,705
*
—
*
337,383
339,979
1.62
%
—
*
722,963
728,526
3.41
%
—
*
481,975
485,684
2.30
%
—
*
5,794,222
6,740,679
25.47
%
900,000
3.40
%
1,552,193
1,564,741
7.05
%
—
*
7,090,064
7,146,891
25.74
%
—
*
870,063
877,097
4.08
%
—
*
870,063
877,097
4.08
%
—
*
154,280
155,467
*
—
*
182,713
1,204,137
5.52
%
1,019,947
4.90
%
174,012
235,419
1.12
%
60,000
*
17,401
116,292
*
98,750
*
43,503
57,605
*
13,750
*
289,185
291,410
1.39
%
—
*
25,353,458
29,529,697
64.45
%
3,988,600
10.49
%
Shares Beneficially Owned
Shares Beneficially Owned
Prior to the Offering(3)
After the Offering(4)
No. of Shares
Name(1)
Offered(2)
Number
Percentage
Number
Percentage
435,032
448,549
2.13
%
10,000
*
3,620,253
5,118,389
21.08
%
1,470,000
6.06
%
1,740,126
2,279,394
10.19
%
525,200
2.35
%
1,218,088
2,019,186
9.24
%
791,250
3.62
%
435,032
438,549
2.08
%
—
*
*
Represents less than 1%.
(1)
Dr. Kapoor, the trustee and sole beneficiary
of the Kapoor Trust, has served as the chairman of our board of
directors since May 1995 and from December 1991 to January 1993.
Dr. Kapoor served as our chief executive officer from March
2001 to December 2002. Mr. Przybyl is our president and
chief executive officer, positions he has held since September
2002 and February 2003, respectively. Each of
Messrs. Przybyl, Treppel and Waney has served on our board
of directors since November 2003. Mr. Waney serves as
chairman and managing director of, and owns 52% of, Argent Fund
Management Ltd. Mr. Treppel is the managing member of the
general partner of Wheaten Healthcare Partners LP. AEG served as
our restructuring consultant during 2002 and 2003. To our
knowledge, the persons named in the table have sole voting and
investment power with respect to all shares of common stock
shown as beneficially owned by them, subject to community
property laws, where applicable, and the information contained
in the footnotes to this table.
(2)
In addition to the shares set forth in the
column, we are registering 2,770,882 shares of common stock
that are estimated to be issuable in respect of accrued and
unpaid dividends on our outstanding Series A Preferred
Stock and our Series B Preferred Stock and issuable upon
the conversion of accrued and unpaid interest on the
Tranche A Note and the Tranche B Note, from
September 1, 2004 through August 31, 2005. The number
of shares included in this prospectus are subject to adjustment
to prevent dilution resulting from stock splits, stock
dividends, the issuance of common stock or securities
convertible into or exercisable for common stock at prices below
certain thresholds or similar events. Therefore, pursuant to
Rule 416 under the Securities Act, we are also registering
such indeterminate number of shares as may be issuable in
connection with stock splits, stock dividends or similar events.
(3)
Includes all shares beneficially owned, whether
directly or indirectly, individually or together with
associates, jointly or as community property with a spouse and
shares to which each individual has the right to acquire
beneficial ownership within 60 days of August 31,
2004, by the exercise of stock options, warrants or otherwise.
(4)
Percentage of shares of common stock beneficially
owned by each stockholder after the offering is based upon
20,622,434 shares of our common stock outstanding as of
August 31, 2004, plus shares of common stock issuable
within 60 days of such date upon the conversion of
preferred stock or notes and exercise of warrants held by that
particular holder. However, we did not treat as outstanding the
common stock issuable upon the conversion of preferred stock or
notes and the exercise of warrants held by persons other than
the particular holder.
(5)
Lawrence M. Adelman, Craig J. Dean and Michael P.
Goldsmith, members of AEG Partners, LLC, have shared voting and
investment power over the securities.
(6)
Arjun C. Waney, chairman, managing director and
52% owner of Argent Fund Management Ltd., has voting and
investment power over the securities. Mr. Waney disclaims
beneficial ownership over the securities.
(7)
Arun K. Puri is the trustee of the Arun K. Puri
Living Trust and is the natural person with voting and
investment power over the securities.
(8)
Baystar Capital Management, LLC is the general
partner of Baystar Capital II, L.P. Bay East, L.P., Lawrence
Goldfarb and Steven M. Lamar are each a managing member of
Baystar Capital
Management, LLC. Steven Derby is the general
partner of Bay East, L.P. Messrs. Lamar and Goldfarb and
Bay East, L.P., in their capacities as the managing members of
the BayStar Capital Management, LLC, and Mr. Derby, in his
capacity as the general partner of Bay East, L.P., may be deemed
to share the power to vote or to direct the vote and to dispose
or to direct the disposition of the shares beneficially owned by
Baystar Capital II, L.P. Each of Bay East, L.P. and
Messrs. Lamar, Goldfarb and Derby disclaim beneficial
ownership of the securities set forth in this prospectus except
to the extent of any indirect pecuniary interest therein.
(9)
Jeffrey R. Jay is the natural person with voting
and investment power over the securities.
(10)
Merlin BioMed Group, LLC is the general partner
of Merlin BioMed Long Term Appreciation LP. Stuart T. Weisbrod,
the managing member of Merlin BioMed Group, LLC, is the natural
person with voting and investment power over the securities.
(11)
Merlin BioMed Group, LLC is the general partner
of Merlin BioMed Offshore Fund. Stuart T. Weisbrod, the managing
member of Merlin BioMed Group, LLC, is the natural person with
voting and investment power over the securities.
(12)
Millennium Management, LLC, a Delaware limited
liability company, is the managing partner of Millennium
Partners, L.P., a Cayman Islands exempted company, and
consequently has voting control and investment discretion over
securities owned by Millennium Partners, L.P. Israel A.
Englander is the sole managing member of Millennium Management,
LLC. As a result, Mr. Englander may be considered the
beneficial owner of any shares deemed to be beneficially owned
by Millennium Management. The foregoing should not be construed
in and of itself as an admission by either Millennium
Management, LLC or Mr. Englander as to beneficial ownership
of the shares owned by Millennium Partners.
(13)
Morgan Stanley & Co. Incorporated is a
reporting company or a subsidiary of a reporting company under
the Exchange Act.
(14)
Pequot Capital Management, Inc., which is an
investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, is the beneficially owner of
such securities. In addition, Pequot Capital Management, Inc.
has sole dispositive power over 154,122 shares held by
Premium Series PCC Limited Cell C32, but does not have any
voting power over such shares. Arthur J. Samberg is the sole
shareholder of Pequot Capital Management, Inc.
(15)
Pequot Capital Management, Inc., which is an
investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, is the beneficially owner of
such securities. Premium Series PCC Limited Cell C32 has
sole voting power over such securities, but Pequot Capital
Management, Inc. has sole dispositive power over such
securities. Arthur J. Samberg is the sole shareholder of Pequot
Capital Management, Inc.
(16)
Pursuant to an investment agreement, Sigma
Capital Management, LLC has investment and voting power with
respect to the securities held by Sigma Capital Associates, LLC.
Steven A. Cohen controls Sigma Capital Management, LLC. Each of
Sigma Capital Management, LLC and Mr. Cohen disclaim
beneficial ownership of any of the securities covered by this
prospectus.
(17)
Dr. John N. Kapoor, trustee of the Kapoor
Trust, is the natural person with voting and investment power
over the securities.
(18)
Jerry Treppel, the general partner of Wheaten
Healthcare Partners LP, is the natural person with voting and
investment power over the securities.
Series A
Series B
Common
Preferred
Series A
Preferred
Series B
Name
Stock
Stock(1)
Warrants(2)
Stock(3)
Warrants(4)
Other
Total
—
—
—
—
—
1,250,000
(5)
1,250,000
—
35,170
8,333
—
—
—
43,503
—
375,895
89,067
—
—
5,000
(6)
469,962
—
1,406,793
333,333
—
—
—
1,740,126
—
—
—
1,854,321
555,556
—
2,409,877
851,800
15,101,921
3,578,333
—
—
5,821,404
(7)
25,353,458
244,019
1,758,491
—
—
—
—
2,002,510
—
—
—
111,260
33,333
—
144,593
—
—
—
259,605
77,778
—
337,383
—
—
—
556,296
166,667
—
722,963
—
—
—
370,864
111,111
—
481,975
—
3,883,452
920,167
762,237
228,367
—
5,794,223
—
1,254,860
297,333
—
—
—
1,552,193
—
4,709,239
1,115,833
973,370
291,622
—
7,090,064
—
703,396
166,667
—
—
—
870,063
—
703,396
166,667
—
—
—
870,063
—
—
—
118,713
35,567
—
154,280
—
147,713
35,000
—
—
—
182,713
—
140,679
33,333
—
—
—
174,012
—
35,170
8,333
—
—
—
43,503
—
14,068
3,333
—
—
—
17,401
—
—
—
222,519
66,666
—
289,185
—
351,698
83,334
—
—
—
435,032
—
2,813,586
666,667
—
—
140,000
(8)
3,620,253
—
1,406,793
333,333
—
—
—
1,740,126
—
984,755
233,333
—
—
—
1,218,088
—
351,698
83,334
—
—
—
435,032
1,095,819
36,178,773
8,155,733
5,229,185
1,566,667
7,216,404
59,442,581
(1)
Each share of Series A Preferred Stock is
convertible into a number of shares of common stock equal to the
quotient obtained by dividing (x) $100 plus any accrued but
unpaid dividends on such share by (y) $0.75, as such
numerator and denominator may be adjusted from time to time
pursuant to the anti-dilution provisions of the articles of
amendment governing the Series A Preferred Stock.
(2)
Each Series A Warrant is convertible into
one share of common stock, subject to anti-dilution adjustments,
at an exercise price of $1.00 per share of common stock.
(3)
Each share of Series B Preferred Stock is
convertible into a number of shares of common stock equal to the
quotient obtained by dividing (x) $100 plus any accrued but
unpaid dividends on such share by
(y) $2.70, as such numerator and denominator
may be adjusted from time to time pursuant to the anti-dilution
provisions of the articles of amendment to our articles of
incorporation governing the Series B Preferred Stock.
(4)
Each Series B Warrant is convertible into
one share of common stock, subject to anti-dilution adjustments,
at an exercise price of $3.50 per share of common stock.
(5)
Shares of common stock issuable upon exercise of
the AEG Warrants.
(6)
Shares issuable upon exercise of Note Warrants.
(7)
Includes 1,667,382 shares of common stock
issuable upon conversion of the Tranche A Note,
1,395,308 shares of common stock issuable upon conversion
of the Tranche B Note, 1,000,000 shares of common
stock issuable upon exercise of the Tranche A Warrant,
667,000 shares of common stock issuable upon exercise of
the Tranche B Warrant, 880,000 shares of common stock
issuable upon exercise of Guaranty Warrants, and
211,714 shares of common stock issuable upon exercise of
Note Warrants.
(8)
Includes 80,000 shares of common stock
issuable upon exercise of Guaranty Warrants, and
60,000 shares of common stock issuable upon exercise of
Note Warrants.
•
On any national securities exchange or quotation
service at which our common stock may be listed or quoted at the
time of sale;
•
In the over-the-counter market;
•
In private transactions;
•
Through options, swaps or other derivative
securities (whether exchange–listed or otherwise);
•
By pledge to secure debts and other obligations;
•
In ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchases;
•
In block trades in which the broker-dealer will
attempt to sell the shares as agent but may position and resell
a portion of the block as principal to facilitate the
transaction;
•
Through purchases by a broker-dealer as principal
and resale by the broker-dealer for its account;
•
In settlement of short sales;
•
Through the sale of a specified number of shares
at a stipulated price per share by agreement between
broker-dealers and the selling stockholders;
•
Sales in other ways not involving market makers
or established trading markets, including direct sales to
purchasers, sales effected through agents or other privately
negotiated transactions;
•
A combination of any of the above methods; or
•
Any other method permitted pursuant to applicable
law.
High
Low
$
3.59
$
2.00
3.78
2.75
3.76
2.30
$
1.55
$
0.50
1.30
0.50
1.19
0.45
2.35
1.22
$
4.00
$
3.31
3.73
0.60
1.60
0.60
1.50
0.60
•
AmerisourceBergen Corporation;
•
Cardinal Health, Inc.; and
•
McKesson Drug Company.
June 30, 2004
June 30, 2003
2003
2002
Gross
Gross Acct.
Gross
Gross Acct.
Gross
Gross Acct.
Gross
Gross Acct.
Sales
Revenue
Receivables
Sales
Revenue
Receivables
Sales
Revenue
Receivables
Sales
Revenue
Receivables
12
%
6
%
18
%
21
%
17
%
32
%
19
%
15
%
13
%
28
%
22
%
28
%
23
%
15
%
26
%
19
%
12
%
19
%
19
%
14
%
22
%
18
%
12
%
27
%
14
%
11
%
19
%
17
%
16
%
15
%
16
%
15
%
17
%
11
%
8
%
6
%
Six Months Ended
June 30,
Year Ended December 31,
2004
2003
2003
2002
2001
2000
1999
$
22,736
$
21,622
$
45,491
$
51,419
$
41,545
$
66,221
$
64,632
7,338
6,379
12,148
20,537
6,398
28,131
33,477
(2,084
)
(2,928
)
(6,276
)
(3,565
)
(21,074
)
(1,731
)
12,122
(2,713
)
(1,257
)
(6,220
)
(3,148
)
(3,852
)
(2,283
)
(1,483
)
(4,797
)
(4,185
)
(12,496
)
(6,713
)
(24,926
)
(4,014
)
10,639
2
(171
)
(171
)
6,239
(9,780
)
(1,600
)
3,969
$
(4,799
)
$
(4,014
)
$
(12,325
)
$
(12,952
)
$
(15,146
)
$
(2,414
)
$
6,670
20,038
19,705
19,745
19,589
19,337
19,030
18,269
20,038
19,705
19,745
19,589
19,337
19,030
18,573
$
0.37
$
0.38
$
0.58
$
0.58
$
1.23
$
1.85
$
1.88
(0.24
)
(0.20
)
(0.62
)
(0.66
)
(0.78
)
(0.13
)
0.37
(0.24
)
(0.20
)
(0.62
)
(0.66
)
(0.78
)
(0.13
)
0.36
3.60
1.55
2.35
4.00
6.44
13.63
5.56
2.00
.50
0.45
0.60
1.03
3.50
3.50
$
14,095
$
10,869
$
10,595
$
13,239
$
28,580
$
37,522
$
35,851
32,992
34,688
33,907
35,314
33,518
34,031
20,812
58,799
59,844
59,415
63,538
84,546
91,917
76,098
14,994
50,968
11,959
43,803
52,937
15,768
9,693
36,417
1,468
36,065
8,383
7,779
40,918
32,015
7,388
7,408
11,391
11,352
23,830
35,231
34,390
(1)
Operating income (loss) includes the following
(in thousands): (a) long-lived asset impairment charges of
(i) $1,851 in the six months ended June 30, 2004,
(ii) $2,362 in 2002 and (iii) $2,132 in 2001, and
(b) restructuring charges of $1,117 in 2001.
(2)
Interest and other expense includes the following
(in thousands): (a) loss on Exchange Transaction of $3,102
in 2003 and (b) dividends and discount accretion related to
our Series A Preferred Stock of $1,120 in the six months
ended June 30, 2004 and $589 in 2003. After the July
2004 shareholder approval relating to our Series A
Preferred Stock, such dividends and accretion do not impact net
income (loss) but will continue to impact earnings (loss) per
share.
(3)
Income tax provision (benefit) includes (in
thousands) a $9,216 charge in 2002 to establish a full valuation
allowance against our net deferred income tax assets. Such net
assets continued to be fully offset by a valuation allowance.
(4)
Current liabilities include (in thousands)
$35,870, $35,565 and $44,800 of debt in default as of
June 30, 2003, December 31, 2002 and 2001,
respectively. That debt was refinanced in 2003 as part of the
Exchange Transaction.
(5)
Long-term obligations include (in thousands)
$22,181 and $21,132 of Series A Preferred Stock as of
June 30, 2004 and December 31, 2003, respectively.
Pursuant to the July 2004 shareholder approval relating to
our Series A Preferred Stock, these securities were
reclassified into shareholders’ equity, subsequent to
June 30, 2004.
Six Months
Ended
Years Ended
June 30,
December 31,
2004
2003
2003
2002
2001
61
%
52
%
57
%
58
%
41
%
19
34
27
25
23
20
14
16
17
36
100
100
100
100
100
28
%
15
%
18
%
27
%
(2
)%
3
16
9
12
7
1
(1
)
0
1
10
32
30
27
40
15
27
36
35
40
56
11
3
3
3
4
3
4
3
4
6
(9
)
(13
)
(14
)
(7
)
(51
)
(21
)
(19
)
(27
)
(25
)
(36
)
Comparison of Six Month Periods Ended
June 30, 2004 and 2003
Comparison of Twelve Months Ended
December 31, 2003 and 2002
Comparison of Twelve Months Ended
December 31, 2002 and 2001.
Overview
•
The then-existing default on our senior bank debt
with Northern Trust was eliminated, as the associated debt was
retired;
•
The then-existing defaults on our subordinated
loans from NeoPharm, Inc. and the Kapoor Trust were waived;
•
The total amount of our senior bank debt was
reduced from $37,731,000 as of September 30, 2003 to
$7,000,000 as of the closing of those transactions;
•
The interest rate on our senior bank debt was
reduced from prime plus 3.0% to prime plus 1.75% for the new
term loans and prime plus 1.50% for the new revolving line of
credit;
•
We obtained a revolving line of credit of up to
$5,000,000 and an additional $1,000,000 pursuant to one of the
term loans under the New Credit Facility to meet working capital
needs and fund future operations;
•
We issued additional subordinated debt with an
aggregate principal amount of approximately $2,767,000, which
accrues interest at a rate of prime plus 1.75% per annum;
•
We issued our Series A Preferred Stock with
an aggregate initial stated value of $25,717,200, which accrues
dividends at a rate of 6.0% per annum; and
•
The investors whom acquired our Series A
Preferred Stock and Series A Warrant, as of the closing,
had the right to acquire approximately 44,000,000 shares of
our common stock, or more than 220% of the outstanding shares of
common stock prior to the closing.
Debt and Equity Financing
New Credit Facility
Subordinated Debt
Payment Due — by Period
Description
Total
2004
2005-6
2007-8
2009+
(In thousands)
$
20,555
$
4,156
$
15,797
$
602
$
—
25,717
—
—
—
25,717
7,046
1,557
3,106
2,242
141
1,156
—
1,156
—
—
$
54,474
$
5,713
$
20,059
$
2,844
$
25,858
Net Income (Loss)
Gross
Per Share
Per Share
Revenues
Profit
Amount
Basic
Diluted
(In thousand, except per share amounts)
$
11,660
$
4,019
$
(1,216
)
$
(0.06
)
$
(0.06
)
11,076
3,319
(3,583
)
(0.18
)
(0.18
)
$
22,736
$
7,338
$
(4,799
)
$
(0.24
)
$
(0.24
)
$
12,782
$
5,844
$
182
$
0.01
$
0.01
8,840
535
(4,197
)
(0.21
)
(0.21
)
14,349
5,075
(343
)
(0.02
)
(0.02
)
9,520
694
(7,967
)
(0.40
)
(0.40
)
$
45,491
$
12,148
$
(12,325
)
$
(0.62
)
$
(0.62
)
$
13,443
$
6,349
$
151
$
0.01
$
0.01
14,165
6,366
(783
)
(0.04
)
(0.04
)
12,121
4,456
(9,387
)
(0.48
)
(0.48
)
11,690
3,366
(2,933
)
(0.15
)
(0.15
)
$
51,419
$
20,537
$
(12,952
)
$
(0.66
)
$
(0.66
)
Allowance for Product Returns
Allowance for Doubtful
Accounts
•
Identified the relevant factors that might affect
the accounting estimate for allowance for doubtful accounts,
including: (a) historical experience with collections and
write-offs; (b) credit quality of customers; (c) the
interaction of credits being taken for discounts, rebates,
allowances and other adjustments; (d) balances of
outstanding receivables, and partially paid receivables; and
(e) economic and other exogenous factors that might affect
collectibility (e.g., bankruptcies of customers or
“channel” factors).
•
Accumulated data on which to base the estimate
for allowance for doubtful accounts, including:
(a) collections and write-offs data; (b) information
regarding current credit quality of customers; and
(c) information regarding external factors, particularly in
respect of major customers.
•
Developed assumptions reflecting
management’s judgments as to the most likely circumstances
and outcomes, regarding, among other matters:
(a) collectibility of outstanding balances relating to
“partial payments;” (b) the ability to collect
items in dispute (or subject to reconciliation) with customers;
and (c) economic and other external factors that might
affect collectibility of outstanding balances — based
upon information available at the time.
Allowance for Discounts
Allowance for Slow-Moving
Inventory
Income Taxes
Intangibles
Name
Age
Position with Akorn
60
Director, Chairman of the Board
47
Director, President and Chief Executive Officer
48
Chief Financial Officer, Secretary and Treasurer
63
Director
50
Director
66
Director
59
Director
(1)
Member of the Compensation Committee
(2)
Member of the Nominating and Corporate Governance
Committee
(3)
Member of the Audit Committee
Annual Compensation
Long-Term Compensation
Awards
# of Securities
Underlying
All Other
Name & Principal Position
Year
Salary
Other
Options/SARs
Compensation(1)
2003
$
—
$
—
—
$
—
Chairman
2002
—
—
—
—
2001
2,083
—
500,000
—
2003
$
259,089
$
10,000
75,000
$
44,649
(3)
President & CEO
2002
93,482
3,308
300,000
1,059
2001
—
—
—
—
2003
$
170,154
$
4,846
25,000
$
—
2002
148,263
—
100,000
—
2001
39,094
—
75,000
—
—
$
—
$
—
—
$
—
CFO, Secretary and Treasurer
(1)
Represents contributions to our Savings and
Retirement Plan, except as indicated in note (3).
(2)
Dr. Kapoor currently serves as the chairman
of our board of directors and served as chief executive officer
from March 2001 to December 2002. In lieu of a salary for 2001,
we issued Dr. Kapoor options to
purchase 500,000 shares of our common stock.
Dr. Kapoor was not paid a salary or granted options in 2003
or in 2002.
(3)
Mr. Przybyl became chief executive officer
in February 2003. Prior to this, Mr. Przybyl was our
president and chief operating officer. For 2003, his “All
Other Compensation” is exclusively related to reimbursement
for relocation expenses totaling $44,649 and “Other Annual
Compensation” represents a $10,000 automobile allowance.
(4)
Mr. Pothast was our chief financial officer,
secretary and treasurer from September 2001 to June 2004. His
“Other Annual Compensation” for 2003 represents an
automobile allowance.
(5)
Mr. Whitnell began his employment with us in
June 2004.
Individual Grants
Potential Realizable
Value at Assumed
Number of
Percent of Total
Annual Rates of Stock
Securities
Options
Exercise
Price Appreciation for
Underlying
Granted to
or Base
Option Term
Options
Employees in
Price
Expiration
Name
Granted(#)
Fiscal Year
($/Sh)
Date
5%($)
10%($)
50,000
10
%
0.80
1/20/08
51,051
64,420
25,000
5
%
0.90
2/18/08
28,716
39,860
25,000
5
%
0.90
2/18/08
28,716
39,860
Number of Securities
Value of Unexercised In-the-
Underlying Unexercised
Money Options at
Options at December 31, 2003
December 31, 2003(1)
Name
Exercisable
Unexercisable
Exercisable
Unexercisable
385,000
125,000
—
—
187,500
187,500
$
181,250
$
181,250
125,000
75,000
43,750
43,750
(1)
Based on a closing price of $2.00 per share
of Common Stock on December 31, 2003.
Shares Beneficially
Percent of
Beneficial Owner
Owned
Class
29,529,697
(1)
64.45
%
6,050,610
(2)
24.44
%
887,098
(3)
4.12
%
57,000
(4)
0.28
%
30,000
(5)
0.15
%
1,204,137
(6)
5.52
%
25,000
(7)
0.12
%
37,783,542
72.46
%
17,361,973
(8)
46.82
%
2,428,420
(9)
10.54
%
2,279,394
(10)
10.19
%
2,020,095
(11)
9.02
%
2,019,186
(12)
9.24
%
1,754,194
(13)
7.84
%
1,250,000
(14)
5.71
%
(1)
Includes (i) 851,800 shares owned by
the Kapoor Trust of which Dr. Kapoor is the sole trustee
and beneficiary, (ii) 3,395,000 shares owned by EJ
Financial/ Akorn Management, L.P. of which Dr. Kapoor is
managing general partner, (iii) 25,000 shares owned by
Dr. Kapoor, (iv) 63,600 shares owned by a trust,
the trustee of which is Dr. Kapoor’s wife and the
beneficiaries of which are their children,
(v) 505,000 shares issuable upon exercise of options,
(vi) 3,578,333 shares issuable upon exercise of
Series A Warrants held by the Kapoor Trust,
(vii) 1,091,714 shares issuable in the aggregate upon
exercise of the Note Warrants and Guaranty Warrants held by the
Kapoor Trust, (viii) 3,099,309 shares issuable upon
the conversion of the Tranche A and B Notes held by the
Kapoor Trust, (vix) 1,667,000 shares issuable upon
exercise of the Tranche A and B Warrants held by the Kapoor
Trust and (vx) 15,252,941 shares issuable upon
conversion of Series A Preferred Stock.
(2)
Includes (i) 932,221 shares held by
Argent Fund Management Ltd., of which Mr. Waney, our
director, serves as chairman and managing director and owns a
52% interest, including 458,500 shares of common stock,
379,654 shares issuable upon conversion of Series A
Preferred Stock, 89,067 shares issuable upon exercise of
Series A Warrants and 5,000 shares issuable upon
exercise of Note Warrants, (ii) 628,400 shares of
common stock held by First Winchester Investments Ltd., which
operates as an equity fund for investors unrelated to
Mr. Waney and whose investments are directed by Argent
Fund, (iii) 506,000 shares held by Mr. Waney
through individual retirement accounts,
(iv) 10,000 shares issuable upon exercise of options
and (v) 3,973,989 shares held jointly by
Mr. Waney and his wife, including 325,600 shares of
common stock, 2,841,722 shares
issuable upon conversion of Series A
Preferred Stock, 666,667 shares issuable upon exercise of
Series A Warrants, and 140,000 shares issuable upon
exercise of Note and Guaranty Warrants. Under SEC rules,
Mr. Waney may be deemed to be the beneficial owner of the
shares held by First Winchester.
(3)
Includes (i) 10,000 shares issuable
upon exercise of options, (ii) 355,215 shares issuable
upon conversion of Series A Preferred Stock,
(iii) 83,334 shares issuable upon exercise of
Series A Warrants, and (iv) 355,215 shares
issuable upon conversion of Series A Preferred Stock and
83,334 shares issuable upon exercise of Series A
Warrants which Mr. Treppel beneficially owns indirectly
through Wheaten Healthcare Partners LP.
(4)
Includes (i) 2,000 shares of common
stock and (ii) 55,000 shares issuable upon exercise of
options.
(5)
Such shares are issuable upon exercise of options.
(6)
Includes (i) 7,447 shares of common
stock, (ii) 1,012,500 shares issuable upon exercise of
options, (iii) 149,190 shares issuable upon conversion
of Series A Preferred Stock, and
(iv) 35,000 shares issuable upon exercise of
Series A Warrants.
(7)
Such shares are issuable upon exercise of options.
(8)
Includes (i) 900,000 shares of common
stock; (ii) 11,366,886 shares issuable upon conversion
of Series A Preferred Stock, 3,922,286 shares of which
are held by Pequot Healthcare Fund, L.P., 4,756,331 shares
of which are held by Pequot Healthcare Offshore Fund, Inc.,
1,267,407 shares of which are held by Pequot Healthcare
Institutional Fund, LP, 710,431 shares of which are held by
Pequot Scout Fund, and 710,431 shares of which are held by
Pequot Navigator Onshore Fund, LP;
(iii) 1,872,864 shares issuable upon conversion of
Series B Preferred Stock, 769,859 of which are held by
Pequot Healthcare Fund, L.P., 983,104 shares of which are
held by Pequot Healthcare Offshore Fund, Inc., and
119,901 shares of which are held by Premium Series PCC
Limited Cell C32; (iv) 2,666,667 shares issuable upon
exercise of Series A Warrants, 920,167 of which are held by
Pequot Healthcare Fund, L.P., 1,115,833 of which are held by
Pequot Healthcare Offshore Fund, Inc., 297,333 of which are held
by Pequot Healthcare Institutional Fund, LP, 166,667 of which
are held by Pequot Scout Fund, and 166,667 of which are held by
Pequot Navigator Onshore Fund, LP; and
(v) 555,556 shares issuable upon exercise of
Series B Warrants, 228,367 of which are held by Pequot
Healthcare Fund, L.P., 291,622 of which are held by Pequot
Healthcare Offshore Fund, Inc., and 35,567 of which are held by
Premium Series PCC Limited Cell C32. Pequot Capital
Management, Inc., an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940, is the
beneficially owner of such securities. Pequot Capital
Management, Inc. has sole dispositive power over all such
securities, but does not have any voting power over the
securities held by Premium Series PCC Limited Cell C32,
which is retained by Premium Series PCC Limited Cell C32.
Arthur J. Samberg is the sole shareholder of Pequot Capital
Management, Inc. Pequot’s address is 500 Nyala Farm Road,
Westport, Connecticut 06880.
(9)
Includes (i) 1,872,864 shares issuable
upon conversion of Series B Preferred Stock; and
(ii) 555,556 shares issuable upon exercise of
Series B Warrants. Baystar’s address is 80 East Sir
Francis Drake Blvd., Suite 2B, Larkspur, California 94939.
Baystar Capital Management, LLC is the general partner of
Baystar Capital II, L.P. Bay East, L.P., Lawrence Goldfarb
and Steven M. Lamar are each a managing member of Baystar
Capital Management, LLC. Steven Derby is the general partner of
Bay East, L.P. Messrs. Lamar and Goldfarb and Bay East,
L.P., in their capacities as the managing members of the BayStar
Capital Management, LLC, and Mr. Derby, in his capacity as
the general partner of Bay East, L.P., may be deemed to share
the power to vote or to direct the vote and to dispose or to
direct the disposition of the shares beneficially owned by
Baystar Capital II, L.P. Each of Bay East, L.P. and
Messrs. Lamar, Goldfarb and Derby disclaim beneficial
ownership of the securities set forth in this prospectus except
to the extent of any indirect pecuniary interest therein.
(10)
Includes (i) 29,000 shares of common
stock, (ii) 496,200 shares of common stock,
346,200 shares of which are held by Savika Ltd.,
130,000 shares of which are held by Doral Park, and
20,000 shares of which are held by Shiveley Ltd., all three
entities of which are owned by Mr. Waney,
(iii) 1,420,861
shares issuable upon conversion of Series A
Preferred Stock; and (iv) 333,333 shares issuable upon
exercise of Series A Warrants. Mr. Waney’s
address is P.O. Box 27977, Sharjah, United Arab Emirates.
(11)
Includes (i) 244,019 shares of common
stock and (ii) 1,776,076 shares issuable upon
conversion of Series A Preferred Stock. JRJAY Public
Investments LLC address is 50 Fox Run Lane, Greenwich,
Connecticut 06831.
(12)
Includes (i) 791,250 shares of common
stock, 429,750 of which are owned directly by Mr. Waney,
333,000 shares of which are held by Trident Fashions, Inc.,
an entity of which all outstanding shares are held by Kithel
Holding Limited of which Mr. Waney is the sole shareholder,
and 28,5000 shares of which are held by Range Resources
Limited, an entity of which Mr. Waney owns 50% of its
outstanding shares, (ii) 994,603 shares issuable upon
conversion of Series A Preferred Stock; and
(iii) 233,333 shares issuable upon exercise of
Series A Warrants. Mr. Waney’s address is 18/ FL
Corporation Square, No. 8 Lamlok Street, Kowloon Bay,
Kowloon, Hong Kong.
(13)
Includes (i) 1,420,861 shares issuable
upon conversion of Series A Preferred Stock; and
(ii) 333,333 shares issuable upon exercise of
Series A Warrants. The Arun K. Puri Living Trust address is
9100 S. Dareland Blvd., Suite 1011, Miami,
Florida 33156.
(14)
Such shares are issuable upon exercise of the AEG
Warrants. Lawrence M. Adelman, Craig J. Dean and Michael P.
Goldsmith, members of AEG Partners, LLC, have shared voting and
investment power over the securities. AEG’s address is 1849
Green Bay Road, Suite 270, Highland Park, Illinois 60035.
Voting Rights
Dividends
Other Rights
Voting Rights
Series A Preferred Stock
Series B Preferred Stock
Dividends
Series A Preferred Stock
Series B Preferred Stock
Dividend Participation Rights
Conversion Rights
Series A Preferred Stock
Series B Preferred Stock
Redemption
Ranking; Liquidation; Anti-Dilution
Protections
Series A Warrants
Series B Warrants
Tranche A Note
Tranche B Note
Tranche A Warrants and Tranche B
Warrants
AEG Warrants
Note Warrants
Guaranty Warrants
•
vote separately as a class on any proposed merger
or consolidation;
•
cast a proportionately larger vote together with
our common stock, Series A Preferred Stock and
Series B Preferred Stock on any such transaction or for all
purposes;
•
elect directors having terms of office or voting
rights greater than those of our other directors;
•
convert such preferred stock into a greater
number of shares of our common stock or other securities;
•
demand redemption at a specified price under
prescribed circumstances related to a change of control; or
•
exercise other rights designed to impede a
takeover.
Louisiana Control Share Acquisition
Statute
Requirements of the Statute
Effects of the Statute
Exclusion from Statute
Louisiana Fair Price Protection
Statute
Requirements of the Statute
•
80% of the votes entitled to be cast by
outstanding shares of the company’s voting stock voting
together as a single voting group, and
•
two-thirds of the votes entitled to be cast by
holders of voting stock, other than voting stock held by the
acquiring party and its affiliates, voting together as a single
group.
•
the acquiring party, in the second step of the
transaction, pays the other shareholders a price at least equal
to the highest price per share paid by the acquiring party for
company securities in the first-step transaction or within the
two-year period immediately prior to the announcement date of
the second-step transaction and, in addition, the form of
consideration paid in the second-step transaction is cash or is
the same as in the first-step transaction,
•
the company has not failed to declare and pay
timely any dividends payable on preferred stock or reduced the
annual rate of dividends, if any, paid on common stock,
•
the acquiring party has not received from the
company any loans, guarantees or other financial
assistance, and
•
certain other procedural requirements are met.
Effects of the Statute
Exemptions Previously Granted
•
John N. Kapoor, Ph.D, the chairman of our board
of directors and the Kapoor Trust or any beneficiary of the
trust, who first invested in our company in November 1990;
•
any of the investors in the Exchange Transaction
(i.e., our October 2003 financing transaction pursuant to which
we issued our Series A Preferred Stock);
•
any of the investors in our August 2004 financing
transaction pursuant to which we issued our Series B
Preferred Stock; or
•
any affiliate or associate (as such terms are
defined in the statute) of any of the foregoing persons and
entities.
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-35
F-36
F-37
F-38
Year Ended December 31,
2003
2002
2001
(In thousands, except per share data)
$
45,491
$
51,419
$
41,545
33,343
30,882
35,147
12,148
20,537
6,398
16,015
19,043
17,935
(471
)
(55
)
4,480
1,415
3,228
2,459
1,465
1,886
2,598
18,424
24,102
27,472
(6,276
)
(3,565
)
(21,074
)
(3,157
)
(3,150
)
(3,768
)
(3,102
)
—
—
39
2
(84
)
(12,496
)
(6,713
)
(24,926
)
(171
)
6,239
(9,780
)
$
(12,325
)
$
(12,952
)
$
(15,146
)
$
(0.62
)
$
(0.66
)
$
(0.78
)
$
(0.62
)
$
(0.66
)
$
(0.78
)
19,745
19,589
19,337
19,745
19,589
19,337
Warrants
Retained
Common Stock
to Acquire
Earnings
Common
(Accumulated
Shares
Amount
Stock
Deficit)
Total
(In thousands)
19,247
$
22,647
$
—
$
12,584
$
35,231
—
—
—
(15,146
)
(15,146
)
—
—
1,516
—
1,516
—
1,508
—
—
1,508
175
583
—
—
583
44
138
—
—
138
19,466
24,876
1,516
(2,562
)
23,830
(12,952
)
(12,952
)
—
114
—
—
114
92
253
—
—
253
99
107
—
—
107
19,657
25,350
1,516
(15,514
)
11,352
—
—
—
(12,325
)
(12,325
)
—
—
9,188
—
9,188
—
—
1,166
—
1,166
—
—
336
—
336
—
—
1,518
—
1,518
42
40
—
—
40
127
116
—
—
116
19,826
$
25,506
$
13,724
$
(27,839
)
$
11,391
Year Ended December 31,
2003
2002
2001
(Dollars in thousands)
$
(12,325
)
$
(12,952
)
$
(15,146
)
4,128
4,510
4,286
—
2,362
2,132
(1,518
)
—
—
589
—
—
(36
)
(23
)
78
—
5,919
(2,813
)
509
519
431
(350
)
4,481
10,722
625
5,870
(6,540
)
2,594
(2,266
)
5,923
257
179
428
(217
)
2,721
(2,865
)
776
(1,963
)
2,920
(1,932
)
9,357
(444
)
(1,819
)
(5440
)
(3,626
)
76
125
—
(500
)
(1,743
)
(5,315
)
(4,126
)
156
474
721
(6,352
)
(11,994
)
(1,153
)
9,166
2,487
8,034
1,500
—
—
(941
)
—
—
—
—
1,516
3,529
(9,033
)
9,118
(146
)
(4,991
)
4,548
364
5,355
807
$
218
$
364
$
5,355
Note A —
Business and Basis of Presentation
Note B —
Summary of Significant Accounting
Policies
•
Identified the relevant factors that might affect
the accounting estimate for allowance for doubtful accounts,
including: (a) historical experience with collections and
write-offs; (b) credit quality of customers; (c) the
interaction of credits being taken for discounts, rebates,
allowances and other adjustments; (d) balances of
outstanding receivables, and partially paid receivables; and
(e) economic and other exogenous factors that might affect
collectibility (e.g., bankruptcies of customers,
“channel” factors, etc.).
•
Accumulated data on which to base the estimate
for allowance for doubtful accounts, including:
(a) collections and write-offs data; (b) information
regarding current credit quality of customers; and
(c) information regarding exogenous factors, particularly
in respect of major customers.
•
Developed assumptions reflecting
management’s judgments as to the most likely circumstances
and outcomes, regarding, among other matters:
(a) collectibility of outstanding balances relating to
“partial payments;” (b) the ability to collect
items in dispute (or subject to reconciliation) with customers;
and (c) economic and other exogenous factors that might
affect collectibility of outstanding balances — based
upon information available at the time.
$
1,430
1,383
1,311
1,282
1,282
2003
2002
2001
$
(12,325
)
$
(12,952
)
$
(15,146
)
—
—
—
$
(1,969
)
$
(1,665
)
$
(1,754
)
$
(14,294
)
$
(14,617
)
$
(16,900
)
$
(0.62
)
$
(0.66
)
$
(0.78
)
$
(0.72
)
$
(0.75
)
$
(0.87
)
Doubtful Accounts
Returns
Years Ended December 31,
Years Ended December 31,
2003
2002
2001
2003
2002
2001
$
1,200
$
3,706
$
8,321
$
1,166
$
548
$
232
(471
)
(55
)
4,480
2,085
2,574
4,103
(120
)
(2,451
)
(9,095
)
(2,174
)
(1,956
)
(3,787
)
$
609
$
1,200
$
3,706
$
1,077
$
1,166
$
548
Discounts
Chargebacks and Rebates
Years Ended December 31,
Years Ended December 31,
2003
2002
2001
2003
2002
2001
$
172
$
143
$
0
$
4,302
$
4,190
$
3,296
689
1,014
886
12,836
15,418
28,655
(767
)
(985
)
(743
)
(12,334
)
(15,306
)
(27,761
)
$
94
$
172
$
143
$
4,804
$
4,302
$
4,190
Note D —
Inventories
December 31,
2003
2002
$
3,510
$
3,460
1,385
1,877
2,912
5,064
$
7,807
$
10,401
Years Ended December 31,
2003
2002
2001
$
1,206
$
1,845
$
3,171
940
838
1,830
(1,229
)
(1,477
)
(3,156
)
$
917
$
1,206
$
1,845
Note E —
Investment in Novadaq Technologies
Note F —
Property, Plant and Equipment
December 31,
2003
2002
$
396
$
396
8,890
8,890
27,117
27,390
55
55
36,458
36,731
(21,636
)
(19,236
)
14,822
17,495
19,085
17,819
$
33,907
$
35,314
December 31,
2003
2002
$
—
$
35,565
1,500
—
6,415
—
5,000
5,000
1,623
1,917
3,250
3,250
2,767
—
20,555
45,732
2,622
2,074
4,156
35,859
$
13,777
$
7,799
$
4,156
4,415
11,382
394
208
$
20,555
$
1,557
1,556
1,550
1,521
862
$
7,046
Year Ended December 31,
2003
2002
2001
Weighted
Weighted
Weighted
Average
Average
Average
Exercise
Exercise
Exercise
Shares
Price
Shares
Price
Shares
Price
2,997
$
2.83
3,226
$
3.72
1,827
$
4.78
1,102
$
1.09
1,131
$
2.23
2,039
$
3.05
(42
)
$
0.93
(92
)
$
2.19
(175
)
$
2.48
(579
)
$
3.83
(1,268
)
$
4.82
(465
)
$
5.40
3,478
$
2.30
2,997
$
2.93
3,226
$
3.72
2,076
$
2.72
1,940
$
3.10
1,735
$
3.92
1,077
1,349
1,660
$
1.16
$
1.56
$
2.02
Options Outstanding
Options Exercisable
Number
Number
Outstanding
Weighted Average
Exercisable at
December 31,
Remaining
Weighted Average
December 31,
Weighted Average
Range of Exercise Prices
2003
Contractual Life
Exercise Price
2003
Exercise Price
177
4.3 years
$
0.72
43
$
0.74
646
4.2 years
$
0.92
196
$
0.94
648
4.5 years
$
1.34
253
$
1.26
1,174
4.2 years
$
2.31
961
$
2.32
497
3.8 years
$
3.61
326
$
3.62
98
0.4 years
$
4.54
92
$
4.54
109
2.3 years
$
5.37
80
$
5.39
84
1.7 years
$
5.73
80
$
5.79
45
1.4 years
$
8.29
45
$
8.29
3,478
2,076
Current
Deferred
Total
$
0
$
0
$
0
(171
)
0
(171
)
$
(171
)
$
0
$
(171
)
$
(293
)
$
3,585
$
3,292
613
2,334
2,947
$
320
$
5,919
$
6,239
$
(6,714
)
$
(746
)
$
(7,460
)
(253
)
(2,067
)
(2,320
)
$
(6,967
)
$
(2,813
)
$
(9,780
)
Years Ended December 31,
2003
2002
2001
$
(4,191
)
$
(2,283
)
$
(8,475
)
(765
)
(323
)
(1,245
)
4,816
9,216
—
(31
)
(371
)
(60
)
$
(171
)
$
6,239
$
(9,780
)
December 31,
December 31,
2003
2002
$
378
$
469
448
490
13,666
9,295
2,144
2,431
$
16,636
$
12,685
(13,886
)
(9,216
)
$
2,750
$
3,469
(2,750
)
(2,669
)
—
(800
)
$
(2,750
)
$
(3,469
)
$
0
$
0
Years Ended December 31,
2003
2002
2001
$
26,056
$
29,579
$
16,936
12,155
12,977
9,663
7,280
8,863
14,946
$
45,491
$
51,419
$
41,545
$
7,967
$
13,917
$
(751
)
4,309
5,955
2,739
(128
)
665
4,410
12,148
20,537
6,398
18,424
24,102
27,472
(6,276
)
(3,565
)
(21,074
)
(6,220
)
(3,148
)
(3,852
)
$
(12,496
)
$
(6,713
)
$
(24,926
)
Year Ended December 31,
2003
2002
2001
$
2,289
$
3,150
$
3,308
—
613
38
—
—
100
300
—
—
713
—
1,518
—
—
32,257
—
—
20,874
—
—
2,046
—
—
9,337
—
—
2003
2002
Gross
Gross Acct.
Gross
Gross Acct.
Sales
Revenue
Receivables
Sales
Revenue
Receivables
19%
15%
13%
28%
22%
28%
19%
14%
22%
18%
12%
27%
16%
15%
17%
11%
8%
6%
Six Months Ended
June 30,
2004
2003
(In thousands, except
per share data
(Unaudited)
$
22,736
$
21,622
15,398
15,243
7,338
6,379
6,150
7,773
2,560
699
712
835
9,422
9,307
(2,084
)
(2,928
)
(2,713
)
(1,257
)
(4,797
)
(4,185
)
2
(171
)
$
(4,799
)
$
(4,014
)
$
(0.24
)
$
(0.20
)
20,038
19,705
Six Months Ended
June 30,
2004
2003
(In thousands)
(Unaudited)
$
(4,799
)
$
(4,014
)
2,768
2,228
1,849
—
478
500
1,049
—
(2,863
)
1,865
(996
)
635
141
(568
)
868
415
304
(449
)
(1,201
)
612
(60
)
—
(441
)
(903
)
(501
)
(903
)
(1,335
)
(155
)
2,127
12
692
70
1,484
(73
)
(218
)
(364
)
218
364
$
(0
)
$
(0
)
$
308
$
797
38
—
Six Months Ended
June 30
2004
2003
$
(4,799
)
$
(4,014
)
—
—
(517
)
(86
)
$
(5,316
)
$
(4,100
)
$
(0.24
)
$
(0.20
)
$
(0.24
)
$
(0.21
)
•
Identified the relevant factors that might affect
the accounting estimate for allowance for doubtful accounts,
including: (a) historical experience with collections and
write-offs; (b) credit quality of customers; (c) the
interaction of credits being taken for discounts, rebates,
allowances and other adjustments; (d) balances of
outstanding receivables, and partially paid receivables; and
(e) economic and other exogenous factors that might affect
collectibility (e.g., bankruptcies of customers, factors that
affect particular distribution channels).
•
Accumulated data on which to base the estimate
for allowance for doubtful accounts, including:
(a) collections and write-offs data; (b) information
regarding current credit quality of customers; and
(c) other information such as buying patterns and payment
patterns, particularly in respect to major customers.
•
Developed assumptions reflecting
management’s judgments as to the most likely circumstances
and outcomes, regarding, among other matters:
(a) collectibility of outstanding balances relating to
“partial payments;” (b) the ability to collect
items in dispute (or subject to reconciliation) with customers;
and (c) economic factors that might affect collectibility
of outstanding balances — based upon information
available at the time.
June 30,
December 31,
2004
2003
$
3,809
$
3,510
1,652
1,385
3,342
2,912
$
8,803
$
7,807
June 30,
December 31,
2004
2003
$
396
$
396
9,319
8,890
27,439
27,117
55
55
37,209
36,458
(22,991
)
(21,636
)
14,218
14,822
18,774
19,085
$
32,992
$
33,907
June 30,
December 31,
2004
2003
$
3,627
$
1,500
5,245
6,415
5,000
5,000
1,468
1,623
3,250
3,250
2,767
2,767
21,357
20,555
2,258
2,622
6,294
4,156
$
12,805
$
13,777
Six Months
Ended June 30,
2004
2003
12,309
4,474
2,666
3,600
Six Months Ended
June 30,
2004
2003
$
13,806
$
11,252
4,305
7,449
4,625
2,921
$
22,736
$
21,622
$
6,344
$
3,153
705
3,493
289
(267
)
7,338
6,379
9,422
9,307
Six Months Ended
June 30,
2004
2003
(2,084
)
(2,928
)
(2,713
)
(1,257
)
$
(4,797
)
$
(4,185
)
Item 13.
Other Expenses of Issuance and
Distribution
$
23,253
$
10,000
$
40,000
$
75,000
$
45,000
$
25,000
$
218,253
Item 14.
Indemnification of Directors and
Officers
•
By the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such
action, suit, or proceeding, or
•
If such a quorum is not obtainable and the board
of directors so directs, by independent legal counsel, or
•
By the shareholders.
•
For any breach of the director’s or
officer’s duty of loyalty to the corporation or its
shareholders;
•
For acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law;
•
Who knowingly or without the exercise of
reasonable care and inquiry votes in favor of a dividend paid in
violation of Louisiana law, any other unlawful distribution,
payment or return of assets to be made to the shareholders or
stock purchases or redemptions in violation of Louisiana
law; or
•
For any transaction from which the director or
officer derived an improper personal benefit.
•
By the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such
action, suit, or proceeding, or
•
If such a quorum is not obtainable and the board
of directors so directs, by independent legal counsel, or
•
By the shareholders.
Item 15.
Recent Sales of Unregistered
Securities
Item 16.
Exhibits
Exhibit No.
Description
3.1*
Restated Articles of Incorporation of the Company
dated September 16, 2004.
3.2
Amended and Restated By-laws of the Company,
incorporated by reference to Exhibit 3.2 to the
Company’s report on Form 8-K filed on October 24,
2003.
4.1
First Amendment dated October 7, 2003 to
Registration Rights Agreement dated July 12, 2001 between
the Company and The John N. Kapoor Trust dtd 9/20/89,
incorporated by reference to Exhibit 4.1 to the
Company’s report on Form 8-K filed on October 24,
2003.
4.2
Form of Warrant Certificate, incorporated by
reference to Exhibit 4.2 to the Company’s report on
Form 8-K filed on October 24, 2003.
4.3
Form of Warrant Agreement dated October 7,
2003 between the Company and certain investors, incorporated by
reference to Exhibit 4.3 to the Company’s report on
Form 8-K filed on October 24, 2003.
4.4
Warrant Agreement dated October 7, 2003
between the Company and The John N. Kapoor Trust dtd 9/20/89
issued with respect to New Credit Facility guaranty,
incorporated by reference to Exhibit 4.4 to the
Company’s report on Form 8-K filed on October 24,
2003.
4.5
Warrant Agreement dated October 7, 2003
between the Company and Arjun C. Waney issued with respect to
New Credit Facility guaranty, incorporated by reference to
Exhibit 4.5 to the Company’s report on Form 8-K
filed on October 24, 2003.
4.6
Warrant Agreement dated October 7, 2003
between the Company and The John N. Kapoor Trust dtd 9/20/89
issued with respect to the Notes, incorporated by reference to
Exhibit 4.6 to the Company’s report on Form 8-K
filed on October 24, 2003.
Exhibit No.
Description
4.7
Warrant Agreement dated October 7, 2003
between the Company and Arjun C. Waney issued with respect to
the Notes, incorporated by reference to Exhibit 4.7 to the
Company’s report on Form 8-K filed on October 24,
2003.
4.8
Warrant Agreement dated October 7, 2003
between the Company and Argent Fund Management Ltd. issued with
respect to the Notes, incorporated by reference to
Exhibit 4.8 to the Company’s report on Form 8-K
filed on October 24, 2003.
4.9
Registration Rights Agreement dated
October 7, 2003 among the Company and certain investors,
incorporated by reference to Exhibit 4.9 to the
Company’s report on Form 8-K filed on October 24,
2003.
4.10
Form of Subscription Agreement dated
August 18, 2004 between the Company and certain investors,
incorporated by reference to Exhibit 4.1 to the
Company’s report on Form 8-K filed on August 24,
2004.
4.11
Form of Warrant Agreement dated August 18,
2004 between the Company and certain investors, incorporated by
reference to Exhibit 4.2 to the Company’s report on
Form 8-K filed on August 24, 2004.
4.12*
Stock Registration Rights Agreement dated
November 15, 1990 between the Company and The John N.
Kapoor Trust dtd 9/20/89.
4.13*
Stock Purchase Agreement dated November 15,
1990 between the Company and The John N. Kapoor Trust dtd
9/20/89.
5.1*
Opinion of Jones, Walker, Waechter, Poitevent,
Carrère & Denègre, L.L.P.
10.1*
Consulting Agreement dated November 15, 1990
by and between E. J. Financial Enterprises, Inc., a Delaware
corporation, and the Company.
10.2*
Amended and Restated Akorn, Inc. 1988 Incentive
Compensation Program.
10.3*
1991 Akorn, Inc. Stock Option Plan for Directors.
10.4
Promissory Note among the Company, Akorn (New
Jersey), Inc. and The Northern Trust Company dated
April 16, 2001, incorporated by reference to
Exhibit 10.3 to the Company’s report on Form 8-K
filed on April 25, 2001.
10.5
Letter of Commitment to the Company from John. N.
Kapoor, incorporated by reference to Exhibit 10.3 to the
Company’s report on Form 8-K filed on April 25,
2001.
10.6
Convertible Bridge Loan and Warrant Agreement
dated as of July 12, 2001, by and between the Company and
The John N. Kapoor Trust dtd 9/20/89, incorporated by reference
to Exhibit 10.1 to the Company’s report on
Form 8-K filed on July 26, 2001.
10.7
The Tranche A Common Stock Purchase Warrant,
dated July 12, 2001, incorporated by reference to
Exhibit 10.2 to the Company’s report on Form 8-K
filed on July 26, 2001.
10.8
The Tranche B Common Stock Purchase Warrant,
dated July 12, 2001, incorporated by reference to
Exhibit 10.3 to the Company’s report on Form 8-K
filed on July 26, 2001.
10.9
Registration Rights Agreement dated July 12,
2001, by and between the Company and The John N. Kapoor Trust
dtd 9/20/89, incorporated by reference to Exhibit 10.4 to
the Company’s report on Form 8-K filed on
July 26, 2001.
10.10
Offer Letter dated September 4, 2001 from
the Company to Mr. Pothast, incorporated by reference to
Exhibit 10.161 to the Company’s report on
Form 10-K for the fiscal year ended December 31, 2002,
filed on May 21, 2003.
10.11
Promissory Note among the Company, Akorn (New
Jersey), Inc. and NeoPharm, Inc. dated December 20, 2001,
incorporated by reference to Exhibit 10.17 to the
Company’s report on Form 10-K for fiscal year ended
December 31, 2001 filed on April 16, 2002.
10.12
Processing Agreement dated December 20,
2001, by and between the Company and NeoPharm, Inc.,
incorporated by reference to Exhibit 10.18 to the
Company’s report on Form 10-K for fiscal year ended
December 31, 2001 filed on April 16, 2002.
Exhibit No.
Description
10.13
Subordination and Intercreditor Agreement dated
December 20, 2001, by and between NeoPharm, Inc. and The
John N. Kapoor Trust dtd 9/20/89, incorporated by reference to
Exhibit 10.20 to the Company’s report on
Form 10-K for fiscal year ended December 31, 2001
filed on April 16, 2002.
10.14*
Allonge to Revolving Note ($2 million) dated
December 20, 2001 by and between the Company and The John
N. Kapoor Trust dtd 9/20/89.
10.15*
Allonge to Revolving Note ($3 million) dated
December 20, 2001 by and between the Company and The John
N. Kapoor Trust dtd 9/20/89.
10.16*
First Amendment to Convertible Bridge Loan and
Warrant Agreement dated December 20, 2001 by and between
the Company and The John N. Kapoor Trust dtd 9/20/89.
10.17
Supply Agreement dated January 4, 2002, by
and between the Company and Novadaq Technologies, Inc.,
incorporated by reference to Exhibit 10.22 to the
Company’s report on Form 10-K for fiscal year ended
December 31, 2001 filed on April 16, 2002.
10.18
Mutual Termination and Settlement Agreements by
and between The Company and The Johns Hopkins University/
Applied Physics Laboratory dtd. July 3, 2002, incorporated
by reference to Exhibit 10.23 to the Company’s report
on Form 10-K for fiscal year ended December 31, 2001
filed on October 7, 2002.
10.19*
Second Amendment to Convertible Bridge Loan and
Warrant Agreement dated December 20, 2001 by and between
the Company and The John N. Kapoor Trust dtd 9/20/89.
10.20
Engagement Letter by and among the Company and
AEG Partners LLC dated as of September 26, 2002,
incorporated by reference to Exhibit 10.39 to the
Company’s Report on Form 10-Q for the period ended
September 30, 2002, filed on May 21, 2003.
10.21
Amendment to Engagement Letter by and among the
Company and AEG Partners LLC dated as of November 21, 2002
incorporated by reference to Exhibit 10.40 to the
Company’s report on Form 10-K for the fiscal year
ended December 31, 2002, filed on May 21, 2003.
10.22*
Third Amendment to Convertible Bridge Loan and
Warrant Agreement dated December 20, 2001 by and between
the Company and The John N. Kapoor Trust dtd 9/20/89.
10.23
Offer Letter dated January 22, 2003 from the
Company to Arthur S. Przybyl, incorporated by reference to
Exhibit 10.41 to the Company’s report on
Form 10-K for the fiscal year ended December 31, 2000,
filed on May 21, 2003.
10.24
Indemnification Agreement dated May 15, 2003
by and between the Company and Arthur S. Przybyl, incorporated
by reference to Exhibit 10.42 to the Company’s report
on Form 10-K for the fiscal year ended December 31,
2002, filed on May 21, 2003.
10.25
Subordinated Promissory Note dated
October 7, 2003 issued to The John N. Kapoor Trust dtd
9/20/89, incorporated by reference to Exhibit 10.2 to the
Company’s report on Form 8-K filed on October 24,
2003.
10.26
Subordinated Promissory Note dated
October 7, 2003 issued to Arjun C. Waney, incorporated by
reference to Exhibit 10.3 to the Company’s report on
Form 8-K filed on October 24, 2003.
10.27
Subordinated Promissory Note dated
October 7, 2003 issued to Argent Fund Management Ltd.,
incorporated by reference to Exhibit 10.4 to the
Company’s report on Form 8-K filed on October 24,
2003.
10.28
Credit Agreement dated October 7, 2003 among
the Company, Akorn New Jersey, Inc., the lenders party thereto
and LaSalle Bank National Association, as Administrative Agent,
incorporated by reference to Exhibit 10.1 to the
Company’s report on Form 8-K filed on October 24,
2003.
10.29
Form of Indemnity Agreement dated October 7,
2003 between the Company and each of the Directors as
incorporated by reference to Exhibit 10.1 to the
Company’s report on Form 10-Q for quarter ended
September 30, 2003, filed on December 31, 2003.
10.30
Form of Amended and Restated Promissory Note
dated October 7, 2003 issued to NeoPharm, incorporated by
reference to Exhibit 10.2 to the Company’s report on
Form 10-Q for quarter ended September 30, 2003, filed
on December 31, 2003.
Exhibit No.
Description
10.31
Form of Reaffirmation of Subordination and
Intercreditor Agreement from The John N. Kapoor Trust dtd
9/20/89 to NeoPharm, incorporated by reference to
Exhibit 10.3 to the Company’s report on Form 10-Q
for quarter ended September 30, 2003, filed on
December 31, 2003.
10.32
Form of Subordination and Intercreditor Agreement
dated October 7, 2003 among the Company, Akorn (New
Jersey), Inc., LaSalle Bank and NeoPharm, incorporated by
reference to Exhibit 10.4 to the Company’s report on
Form 10-Q for quarter ended September 30, 2003, filed
on December 31, 2003.
10.33
Form of Fourth Amendment to Convertible Bridge
Loan and Warrant Agreement dated October 7, 2003 between
the Company and The John N. Kapoor Trust dtd 9/20/89,
incorporated by reference to Exhibit 10.5 to the
Company’s report on Form 10-Q for quarter ended
September 30, 2003, filed on December 31, 2003.
10.34*
Limited Waiver Letter dated December 20,
2001 from The John N. Kapoor Trust dtd 9/20/89.
10.35
Form of Acknowledgment of Subordination dated
October 7, 2003 between the Company and The John N. Kapoor
Trust dtd 9/20/89, incorporated by reference to
Exhibit 10.6 to the Company’s report on Form 10-Q
for quarter ended September 30, 2003, filed on
December 31, 2003.
10.36
Form of Subordination and Intercreditor Agreement
dated October 7, 2003 among the Company, Akorn (New
Jersey), Inc., LaSalle Bank and The John N. Kapoor Trust dtd
9/20/89, incorporated by reference to Exhibit 10.7 to the
Company’s report on Form 10-Q for quarter ended
September 30, 2003, filed on December 31, 2003.
10.37
Form of Subordination and Intercreditor Agreement
dated October 7, 2003 among the Company, Akorn (New
Jersey), Inc., LaSalle Bank and The John N. Kapoor Trust dtd
9/20/89, incorporated by reference to Exhibit 10.8 to the
Company’s report on Form 10-Q for quarter ended
September 30, 2003, filed on December 31, 2003.
10.38
Form of Subordination and Intercreditor Agreement
dated October 7, 2003 among the Company, Akorn (New
Jersey), Inc., LaSalle Bank and Arjun C. Waney, incorporated by
reference to Exhibit 10.9 to the Company’s report on
Form 10-Q for quarter ended September 30, 2003, filed
on December 31, 2003.
10.39
Form of Subordination and Intercreditor Agreement
dated October 7, 2003 among the Company, Akorn (New
Jersey), Inc., LaSalle Bank and Argent Fund Management Ltd,
incorporated by reference to Exhibit 10.10 to the
Company’s report on Form 10-Q for quarter ended
September 30, 2003, filed on December 31, 2003.
10.40
Akorn, Inc. 2003 Stock Option Plan, incorporated
by reference to Exhibit 10.35 to the Company’s report
on Form 10-K for the fiscal year ended December 31,
2003, filed on March 30, 2004.
10.41
Form of Akorn, Inc. Non-Qualified Stock Option
Agreement, incorporated by reference to Exhibit 10.36 to
the Company’s report on Form 10-K for the fiscal year
ended December 31, 2003, filed on March 30, 2004.
10.42
Form of Akorn, Inc. Incentive Stock Option
Agreement, incorporated by reference to Exhibit 10.37 to
the Company’s report on Form 10-K for the fiscal year
ended December 31, 2003, filed on March 30, 2004.
10.43
Engagement Letter dated August 5, 2004
between Leerink Swann & Company and the Company,
incorporated by reference to Exhibit 10.1 to the
Company’s report on Form 8-K filed on August 24,
2004.
10.44
Waiver and Consent dated August 23, 2004,
among LaSalle Bank National Association, the financial
institutions party thereto, the Company and Akorn (New Jersey),
Inc., incorporated by reference to Exhibit 10.2 to the
Company’s report on Form 8-K filed on August 24,
2004.
10.45
Consent and Agreement of Holders of Series A
6.0% Participating Convertible Preferred Stock of Akorn, Inc.
dated as of August 17, 2004, incorporated by reference to
Exhibit 10.3 to the Company’s report on Form 8-K
filed on August 24, 2004.
21.1
Subsidiaries of Company, incorporated by
reference to Exhibit 21.1 to the Company’s Annual
Report on Form 10-K for fiscal year ended December 31,
2001 filed on April 16, 2002.
23.1*
Consent of BDO Seidman, LLP, independent
registered public accountants.
Exhibit No.
Description
23.2*
Consent of Deloitte & Touche LLP,
independent registered public accounting firm.
23.3*
Consent of Jones, Walker, Waechter, Poitevent,
Carrère & Denègre, LLP is contained in
Exhibit 5.1 to this Registration Statement
24.1*
Power of Attorney is contained on the Signature
Page of this Registration Statement
Item 17.
Undertakings
(i) to include any prospectus required by
Section 10(a) (3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts
or events arising after the effective date of this registration
statement (or the most recent post-effective amendment thereof)
which, individually or in aggregate, represent a fundamental
change in the information in the registration statement.
Notwithstanding the foregoing, any increase of decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement; and
(iii) to include any material information
with respect to the plan of distribution not previously
disclosed in the registration statement or any material change
to such information in the registration statement;
AKORN, INC.
By:
/s/ ARTHUR S. PRZYBYL
Arthur S. Przybyl
President and Chief Executive
Officer
Signature
Title
Date
/s/ ARTHUR S. PRZYBYL
Arthur S. Przybyl
President and
Chief Executive Officer
(Principal Executive Officer)
September 20, 2004
/s/ JEFFREY A. WHITNELL
Jeffrey A. Whitnell
Chief Financial Officer,
Treasurer and Secretary
(Principal Financial Officer)
September 20, 2004
/s/ JOHN KAPOOR
John Kapoor
Chairman and Director
September 20, 2004
/s/ JERRY N. ELLIS
Jerry N. Ellis
Director
September 20, 2004
/s/ ARJUN C. WANEY
Arjun C. Waney
Director
September 20, 2004
Signature
Title
Date
/s/ JERRY TREPPEL
Jerry Treppel
Director
September 20, 2004
/s/ RONALD M. JOHNSON
Ronald M. Johnson
Director
September 20, 2004
Exhibit 3.1
RESTATED ARTICLES OF INCORPORATION
AKORN, INC., a Louisiana corporation (the “Corporation”), through its
undersigned President and Chief Executive Officer, and by authority of its
Board of Directors, does hereby certify the following:
FIRST: The Restated Articles of Incorporation set forth in paragraph
FIFTH below accurately copies the Articles of Incorporation of the Corporation
and all amendments thereto in effect at the date hereof without substantive
change.
SECOND: Each amendment to the Articles of Incorporation of the
Corporation has been effected in conformity with law.
THIRD: The date of incorporation of the Corporation was January 20, 1971,
and the date of these Restated Articles of Incorporation is September 16, 2004.
FOURTH: At a meeting of the Corporation’s Board of Directors held on
September 16, 2004, the Corporation’s Board of Directors adopted resolutions
authorizing the restatement of the Articles of Incorporation of the Corporation
as set forth below.
FIFTH: The Restated Articles of Incorporation of the Corporation are as
follows:
ARTICLE I
The name of this corporation shall be:
AKORN, INC.
under which corporate name it shall have authority to have a corporate seal and
to alter the same at pleasure, but a failure to affix said seal shall not
affect the validity of any instrument; to contract, sue and be sued in its
corporate name; to acquire, in any legal manner, and to hold, sell, dispose of,
lease, pledge, mortgage, or otherwise alienate or encumber, any property,
movable or immovable, corporeal or incorporeal, subject to any limitations
prescribed by law, or by these Articles; to acquire, in any legal manner, to
hold, sell, dispose of, pledge, mortgage, or otherwise alienate or encumber the
shares, bonds, debentures and other securities or evidence of debt, or
franchises and rights of any other corporation, domestic or foreign, subject to
the limitation contained in these Articles, and in relation thereto to exercise
all the rights, powers and privileges of ownership, including the right to vote
on any shares of stock of any other corporation, to conduct business in this
state and elsewhere, as may be permitted by law; to appoint such officers and
agents as the business of the corporation may require; to borrow money and to
issue, sell, pledge or otherwise dispose of its bonds, debentures, promissory
notes, bills of exchange and other obligations and evidences of debt, and to
secure the same by mortgage, pledge or other hypothecation of any kind of
property; to make by-laws, not inconsistent
1
OF
AKORN, INC.
NAME
herewith or contrary to law, for the management and operation of its business, the regulation of its affairs, and the certification and transfer of its shares of stock; to accomplish its purposes as stated hereinafter, it shall be authorized to guarantee shares, bonds, contracts, securities and/or evidences of debt of any other domestic or foreign corporation, including interest and/or dividends thereon and subject to the provisions of Louisiana law, and to acquire by purchase, or otherwise, its own shares of stock.
The said corporation generally shall possess all powers, rights, privileges and immunities which corporations are, or may be hereafter, authorized to have and possess, under the Constitution and laws of this State; and its Board of Directors shall have all corporate powers, allowed by the laws of the State of Louisiana.
ARTICLE II
OBJECTS AND PURPOSES
The objects and purposes for which this corporation is organized and the nature of the business or businesses to be conducted by it are stated and declared to be as follows:
To enter any business lawful under the laws of the State of Louisiana, either for its own account, or for the account of others, as agent, and either as agent or principal, to enter upon or engage in any kind of business of any nature whatsoever, in which corporations organized under the Louisiana Business Corporation Law may engage; and to the extent not prohibited thereby to enter upon and engage in any kind of business of any nature whatsoever in any other state of the United States of America, any foreign nation, any territory of any country to the extent permitted by the laws of such other state, nation or territory.
ARTICLE III
DURATION
The duration of this corporation shall be in perpetuity, or such maximum period as may be authorized by the Laws of Louisiana.
ARTICLE IV
REGISTERED OFFICE AND REGISTERED AGENTS
The registered office of this corporation is located at One Lakeway Center, Suite 1470, 3900 North Causeway Boulevard, Metairie, Louisiana 70002, which shall continue as the registered office of this corporation until changed by the Board of Directors in the manner required by law.
The name and address of the registered agent for the service of process of this corporation is P. Keith Daigle, One Lakeway Center, Suite 1470, 3900 North Causeway Boulevard, Metairie, Louisiana 70002.
2
ARTICLE V
AUTHORIZED CAPITAL
A. The Corporation shall have the authority to issue an aggregate of 150,000,000 shares of common stock, no par value per share.
B. The Corporation shall have authority to issue 5 million shares of Preferred Stock, $1.00 par value per share. Shares of Preferred Stock may be issued form time to time in one or more series. Authority is hereby vested in the Board of Directors of the Corporation to amend these Articles of Incorporation from time to time to fix the preferences, limitations and relative rights as between the Preferred Stock and the Common Stock, and to fix the variations in the preferences, limitations, and relative rights as between different classes and series of Preferred Stock.
C. A series of authorized Preferred Stock, par value $1.00 per share, of the Corporation is hereby created having the designation and amount, the voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions set forth below.
SECTION 1. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as the “Series A 6.0% Participating Convertible Preferred Stock” (the “ Series A Preferred Stock ”) and the number of shares constituting such series shall be 257,172 shares of Series A Preferred Stock.
SECTION 2. RANK.
The Series A Preferred Stock shall, with respect to payment of dividends, distributions and the distribution of assets upon liquidation, winding up or dissolution, rank (i) senior to all Junior Securities, (ii) on a parity with all Parity Securities and (iii) junior to all Senior Securities.
SECTION 3. DIVIDENDS AND DISTRIBUTIONS.
(a) Payment and Accrual of Dividends.
(i) The holders of shares of Series A Preferred Stock shall be entitled to receive on each Dividend Payment Date, in respect of the Dividend Period ending on (and including) the date immediately prior to such Dividend Payment Date, dividends on each share of Series A Preferred Stock at the rate of 6.0% (the " Dividend Rate ”) per annum on the Accrued Value thereof from and after the Issuance Date, provided that with respect to the Initial Dividend Period, the dividends set forth above shall be prorated based on the number of days in such period. Such dividends shall be fully cumulative and accumulate and accrue on a daily basis (computed on the basis of a 360-day year of twelve 30-day months) and compound quarterly in arrears on the Dividend Payment Dates at the rate indicated above and in the manner set forth herein, whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. If the Stockholder Approval has not yet been obtained (or the Stockholder Approval has been obtained, but the
3
Corporation does not have a sufficient number of shares of Common Stock duly authorized and reserved for issuance upon conversion of all of the outstanding shares of Series A Preferred Stock) on October 7, 2004 (the " Required Date ”), shares of the Series A Preferred Stock shall accrue dividends at a rate equal to 10.0% per annum of the Accrued Value, accruing and compounding in the manner set forth in this Section 3(a) from such date until such shares are redeemed by the Corporation or converted into shares of Common Stock, in each case in accordance with this Article V(C); provided, however, that on any date after the Required Date, if the Stockholder Approval has been obtained and the Corporation has a sufficient number of shares of Common Stock duly authorized and reserved for issuance upon conversion of all of the outstanding shares of Series A Preferred Stock, from and after such date, for so long as the Corporation shall have a sufficient number of shares of Common Stock duly authorized and reserved for issuance upon conversion of all of the outstanding shares of Series A Preferred Stock, the dividends shall accrue at the Dividend Rate.
(ii) Such dividends shall, at the option of the Company, either be paid in cash or accrue and compound and be added to the Accrued Value on the applicable Dividend Payment Dates, provided, however, that all dividends payable on any given Dividend Payment Date must either (i) all be paid in cash or (ii) all accrue and compound and be added to the Accrued Value, in each case on the Dividend Payment Date. Each such dividend which is payable in cash shall be payable on the Dividend Payment Date to the holders of record of shares of the Series A Preferred Stock, as they appear on the transfer books of the Corporation at the close of business on the day immediately preceding such Dividend Payment Date. Any dividend that is not otherwise paid in cash on the applicable Dividend Payment Date (whether due to the Company’s election not to pay such dividend in cash, its inability to pay such dividend in cash, or otherwise) shall automatically, and without any action on the part of the Corporation, accrue and compound and be added to the Accrued Value on such Dividend Payment Date.
(b) Additional Dividends. In addition to dividends payable pursuant to Section 3(a) hereof, in the event any dividends are declared or paid or any other distribution is made on or with respect to the Common Stock, the holders of the Series A Preferred Stock as of the record date established by the Board of Directors for such dividend or distribution on the Common Stock shall be entitled to receive as additional dividends (the “ Additional Dividends ”) an amount (whether in the form of cash, securities or other property) equal to the amount (and in the form) of the dividends or distribution that such holder would have received had the Series A Preferred Stock been converted into Common Stock (without regard to any limitation on conversion contained herein, the availability of authorized and unissued shares for issuance upon conversion, or otherwise) as of the date immediately prior to the record date of such dividend or distribution on the Common Stock; provided, however, that if the Corporation declares and pays a dividend or makes a distribution on the Common Stock consisting in whole or in part of Common Stock or Convertible Securities, then no such dividend or distribution shall be payable in respect of the Series A Preferred Stock on account of the portion of such dividend or distribution on the Common Stock payable in Common Stock or Convertible Securities to the extent that the applicable anti-dilution adjustment under Section 7(b)(i) below shall be made in connection therewith. The record date for any such Additional Dividends shall be the record date for the applicable dividend or distribution on the Common Stock, and any such Additional Dividends shall be payable on the same payment date as the payment date for the dividend on the Common Stock established by the Board of Directors.
4
(c) Restricted Payments.
(i) Junior Securities . So long as any shares of Series A Preferred Stock remain outstanding, the Corporation shall not, directly or indirectly, make any Junior Securities Distribution unless (A) all accrued and unpaid dividends on the shares of Series A Preferred Stock shall have been paid in cash, (B) sufficient consideration shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series A Preferred Stock and the current dividend period with respect to any Parity Securities and (C) all Redemption Obligations have been fully discharged.
(ii) Parity Securities . So long as any shares of Series A Preferred Stock remain outstanding, the Corporation shall not make any Parity Securities Distribution unless (A) all accrued and unpaid dividends on the shares of Series A Preferred Stock shall have been paid in cash, (B) sufficient consideration shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series A Preferred Stock and the current dividend period with respect to any Parity Securities and (C) all Redemption Obligations have been fully discharged; provided, that, dividends may be declared and paid on Parity Securities if dividends are declared and paid on the Series A Preferred Stock (in accordance with the terms of Section 3(a)) ratably in proportion to the respective aggregate amounts of dividends accumulated and unpaid on such Parity Securities and accumulated and unpaid on the Series A Preferred Stock.
(d) Priority With Respect to Junior Securities. Holders of shares of Series A Preferred Stock shall be entitled to receive the dividends provided for in this Section 3 in preference to and in priority over any dividends upon any Junior Securities.
SECTION 4. REDEMPTION.
(a) General. Except as provided in this Section 4, the Corporation shall have no right to redeem any shares of Series A Preferred Stock.
(b) Mandatory Redemption. On October 31, 2011 (the “ Mandatory Redemption Date ”), subject to the limitations of Section 55 and other applicable provisions of the LBCL, the Corporation shall be required to redeem all then outstanding shares of Series A Preferred Stock for an amount in cash in respect of each share of Series A Preferred Stock equal to the Redemption Price of such share of Series A Preferred Stock.
(c) Optional Redemption. Provided the Stockholder Approval has been obtained and the Corporation then has a sufficient number of shares of Common Stock duly authorized and reserved for issuance upon conversion of all of the outstanding shares of Series A Preferred Stock, the Corporation may redeem, at its option, on and after October 9, 2006, subject to the holders’ conversion rights set forth in Section 7, all, but not less than all, outstanding shares of Series A Preferred Stock for an amount in cash in respect of each share of Series A Preferred Stock equal to the Redemption Price of such share of Series A Preferred Stock.
5
(d) Redemption Procedures.
(i) Mandatory Redemption Notice . Notice of any redemption pursuant to Section 4(b) shall be sent by or on behalf of the Corporation not less than 45 nor more than 60 days prior to the Mandatory Redemption Date, by first class mail, postage prepaid, to each holder of record of the Series A Preferred Stock at such holder’s last address as it appears on the transfer books of the Corporation; provided, however, that no failure to give such notice or any defect therein shall affect the validity of the giving of such notice for the redemption of any shares of Series A Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. Each such notice shall state: (A) the number of shares of Series A Preferred Stock to be redeemed in the aggregate and from such holder; (B) the Redemption Price per share, including a detailed calculation thereof; (C) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price; and (D) that, unless the Corporation defaults in making payment therefore, the dividends on the shares to be redeemed shall cease to accrue on the Mandatory Redemption Date.
(ii) Optional Redemption Notice . Notice of any redemption pursuant to Section 4(c) shall be sent by or on behalf of the Corporation not less than 45 nor more than 60 days prior to the Optional Redemption Date, by first class mail, postage prepaid, to each holder of record of the Series A Preferred Stock at such holder’s last address as it appears on the transfer books of the Corporation; provided, however, that no failure to give such notice or any defect therein shall affect the validity of the giving of such notice for the redemption of any shares of Series A Preferred Stock except as to the holder to whom the Corporation has failed to give notice or except as to the holder to whom notice was defective. Each such notice shall state: (A) the number of shares of Series A Preferred Stock to be redeemed in the aggregate and from such holder; (B) the Redemption Price per share, including a detailed calculation thereof; (C) the redemption date (the “ Optional Redemption Date ”); (D) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price and (E) that, unless the Corporation defaults in making payment therefore, the dividends on the shares to be redeemed shall cease to accrue on the Optional Redemption Date.
(iii) Payment of Funds . If notice has been mailed in accordance with Section 4(d)(i) or Section 4(d)(ii), as applicable, and provided that on or before the Mandatory Redemption Date or Optional Redemption Date, as applicable, all funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds in trust for the pro rata benefit of the holders of the shares to be redeemed, so as to be, and to continue to be available therefor, then, from and after the Mandatory Redemption Date or Optional Redemption Date, as applicable, dividends on the shares of the Series A Preferred Stock so redeemed shall cease to accrue and accumulate, and such shares shall no longer be deemed to be outstanding and shall not have the status of shares of Series A Preferred Stock, and all rights of the holders thereof as shareholders of the Corporation (except the right to receive from the Corporation the Redemption Price) shall cease. Upon surrender, in accordance with such notice, of the certificates for any shares so redeemed, such shares shall be redeemed by the Corporation at the Redemption Price, which shall be paid in cash in immediately available funds.
6
(iv) Representations . Any notice of redemption pursuant Section 4(d)(i) or (ii) shall be accompanied by a representation by the Corporation to the effect that the consummation of the redemption will not render the Corporation insolvent or unable to pay its debts as they become due.
(e) Failure to Discharge a Redemption Obligation. If the Corporation does not have sufficient funds or capital and surplus legally available to discharge any Redemption Obligation (or is otherwise prohibited from affecting such redemption), the Corporation shall take all actions required or permitted under the LBCL to permit such redemption of the Series A Preferred Stock, and the Corporation shall redeem as many shares of the Series A Preferred Stock as it may legally redeem, ratably from the holders thereof in proportion to the number of shares held by the holders from which shares are being redeemed, and shall thereafter from time to time, as soon as it shall have funds available therefor, redeem as many shares of the Series A Preferred Stock as it legally may redeem until it has fully discharged all Redemption Obligations. Shares of the Series A Preferred Stock not redeemed as required pursuant to any Redemption Obligation shall accrue dividends at a rate equal to 10% per annum of the Accrued Value, accruing and compounding in the manner set forth in Section 3(a) hereof from the Mandatory Redemption Date or the Optional Redemption Date, as applicable, until such shares are redeemed by the Corporation in accordance with Section 4(b) or Section 4(c), as applicable.
(f) No Selective Repurchase Offers. Neither the Corporation nor any of its Subsidiaries shall repurchase any outstanding shares of Series A Preferred Stock unless the Corporation either (i) offers to purchase all of the then outstanding shares of Series A Preferred Stock or (ii) offers to purchase shares of Series A Preferred Stock from the holders in proportion to the respective number of shares of Series A Preferred Stock held by each holder. In any such repurchase by the Corporation, if all shares of Series A Preferred Stock are not being repurchased, then the number of shares of Series A Preferred Stock to be repurchased shall be allocated among all shares of Series A Preferred Stock held by holders which accept the Corporation’s repurchase offer so that the shares of Series A Preferred Stock are repurchased from such holders in proportion to the respective number of shares of Series A Preferred Stock held by each such holder which accepts the Corporation’s offer (or in such other proportion as agreed by all such holders who accept the Corporation’s offer). Nothing in this Section 4(f) shall (i) obligate a holder of shares of Series A Preferred Stock to accept the Corporation’s repurchase offer or (ii) prevent the Corporation from redeeming shares of Series A Preferred Stock in accordance with the terms of (and this Section 4(f) shall not apply to) Sections 4(a) through 4(e).
SECTION 5. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event the Corporation shall (i) commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law, (ii) consent to the entry of an order for relief in an involuntary case under such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation, or of any substantial part of its property, (iii) make an assignment for the benefit of its creditors, (iv) admit in writing its inability to pay its debts generally as they become due, (v) enter into a transaction which results in a Change of Control of the Corporation, or (vi) otherwise liquidate, dissolve or wind up (any such event, a “ Liquidation ”), each holder of Series A Preferred Stock shall be entitled to receive out of assets
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of the Corporation available for distribution to its shareholders, in preference to any distribution to holders of Junior Securities an amount of cash with respect to each share of Series A Preferred Stock held by such holder equal to the Liquidation Preference.
(b) No full preferential payment on account of any Liquidation shall be made to the holders of any class of Parity Securities unless there shall likewise be paid at the same time to the holders of the Series A Preferred Stock the full amounts to which such holders are entitled with respect to such Liquidation. If, upon any Liquidation, after the distribution of the liquidation preferences to Senior Securities, if any, the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the holders of the outstanding Series A Preferred Stock and outstanding shares of Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the full respective preferential payments that would be payable on such shares of Series A Preferred Stock and such shares of Parity Securities if all amounts payable thereon were payable in full.
(c) After the payment to the holders of shares of the Series A Preferred Stock of the full amount of any liquidating distribution to which they are entitled under this Section 5, the holders of the Series A Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation.
SECTION 6. VOTING RIGHTS.
(a) General. Each holder of Series A Preferred Stock shall have full voting rights and powers, and shall be entitled to vote on all matters put to a vote or consent of shareholders of the Corporation, with each holder of shares of Series A Preferred Stock having the number of votes equal to the quotient obtained by dividing (x) the sum of (i) the aggregate Stated Value of such shares as of the record date for the vote or consent which is being taken, or if no such record date is established, on the date such vote is taken or any consent of shareholders is solicited plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such shares as of such date by (y) the Conversion Price as of such date. The holders of the Series A Preferred Stock and the holders of Common Stock shall vote together as a single class on all matters submitted to a vote of the shareholders of the Corporation, except in cases where a vote of the holders of the Series A Preferred Stock, voting separately as a class, is required by law or by this Article V(C). Holders of Series A Preferred Stock shall be entitled to notice of all shareholders meetings in accordance with the procedures set forth in the Corporation’s Bylaws.
(b) Voting With Respect to Certain Matters. In addition to any matters requiring a separate vote of the Series A Preferred Stock under applicable law, the Corporation shall not, without the prior consent or approval of (A) the holders of at least 50.01% of the issued and outstanding shares of Series A Preferred Stock, voting as a single class, and (B) each Significant Holder:
(i) amend, alter, repeal, restate, or supplement its Articles of Incorporation, Bylaws or this Article V(c) in a manner that alters or changes, in any adverse manner, the powers, preferences, privileges or rights of the Series A Preferred Stock or which
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otherwise would adversely affect the rights, privileges or preferences of the Series A Preferred Stock;
(ii) authorize, issue or otherwise create any shares of Senior Securities, Parity Securities, additional shares of Series A Preferred Stock, or any other debt or equity securities of the Corporation that by their terms are convertible into, or exchangeable or exercisable for, shares of Senior Securities, Parity Securities or additional shares of Series A Preferred Stock, or reissue any shares of Series A Preferred Stock which have been reacquired by the Corporation (whether by redemption or otherwise);
(iii) effect any transaction which would result in a Change of Control of the Corporation.
(iv) authorize or otherwise effectuate a reverse stock split of Series A Preferred Stock.
SECTION 7. CONVERSION.
(a) Terms of Conversion. Each share of Series A Preferred Stock shall be convertible, at the option of the holder thereof, at any time, and from time to time, whether or not the Corporation has given notice of redemption under Section 4, on the terms and conditions set forth in this Section 7, into a number of fully paid and non-assessable shares of Common Stock equal to the quotient obtained by dividing (x) the sum of (i) the Stated Value plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share calculated through and including the date of such conversion by (y) the Conversion Price in effect on the date of such conversion
(b) Adjustment of Conversion Price. The Conversion Price shall be subject to adjustment from time to time as follows:
(i) Stock Dividends, Splits, etc . In case the Corporation shall at any time or from time to time after the Issuance Date (A) declare a dividend or make a distribution on the outstanding shares of Common Stock or securities convertible into Common Stock, in either case, in shares of Common Stock or (B) effect a subdivision, combination, consolidation or reclassification of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then, and in each such case, the Conversion Price in effect immediately prior to such event or the record date therefor, whichever is earlier, shall be adjusted by multiplying such Conversion Price by a fraction of which (x) the numerator is the number of shares of Common Stock that were outstanding immediately prior to such event and (y) the denominator is the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section 7(b)(i) shall become effective (x) in the case of any such dividend or distribution, immediately after the close of business on the date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution, or (y) in the case of any such subdivision, combination, consolidation or reclassification, at the close of business on the day upon which such corporate action becomes effective.
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(ii) Below Market or Conversion Price Issuances . In case the Corporation shall at any time or from time to time after the Issuance Date issue or sell any Common Stock or Convertible Security (collectively, “ Additional Shares ”) without consideration or for a consideration per share (or having a conversion, exchange or exercise price per share) less than the greater of (A) the Closing Price per share of Common Stock on the Business Day immediately preceding the earlier of the issuance, or public announcement of the issuance, of such Additional Shares and (B) the Conversion Price as of the date of such issuance then, and in each such case, the Conversion Price shall be reduced to an amount determined by multiplying the Conversion Price in effect on the day immediately prior to such date by a fraction of which (x) the numerator is the sum of (i) the product of (A) the number of shares of Common Stock outstanding immediately prior to such sale or issuance multiplied by (B) the greater of (1) the then applicable Conversion Price per share and (2) the Closing Price per share of Common Stock on the date preceding the earlier of the issuance or public announcement of the issuance of such Additional Shares (the greater of (1) and (2) above hereinafter referred to as the “ Adjustment Price ”) and (ii) the aggregate consideration receivable by the Corporation for the total number of shares of Common Stock so issued (or into or for which the Convertible Securities are convertible, exercisable or exchangeable), and (y) the denominator equals the product of (i) the sum of (A) the total number of shares of Common Stock outstanding immediately prior to such sale or issue and (B) the number of additional shares of Common Stock issued (or into or for which the Convertible Securities may be converted, exercised or exchanged), multiplied by (ii) the Adjustment Price. An adjustment made pursuant to this subsection (ii) shall be made on the next Business Day following the date on which any such issuance is made and shall be effective retroactively to the close of business on the date of such issuance. Notwithstanding the foregoing, no adjustment (other than as provided for in Section 7(b)(iv)(5)(D)) shall be made pursuant to this Section 7(b)(ii) in connection with any Excluded Issuances.
(iii) Special Dividends; Repurchases . In case the Corporation after the Issuance Date shall (1) distribute to all holders of shares of Common Stock evidences of its indebtedness, assets (excluding any regular periodic cash dividend but including any extraordinary cash dividend), capital stock (other than Common Stock) or rights to subscribe for capital stock (other than Common Stock), or (2) purchase or otherwise acquire for value any shares of Common Stock in an Above Market Repurchase, in each such case the Conversion Price in effect immediately prior to the date of such distribution (or the date immediately prior to the date of the public announcement of such distribution, whichever is earlier) or date of such purchase (or the date immediately prior to the date of the public announcement of such purchase), as applicable, shall be adjusted by multiplying such Conversion Price by a fraction of which (x) the numerator is the remainder (if greater than zero) of (i) the Closing Price per share of Common Stock on such date, minus (ii) the Fair Market Value as of such date of the portion of assets, evidences of indebtedness, capital stock or subscription rights so distributed or paid applicable to one share of Common Stock, and (y) the denominator is the Closing Price per share of Common Stock on such date, such adjustment to become effective immediately prior to the opening of business on the day following the date of distribution or purchase; provided, however, that no adjustment shall be made pursuant to clause (1) of this subparagraph (b)(iii) (A) to the extent each holder of Series A Preferred Stock receives such evidences of indebtedness, assets, capital stock or rights to subscribe for capital stock, as applicable, as Additional Dividends in accordance with the terms of Section 3(b), (B) if such issuance is an Excluded Issuance or (C) if
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an adjustment shall otherwise be made with respect to such distribution or issuance pursuant to Section 7(b)(ii); and further provided, however, that if in any case the numerator of such fraction shall be zero or less than zero, no adjustment shall be made in such case. The Corporation shall provide any holder of Series A Preferred Stock, upon receipt of a written request therefor, with any indenture or other instrument defining the rights of the holders of any indebtedness, assets, subscription rights or capital stock referred to in this subparagraph (b)(iii).
(iv) General . For the purposes of any adjustment of the Conversion Price pursuant to paragraph (ii) of this Section 7(b), the following provisions shall be applicable:
(1) In the case of the issuance of Common Stock or Convertible Securities for cash in a public offering or private placement, the aggregate consideration shall be deemed to be the amount of cash paid before deducting any discounts, commissions or placement fees payable by the Corporation to any underwriter or placement agent in connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, such consideration shall be deemed to be the Fair Market Value thereof.
(3) Subparagraph (2) above notwithstanding, in the case of the issuance of Additional Shares to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of consideration therefore shall be deemed to be the Fair Market Value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock or Convertible Securities, as the case may be.
(4) If Common Stock is sold as a unit with other securities, the aggregate consideration received for such Common Stock shall be deemed to be net of the Fair Market Value of such other securities.
(5) In the case of the issuance of Convertible Securities:
(A) The aggregate maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent reduction of such number) deliverable upon conversion of or in exchange for, or upon the exercise of, such Convertible Securities and subsequent conversion, exchange or exercise thereof shall be deemed to have been issued at the time such Convertible Securities were issued and for a consideration equal to the consideration received by the Corporation for any such Convertible Securities, plus the minimum amount of consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent increase of consideration), if any, to be received by the Corporation upon the conversion, exercise or exchange of such Convertible Securities;
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(B) With respect to any Convertible Securities issued after the Issuance Date for which an adjustment to the Conversion Price previously has been made pursuant to Section 7(b)(ii), on any increase in the number of shares of Common Stock deliverable upon exercise, conversion or exchange of, or a decrease in the exercise price of, such Convertible Securities other than a change resulting from the anti-dilution provisions thereof, the applicable Conversion Price shall forthwith be readjusted retroactively to give effect to such increase or decrease;
(C) With respect to any Convertible Securities issued after the Issuance Date for which an adjustment to the Conversion Price has previously not been made pursuant to Section 7(b)(ii), if there is any increase in the number of shares of Common Stock deliverable upon exercise, conversion or exchange of, or a decrease in the exercise price of, such Convertible Securities other than a change resulting from the anti-dilution provisions thereof, such Convertible Securities shall be treated as if they had been cancelled and reissued and an adjustment to the Conversion Price with respect to such deemed issuance shall be made pursuant to Section 7(b)(ii), if applicable;
(D) With respect to any Convertible Securities issued prior to the Issuance Date, if there is any increase in the number of shares of Common Stock deliverable upon exercise, conversion or exchange of, or a decrease in the exercise price of, such Convertible Securities other than a change resulting from the anti-dilution provisions thereof, such Convertible Securities shall be treated as if they had been cancelled and reissued and an adjustment to the Conversion Price with respect to such deemed issuance shall be made pursuant to Section 7(b)(ii), if applicable; and
(E) No further adjustment of the Conversion Price adjusted upon the issuance of any such Convertible Securities shall be made as a result of the actual issuance of Common Stock upon the exercise, conversion or exchange of any such Convertible Securities.
(v) Rights Distributions . Rights or warrants issued by the Corporation to all holders of Common Stock entitling the holders thereof to subscribe for or purchase capital stock of the Corporation, which rights or warrants (1) are deemed to be transferred with such shares of Common Stock, (2) are not exercisable and (3) are also issued in respect of future issuances of Common Stock, including shares of Common Stock issued upon conversion of shares of Series A Preferred Stock, in each case in clauses (1) through (3) until the occurrence of a specified event, shall for purposes of subparagraphs (b)(ii) and (b)(iii) not be deemed issued until the occurrence of the earliest such specified event.
(vi) Calculations . All calculations of the Conversion Price shall be made to the nearest five decimal places. Anything in Section 7(b) to the contrary notwithstanding, in no event shall the then current Conversion Price be increased as a result of
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any calculation made at any time pursuant to Sections 7(b)(ii) through 7(b)(iv). No adjustment to the Conversion Price pursuant to paragraph 7(b) shall be required unless such adjustment would require an increase or decrease of at least 1% in the Conversion Price; provided, however, that any adjustments which by reason of this paragraph 7(b)(vii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. Notwithstanding any other provision of this Section 7(b), no adjustment to the Conversion Price shall reduce the Conversion Price below $0.01, and any such purported adjustment shall instead reduce the Conversion Price to $0.01.
(vii) Outstanding Shares . The number of shares of Common Stock at any time outstanding shall include all shares of Common Stock outstanding at such time and any shares of Common Stock issuable upon conversion of or in exchange for any convertible or exchangeable security or upon the exercise of any option. The number of shares of Common Stock at any time outstanding shall not include any shares of Common Stock then owned or held by or for the account of the Corporation or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock.
(viii) Successive Adjustments . Successive adjustments in the Conversion Price shall be made, without duplication, whenever any event specified in Sections 7(b)(i) through 7(b)(iii) shall occur.
(c) Reorganization, Consolidation, Merger, Asset Sale.
(i) In case of any capital reorganization or reclassification of outstanding shares of Common Stock (other than a reclassification covered by Section 7(b)), or in case of any consolidation or merger of the Corporation with or into another Person, or in case of any sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation) of all or substantially all of the Corporation’s assets, on a consolidated basis, in one transaction or a series of related transactions, to any Person (including any group that is deemed to be a Person) not otherwise constituting a Liquidation in accordance with Section 5 (each of the foregoing being referred to as a “ Transaction ”), in each case which is effected in such a manner that the holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock or other securities or property (including cash) with respect to or in exchange for Common Stock, shares of Series A Preferred Stock then outstanding shall thereafter be convertible into, in lieu of the Common Stock issuable upon such conversion prior to the consummation of such Transaction, the kind and amount of shares of stock and other securities and property (including cash) receivable upon the consummation of such Transaction by a holder of that number of shares of Common Stock into which one share of Series A Preferred Stock was convertible (without regard to any limitation on conversion contained herein, the availability of authorized and unissued shares for issuance upon conversion, or otherwise) immediately prior to the consummation of such Transaction. In any such case, the Corporation or the person formed by the consolidation or resulting from the merger or which acquires such assets or which acquires the Corporation’s shares, as the case may be, shall make or cause to be made appropriate provisions (as determined in good faith by the Board of Directors) in the applicable agreement of merger or consideration, its certificate or articles of incorporation or other constituent documents to ensure that the provisions of Sections 2-3, 4(b)-(f) and 5-7 herein will continue to be applicable to the Series A Preferred Stock or any such other
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shares of stock and other securities (other than Common Stock) and property deliverable upon conversion of the shares of Series A Preferred Stock remaining outstanding following the Transaction. In case securities or property other than Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all references in this Section 7 shall be deemed to apply, so far as appropriate and as nearly as may be, to such other securities or property. The provisions of this Section 7(c) shall similarly apply to successive Transactions. The Corporation shall give written notice to the holders of Series A Preferred Stock at least 30 days prior to the date on which any Transaction or Change of Control or similar transaction affecting the Corporation shall take place.
(ii) Notwithstanding anything contained herein to the contrary, the Corporation will not effect any Transaction unless, prior to the consummation thereof, the Surviving Person, if other than the Corporation, shall mail, by first-class mail, postage prepaid, to each record holder of shares of Series A Preferred Stock, at such holder’s address as it appears on the transfer books of the Corporation, (A) a written instrument assuming the obligation to deliver to such holder such cash, property and securities to which, in accordance with the foregoing provisions, such holder is entitled, and (B) an opinion of outside counsel for such Surviving Person stating that such assumption agreement is a valid, binding and enforceable agreement of the Surviving Person.
(iii) Nothing contained in this Section 7(c) shall limit the rights of holders of the Series A Preferred Stock to convert the Series A Preferred Stock, to require the Corporation to effect a redemption or to vote their shares of Series A Preferred Stock in connection with a Transaction.
(d) Reports. Whenever the number of shares of Common Stock into which each share of Series A Preferred Stock is convertible is adjusted as provided in this Section 7, the Corporation shall promptly mail to the holders of record of the outstanding shares of Series A Preferred Stock, at their respective addresses as the same shall appear in the Corporation’s transfer books, a certificate signed by an executive officer stating that the number of shares of Common Stock into which the shares of Series A Preferred Stock are convertible has been adjusted (setting forth in reasonable detail and certifying the calculation of such adjustment), the new number of shares of Common Stock (or describing the new stock, securities, cash or other property) into which each share of Series A Preferred Stock is convertible as a result of such adjustment, a brief statement of the facts requiring such adjustment and when such adjustment became effective. The Corporation shall give the holders of Series A Preferred Stock written notice at least 20 days prior to the date on which the Corporation closes its books or takes a record (i) with respect to any dividend or distribution upon Common Stock, (ii) with respect to any pro rata subscription offer to holders of Common Stock or (iii) for determining rights to vote with respect to any Transaction.
(e) Conversion Procedures.
(i) The holder of any shares of Series A Preferred Stock may exercise its right to convert any or all such outstanding shares into shares of Common Stock at any time by surrendering for such purpose to the Corporation, at its principal office or at such other office or agency maintained by the Corporation for that purpose, a certificate or certificates
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representing the shares of Series A Preferred Stock to be converted, duly endorsed to the Corporation in blank, accompanied by a written notice stating that such holder elects to convert all or a specified whole number of such shares in accordance with the provisions of this Section 7. Upon delivery to the Corporation by a holder of shares of Series A Preferred Stock of a notice of election to convert, the right of the Corporation to redeem such shares of Series A Preferred Stock shall terminate, regardless of whether a notice of redemption as described in Section 4(d) has been mailed. The Corporation will pay any and all documentary, stamp or similar issue or transfer tax that may be payable in respect of any issue or delivery of shares of Common Stock to the holder on conversion of the Series A Preferred Stock pursuant hereto.
(ii) As promptly as practicable, and in any event within five Business Days after the surrender of such certificate or certificates and the receipt of such notice relating thereto and, if applicable, payment of all transfer taxes (or the demonstration to the reasonable satisfaction of the Corporation that such taxes are inapplicable), the Corporation shall deliver or cause to be delivered (i) certificates (which shall bear legends, if appropriate) registered in the name of such holder representing the number of full shares of Common Stock to which the holder of shares of Series A Preferred Stock so converted shall be entitled, (ii) if less than the full number of shares of Series A Preferred Stock evidenced by the surrendered certificate or certificates are being converted, a new certificate or certificates for the number of shares evidenced by such surrendered certificate or certificates less the number of shares converted and (iii) payment of all amounts to which a holder is entitled pursuant to Section 7(f) hereof. All shares of Common Stock issuable upon conversion of the Series A Preferred Stock will be made without charge to the holders of Series A Preferred Stock and upon issuance will be fully paid and non-assessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof. Such conversion shall be deemed to have been made at the close of business on the date of receipt of such notice and of such surrender of the certificate or certificates representing the shares of Series A Preferred Stock to be converted so that the rights of the holder thereof as to the shares being converted shall cease except for the right to receive shares of Common Stock and any payment of amounts due pursuant to Section 7(f), and the person entitled to receive the shares of Common Stock shall be treated for all purposes as having become the record holder of such shares of Common Stock at such time.
(iii) If a conversion of Series A Preferred Stock is to be made in connection with a Transaction or Change of Control or a similar transaction affecting the Corporation (other than a tender or exchange offer), the conversion of any shares of Series A Preferred Stock may, at the election of the holder thereof, be conditioned upon the consummation of such transaction, in which case such conversion shall not be deemed to be effective until such transaction has been consummated. In connection with any tender or exchange offer for shares of Common Stock, holders of Series A Preferred Stock shall have the right to tender (or submit for exchange) shares of Series A Preferred Stock in such a manner so as to preserve the status of such shares as Series A Preferred Stock until immediately prior to such time as shares of Common Stock are to be purchased (or exchanged) pursuant to such offer, at which time that portion of the shares of Series A Preferred Stock so tendered which is convertible into the number of shares of Common Stock to be purchased (or exchanged) pursuant to such offer shall be deemed converted into the appropriate number of shares of Common Stock. Any shares of Series A Preferred Stock not so converted shall be returned to the holder as Series A Preferred Stock.
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(iv) The Corporation shall not close its books against the transfer of Series A Preferred Stock or of Common Stock issued or issuable upon conversion of Series A Preferred Stock in any manner which unreasonably interferes with the timely conversion of Series A Preferred Stock.
(f) Fractional Shares. In connection with the conversion of any shares of Series A Preferred Stock pursuant to this Section 7, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Closing Price per share of Common Stock on the day on which such shares of Series A Preferred Stock are deemed to have been converted. If more than one share of Series A Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the total number of shares of Series A Preferred Stock so surrendered.
(g) Reservation of Shares. The Corporation shall (i) prior to the date of the Stockholder Approval, at all times reserve and keep available, free from liens, charges and security interests and not subject to any preemptive rights solely for issuance upon conversion of the Series A Preferred Stock, the Available Shares and to ensure that the Available Shares may be issued without violation of any applicable law or regulation or of any requirement of any securities exchange or inter-dealer quotation system on which the Available Shares may be listed or traded, and (ii) from and after the date of the Stockholder Approval, at all times reserve and keep available, free from liens, charges and security interests and not subject to any preemptive rights, solely for issuance upon conversion of the Series A Preferred Shares, the number of shares of Common Stock from time to time issuable upon conversion of all shares of the Series A Preferred Stock at the time outstanding and to ensure that the shares of Common Stock may be issued without violation of any applicable law or regulation or of any requirement of any securities exchange or inter-dealer quotation system on which the shares of Common Stock may be listed or traded.
(h) Certain Events. If an event not specifically provided for in this Section 7 occurs which would have an inequitable or dilutive effect on the relative percentage ownership interests of the holders of Series A Preferred Stock as those specifically provided for in this Section 7, then the Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series A Preferred Stock.
(i) Mandatory Conversion. Provided that the Stockholder Approval has been obtained and the Corporation has a sufficient number of shares of Common Stock duly authorized and reserved for issuance upon conversion of all of the outstanding shares of Series A Preferred Stock, on October 8, 2006 (the " Mandatory Conversion Date ”), whether or not the Corporation has given notice of a redemption pursuant to Section 4, each share of Series A Preferred Stock shall, immediately automatically convert into fully paid and non-assessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series A Preferred Stock shall be entitled upon such automatic conversion shall be determined by dividing (x) (i) the Stated Value plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share by (y) the Conversion Price in effect on the date of such conversion. Any conversion pursuant to this Section 7(i) shall occur automatically
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and without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. Upon the occurrence of such automatic conversion of the Series A Preferred Stock, the Corporation shall provide written notice to the holders of the Series A Preferred Stock and the holders of the Series A Preferred Stock shall, a reasonable time thereafter, surrender the certificates representing such shares at the office of the Corporation or any transfer agent for the Series A Preferred Stock. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on the Corporation’s stock records, a certificate or certificates for the number of shares of Common Stock into which the shares of Series A Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred. All certificates evidencing shares of Series A Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the occurrence of the Mandatory Conversion Event, be deemed to have been retired and cancelled and the shares of Series A Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates.
(j) Automatic Conversion on Conversion Trigger Date.
(i) Provided the Stockholder Approval has been obtained, and the Corporation has a sufficient number of shares of Common Stock duly authorized and reserved for issuance upon conversion of all of the outstanding shares of Series A Preferred Stock, upon the occurrence of any Conversion Trigger Date, all of the then outstanding shares of Series A Preferred Stock shall be immediately and automatically converted into fully paid and non-assessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series A Preferred Stock shall be entitled upon such conversion shall be determined by dividing (x) the sum of (i) the Stated Value plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share by (y) the Conversion Price in effect at the close of business on the Business Day immediately preceding such Conversion Trigger Date.
(ii) Mechanics. Any conversion pursuant to this Section 7(j) shall occur automatically and without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. Upon the occurrence of such automatic conversion of the Series A Preferred Stock, the Corporation shall provide written notice to the holders of the Series A Preferred Stock and the holders of the Series A Preferred Stock shall, a reasonable time thereafter, surrender the certificates representing such shares at the office of the Corporation or any transfer agent for the Series A Preferred Stock. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on the Corporation’s stock records, a certificate or certificates for the number of shares of Common Stock into which the shares of Series A Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred. All certificates evidencing shares of Series A Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the date of such conversion, be deemed to have been retired and cancelled and the shares of Series A Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates.
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SECTION 8. REACQUIRED SHARES.
Any shares of Series A Preferred Stock converted, redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof.
SECTION 9. NO PREEMPTIVE RIGHTS.
Holders of Series A Preferred Stock shall not have any preemptive right pursuant to this Article V(C) to subscribe to any additional issue of stock or to any security convertible into such stock. Nothing herein shall limit the power of the Corporation to grant any of the foregoing rights to persons by contract or otherwise or the power of any person, including, without limitation, the holders of Series A Preferred Stock, to exercise any of the foregoing rights granted to them by contract or otherwise.
SECTION 10. GENERAL PROVISIONS.
(a) Headings. The headings of the sections, paragraphs, subparagraphs, clauses and subclauses of this Article V(C) are for convenience of reference only and shall not define, limit or affect any of the provisions hereof.
(b) Waivers. In the event that (A) the holders of at least 50.01% of the issued and outstanding shares of Series A Preferred Stock, voting as a single class, and (B) each Significant Holder, shall consent to waive compliance by the Corporation with any provision of, or a breach by the Corporation of any provision of, this Article V(C), all holders of outstanding shares of Series A Preferred Stock shall be bound by such waiver.
SECTION 11. DEFINITIONS.
For the purposes of this Article V(C):
“ Above Market Repurchase ” shall mean any purchase (by tender or exchange offer, open market purchase, privately negotiated purchase or otherwise) of all or any portion of the Corporation’s Common Stock where such purchase is for aggregate consideration having a Fair Market Value as of the earlier of (i) the date of such purchase or (ii) the date immediately prior to the date of the public announcement of such purchase, that exceeds the product of (x) the aggregate number of shares being purchased, multiplied by (y) the Closing Price of the Common Stock on such date.
“ Accrued Value ” means, with respect to a share of Series A Preferred Stock, as at any date, the sum of (as adjusted for any split, subdivision, combination, consolidation, recapitalization or similar event with respect to the Series A Preferred Stock) (i) the Stated Value plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share through and including such date which have been added to Accrued Value pursuant to Section 3(a)(ii).
“ Additional Dividends ” has the meaning set forth in Section 3(b) above.
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“ Additional Shares ” has the meaning set forth in Section 7(b)(ii) above.
“ Adjustment Price ” has the meaning set forth in Section 7(b)(ii) above.
“ Affiliate ” shall have the meaning set forth in Rule 12b-2 promulgated by the Securities and Exchange Commission under the Exchange Act.
“ Available Shares ” shall have the meaning ascribed thereto in the Preferred Stock Purchase Agreement.
“ Business Day ” means any day other than a Saturday, Sunday, or a day on which commercial banks in the City of New York are authorized or obligated by law or executive order to close.
“ Change of Control ” means (i) any sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation) of all or substantially all of the Corporation’s assets, on a consolidated basis, in one transaction or a series of related transactions, to any Person (including any group that is deemed to be a Person) other than the Initial Purchasers or their respective Affiliates; (ii) any Person (including any group that is deemed to be a Person) other than the Initial Purchasers or any of their respective Affiliates, is or becomes the “beneficial owner” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) directly or indirectly, of more than 50% of the combined voting power of the Voting Securities of the Corporation (or the surviving entity or entities of a transaction or a series of related transactions if other than the Corporation); (iii) the Continuing Directors cease for any reason to constitute a majority of the members of the Board of Directors then in office; (iv) a merger or consolidation of the Corporation with any other company, other than a merger or consolidation resulting in the Voting Securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the Voting Securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation; or (v) the Corporation adopts, voluntarily or involuntarily, a plan of liquidation or dissolution.
“ Closing Price ” per share of Common Stock on any date shall be the closing sale price on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Stock or such other securities are listed or admitted to trading or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotation System or such other system then in use, or, if on any such date the Common Stock or such other securities are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker, selected by the Board of Directors and reasonably acceptable to the holders of a majority of the outstanding shares of Series A Preferred Stock, making a market in the Common Stock or such other securities of the Corporation.
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“ Common Stock ” means the common stock, no par value per share, of the Corporation.
“ Continuing Directors ” means the individuals who are members of the Corporation’s Board of Directors as of the Issuance Date; provided, however, that if the election, or nomination for election by the Corporation’s shareholders, of any new director was approved by a vote of at least a majority of the Continuing Directors, such new director shall be considered a “Continuing Director”.
“ Conversion Notice ” has the meaning set forth in Section 7(j)(ii) above.
“ Conversion Price ” means the Initial Conversion Price, subject to adjustment as provided in Section 7(b).
“ Conversion Trigger Date ” shall mean any date on which the Closing Price per share of Common Stock for at least 20 consecutive Trading Days immediately preceding such date, including the last Trading Day of such period, exceeds $4.00 per share (as adjusted for any split, subdivision, combination, consolidation, recapitalization or similar event with respect to the Common Stock).
“ Convertible Securities ” shall mean any options or warrants to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock, or options or warrants to purchase or rights to subscribe for such convertible or exchangeable securities.
“ Dividend Payment Date ” means each of March 31, June 30, September 30 and December 31, except that if such date is not a Business Day then the Dividend Payment Date shall be the next day that is a Business Day.
“ Dividend Period ” means the Initial Dividend Period and, thereafter, each quarterly period from and including a Dividend Payment Date to the next following Dividend Payment Date (but without including such later Dividend Payment Date).
“ Dividend Rate ” has the meaning set forth in Section 3(a)(i).
“ Exchange Act ” means the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder.
“ Excluded Issuances ” means the issuance or reissuance of any shares of Common Stock or Convertible Securities (whether treasury shares or newly issued shares) pursuant to or in connection with (1) a dividend or distribution on, or subdivision, combination, consolidation or reclassification of, the outstanding shares of Common Stock requiring an adjustment in the Conversion Price pursuant to Section 7(b)(i), (2) any Convertible Security outstanding as of the Issuance Date (except as otherwise provided in Section 7(b)(iv)(5)(D)), including, without limitation, the Note Warrants and the Preferred Stock Warrants (3) the conversion of shares of Series A Preferred Stock, (4) the grant or exercise of any stock or stock options to employees, directors or consultants of the Corporation that may be granted to or exercised by any employee, director or consultant under any stock option or similar benefit plan of the Corporation now existing or to be implemented in the future, (5) any transaction involving the Corporation’s
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issuance of securities in connection with an acquisition (the primary purpose of which is not to raise equity capital), (6) any transaction involving the Corporation’s issuance of securities in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), (7) any issuance of securities by the Corporation as consideration for the acquisition of a license by the Corporation, (8) the issuance of securities pursuant to any financing from a bank or similar financial or lending institution approved by the Board of Directors, or (9) the issuance of warrants to purchase Common Stock pursuant to the Warrant Agreements; provided, however, that issuances of securities described in the forgoing sub-clauses (4), (6), (7) and (8) subsequent to the Issuance Date which exceed, in the aggregate, 10% of the outstanding Common Stock of the Corporation outstanding as of the Issuance Date (as adjusted for any split, subdivision, combination, consolidation, recapitalization or similar event with respect to the Common Stock), as determined on a fully-diluted basis, shall not be deemed to be Excluded Issuances.
“ Fair Market Value ” with respect to any securities, assets or property shall mean the fair value thereof as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board of Directors and acceptable to the holders of a majority of the outstanding shares of Series A Preferred Stock; provided, that, the value of any securities that trade on a national securities exchange or inter-dealer quotation system shall be the Closing Price thereof as of the date such value is determined.
“ Initial Conversion Price ” means $0.75.
“ Initial Dividend Period ” means the dividend period commencing on the Issuance Date and ending on (and including) the date immediately prior to the first Dividend Payment Date to occur thereafter.
“ Initial Purchasers ” means the initial Purchasers of the Series A Preferred Stock pursuant to the Preferred Stock Purchase Agreement.
“ Issuance Date ” means with respect to any share of Series A Preferred Stock, the date on which the Corporation initially issues such share of Series A Preferred Stock, regardless of the number of times transfer of such share is made on the stock records of the Corporation and regardless of the number of certificates which may be issued to evidence such share.
“ Junior Securities ” shall mean the Corporation’s Common Stock and all classes and series of capital stock of the Corporation now or hereafter authorized, issued or outstanding which by their terms expressly provide that they are junior to the Series A Preferred Stock, or which do not specify their rank, with respect to payment of dividends and the distribution of assets upon liquidation, winding up or dissolution. This definition of Junior Securities shall include, without limitation, any Convertible Securities exercisable or exchangeable for or convertible into any Junior Securities.
“ Junior Securities Distribution ” means the declaration or payment on account of, or setting apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any Junior Securities or any Convertible Securities exercisable or
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exchangeable for or convertible into any shares of Junior Securities, or any distribution in respect thereof (except for (i) dividends on Junior Securities which are payable solely in additional shares of Junior Securities, or by the increase in the liquidation value of Junior Securities, in each case, as required by the terms of such Junior Securities, or (ii) cashless exercises of options), either directly or indirectly, and whether in cash, obligations, Common Stock, Convertible Securities or other property, or the purchase or redemption by any corporation or other entity directly or indirectly controlled by the Corporation of any of the Junior Securities or any Convertible Securities exercisable or exchangeable for or convertible into any Junior Securities.
“ Liquidation ” has the meaning set forth in Section 5(a) above.
“ Liquidation Preference ” means the greater of (x) the sum of (i) the Stated Value plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share and (y) the amount that would be payable to such holder in the Liquidation in respect of Common Stock issuable upon conversion of such share of Series A Preferred Stock if all outstanding shares of Series A Preferred Stock were converted into Common Stock immediately prior to the Liquidation in accordance with Section 7 hereof.
“ Mandatory Conversion Date ” has the meaning set forth in Section 7(i) above.
“ Mandatory Redemption Date ” has the meaning set forth in Section 4(b) above.
“ Note Warrants ” has the meaning ascribed thereto in the Preferred Stock Purchase Agreement.
“ Optional Redemption Date ” has the meaning set forth in Section 4(d)(ii) above.
“ Parity Securities ” means each class or series of capital stock issued by the Corporation after the date hereof the terms of which specifically provide that such class or series will rank on a parity with the Series A Preferred Stock with respect to payment of dividends and the distribution of assets upon liquidation, winding up or dissolution. This definition of Parity Securities shall include, without limitation, any Convertible Securities exercisable or exchangeable for or convertible into any Parity Securities.
“ Parity Securities Distribution ” means the declaration or payment on account of, or setting apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of (other than by conversion into or exchange for Junior Securities), any Convertible Securities exercisable or exchangeable for or convertible into any shares of Parity Securities, or any distribution in respect thereof (except for (i) dividends on Parity Securities which are payable solely in additional shares of Parity Securities, or by the increase in the liquidation value of Parity Securities, in each case, as required by the terms of such Parity Securities or (ii) cashless exercises of options), either directly or indirectly, and whether in cash, obligations, Common Stock, Convertible Securities or other property, or the purchase or redemption by any corporation or other entity directly or indirectly controlled by the Corporation of any of the Parity Securities or any Convertible Securities exercisable or exchangeable for or convertible into any Parity Securities.
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“ Person ” means an individual, corporation, limited liability company or partnership, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof, or other entity of any kind.
“ Preferred Stock Purchase Agreement ” means the Preferred Stock Purchase Agreement dated as of September 25, 2003, by and among the Company and the Purchasers described therein.
“ Preferred Stock Warrants ” has the meaning ascribed thereto in the Preferred Stock Purchase Agreement.
“ Redemption Date ” means the Mandatory Redemption Date or the Optional Redemption Date, as applicable.
“ Redemption Obligation ” means any unsatisfied obligation of the Corporation to redeem shares of Series A Preferred Stock pursuant to Sections 4(b) or 4(c) hereof.
“ Redemption Price ” means the sum of (i) the Stated Value plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share calculated through and including the Mandatory Redemption Date.
“ Required Date ” has the meaning set forth in Section 3(a)(i).
“ Senior Securities ” means each class or series of capital stock issued by the Corporation after the date hereof the terms of which specifically provide that such class or series will rank senior to the Series A Preferred Stock with respect to payment of dividends and the distribution of assets upon liquidation, winding up or dissolution. This definition of Senior Securities shall include, without limitation, any Convertible Securities exercisable or exchangeable for or convertible into any Senior Securities.
“ Series A Preferred Stock ” has the meaning set forth in Section 1 above.
“ Significant Holder ” shall mean as of any date, any holder of Series A Preferred Stock that was issued at least 25,000 shares of Series A Preferred Stock on the original Issuance Date; provided, that, from and after the original Issuance Date, in the event that any Significant Holder shall transfer in the aggregate (in one or more transactions) more than 50% of the shares of Series A Preferred Stock originally issued to such Significant Holder on the original Issuance Date (as adjusted for any stock dividends, combinations, splits, reclassifications or other similar events affecting the number of outstanding shares of the Series A Preferred Stock) to any Person that is not an Affiliate of such Significant Holder, such Significant Holder shall no longer constitute a Significant Holder from and after such date of transfer.
“ Stated Value ” means, with respect to a share of Series A Preferred Stock, $100 (as adjusted for any split, subdivision, combination, consolidation, recapitalization or similar event with respect to the Series A Preferred Stock).
“ Stockholder Approval ” means the approval by the stockholders of the Corporation authorizing a number of shares of Common Stock so that the Corporation shall have a sufficient
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number of shares of Common Stock duly authorized and reserved for issuance upon conversion of the Series A Preferred Stock, the Preferred Stock Warrants, the Note Warrants and any warrants issued or to be issued pursuant to the Warrant Agreements.
“ Subsidiary ” of any Person means any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person.
“ Surviving Person ” means the continuing or surviving Person of a merger, consolidation or other corporate combination, the Person receiving a transfer of all or a substantial part of the properties and assets of the Corporation, or the Person consolidating with or merging into the Corporation in a merger, consolidation or other corporate combination in which the Corporation is the continuing or surviving Person, but in connection with which the Series A Preferred Stock or Common Stock of the Corporation is exchanged, converted or reinstated into the securities of any other Person or cash or any other property; provided, however, if such Surviving Person is a direct or indirect Subsidiary of a Person, the parent entity shall be deemed to be a Surviving Person.
“ Trading Day ” means a day on which the principal national securities exchange on which the Common Stock is quoted, listed or admitted to trading is open for the transaction of business or, if the Common Stock is not quoted, listed or admitted to trading on any national securities exchange (or the Nasdaq Stock Market), any Business Day.
“ Transaction ” has the meaning set forth in Section 7(c) above.
“ Voting Securities ” mean the Common Stock, the Series A Preferred Stock and any other securities of the Corporation having the voting power under ordinary circumstances with respect to the election of directors of the Corporation.
“ Warrant Agreements ” (a) the Warrant Agreement, dated as of October 7, 2003, between the Corporation and The John N. Kapoor Trust, dtd 9/20/89 and (b) the Warrant Agreement, dated as of October 7, 2003, between the Corporation and Arjun Waney, whereby in consideration for having such parties enter into a personal guaranty under the Corportion’s credit facility, the Corporation will grant warrants to such parties.
D. A series of authorized Preferred Stock, par value $1.00 per share, of the Corporation is hereby created having the designation and amount, the voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions set forth below.
SECTION 1. DESIGNATION AND AMOUNT.
The shares of such series shall be designated as the “Series B 6.0% Participating Convertible Preferred Stock” (the “Series B Preferred Stock”) and the number of shares constituting such series shall be 170,000 shares of Series B Preferred Stock.
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SECTION 2. RANK.
The Series B Preferred Stock shall, with respect to payment of dividends, distributions and the distribution of assets upon liquidation, winding up or dissolution, rank (i) senior to all Junior Securities, (ii) on a parity with all Parity Securities and (iii) junior to all Senior Securities.
SECTION 3. DIVIDENDS AND DISTRIBUTIONS.
(a) Payment and Accrual of Dividends.
(i) The holders of shares of Series B Preferred Stock shall be entitled to receive on each Dividend Payment Date, in respect of the Dividend Period ending on (and including) the date immediately prior to such Dividend Payment Date, dividends on each share of Series B Preferred Stock at the rate of 6.0% (the “Dividend Rate”) per annum on the Accrued Value thereof from and after the Issuance Date, provided that with respect to the Initial Dividend Period, the dividends set forth above shall be prorated based on the number of days in such period. Such dividends shall be fully cumulative and accumulate and accrue on a daily basis (computed on the basis of a 360-day year of twelve 30-day months) and compound quarterly in arrears on the Dividend Payment Dates at the rate indicated above and in the manner set forth herein, whether or not they have been declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. If the Corporation at any time does not have a sufficient number of shares of Common Stock duly authorized and reserved for issuance upon conversion of all of the outstanding shares of Series B Preferred Stock, shares of the Series B Preferred Stock shall accrue dividends at a rate equal to 10.0% per annum of the Accrued Value, accruing and compounding in the manner set forth in this Section 3(a) from such date until such shares are converted into shares of Common Stock, in each case in accordance with this Article V(D).
(ii) Such dividends shall, at the option of the Company, either be paid in cash or accrue and compound and be added to the Accrued Value on the applicable Dividend Payment Dates, provided, however, that all dividends payable on any given Dividend Payment Date must either (i) all be paid in cash or (ii) all accrue and compound and be added to the Accrued Value, in each case on the Dividend Payment Date. Each such dividend which is payable in cash shall be payable on the Dividend Payment Date to the holders of record of shares of the Series B Preferred Stock, as they appear on the transfer books of the Corporation at the close of business on the day immediately preceding such Dividend Payment Date. Any dividend that is not otherwise paid in cash on the applicable Dividend Payment Date (whether due to the Company’s election not to pay such dividend in cash, its inability to pay such dividend in cash, or otherwise) shall automatically, and without any action on the part of the Corporation, accrue and compound and be added to the Accrued Value on such Dividend Payment Date.
(b) Additional Dividends. In addition to dividends payable pursuant to Section 3(a) hereof, in the event any dividends are declared or paid or any other distribution is made on or with respect to the Common Stock, the holders of the Series B Preferred Stock as of the record date established by the Board of Directors for such dividend or distribution on the Common Stock shall be entitled to receive as additional dividends (the “Additional Dividends”) an amount (whether in the form of cash, securities or other property) equal to the amount (and in
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the form) of the dividends or distribution that such holder would have received had the Series B Preferred Stock been converted into Common Stock (without regard to any limitation on conversion contained herein, the availability of authorized and unissued shares for issuance upon conversion, or otherwise) as of the date immediately prior to the record date of such dividend or distribution on the Common Stock; provided, however, that if the Corporation declares and pays a dividend or makes a distribution on the Common Stock consisting in whole or in part of Common Stock or Convertible Securities, then no such dividend or distribution shall be payable in respect of the Series B Preferred Stock on account of the portion of such dividend or distribution on the Common Stock payable in Common Stock or Convertible Securities to the extent that the applicable anti-dilution adjustment under Section 7(b)(i) below shall be made in connection therewith. The record date for any such Additional Dividends shall be the record date for the applicable dividend or distribution on the Common Stock, and any such Additional Dividends shall be payable on the same payment date as the payment date for the dividend on the Common Stock established by the Board of Directors.
(c) Restricted Payments.
(i) Junior Securities. So long as any shares of Series B Preferred Stock remain outstanding, the Corporation shall not, directly or indirectly, make any Junior Securities Distribution unless (A) all accrued and unpaid dividends on the shares of Series B Preferred Stock shall have been paid in cash and (B) sufficient consideration shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series B Preferred Stock and the current dividend period with respect to any Parity Securities.
(ii) Parity Securities. So long as any shares of Series B Preferred Stock remain outstanding, the Corporation shall not make any Parity Securities Distribution unless (A) all accrued and unpaid dividends on the shares of Series B Preferred Stock shall have been paid in cash and (B) sufficient consideration shall have been paid or set apart for the payment of the dividend for the current Dividend Period with respect to the Series B Preferred Stock and the current dividend period with respect to any Parity Securities; provided, that, dividends may be declared and paid on Parity Securities if dividends are declared and paid on the Series B Preferred Stock (in accordance with the terms of Section 3(a)) ratably in proportion to the respective aggregate amounts of dividends accumulated and unpaid on such Parity Securities and accumulated and unpaid on the Series B Preferred Stock.
(d) Priority With Respect to Junior Securities. Holders of shares of Series B Preferred Stock shall be entitled to receive the dividends provided for in this Section 3 in preference to and in priority over any dividends upon any Junior Securities.
SECTION 4. REDEMPTION.
The Corporation shall have no right to redeem any shares of Series B Preferred Stock.
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SECTION 5. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event the Corporation shall (i) commence a voluntary case under the Federal bankruptcy laws or any other applicable Federal or state bankruptcy, insolvency or similar law, (ii) consent to the entry of an order for relief in an involuntary case under such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of the Corporation, or of any substantial part of its property, (iii) make an assignment for the benefit of its creditors, (iv) admit in writing its inability to pay its debts generally as they become due, (v) enter into a transaction which results in a Change of Control of the Corporation, or (vi) otherwise liquidate, dissolve or wind up (any such event, a “Liquidation”), each holder of Series B Preferred Stock shall be entitled to receive out of assets of the Corporation available for distribution to its shareholders, in preference to any distribution to holders of Junior Securities an amount of cash with respect to each share of Series B Preferred Stock held by such holder equal to the Liquidation Preference.
(b) No full preferential payment on account of any Liquidation shall be made to the holders of any class of Parity Securities unless there shall likewise be paid at the same time to the holders of the Series B Preferred Stock the full amounts to which such holders are entitled with respect to such Liquidation. If, upon any Liquidation, after the distribution of the liquidation preferences to Senior Securities, if any, the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the holders of the outstanding Series B Preferred Stock and outstanding shares of Parity Securities, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the full respective preferential payments that would be payable on such shares of Series B Preferred Stock and such shares of Parity Securities if all amounts payable thereon were payable in full.
(c) After the payment to the holders of shares of the Series B Preferred Stock of the full amount of any liquidating distribution to which they are entitled under this Section 5, the holders of the Series B Preferred Stock as such shall have no right or claim to any of the remaining assets of the Corporation.
SECTION 6. VOTING RIGHTS.
(a) General. Each holder of Series B Preferred Stock shall have full voting rights and powers, and shall be entitled to vote on all matters put to a vote or consent of shareholders of the Corporation, other than matters on which only one or a limited number of specified classes or series of shares (other than the Series B Preferred Stock) or other instruments is entitled by law or these articles of incorporation to vote or consent, with each holder of shares of Series B Preferred Stock having the number of votes equal to the quotient obtained by dividing (x) the sum of (i) the aggregate Stated Value of such shares as of the record date for the vote or consent which is being taken, or if no such record date is established, on the date such vote is taken or any consent of shareholders is solicited plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such shares as of such date by (y) the Conversion Price as of such date. The holders of the Series B Preferred Stock, the holders of the Series A Preferred Stock, and the holders of Common Stock shall vote together as a single class on all matters submitted to a vote of the shareholders of the Corporation, except in cases where a vote of the holders of the Series B Preferred Stock, voting separately as a class, is
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required by law or by this Article V(D). The holders of the Series B Preferred Stock shall vote as part of a single class with the holders of Common Stock, the holders of the Series A Preferred Stock and the holders of other voting stock and instruments of the Corporation, if any, on all matters submitted to a vote of the shareholders of the Corporation, except in cases where a vote of the holders of the Series B Preferred Stock or the holders of only one or more other specified classes or series of shares or other instruments, voting separately as a class, is required by law or by these articles of incorporation. Holders of Series B Preferred Stock shall be entitled to notice of all shareholders meetings in accordance with the procedures set forth in the Corporation’s Bylaws.
(b) Voting With Respect to Certain Matters. In addition to any matters requiring a separate vote of the Series B Preferred Stock under applicable law, the Corporation shall not, without the prior consent or approval of the holders of at least 50.01% of the issued and outstanding shares of Series B Preferred Stock, voting as a single class:
(i) amend, alter, repeal, restate, or supplement its Articles of Incorporation, Bylaws or this Article V(D) in a manner that alters or changes, in any adverse manner, the powers, preferences, privileges or rights of the Series B Preferred Stock or which otherwise would adversely affect the rights, privileges or preferences of the Series B Preferred Stock;
(ii) authorize, issue or otherwise create any shares of Senior Securities, Parity Securities, additional shares of Series B Preferred Stock, or any other debt or equity securities of the Corporation that by their terms are convertible into, or exchangeable or exercisable for, shares of Senior Securities, Parity Securities or additional shares of Series B Preferred Stock, or reissue any shares of Series B Preferred Stock which have been reacquired by the Corporation;
(iii) effect any transaction which would result in a Change of Control of the Corporation;
(iv) authorize or otherwise effectuate a reverse stock split of the Series B Preferred Stock;
(v) increase the par value of the Common Stock;
(vi) enter into any agreement, commitment, understanding or other arrangement to take any of the actions in subparagraphs (i) through (v) above; or
(vii) cause or authorize any subsidiary of the Corporation to engage in any of the foregoing actions.
SECTION 7. CONVERSION.
(a) Terms of Conversion. Each share of Series B Preferred Stock shall be convertible, at the option of the holder thereof, at any time, and from time to time, on the terms and conditions set forth in this Section 7, into a number of fully paid and non-assessable shares of Common Stock equal to the quotient obtained by dividing (x) the sum of (i) the Stated Value
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plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share calculated through and including the date of such conversion by (y) the Conversion Price in effect on the date of such conversion.
(b) Adjustment of Conversion Price. The Conversion Price shall be subject to adjustment from time to time as follows:
(i) Stock Dividends, Splits, etc. In case the Corporation shall at any time or from time to time after the Issuance Date (A) declare a dividend or make a distribution on the outstanding shares of Common Stock or securities convertible into Common Stock, in either case, in shares of Common Stock or (B) effect a subdivision, combination, consolidation or reclassification of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then, and in each such case, the Conversion Price in effect immediately prior to such event or the record date therefor, whichever is earlier, shall be adjusted by multiplying such Conversion Price by a fraction of which (x) the numerator is the number of shares of Common Stock that were outstanding immediately prior to such event and (y) the denominator is the number of shares of Common Stock outstanding immediately after such event. An adjustment made pursuant to this Section 7(b)(i) shall become effective (x) in the case of any such dividend or distribution, immediately after the close of business on the date for the determination of holders of shares of Common Stock entitled to receive such dividend or distribution, or (y) in the case of any such subdivision, combination, consolidation or reclassification, at the close of business on the day upon which such corporate action becomes effective.
(ii) Below Market or Conversion Price Issuances. In case the Corporation shall at any time or from time to time after the Issuance Date issue or sell any Common Stock or Convertible Security (collectively, “Additional Shares”) without consideration or for a consideration per share (or having a conversion, exchange or exercise price per share) less than the greater of (A) the Closing Price per share of Common Stock on the Business Day immediately preceding the earlier of the issuance, or public announcement of the issuance, of such Additional Shares and (B) the Conversion Price as of the date of such issuance then, and in each such case, the Conversion Price shall be reduced to an amount determined by multiplying the Conversion Price in effect on the day immediately prior to such date by a fraction of which (x) the numerator is the sum of (i) the product of (A) the number of shares of Common Stock outstanding immediately prior to such sale or issuance multiplied by (B) the greater of (1) the then applicable Conversion Price per share and (2) the Closing Price per share of Common Stock on the date preceding the earlier of the issuance or public announcement of the issuance of such Additional Shares (the greater of (1) and (2) above hereinafter referred to as the “Adjustment Price”) and (ii) the aggregate consideration receivable by the Corporation for the total number of shares of Common Stock so issued (or into or for which the Convertible Securities are convertible, exercisable or exchangeable), and (y) the denominator equals the product of (i) the sum of (A) the total number of shares of Common Stock outstanding immediately prior to such sale or issue and (B) the number of additional shares of Common Stock issued (or into or for which the Convertible Securities may be converted, exercised or exchanged), multiplied by (ii) the Adjustment Price. An adjustment made pursuant to this subsection (ii) shall be made on the next Business Day following the date on which any such issuance is made and shall be effective retroactively to the close of business on the date of such issuance. Notwithstanding the
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foregoing, no adjustment (other than as provided for in Section 7(b)(iv)(5)(D)) shall be made pursuant to this Section 7(b)(ii) in connection with any Excluded Issuances.
(iii) Special Dividends; Repurchases. In case the Corporation after the Issuance Date shall (1) distribute to all holders of shares of Common Stock or other series of capital stock of the Corporation (other than the Series B Preferred Stock) evidences of its indebtedness, assets (excluding any regular periodic cash dividend but including any extraordinary cash dividend), capital stock (other than Common Stock) or rights to subscribe for capital stock (other than Common Stock), or (2) purchase or otherwise acquire for value any shares of Common Stock in an Above Market Repurchase, in each such case the Conversion Price in effect immediately prior to the date of such distribution (or the date immediately prior to the date of the public announcement of such distribution, whichever is earlier) or date of such purchase (or the date immediately prior to the date of the public announcement of such purchase), as applicable, shall be adjusted by multiplying such Conversion Price by a fraction of which (x) the numerator is the remainder (if greater than zero) of (i) the Closing Price per share of Common Stock on such date, minus (ii) the Fair Market Value as of such date of the portion of assets, evidences of indebtedness, capital stock or subscription rights so distributed or paid applicable to one share of Common Stock, and (y) the denominator is the Closing Price per share of Common Stock on such date, such adjustment to become effective immediately prior to the opening of business on the day following the date of distribution or purchase; provided, however, that no adjustment shall be made pursuant to clause (1) of this subparagraph (b)(iii) (A) to the extent each holder of Series B Preferred Stock receives such evidences of indebtedness, assets, capital stock or rights to subscribe for capital stock, as applicable, as Additional Dividends in accordance with the terms of Section 3(b), (B) if such issuance is an Excluded Issuance or (C) if an adjustment shall otherwise be made with respect to such distribution or issuance pursuant to Section 7(b)(ii); and further provided, however, that if in any case the numerator of such fraction shall be zero or less than zero, no adjustment shall be made in such case. The Corporation shall provide any holder of Series B Preferred Stock, upon receipt of a written request therefor, with any indenture or other instrument defining the rights of the holders of any indebtedness, assets, subscription rights or capital stock referred to in this subparagraph (b)(iii).
(iv) General. For the purposes of any adjustment of the Conversion Price pursuant to paragraph (ii) of this Section 7(b), the following provisions shall be applicable:
(1) In the case of the issuance of Common Stock or Convertible Securities for cash in a public offering or private placement, the aggregate consideration shall be deemed to be the amount of cash paid before deducting any discounts, commissions or placement fees payable by the Corporation to any underwriter or placement agent in connection with the issuance and sale thereof.
(2) In the case of the issuance of Common Stock for a consideration in whole or in part other than cash, such consideration shall be deemed to be the Fair Market Value thereof.
(3) Subparagraph (2) above notwithstanding, in the case of the issuance of Additional Shares to the owners of the non-surviving entity in connection with any merger in which the Corporation is the surviving corporation, the amount of
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consideration therefore shall be deemed to be the Fair Market Value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock or Convertible Securities, as the case may be.
(4) If Common Stock is sold as a unit with other securities, the aggregate consideration received for such Common Stock shall be deemed to be net of the Fair Market Value of such other securities.
(5) In the case of the issuance of Convertible Securities:
(A) The aggregate maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent reduction of such number) deliverable upon conversion of or in exchange for, or upon the exercise of, such Convertible Securities and subsequent conversion, exchange or exercise thereof shall be deemed to have been issued at the time such Convertible Securities were issued and for a consideration equal to the consideration received by the Corporation for any such Convertible Securities, plus the minimum amount of consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent increase of consideration), if any, to be received by the Corporation upon the conversion, exercise or exchange of such Convertible Securities;
(B) With respect to any Convertible Securities issued after the Issuance Date for which an adjustment to the Conversion Price previously has been made pursuant to Section 7(b)(ii), on any increase in the number of shares of Common Stock deliverable upon exercise, conversion or exchange of, or a decrease in the exercise price of, such Convertible Securities, the applicable Conversion Price shall forthwith be readjusted retroactively to give effect to such increase or decrease;
(C) With respect to any Convertible Securities issued after the Issuance Date for which an adjustment to the Conversion Price has previously not been made pursuant to Section 7(b)(ii), if there is any increase in the number of shares of Common Stock deliverable upon exercise, conversion or exchange of, or a decrease in the exercise price of, such Convertible Securities, such Convertible Securities shall be treated as if they had been cancelled and reissued and an adjustment to the Conversion Price with respect to such deemed issuance shall be made pursuant to Section 7(b)(ii), if applicable;
(D) With respect to any Convertible Securities issued prior to the Issuance Date, if there is any increase in the number of shares of Common Stock deliverable upon exercise, conversion or exchange of, or a decrease in the exercise price of, such Convertible Securities other than a change resulting from the anti-dilution provisions thereof, such Convertible Securities shall be treated as if they had been cancelled and reissued and an adjustment to the Conversion Price with respect to such deemed issuance shall be made pursuant to Section 7(b)(ii), if applicable; and
(E) No further adjustment of the Conversion Price adjusted upon the issuance of any such Convertible Securities shall be made as a result of
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the actual issuance of Common Stock upon the exercise, conversion or exchange of any such Convertible Securities.
(v) Rights Distributions. Rights or warrants issued by the Corporation to all holders of Common Stock entitling the holders thereof to subscribe for or purchase capital stock of the Corporation, which rights or warrants (1) are deemed to be transferred with such shares of Common Stock, (2) are not exercisable and (3) are also issued in respect of future issuances of Common Stock, including shares of Common Stock issued upon conversion of shares of Series B Preferred Stock, in each case in clauses (1) through (3) until the occurrence of a specified event, shall for purposes of subparagraphs (b)(ii) and (b)(iii) not be deemed issued until the occurrence of the earliest such specified event.
(vi) Calculations. All calculations of the Conversion Price shall be made to the nearest five decimal places. Anything in Section 7(b) to the contrary notwithstanding, in no event shall the then current Conversion Price be increased as a result of any calculation made at any time pursuant to Sections 7(b)(ii) through 7(b)(iv). No adjustment to the Conversion Price pursuant to paragraph 7(b) shall be required unless such adjustment would require an increase or decrease of at least 1% in the Conversion Price; provided, however, that any adjustments which by reason of this paragraph 7(b)(vii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. Notwithstanding any other provision of this Section 7(b), no adjustment to the Conversion Price shall reduce the Conversion Price below $0.01, and any such purported adjustment shall instead reduce the Conversion Price to $0.01.
(vii) Outstanding Shares. The number of shares of Common Stock at any time outstanding shall include all shares of Common Stock outstanding at such time and any shares of Common Stock issuable upon conversion of or in exchange for any convertible or exchangeable security or upon the exercise of any option. The number of shares of Common Stock at any time outstanding shall not include any shares of Common Stock then owned or held by or for the account of the Corporation or any Subsidiary, and the disposition of any shares so owned or held shall be considered an issue or sale of Common Stock.
(viii) Successive Adjustments. Successive adjustments in the Conversion Price shall be made, without duplication, whenever any event specified in Sections 7(b)(i) through 7(b)(iii) shall occur.
(c) Reorganization, Consolidation, Merger, Asset Sale.
(i) In case of any capital reorganization or reclassification of outstanding shares of Common Stock (other than a reclassification covered by Section 7(b)), or in case of any consolidation or merger of the Corporation with or into another Person, or in case of any sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation) of all or substantially all of the Corporation’s assets, on a consolidated basis, in one transaction or a series of related transactions, to any Person (including any group that is deemed to be a Person) not otherwise constituting a Liquidation in accordance with Section 5 (each of the foregoing being referred to as a “Transaction”), in each case which is effected in such a manner that the holders of Common Stock are entitled to receive (either directly or upon
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subsequent liquidation) stock or other securities or property (including cash) with respect to or in exchange for Common Stock, shares of Series B Preferred Stock then outstanding shall thereafter be convertible into, in lieu of the Common Stock issuable upon such conversion prior to the consummation of such Transaction, the kind and amount of shares of stock and other securities and property (including cash) receivable upon the consummation of such Transaction by a holder of that number of shares of Common Stock into which one share of Series B Preferred Stock was convertible (without regard to any limitation on conversion contained herein, the availability of authorized and unissued shares for issuance upon conversion, or otherwise) immediately prior to the consummation of such Transaction. In any such case, the Corporation or the person formed by the consolidation or resulting from the merger or which acquires such assets or which acquires the Corporation’s shares, as the case may be, shall make or cause to be made appropriate provisions (as determined in good faith by the Board of Directors) in the applicable agreement of merger or consolidation, its certificate or articles of incorporation or other constituent documents to ensure that the provisions of Sections 2-3, 4(b)-(f) and 5-7 herein will continue to be applicable to the Series B Preferred Stock or any such other shares of stock and other securities (other than Common Stock) and property deliverable upon conversion of the shares of Series B Preferred Stock remaining outstanding following the Transaction. In case securities or property other than Common Stock shall be issuable or deliverable upon conversion as aforesaid, then all references in this Section 7 shall be deemed to apply, so far as appropriate and as nearly as may be, to such other securities or property. The provisions of this Section 7(c) shall similarly apply to successive Transactions. The Corporation shall give written notice to the holders of Series B Preferred Stock at least 30 days prior to the date on which any Transaction or Change of Control or similar transaction affecting the Corporation shall take place.
(ii) Notwithstanding anything contained herein to the contrary, the Corporation will not effect any Transaction unless, prior to the consummation thereof, the Surviving Person, if other than the Corporation, shall mail, by first-class mail, postage prepaid, to each record holder of shares of Series B Preferred Stock, at such holder’s address as it appears on the transfer books of the Corporation, (A) a written instrument assuming the obligation to deliver to such holder such cash, property and securities to which, in accordance with the foregoing provisions, such holder is entitled, and (B) an opinion of outside counsel for such Surviving Person stating that such assumption agreement is a valid, binding and enforceable agreement of the Surviving Person.
(iii) Nothing contained in this Section 7(c) shall limit the rights of holders of the Series B Preferred Stock to convert the Series B Preferred Stock or to vote their shares of Series B Preferred Stock in connection with a Transaction.
(d) Reports. Whenever the number of shares of Common Stock into which each share of Series B Preferred Stock is convertible is adjusted as provided in this Section 7, the Corporation shall promptly mail to the holders of record of the outstanding shares of Series B Preferred Stock, at their respective addresses as the same shall appear in the Corporation’s transfer books, a certificate signed by an executive officer stating that the number of shares of Common Stock into which the shares of Series B Preferred Stock are convertible has been adjusted (setting forth in reasonable detail and certifying the calculation of such adjustment), the new number of shares of Common Stock (or describing the new stock, securities, cash or other property) into which each share of Series B Preferred Stock is convertible as a result of such
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adjustment, a brief statement of the facts requiring such adjustment and when such adjustment became effective. The Corporation shall give the holders of Series B Preferred Stock written notice at least 20 days prior to the date on which the Corporation closes its books or takes a record (i) with respect to any dividend or distribution upon Common Stock, (ii) with respect to any pro rata subscription offer to holders of Common Stock or (iii) for determining rights to vote with respect to any Transaction.
(e) Conversion Procedures.
(i) The holder of any shares of Series B Preferred Stock may exercise its right to convert any or all such outstanding shares into shares of Common Stock at any time by surrendering for such purpose to the Corporation, at its principal office or at such other office or agency maintained by the Corporation for that purpose, a certificate or certificates representing the shares of Series B Preferred Stock to be converted, duly endorsed to the Corporation in blank, accompanied by a written notice stating that such holder elects to convert all or a specified whole number of such shares in accordance with the provisions of this Section 7. The Corporation will pay any and all documentary, stamp or similar issue or transfer tax that may be payable in respect of any issue or delivery of shares of Common Stock to the holder on conversion of the Series B Preferred Stock pursuant hereto.
(ii) As promptly as practicable, and in any event within three Business Days after the surrender of such certificate or certificates and the receipt of such notice relating thereto and, if applicable, payment of all transfer taxes (or the demonstration to the reasonable satisfaction of the Corporation that such taxes are inapplicable), the Corporation shall deliver or cause to be delivered (i) certificates (which shall bear legends, if appropriate) registered in the name of such holder representing the number of full shares of Common Stock to which the holder of shares of Series B Preferred Stock so converted shall be entitled, provided that, if the Corporation’s transfer agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer program, and so long as the certificates therefore do not bear a legend (pursuant to the terms of the Subscription Agreement) and the holder thereof is not then required to return such certificate for the placement of a legend thereon (pursuant to the terms of the Subscription Agreement), the Corporation shall cause its transfer agent to promptly electronically transmit the Common Stock issuable upon conversion to the holder by crediting the account of the holder or its nominee with DTC through its Deposit Withdrawal Agent Commission system, (ii) if less than the full number of shares of Series B Preferred Stock evidenced by the surrendered certificate or certificates are being converted, a new certificate or certificates for the number of shares evidenced by such surrendered certificate or certificates less the number of shares converted and (iii) payment of all amounts to which a holder is entitled pursuant to Section 7(f) hereof. All shares of Common Stock issuable upon conversion of the Series B Preferred Stock will be made without charge to the holders of Series B Preferred Stock and upon issuance will be fully paid and non-assessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof. Such conversion shall be deemed to have been made at the close of business on the date of receipt of such notice and of such surrender of the certificate or certificates representing the shares of Series B Preferred Stock to be converted so that the rights of the holder thereof as to the shares being converted shall cease except for the right to receive shares of Common Stock and any payment of amounts due pursuant to Section 7(f), and the person entitled to receive the shares of Common Stock shall be treated for all
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purposes as having become the record holder of such shares of Common Stock at such time. Any shares of Common Stock so delivered on or following the date on which such shares of Common Stock have been registered under the Securities Act pursuant to the Subscription Agreement and continue to be subject to resale under a then-effective registration statement, or otherwise may be sold by the holder pursuant to Rule 144 promulgated under the Securities Act, shall not bear any restrictive legend.
(iii) If a conversion of Series B Preferred Stock is to be made in connection with a Transaction or Change of Control or a similar transaction affecting the Corporation (other than a tender or exchange offer), the conversion of any shares of Series B Preferred Stock may, at the election of the holder thereof, be conditioned upon the consummation of such transaction, in which case such conversion shall not be deemed to be effective until such transaction has been consummated. In connection with any tender or exchange offer for shares of Common Stock, holders of Series B Preferred Stock shall have the right to tender (or submit for exchange) shares of Series B Preferred Stock in such a manner so as to preserve the status of such shares as Series B Preferred Stock until immediately prior to such time as shares of Common Stock are to be purchased (or exchanged) pursuant to such offer, at which time that portion of the shares of Series B Preferred Stock so tendered which is convertible into the number of shares of Common Stock to be purchased (or exchanged) pursuant to such offer shall be deemed converted into the appropriate number of shares of Common Stock. Any shares of Series B Preferred Stock not so converted shall be returned to the holder as Series B Preferred Stock.
(iv) The Corporation shall not close its books against the transfer of Series B Preferred Stock or of Common Stock issued or issuable upon conversion of Series B Preferred Stock in any manner which unreasonably interferes with the timely conversion of Series B Preferred Stock.
(f) Fractional Shares. In connection with the conversion of any shares of Series B Preferred Stock pursuant to this Section 7, no fractions of shares of Common Stock shall be issued, but in lieu thereof the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fractional interest multiplied by the Closing Price per share of Common Stock on the day on which such shares of Series B Preferred Stock are deemed to have been converted. If more than one share of Series B Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the total number of shares of Series B Preferred Stock so surrendered.
(g) Reservation of Shares. The Corporation shall at all times reserve and keep available, free from liens, charges and security interests and not subject to any preemptive rights, solely for issuance upon conversion of the Series B Preferred Stock, the number of shares of Common Stock from time to time issuable upon conversion of all shares of the Series B Preferred Stock at the time outstanding and to ensure that the shares of Common Stock may be issued without violation of any applicable law or regulation or of any requirement of any securities exchange or inter-dealer quotation system on which the shares of Common Stock may be listed or traded.
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(h) Certain Events. If an event not specifically provided for in this Section 7 occurs which would have an inequitable or dilutive effect on the relative percentage ownership interests of the holders of Series B Preferred Stock as those specifically provided for in this Section 7, then the Board of Directors shall make an appropriate adjustment in the Conversion Price so as to protect the rights of the holders of Series B Preferred Stock.
(i) Conversion Disputes. In the case of any dispute with respect to a conversion, the Corporation shall promptly issue such number of shares of Common Stock as are not disputed in accordance with Section 7(e)(ii) above. If such dispute involves the calculation of the Conversion Price, and such dispute is not promptly resolved by discussion between the relevant holder and the Corporation, the Corporation shall submit the disputed calculations to an independent outside accountant via facsimile within three business days of receipt of the written notice of conversion. The accountant, at the Corporation’s sole expense, shall promptly audit the calculations and notify the Corporation and the holder of the results no later than three business days from the date it receives the disputed calculations. The accountant’s calculation shall be deemed conclusive, absent manifest error. The Corporation shall then issue the appropriate number of shares of Common Stock in accordance with this Section 7.
(j) Conversion on the Option of the Corporation.
(i) Provided the Corporation has a sufficient number of shares of Common Stock duly authorized and reserved for issuance upon conversion of all of the outstanding shares of Series B Preferred Stock, upon delivery of written notice of conversion by the Corporation to the holders of Series B Preferred Stock within 15 days after the occurrence of any Conversion Trigger Date, which notice shall specify the applicable Conversion Trigger Date, all (and not less than all) of the then outstanding shares of Series B Preferred Stock shall be immediately and automatically converted into fully paid and non-assessable shares of Common Stock effective as of the date specified in such notice not more than 30 days from the specified Conversion Trigger Date. The number of shares of Common Stock to which a holder of a share of Series B Preferred Stock shall be entitled upon such conversion shall be determined by dividing (x) the sum of (i) the Stated Value plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share as of the close of business on the Business Day immediately preceding the specified Conversion Trigger Date by (y) the Conversion Price in effect at the close of business on the Business Day immediately preceding the specified Conversion Trigger Date.
(ii) Mechanics. Any conversion pursuant to this Section 7(j) shall occur automatically and without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent. Upon the occurrence of such automatic conversion of the Series B Preferred Stock, the holders of the Series B Preferred Stock shall, a reasonable time thereafter, surrender the certificates representing such shares (converted pursuant to this Section 7(j)) at the office of the Corporation or any transfer agent for the Series B Preferred Stock. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on the Corporation’s stock records, a certificate or certificates for the number of shares of Common Stock into which such shares of Series B Preferred Stock surrendered were convertible on the date as of which such automatic conversion occurred. All certificates evidencing shares of
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Series B Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the date of such conversion, be deemed to have been retired and cancelled and the shares of Series B Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates.
SECTION 8. REACQUIRED SHARES.
Any shares of Series B Preferred Stock converted, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof.
SECTION 9. NO PREEMPTIVE RIGHTS.
Holders of Series B Preferred Stock shall not have any preemptive right pursuant to this Article V(D) to subscribe to any additional issue of stock or to any security convertible into such stock. Nothing herein shall limit the power of the Corporation to grant any of the foregoing rights to persons by contract or otherwise or the power of any person, including, without limitation, the holders of Series B Preferred Stock, to exercise any of the foregoing rights granted to them by contract or otherwise.
SECTION 10. GENERAL PROVISIONS.
(a) Headings. The headings of the sections, paragraphs, subparagraphs, clauses and subclauses of this Article V(D) are for convenience of reference only and shall not define, limit or affect any of the provisions hereof.
(b) Waivers. In the event that the holders of at least 50.01% of the issued and outstanding shares of Series B Preferred Stock, voting as a single class shall consent to waive compliance by the Corporation with any provision of, or a breach by the Corporation of any provision of, this Article V(D), all holders of outstanding shares of Series B Preferred Stock shall be bound by such waiver.
SECTION 11. DEFINITIONS.
For the purposes of this Article V(D):
“Above Market Repurchase” shall mean any purchase (by tender or exchange offer, open market purchase, privately negotiated purchase or otherwise) of all or any portion of the Corporation’s Common Stock where such purchase is for aggregate consideration having a Fair Market Value as of the earlier of (i) the date of such purchase or (ii) the date immediately prior to the date of the public announcement of such purchase, that exceeds the product of (x) the aggregate number of shares being purchased, multiplied by (y) the Closing Price of the Common Stock on such date.
“Accrued Value” means, with respect to a share of Series B Preferred Stock, as at any date, the sum of (as adjusted for any split, subdivision, combination, consolidation,
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recapitalization or similar event with respect to the Series B Preferred Stock) (i) the Stated Value plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share through and including such date which have been added to Accrued Value pursuant to Section 3(a)(ii).
“Additional Dividends” has the meaning set forth in Section 3(b) above.
“Additional Shares” has the meaning set forth in Section 7(b)(ii) above.
“Adjustment Price” has the meaning set forth in Section 7(b)(ii) above.
“Affiliate” shall have the meaning set forth in Rule 12b-2 promulgated by the Securities and Exchange Commission under the Exchange Act.
“Available Shares” shall have the meaning ascribed thereto in the Subscription Agreements.
“Business Day” means any day other than a Saturday, Sunday, or a day on which commercial banks in the City of New York are authorized or obligated by law or executive order to close.
“Change of Control” means (i) any sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation) of all or substantially all of the Corporation’s assets, on a consolidated basis, in one transaction or a series of related transactions, to any Person (including any group that is deemed to be a Person) other than the Initial Purchasers or their respective Affiliates; (ii) any Person (including any group that is deemed to be a Person) other than the Initial Purchasers or any of their respective Affiliates, is or becomes the “beneficial owner” (within the meaning of Rule 13d-3 promulgated under the Exchange Act) directly or indirectly, of more than 50% of the combined voting power of the Voting Securities of the Corporation (or the surviving entity or entities of a transaction or a series of related transactions if other than the Corporation); (iii) the Continuing Directors cease for any reason to constitute a majority of the members of the Board of Directors then in office; (iv) a merger or consolidation of the Corporation with any other Person, other than a merger or consolidation resulting in the Voting Securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the Voting Securities of the Corporation or such surviving entity outstanding immediately after such merger or consolidation; or (v) the Corporation adopts, voluntarily or involuntarily, a plan of liquidation or dissolution.
“Closing Price” per share of Common Stock on any date shall be the closing sale price on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Common Stock or such other securities are listed or admitted to trading or, if not quoted or listed or admitted to trading on any national securities exchange or quotation system, the last quoted sale price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated
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Quotation System or such other system then in use, or, if on any such date the Common Stock or such other securities are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker, selected by the Board of Directors and reasonably acceptable to the holders of a majority of the outstanding shares of Series B Preferred Stock, making a market in the Common Stock or such other securities of the Corporation.
“Common Stock” means the common stock, no par value per share, of the Corporation.
“Continuing Directors” means the individuals who are members of the Corporation’s Board of Directors as of the Issuance Date; provided, however, that if the election, or nomination for election by the Corporation’s shareholders, of any new director was approved by a vote of at least a majority of the Continuing Directors, such new director shall be considered a “Continuing Director”.
“Conversion Price” means the Initial Conversion Price, subject to adjustment as provided in Section 7(b).
“Conversion Trigger Date” shall mean any date after August 23, 2005 as to which the Closing Price per share of Common Stock for at least 20 consecutive Trading Days immediately preceding such date, including the last Trading Day of such period, is greater than or equal to $5.00 per share (as adjusted for any split, subdivision, combination, consolidation, recapitalization or similar event with respect to the Common Stock).
“Convertible Securities” shall mean any options or warrants to purchase or rights to subscribe for Common Stock, securities by their terms convertible into or exchangeable for Common Stock, or options or warrants to purchase or rights to subscribe for such convertible or exchangeable securities.
“Dividend Payment Date” means each of March 31, June 30, September 30 and December 31, except that if such date is not a Business Day then the Dividend Payment Date shall be the next day that is a Business Day.
“Dividend Period” means the Initial Dividend Period and, thereafter, each quarterly period from and including a Dividend Payment Date to the next following Dividend Payment Date (but without including such later Dividend Payment Date).
“Dividend Rate” has the meaning set forth in Section 3(a)(i).
“Exchange Act” means the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder.
“Excluded Issuances” means the issuance or reissuance of any shares of Common Stock or Convertible Securities (whether treasury shares or newly issued shares) pursuant to or in connection with (1) a dividend or distribution on, or subdivision, combination, consolidation or reclassification of, the outstanding shares of Common Stock requiring an adjustment in the Conversion Price pursuant to Section 7(b)(i), (2) any Convertible Security outstanding as of the Issuance Date (except as otherwise provided in Section 7(b)(iv)(5)(D)), including, without limitation, warrants originally issued to holders of Series B Preferred Stock pursuant to the
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Subscription Agreements, (3) the conversion of shares of Series B Preferred Stock, (4) the grant or exercise of any stock or stock options to employees, directors or consultants of the Corporation that may be granted to or exercised by any employee, director or consultant under any stock option or similar benefit plan of the Corporation now existing or to be implemented in the future, (5) any transaction involving the Corporation’s issuance of securities in connection with an acquisition (the primary purpose of which is not to raise equity capital), (6) any transaction involving the Corporation’s issuance of securities in connection with any strategic partnership or joint venture (the primary purpose of which is not to raise equity capital), (7) any issuance of securities by the Corporation as consideration for the acquisition of a license by the Corporation, (8) the issuance of securities pursuant to any financing from a bank or similar financial or lending institution approved by the Board of Directors, or (9) the issuance of any Replacement Common Stock; provided, however, that issuances of securities described in the forgoing sub-clauses (4), (6), (7) and (8) subsequent to the Issuance Date which exceed, in the aggregate, 10% of the outstanding Common Stock of the Corporation outstanding as of the Issuance Date (as adjusted for any split, subdivision, combination, consolidation, recapitalization or similar event with respect to the Common Stock), as determined on a fully-diluted basis, shall not be deemed to be Excluded Issuances.
“Fair Market Value” with respect to any securities, assets or property shall mean the fair value thereof as determined by an independent investment banking or appraisal firm experienced in the valuation of such securities or property selected in good faith by the Board of Directors and acceptable to the holders of a majority of the outstanding shares of Series B Preferred Stock; provided, that, the value of any securities that trade on a national securities exchange or inter-dealer quotation system shall be the Closing Price thereof as of the date such value is determined.
“Initial Conversion Price” means $2.70.
“Initial Dividend Period” means the dividend period commencing on the Issuance Date and ending on (and including) the date immediately prior to the first Dividend Payment Date to occur thereafter.
“Initial Purchasers” means the initial Purchasers of the Series B Preferred Stock pursuant to the Subscription Agreements.
“Issuance Date” means with respect to any share of Series B Preferred Stock, the date on which the Corporation initially issues such share of Series B Preferred Stock, regardless of the number of times transfer of such share is made on the stock records of the Corporation and regardless of the number of certificates which may be issued to evidence such share.
“Junior Securities” shall mean the Corporation’s Common Stock and all classes and series of capital stock of the Corporation now or hereafter authorized, issued or outstanding which by their terms expressly provide that they are junior to the Series B Preferred Stock, or which do not specify their rank, with respect to payment of dividends and the distribution of assets upon liquidation, winding up or dissolution. This definition of Junior Securities shall include, without limitation, any Convertible Securities exercisable or exchangeable for or convertible into any Junior Securities.
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“Junior Securities Distribution” means the declaration or payment on account of, or setting apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of, any Junior Securities or any Convertible Securities exercisable or exchangeable for or convertible into any shares of Junior Securities, or any distribution in respect thereof (except for (i) dividends on Junior Securities which are payable solely in additional shares of Junior Securities, or by the increase in the liquidation value of Junior Securities, in each case, as required by the terms of such Junior Securities, or (ii) cashless exercises of options), either directly or indirectly, and whether in cash, obligations, Common Stock, Convertible Securities or other property, or the purchase or redemption by any corporation or other entity directly or indirectly controlled by the Corporation of any of the Junior Securities or any Convertible Securities exercisable or exchangeable for or convertible into any Junior Securities.
“Liquidation” has the meaning set forth in Section 5(a) above.
“Liquidation Preference” means the greater of (x) the sum of (i) the Stated Value plus (ii) an amount equal to the aggregate of all accrued but unpaid dividends (whether or not declared) on such share and (y) the amount that would be payable to such holder in the Liquidation in respect of Common Stock issuable upon conversion of such share of Series B Preferred Stock if all outstanding shares of Series B Preferred Stock were converted into Common Stock immediately prior to the Liquidation in accordance with Section 7 hereof.
“Parity Securities” means the Series A Preferred Stock and each class or series of capital stock issued by the Corporation after the date hereof the terms of which specifically provide that such class or series will rank on a parity with the Series B Preferred Stock with respect to payment of dividends and the distribution of assets upon liquidation, winding up or dissolution. This definition of Parity Securities shall include, without limitation, any Convertible Securities exercisable or exchangeable for or convertible into any Parity Securities.
“Parity Securities Distribution” means the declaration or payment on account of, or setting apart for payment money for a sinking or other similar fund for, the purchase, redemption or other retirement of (other than by conversion into or exchange for Junior Securities), any Parity Securities or any Convertible Securities exercisable or exchangeable for or convertible into any shares of Parity Securities, or any distribution in respect thereof (except for (i) dividends on Parity Securities which are payable solely in additional shares of Parity Securities, or by the increase in the liquidation value of Parity Securities, in each case, as required by the terms of such Parity Securities or (ii) cashless exercises of options), either directly or indirectly, and whether in cash, obligations, Common Stock, Convertible Securities or other property, or the purchase or redemption by any corporation or other entity directly or indirectly controlled by the Corporation of any of the Parity Securities or any Convertible Securities exercisable or exchangeable for or convertible into any Parity Securities.
“Person” means an individual, corporation, limited liability company or partnership, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof, or other entity of any kind.
“Senior Securities” means each class or series of capital stock issued by the Corporation after the date hereof the terms of which specifically provide that such class or series will rank
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senior to the Series B Preferred Stock with respect to payment of dividends and the distribution of assets upon liquidation, winding up or dissolution. This definition of Senior Securities shall include, without limitation, any Convertible Securities exercisable or exchangeable for or convertible into any Senior Securities.
“Series A Preferred Stock” means the Corporation’s Series A 6.0% Participating Convertible Preferred Stock.
“Series B Preferred Stock” has the meaning set forth in Section 1 above.
“Stated Value” means, with respect to a share of Series B Preferred Stock, $100 (as adjusted for any split, subdivision, combination, consolidation, recapitalization or similar event with respect to the Series B Preferred Stock).
“Subscription Agreements” means the Subscription Agreements for the purchase of Series B Preferred Stock executed by each of the Initial Purchasers on or before August 23, 2004, by and among the Company and the respective Initial Purchasers described therein.
“Subsidiary” of any Person means any corporation or other entity of which a majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person.
“Surviving Person” means the continuing or surviving Person of a merger, consolidation or other corporate combination, the Person receiving a transfer of all or a substantial part of the properties and assets of the Corporation, or the Person consolidating with or merging into the Corporation in a merger, consolidation or other corporate combination in which the Corporation is the continuing or surviving Person, but in connection with which the Series B Preferred Stock or Common Stock of the Corporation is exchanged, converted or reinstated into the securities of any other Person or cash or any other property; provided, however, if such Surviving Person is a direct or indirect Subsidiary of a Person, the parent entity shall be deemed to be a Surviving Person.
“Trading Day” means a day on which the principal national securities exchange on which the Common Stock is quoted, listed or admitted to trading is open for the transaction of business or, if the Common Stock is not quoted, listed or admitted to trading on any national securities exchange (or the Nasdaq Stock Market), any Business Day.
“Transaction” has the meaning set forth in Section 7(c) above.
“Voting Securities” mean the Common Stock, the Series A Preferred Stock, the Series B Preferred Stock and any other securities of the Corporation having the voting power under ordinary circumstances with respect to the election of directors of the Corporation.
ARTICLE VI
DIRECTORS
A. Unless and until otherwise provided in the By-laws, all of the corporate powers of this corporation shall be vested in and all the business and affairs of this corporation shall be
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managed by a Board of not more than thirty (30) directors, who need not be stockholders, of whom any majority shall constitute a quorum.
B. The Board of Directors shall have authority to make and alter the by-laws, fix their own qualifications, classification, or terms of office and fix or increase their compensation, subject to the power of the stockholders to change or repeal the by-laws so made.
C. Unless or until otherwise provided in the by-laws, the Directors shall hold office until their successors have been duly elected and qualified, and the number, qualification, classification, terms of office, manner of election, time and places of meetings and powers and duties of the Directors shall be as from time to time fixed by the by-laws.
D. Any vacancy occurring on the Board of Directors shall be filled by the remaining members of the said Board for the unexpired term at any meeting of the Board of Directors.
E. [The names of the members of the first Board of Directors intentionally omitted.]
These Directors shall hold their offices until their successors are elected at the General Annual Stockholders’ Meeting, to be held on the first Monday of February of each year, beginning with the year 1971, or the first day thereafter when said date falls on a legal holiday, unless otherwise provided by the by-laws of the Corporation.
ARTICLE VII
OFFICERS
The Officers of this Corporation shall be a President, one or more Vice Presidents, a Secretary and a Treasurer. Any two Offices may be combined under one Officer.
The failure, from any cause whatsoever, to hold the annual meeting of the stockholders or the failure to elect Directors or the failure of the Directors to elect Officers, shall not dissolve this Corporation, but the Directors and Officers then in office shall remain in office until their successors have been duly elected and installed.
ARTICLE VIII
STOCKHOLDERS’ MEETINGS
All stockholders’ meetings, general or special, shall be held in accordance with the laws of the State of Louisiana unless changed by the by-laws of this corporation, and at all stockholders’ meetings a majority of the stock, whether present or represented by proxy, shall constitute a quorum. All stockholders may vote at all stockholders’ meetings, either in person or by his agent duly authorized in writing to appear and act for him. However, whenever the vote of shareholders is necessary to authorize or constitute corporate action, it may be so authorized and evidenced by the written consent of a majority of all shareholders without the necessity of a formal meeting.
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ARTICLE IX
This charter may be amended and the capital of this corporation may be increased or decreased, or this corporation may be dissolved, in the method and manner provided by law.
ARTICLE X
The corporation claims and shall have the benefit of the provisions of R.S. 12:161 and its stock and shareholders shall have the benefit of Internal Revenue Code, Section 1244.
ARTICLE XI
No stockholder of this corporation shall ever be held liable or responsible for the contracts or faults of this corporation in any further sum than the unpaid balance of the stock for which he has subscribed, nor shall any mere informality in organization have the effect of rendering this charter null or of exposing stockholders to any liability other than as above provided.
ARTICLE XII
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
No director or officer of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director or officer for any act or omission occurring after the effective date of this Article XII, except for liability (i) for any breach of the director’s or officer’s duty of loyalty to the Corporation or its shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law; (iii) for liability under Section 92D of the Louisiana Business Corporation Law; or (iv) for any transaction from which the director or officer derives an improper personal benefit. No amendment to these Articles of Incorporation shall adversely affect any right or protection of a director or officer of the Corporation under this Article XII with respect to any act or omission occurring prior to the effective date of such amendment.
These Restated Articles of Incorporation are dated September 16, 2004.
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AKORN, INC.
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| By: | /s/Arthur S. Przybyl | |||
| Arthur S. Przybyl | ||||
| President and Chief Executive Officer | ||||
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ACKNOWLEDGEMENT
STATE OF ILLINOIS
COUNTY OF LAKE
BEFORE ME, the undersigned authority, personally came and appeared Arthur S. Przybyl, to me known to be the person who signed the foregoing instrument as President and Chief Executive Officer of Akorn, Inc., and who acknowledged and declared, in the presence of the two witnesses whose names are subscribed below, that he signed such instrument as his free act and deed and in the capacity and for the purposes mentioned therein.
IN WITNESS WHEREOF, each of the undersigned has herewith affixed his or her hand on this 16th day of September, 2004.
WITNESSES:
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/s/ Jeffrey A. Whitnell
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/s/ Arthur S. Przybyl | |
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Signature of Witness
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Arthur S. Przybyl | |
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Jeffrey A. Whitnell
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Printed Name of Witness
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/s/ Catherine M. Crabb
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Signature of Witness
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Catherine M. Crabb
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Printed Name of Witness
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| /s/ Susanne E. Driscoll | ||||
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| Notary Public |
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EXHIBIT 4.12
STOCK REGISTRATION RIGHTS AGREEMENT
STOCK REGISTRATION RIGHTS AGREEMENT (this “Agreement”) dated as of November 15, 1990 between Akorn, Inc., a Louisiana corporation (“Akorn”), and the John N. Kapoor Trust dated September 20, 1989 (the “Trust”).
Recitals
WHEREAS, Akorn desires to sell to the Trust, and the Trust is contemplating acquiring from Akorn, 1,000,000 shares of Akorn Common Stock, pursuant to the terms and conditions of a Stock Purchase Agreement dated as of November 15, 1990 between the Trust and Akorn;
WHEREAS, Akorn desires to issue to the Trust, and the trust is contemplating obtaining from Akorn, warrants to purchase up to 2,000,000 shares of Akorn Common Stock (the “Warrants”) pursuant to the terms and conditions of a Common Stock Purchase Warrant dated as of November 15, 1990 between the Trust and Akorn; and
WHEREAS, as inducement to the Trust to acquire the shares of Common Stock and Warrants from Akorn referred to above, Akorn has agreed to provide the registration rights set forth in this Agreement.
NOW, THEREFORE, in consideration of the above recitals and the covenants and agreements contained herein, the Trust and Akorn hereby agree as follows:
1. Definitions .
1.01 The following capitalized terms have the following definitions:
“Agreement” means this Stock Registration Rights Agreement.
“Akorn” means Akorn, Inc., a Louisiana corporation, or its successor.
“Common Stock” means, without duplication, (i) shares of Akorn common stock, no par value per share, and (ii) shares of capital stock issued by Akorn in respect of such common stock by reason of a stock-split, stock dividend or other recapitalization of Akorn.
“Demand Registration” shall have the meaning specified in Section 2.01.
“Exchange Act” means the Securities Exchange Act of 1934, as
amended.
“Person” means any individual, corporation, partnership, association, trust or other entity or organization, including a government or political subdivision or any agency or instrumentality thereof.
“Piggyback Registration” shall have the meaning specified in Section 3.01.
“Registrable Securities” means (a) any shares of Common stock held by the Trust, (b) the authorized but unissued shares of Common Stock issuable by Akorn to the Trust pursuant to the exercise of the Warrants and (C) any warrants or options to purchase shares of Common Stock, securities of Akorn convertible into shares of Common Stock and any and all other equity securities of Akorn held by the Trust; provided, however, that Registrable Securities shall cease to be Registrable Securities when (i) a registration statement covering such Registrable Securities has been declared effective and they have been disposed of pursuant to such effective registration statement, (ii) they are transferred pursuant to Rule 144 or (iii) they have been otherwise transferred and Akorn has delivered new certificates or other evidences of ownership for them not subject to any legal or other restrictions on transfer, and provided further, however, that any warrants or options to purchase shares of Common Stock or securities of Akorn convertible into shares of Common Stock shall not, without the prior consent of Akorn, be distributed pursuant to an effective registration statement in such a manner that would cause any class of any such securities to become held by the public.
“Registration Expenses” shall have the meaning specified in Section 5.01.
“Rule 144” means Rule 144 (or any successor thereto) under the Securities Act.
“Securities Act” means the Securities Act of 1933, as amended.
“Warrants” shall have the meaning specified in the second Recital.
2. Demand Registration .
2.01 Requests for Registration . At any time and from time to time, the Trust may request registration under the Securities Act of all or part of its Registrable securities on Form S-2 or Form S-3 or any similar registration available to Akorn (a “Demand Registration”).
2.02 Demand Registration . The Trust will be entitled to request one Demand Registration, and Akorn will pay all Registration Expenses in connection with such registration; provided, that Akorn shall not be responsible for such expenses, and fees and disbursements of counsel referred to in Section 5.02, which exceed $100,000 in the aggregate. A registration will not count as the permitted Demand
Registration until it has become effective (unless such Demand Registration has not become effective at the request of the Trust other than in accordance with Section 2.04).
2.03 Priority on Demand Registration . Akorn will not include in the Demand Registration any securities which are not Registrable Securities without the written consent of the Trust which consent shall not be unreasonably withheld. If the Demand Registration is an underwritten offering, and the managing underwriters advise Akorn in writing that in their opinion the number of Registrable Securities and other securities requested to be included exceeds the number of Registrable Securities and other securities which can be sold in such offering, Akorn will include in such registration prior to the inclusion of any securities which are not Registrable Securities the number of Registrable Securities requested to he included which in the opinion of such underwriters can be sold. Any Persons other than the Trust who participate in the Demand Registration must pay their share of the Registration Expenses that are not paid for by Akorn as provided in Section 5.03.
2.04 Restrictions on Demand Registration . Akorn may postpone for up to three months the filing or the effectiveness of the registration statement for the Demand Registration (but no more than once in any twelve-month period or twice in total) if (i) Akorn’s board of directors determines in good faith that such Demand Registration might reasonably be expected to have an adverse effect on any proposal or plan by Akorn to engage in any acquisition of assets (other than in the ordinary course of business) or any merger, consolidation, tender offer or similar transaction or any financing (including, without limitation, a primary registration) or (ii) such demand is within 60 days of Akorn’s fiscal year-end and before availability of its audited annual financial statements; providing, however, that in such event, the Trust will be entitled to withdraw such request and, if such request ii withdrawn, such demand will not count as the Demand Registration.
2.05 Selection of Underwriters . The Trust will have the right to select the investment banker(s) and manager(s) to administer the offering in the Demand Registration; provided, however, that engagement of such investment banker(s) and manager(s) shall be subject to the prior written consent of Akorn which consent shall not be unreasonably withheld.
2.06 Other Registration Rights . Except as provided in this Agreement, Akorn will not grant to any Persons the right to request Akorn to register any equity securities of Akorn, or any securities convertible or exchangeable into or exercisable for such securities, without the written consent of the Trust which consent shall not be unreasonably withheld; provided, however, that Akorn may without such consent grant rights to other Persons to (i) participate in Piggyback Registrations so long as such rights are subordinate to the rights of the holders of Registrable Securities with respect to such Piggyback Registration and (ii) require registrations so long as the Trust is entitled to participate in any such registration on the terms set forth in section 3.04.
3. Piggyback Registrations .
3.01 Right to Piggyback . Whenever Akorn proposes to register any of its securities under the Securities Act (other than pursuant to the Demand Registration) and the registration form to be used is other than Form S-4 or S-8 (and other than a registration filed in connection with an exchange offering or an offering of securities solely to existing holders of Akorn’s securities) and may be used for the registration of Registrable Securities (a “Piggyback Registration”), Akorn will give prompt written notice to the Trust of its intention to effect such a registration and will include in such registration all Registrable Securities with respect to which Akorn has received written request for inclusion therein within 15 days after the receipt of Akorn’s notice.
3.02 Piggyback Expenses . If Akorn proposes to sell any of its securities in a Piggyback Registration, the Registration Expenses of the Trust in connection with such Piggyback Registration will be paid by Akorn. In all other Piggyback Registrations, the Trust will pay its share of the Registration Expenses of such registration as provided in Section 5.03.
3.03 Priority on Primary Registrations . If a Piggyback Registration is an underwritten primary registration on behalf of Akorn, and the managing underwriters advise Akorn in writing that, in their opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering, Akorn will include in such registration (i) first, the aggregate number of securities to be issued by Akorn, (ii) second, the Registrable Securities requested to be included in such registration, and (iii) third, other securities requested to be included in such registration; provided, however, in the event that such priority would result in the inclusion in such registration of less than all Registrable Securities requested to be included therein, the Test shall have the right, exercisable within 30 days after receipt of such advice of such managing underwriters, to locate other investment banker(s) or underwriter(s) in whose opinion a higher number of securities may be included in such registration; and provided further, however, that to the extent that such priority violates an agreement of Akorn with certain persons relating to Akorn’s acquisition of Spectrum Scientific Pharmaceutical, Inc., the 232,668 shares covered in such agreement shall be treated on a pro rata basis with the Registrable Securities requested to be included in such registration.
3.04 Priority on Secondary Registrations . If a Piggyback Registration is an underwritten secondary registration on behalf of holders of Akorn’s securities, and the managing underwriters advise Akorn in writing that, in their opinion, the number of securities requested to be included in such registration exceeds the number which can be sold in such offering, Akorn will include in such registration (1) first, the aggregate number of (x) securities requested to be included therein by the holders requesting such registration and (y) the Registrable Securities requested to be included in such Registration, which aggregate number, in the opinion of such underwriters, can be sold, pro rata among the holders requesting such registration and the Trust based on a fraction, with respect to each holder, the numerator of which is the number of securities requested to be included in such registration by such holder, and the denominator of which is the number of securities requested to be included in such registration by the
holders requesting such registration plus the Trust, and (ii) second, other securities requested to be included in such registration.
3.05 Other Registrations . If Akorn has previously filed a registration statement with respect to Registrable Securities pursuant to Section 2 or pursuant to this Section 3, and if such previous registration has not been withdrawn or abandoned, Akorn will not file or cause to be effected any other registration of any of its equity securities or securities convertible or exchangeable into or exercisable for its equity securities under the Securities Act (except on Form S-8), whether on its own behalf or at the request of any holder or holders of such securities, until a period of at least six months has elapsed from the effective date of such previous registration.
4. Registration Procedures .
Whenever the Trust has requested that any Registrable Securities be registered pursuant to this Agreement, Akorn will use its best efforts to effect the registration and the sale of such Registrable Securities in accordance with the intended method of disposition thereof, and pursuant thereto Akorn will as expeditiously as possible:
(a) prepare and file with the Securities and Exchange commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such Registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, Akorn will furnish to counsel selected by the Trust copies of all such documents proposed to be filed);
(b) prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than three months (or such shorter period as may be required if all Registrable Securities covered by such registration statement are sold prior to the expiration of such period) and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement;
(c) furnish to the Trust such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as the Trust may reasonably request in order to facilitate the disposition of the Registrable Securities owned by the Trust;
(d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as the Trust reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable the Trust to consummate the disposition in such jurisdictions of the
Registrable Securities owned by the Trust (provided that Akorn will not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this paragraph (d), (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction);
(e) notify the Trust at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of the Trust, Akorn will prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus will not contain an untrue statement of a material fact or omit to state any fact necessary to make statements therein not misleading (the Trust hereby agreeing not to offer for sale, following any such notice, any of such Registrable Securities pursuant to the prospectus that contains such untrue statement or omission until so supplemented or amended);
(f) cause all such Registrable Securities to be listed on the NASDAQ National Market System or such other securities exchange or market on which similar securities listed by Akorn are then listed;
(g) provide a transfer agent and registrar for all of such Registrable Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the Trust or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities;
(i) subject to customary confidentiality protections, make available for inspection by the Trust, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by the Trust or underwriter, all financial and other records, pertinent corporate documents and properties of Akorn, and cause Akorn’s officers, directors, employees and independent accountants to supply all information reasonably requested by the Trust, underwriter, attorney, accountant or agent in connection with such registration statement;
(j) in the event such sale is pursuant to an underwritten offering, use its best efforts to obtain a “cold comfort” letter from Akorn’s independent accountants in customary form and covering such matters of the type customarily covered by “cold comfort” letters as the Trust or the managing underwriter reasonably request;
(k) use its best efforts to obtain an opinion or opinions from counsel for Akorn in customary form; and
(l) otherwise use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission, and make available to the stockholders of Akorn, as soon as reasonably practicable, an earnings statement covering
a period of 12 months, beginning within three months after the effective date of the registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act.
5. Registration Expenses .
5.01 Generally . All expenses incident to Akorn’s performance of or compliance with this Agreement, including, without limitation, all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, and fees and disbursements of counsel for Akorn and independent accountants, underwriters (excluding discounts and commissions) and other Persons retained by Akorn (all such expenses being herein called “Registration Expenses”), will be borne as provided in this Agreement; except that Akorn will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by Akorn are then listed.
5.02 Counsel for Stockholders . In connection with the Demand Registration, Akorn will reimburse the Trust for the reasonable fees and disbursements of counsel chosen by the Trust.
5.03 Expenses Not Borne by Company . To the extent Registration Expenses are not required to be paid by Akorn, each holder of securities included in any registration hereunder will pay those Registration Expenses allocable to the registration of such holder’s securities so included, and any Registration Expenses not so allocable will be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered.
6. Indemnification .
6.01 Indemnification by Akorn . Akorn agrees to indemnify, to the extent permitted by law, the Trust, each trustee and beneficiary thereof and each Person who controls any of the foregoing (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to Akorn by such holder expressly for use therein or by such holder’s failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after Akorn has furnished the Trust with a sufficient number of copies of the same. In connection with an underwritten offering, Akorn will indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification
of the holders of Registrable Securities.
6.02 Indemnification by the Trust . In connection with any registration statement in which the Trust is participating, the Trust will furnish to Akorn in writing such information and affidavits as Akorn reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, will indemnify Akorn, its directors and officers and each Person who controls Akorn (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by the Trust; provided, however, that the obligation to indemnify will be limited to the net amount received by the Trust from the sale of Registrable Securities pursuant to such registration statement.
6.03 Conduct of Indemnification Proceeding . Any Person entitled to indemnification hereunder will (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that failure to give or delay giving such notice shall not relieve the indemnifying party of any indemnification obligation hereunder or otherwise except to the extent that the indemnifying party is prejudiced by such failure or delay), and (ii) unless in such indemnified party’s reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party will not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim will not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim.
The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person or such indemnified party and will survive the transfer of securities.
7. Participation in Underwritten Registrations .
No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person’s securities on the basis provided in any underwriting arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements.
8. Miscellaneous .
8.01 No Inconsistent Agreements . Akorn will not hereafter enter into any agreement with respect to its securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement.
8.02 Remedies . Any Person having rights under any provision of this Agreement will be entitled to enforce such rights specifically, to recover damages caused by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law.
8.03 Entire Agreement; Amendment . This Agreement contains the entire agreement among the parties hereto with respect to the matters contemplated herein, supersedes all prior agreements and negotiations and oral understandings, if any, and may not be amended, supplemented or discharged except by an instrument in writing signed by the parties hereto.
8.04 Beneficiaries . Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective beneficiaries, successors and permitted assigns, as the case may be. In addition, the provisions of this Agreement which are for the benefit of the Trust are also for the benefit of, and enforceable by, the beneficiaries thereof. In the event that the Trust shall distribute Registrable Securities to one or more of the beneficiaries of the Trust who are members of John N. Kapoor’s immediate family or to not more than eight employees of EJ Financial Enterprises, Inc. or its affiliates, the persons receiving such distribution shall succeed to the rights of the Trust under this Agreement and shall exercise such rights by action of a majority thereof (measured by ownership of Registrable Securities).
8.05 Severability . Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision will be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of this Agreement.
8.06 Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of Louisiana without regard to principles of conflicts of law.
8.07 Headings . Section headings are inserted herein for convenience only and do not form a part of this Agreement.
8.08 Counterparts . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
8.09 Notices . All notices, statements, instructions or other documents required to be given hereunder shall be in writing and shall be given
personally, by courier, by mailing the same in a sealed envelope, first-class mail, postage prepaid and either certified or registered, return receipt requested, or by confirmed telecopy addressed to Akorn at its principal office, 100 Akorn Drive, Abita Springs, LA 70420, Attn: Barry LeBlanc, president, and to the Trust, do Dr. John N. Kapoor, 225 East Deerpath Road, Suite 250, Lake Forest, IL 60045. Akorn and the Trust, by written notice given in accordance with this Section 8.09, may change the address to which notices, statements, instructions or other documents are to be sent to Akorn or the Trust, as the case may be. All notices, statements, instructions and other documents hereunder that are mailed shall be deemed to have been given when actually received or five (5)days after deposited in the United States mails.
IN WITNESS WHEREOF, the parties have caused this Stock Registration Rights Agreement to be duly executed as of the date first written above.
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AKORN, INC.
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| By: | ||||
| Doyle S. Gaw | ||||
| Chairman | ||||
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JOHN N. KAPOOR TRUST
DATED SEPTEMBER 20, 1989 |
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| By: | ||||
| John N. Kapoor as | ||||
| Trustee | ||||
Exhibit 4.13
STOCK PURCHASE AGREEMENT
This STOCK PURCHASE AGREEMENT, dated as of November 15, 1990 (“Agreement”), is entered into by and between the John N. Kapoor Trust dated September 20, 1989 (the “Trust”) and Akorn, Inc., a Louisiana corporation (“Akorn”).
WITNESSETH:
WHEREAS, Norbrook Holdings, B.V., a Netherlands corporation (“Norbrook”) is the owner of one million (1,000,000) shares of the outstanding common stock of Akorn (the “Norbrook Common Stock”);
WHEREAS, Akorn desires to repurchase the Norbrook Common Stock and simultaneously sell to the Trust one million (1,000,000) shares of common stock of Akorn (the “Stock”); and
WHEREAS, the Trust is willing to purchase the Stock from Akorn, subject to the terms and conditions set forth herein;
NOW, THEREFORE, to induce the Trust to purchase the Stock and in consideration of the above recitals and the covenants and agreements contained herein and in the Exhibits hereto, the Trust and Akorn hereby agree as follows:
1. Purchase of Shares by Trust . Upon receipt of the items listed in Section 2(a) hereof and subject to the satisfaction of the other covenants set forth in Section 2 hereof to be performed by Akorn at or prior to the Closing and the conditions precedent hereto, the Trust agrees that it will purchase from Akorn, and Akorn agrees that it will sell to the Trust, the Stock for One Million Five Hundred Thousand Dollars ($1,500,000) payable in immediately available funds by, at Akorn’s option, certified or bank cashier’s check or by wire transfer to an account or accounts designated by Akorn at 10:00 A.M. on November 15, 1990 or at such other time and date thereafter as shall be mutually acceptable to the Trust and Akorn (the “Closing”). Akorn may cause such funds to be delivered directly to Norbrook in payment of the purchase price for the Norbrook Shares. If Akorn requests the Trust to obtain expeditious confirmation of any wire transfer, the cost thereof shall be payable by Akorn.
2. Covenants of Akorn .
(a) Deliveries by Akorn. Akorn agrees that at or prior to the closing, Akorn shall deliver, or cause to be delivered, the following items:
(i) a Common Stock Purchase Warrant in the form of Exhibit A attached hereto and made a part hereof, dated the date of the Closing (“Closing Date”), duly executed by Akorn (the “Warrant”);
(ii) a Consulting Agreement in the form of Exhibit B attached hereto and made a part hereof, dated the Closing Date, duly
executed by Akorn (the “Consulting Agreement”);
(iii) a Stock Registration Rights Agreement in the form of Exhibit C attached hereto and made a part hereof, dated the Closing Date, duly executed by Akorn (the “Stock Registration Rights Agreement”);
(iv) an opinion of counsel addressed to the Trust and dated the Closing Date, of Jones, Walker, Waechter, Poitevent, Carrere & Denegre, counsel for Akorn, in the form of Exhibit D attached hereto;
(v) a copy of the Norbrook Agreement (as defined in Section 3(n)) executed by Akorn, Norbrook and certain of Norbrook’s affiliates;
(vi) certificate(s) representing an aggregate of one million (1,000,000) shares of the common stock of Akorn, duly issued in the name of the Trust; and
(vii) a certificate of the Secretary of Akorn certifying copies of Akorn’s charter, bylaws and all resolutions adopted by its Board of Directors in connection with this Agreement and all other agreements and transactions contemplated hereby.
(b) Trust’s Designation of Director. Akorn agrees that, so long as the Trust owns at least 600,000 shares of common stock of Akorn (subject to appropriate adjustment in the case of stock splits or stock dividends), the Trust shall have the right to designate one director to serve on Akorn’s Board of Directors and that, at the request of the Trust, Akorn’s management shall take such action as may be necessary to cause Dr. John N. Kapoor (“Kapoor”) to be named as a director of Akorn, effective within ten days of such request and continuing until the next shareholder election of directors. Akorn agrees that, at the request of the Trust, so long as the Trust owns at least such number of shares of common stock of Akorn, Akorn’s management will nominate Kapoor, or another person designated by the Trust who is reasonably satisfactory to Akorn’s Board of Directors, and recommend to shareholders that they vote for such person as a director of Akorn, and Akorn will use its best efforts to cause such person to be elected a director. The Trust shall have the further right to designate a representative, other than the person appointed by the Board of Directors or elected by the shareholders, to attend any meeting of the Board of Directors of Akorn, except that such additional designated representative shall not have any voting rights at any such meeting. Akorn agrees to take no action that would cause its Board of Directors to exceed fifteen in number without the consent of Kapoor or any other Akorn director designated by the Trust.
(c) Indemnification of the Director Designated by Trust. Akorn agrees to indemnify and hold harmless Kapoor and such other person designated from time to time by the Trust to serve as a director of Akorn (an “Indemnified Person”),
to the fullest extent permissible under law, from and against any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (collectively, an “Action”) to which the Indemnified Person is, was or is threatened to be made a party by a reason of the fact that the Indemnified Person is or was a director, officer, employee or agent of Akorn, or is or was serving at the request of Akorn as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees) and judgments, fines and amounts paid in settlement incurred by the Indemnified Person in connection with such action, suit or proceeding. Akorn shall advance the reasonable costs and expenses, as they become payable, including reasonable attorneys’ fees arising from the investigation of any claim, preparation for the defense or defense or settlement of an Action. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which the Indemnified Person may have under any provision of law, Akorn’s corporate charter or by-laws, the vote of Akorn’s shareholders or directors, other agreements, or otherwise. The Indemnified Person’s rights shall continue after the Indemnified Person has ceased acting as a director, officer, employee or agent and shall inure to the benefit of the successors and assigns of the Indemnified Person. If any payment, advance or indemnification of the Indemnified Person under this Agreement or otherwise shall require that he shall have acted in good faith, in a manner reasonably believed to be for or not opposed to the best interests of Akorn or without reasonable cause to believe his conduct was unlawful, then it shall be presumed that he so acted unless proven otherwise by clear and convincing evidence.
(d) Insurance. Akorn agrees that, from and after December 31, 1990 and for so long thereafter as Kapoor or any other person designated by the Trust serves as a director of Akorn, Akorn will maintain in effect policies of directors’ and officers’ liability insurance in an amount of coverage of at least $2,000,000 and a deductible of no greater than $200,000.
(e) Public Announcements. Akorn agrees to consult with the Trust before issuing any press release or otherwise making any public disclosures or statements with respect to the transactions contemplated hereby or the service by Kapoor as a director of Akorn and shall not issue any such press release or make any such public statement prior to such consultation or if reasonably objected to by the Trust, except as may be required by law.
(f) Director Information. Akorn agrees that, for so long as the Trust continues to own at least 240,000 shares of common stock of Akorn (subject to appropriate adjustment in the case of stock splits or stock dividends), Akorn will, at the request of the Trust, promptly provide to the Trust copies of all documents and other information and materials provided to, or made available to, its directors in connection with their service as directors.
(g) Right of First Refusal. For so long as the Trust owns at least 600,000 shares of common stock of Akorn (subject to appropriate adjustment in the case of stock splits or stock dividends), if at any time or from time to time Akorn
proposes to issue, sell, transfer or otherwise dispose of any shares of its capital stock (other than (i) shares issued or issuable to employees or directors pursuant to employee benefit plans and director stock options in existence at the date hereof, (ii) shares issued in stock splits or dividends, (iii) shares issued in connection with the acquisition of the stock or assets of other businesses and (iv) shares issued other than for cash in a number not exceeding 300,000 shares), Akorn agrees to notify the Trust in writing of the terms of any offer or proposal relating thereto (which notice shall identify all parties in interest to, and the precise terms of, such offer or proposal), and the Trust shall thereupon be entitled to purchase or otherwise acquire, subject to Section 4(h), all or any portion of the shares proposed to be issued, sold, transferred or otherwise disposed of on the same terms contained in such offer or proposal, upon notification in writing by the Trust to Akorn within 30 days following receipt of such notification from Akorn, with a closing of the transaction to be consummated within 60 days following the Trust’s notification to exercise its right to purchase. If the Trust tails to exercise its right to purchase the shares proposed to be disposed of, Akorn shall be tree to dispose of such shares in accordance with the terms of the offer or proposal submitted to the Trust. If such transaction is not completed within 90 days following the expiration of the Trust’s option, the Trust’s option shall be reinstated as if the notification to the Trust had not been made in the first instance.
(h) Capital Stock. Akorn agrees that it will not create any class of, or issue any, voting stock with voting rights unequal to those which currently inure to its common stock without the prior written consent of the Trust, except to the extent permitted by Section 2(i).
(i) Rights Plan. Until such time as (i) the Warrant has expired unexercised and (ii) Kapoor is no longer a director of Akorn, Akorn agrees that it will not (x) create any class of, or issue any, “poison pill” or other similar rights relating to any class of stock which could become exercisable upon acquisition by the Trust of beneficial ownership of 25% or less of outstanding shares of common stock of Akorn or, if greater, 3,352,327 shares or less of common stock of Akorn or (y) take any other action which could directly or indirectly adversely affect the Trust’s ability to exercise the Warrant without significant adverse effects to its economic interest or its rights (including voting rights) as a shareholder of Akorn so long as the Trust does not have, and has no pending offer to acquire, beneficial ownership of securities having more than 25% of the voting power respecting the election of directors of Akorn, or, if greater, more than 3,352,327 shares of common stock of Akorn, or rights to acquire securities convertible into such securities. Par purposes of this Section 2(1), “beneficial ownership” has the moaning assigned to that term in Rule 13d-3 under the Securities Exchange Act of 1934 or any successor provision.
(j) Rights of Trust’s Beneficiaries. In the event that the Trust shall distribute the shares of common stock of Akorn owned by it or its rights under the Warrant to one or more of the beneficiaries of the Trust who are members of Kapoor’s immediate family or to not more than eight employees of EJ Financial or its affiliates, the persons receiving such distribution shall succeed to the rights of the Trust under this Section 2 and shall exercise such rights by action of a majority thereof (measured by
ownership of outstanding shares of common stock of Akorn), and the ownership requirements of subsections (b), (f), (g) and (k) shall be satisfied by and the beneficial ownership limitation of subsection (1) shall include the aggregate holdings of such persons. In the event that the Trust shall make a partial distribution of the shares of common stock of Akorn owned by it and the Warrant to one or more of such persons, the Trust shall retain its rights under this Section 2, but the ownership requirements of subsection (b), (f), (g) and (k) shall be satisfied by and the beneficial ownership limitation of subsection (1) shall include the aggregate holdings of the Trust and such persons.
(k) Right to Maintain Interest. For so long as the Trust owns at least 600,000 shares of common stock of Akorn (subject to appropriate adjustment in the case of stock splits or stock dividends), if at any time or from time to time Akorn issues, sells, transfers or otherwise disposes of (an “Issuance”) any shares of its capital stock (other than (1) shares issued to employees or directors pursuant to employee benefit plans and director stock options in existence at the date hereof, and (2) shares issued in stock splits or dividends), Akorn agrees to notify the Trust In writing of the terms of the Issuance (which notice shall identify all parties in interest to, and the precise terms of, such offer or proposal), and to the extent that the Trustee has not exercised its right of first refusal as set forth in Section 2(g), the Trust shall thereupon be entitled to purchase from Akorn up to a number of shares of common stock of Akorn such that after such purchase and after the Issuance the ratio of the number of shares of common stock of Akorn then held by the Trust as compared to the total number of shares of common stock of Akorn then outstanding, in each case assuming exercise of the Warrant, shall be equal to the ratio of the number of shares of common stock of Akorn held by the Trust prior to the Issuance as compared to the total number of shares of common stock of Akorn outstanding prior to the Issuance, in each case assuming exercise of the Warrant, at a price per share equal to the price agreed to by the parties to the Issuance, if specified by them or, if not so specified, at a price equal on a per share basis to the Fair Value of the consideration received by the parties to the Issuance, the term “Fair Value” having the meaning Bet forth in Section 4(b) of the Warrant, upon notification in writing by the Trust to Akorn within 30 days following receipt of such notification from Akorn, with a closing of the transaction to be consummated within 60 days following the Trust’s notification to exercise its right to purchase.
3. Representations and Warranties of Akorn . Akorn represents and warrants to the Trust as of the date hereof as follows:
(a) Corporate Organization. Akorn is a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana, has the power to own its property and carry on its business as now being conducted, is duly licensed, qualified and authorized to do business and is in good standing in every state or other jurisdiction in which the nature of its business or properties make such licensing, qualification, authorization to do business and good standing necessary, and has the power and authority to enter into this Agreement, the Consulting Agreement and the Stock Registration Rights Agreement and to execute and deliver the Warrant.
(b) Authority. The execution and delivery of this Agreement, the Warrant, the Consulting Agreement and the Stock Registration Rights Agreement by Akorn and the performance of its obligations hereunder and thereunder have been duly authorized by all necessary corporate action, and each of this Agreement, the Consulting Agreement and the Stock Registration Rights Agreement have been duly executed and delivered by Akorn, and the Warrant has been duly executed, issued and delivered by Akorn, and each such instrument constitutes the legal, valid and binding obligation of Akorn, enforceable in accordance with its terms, subject only to applicable bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and to general principles of equity.
(c) No Conflicts. There is no charter, by-law or capital stock provision of Akorn, and no provision of any indenture or agreement, written or oral, to which Akorn is a party or under which Akorn is obligated, nor is there any statute, rule or regulation or any judgment, decree or order of any court or agency, binding on Akorn which would be contravened by the execution and delivery by Akorn of this Agreement, the Warrant, the Consulting Agreement or the Stock Registration Rights Agreement or by the performance by Akorn of any provision, condition, covenant or other term hereof or thereof.
(d) Litigation. No litigation (including, without limitation, derivative actions), arbitration proceedings or governmental proceedings, or series of related actions, are pending against or involve as a party or are threatened against Akorn which could, singly or in the aggregate, materially adversely affect the condition, financial or otherwise, business, operations or prospects of Akorn.
(e) Capitalization. Akorn has an authorized capitalization consisting solely of 20,000,000 shares of common stock, of which as of the date hereof (and after giving effect to the consummation of the Norbrook Agreement as defined in Section 3(n) below) 11,409,309 shares of common stock have been validly issued and are outstanding, fully paid and non-assessable. At the date hereof, the common stock to be acquired by the Trust pursuant to this Agreement represents 22.37% of the outstanding common stock of Akorn (assuming exercise of the Warrant).
(f) SEC Reports; No Material Adverse Change. Akorn is a reporting company under the Securities Exchange Act of 1934, as amended (the “1934 Act”) and is current in all forms, reports and documents required to be filed pursuant to the 1934 Act. All such filings at the time they were filed with the Securities and Exchange Commission complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder and, as of the Closing Date, the most recent Form 10-K and Annual Report to Shareholders of Akorn, when read together with filings made subsequent thereto, including the Form 10-Q dated November 9, 1990, do not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Since the respective dates as of which information is given in such filings, (i) there has been no material adverse change in the condition, financial or otherwise, of Akorn and its subsidiaries considered as a whole, or in the business, operations, or
prospects of Akorn and its subsidiaries considered as a whole, whether or not arising in the ordinary course of business, (ii) there have been no transactions entered into by Akorn or any of its subsidiaries which are material to Akorn and its subsidiaries considered as a whole, other than those in the ordinary course of business and those contemplated by this Agreement, and (iii) there has been no dividend or distribution of any kind declared, paid or made by Akorn on any class of its capital stock, except for a dividend in the amount of $0.017 per share declared at the October 27, 1990 meeting of Akorn’s Board of Directors.
(g) Capital Stock. The issuance of all outstanding common stock of Akorn, including the issuance of the common stock to be acquired by the Trust pursuant to this Agreement, has been duly authorized by all necessary corporate action. All of the issued and outstanding shares of capital stock of Akorn have been duly and validly issued and are fully paid and non-assessable and tree of preemptive rights, and no person has a valid cause of action relating to the offer, issuance or sale of shares of capital stock of Akorn in violation of the registration requirements of the Securities Act of 1933, as amended, except as described in Exhibit E hereto. The shares of common stock of Akorn issuable upon exercise of the Warrant have been (i) duly and validly authorized and reserved for issuance upon such exercise and (ii) when issued upon such exercise in accordance with the terms of the Warrant, will have been duly and validly issued and fully paid and will be non-assessable and free of preemptive rights. Except for warrants and options outstanding as of the date hereof as set forth in Exhibit F hereto, there are no outstanding options, conversion rights, warrants, preemptive rights, rights of first refusal or other rights, or agreements or commitments, obligating Akorn to issue, transfer or sell any shares of its capital stock, except as contemplated by this Agreement.
(h) Capital Stock of Subsidiaries. All of the outstanding shares of capital stock of each of Akorn’s subsidiaries have been duly and validly issued and are fully paid and nonassessable and are owned directly or indirectly by Akorn, free and clear of all liens, charges, claims or encumbrances. There are no outstanding options, conversion rights, warrants, preemptive rights, rights of first refusal or other rights, or other agreements or commitments, obligating any subsidiary of Akorn to issue, transfer or sell any shares of its capital stock.
(i) Exemption from Business Combination Provisions. Set forth below is a true and correct copy of a resolution adopted by the Board of Directors of Akorn at a meeting duly called, convened and held on November 9, 1990, at which meeting a quorum was present and acting throughout; such resolution is the only resolution which has been adopted by the Board of Directors of Akorn dealing with the matters specifically dealt with therein and such resolution has not been rescinded or amended and is in full force and effect on the date hereof:
“RESOLVED, that this Board of Directors hereby irrevocably exempts from the requirements of Louisiana R.S. 12:133 any business combination (as defined in Louisiana R.S. 12:132) involving transactions with the John N. Kapoor Trust dated September 20, 1989, or with
John Kapoor or any of the other beneficiaries of said trust, or any of its, his or their existing or future affiliates or associates (as so defined).”
(j) No Control Share Acquisition. The acquisition by the Trust of the Stock, together with receipt of the Warrant and the right to acquire shares of common stock of Akorn as contemplated thereby, does not constitute a “control share acquisition” within the meaning of Louisiana R.S. 12:135 through 12:140.2, presuming that the Trust, upon such acquisition and receipt, (i) will not own any other shares of Akorn common stock and (ii) may not exercise or direct the exercise, directly or indirectly, alone or as part of a group, of voting power with respect to any other shares of Akorn common stock.
(k) Deliveries to Norbrook. No document or other information or material relating to the condition, financial or otherwise, business, operations and prospects of Akorn furnished by or on behalf of Akorn to Norbrook on which Norbrook nay have reasonably relied to make an informed decision relating to the proposed repurchase of the Norbrook Common Stock by Akorn contains any untrue statement of a material fact or omits to state a material fact which will make the statements therein, in light of the circumstances under which they were made, misleading.
(l) Finder’s Fees. There is no agreement for the payment of any brokerage fees, commissions or finder’s fees in connection with this Agreement.
(m) Disclosure. No financial statement, certification, schedule, exhibit, list or other written information furnished by or on behalf of Akorn to the Trust in connection with this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state a material tact which will make the statements herein or therein, in light of the circumstances under which they were made, misleading.
(n) Repurchase of Norbrook Common Stock. Prior to or simultaneously with the execution and delivery of this Agreement, Akorn is entering into and consummating an agreement or agreements with Norbrook (the “Norbrook Agreement) in the form delivered to the Trust for the repurchase by Akorn of the Norbrook Common Stock for $1,500,000. Akorn has complied in all material respects with its obligations to Norbrook and certain of Norbrook’s affiliates as set forth in the Stock Purchase Agreement dated as of September 1, 1989 among Akorn, on the one hand, and Norbrook and certain of its affiliates, on the other hand, and the Common Stock Purchase Warrant dated September 19, 1989 between Akorn and Norbrook. Except as expressly provided in the Norbrook Agreement, all obligations of Akorn to Norbrook and Norbrook’s affiliates have now terminated, and in the Norbrook Agreement Norbrook and its affiliates have executed a written release of Akorn therefrom. Norbrook’s representative on the Board of Directors of Akorn has resigned prior to or simultaneously with the Closing.
(o) Auditors. Akorn has reappointed Ernst & Young as its auditors for its 1991 fiscal year.
4. Representations, Warranties and Covenants of the Trust . The Trust represents and warrants to, and covenants with, Akorn as of the date hereof as follows:
(a) Organization. The Trust is a trust validly created and existing under the laws of the State of Illinois and has the power and authority to purchase and own shares of Akorn common stock and to enter into and perform its obligations under this Agreement and the Stock Registration Rights Agreement.
(b) Authority. The execution and delivery of this Agreement and the Stock Registration Rights Agreement by the Trust and the performance of its obligations hereunder and thereunder have been duly authorized in accordance with the Trust’s instrument of trust, and this Agreement has been and the Stock Registration Rights Agreement will be duly executed and delivered by the Trust at the Closing. This Agreement and the Stock Registration Rights Agreement constitute the legal, valid and binding obligations of the Trust, enforceable in accordance with their respective terms, subject only to applicable bankruptcy, insolvency, moratorium or other similar laws affecting the rights of creditors generally and to general principles of equity.
(c) No Conflicts. There is no provision of the Trust’s governing instrument, and no provision of any indenture or agreement, written or oral, to which the Trust is a party or under which the Trust is obligated, nor is there any statute, rule or regulation or any judgment, decree or order of any court or agency, binding on the Trust which would be contravened by the execution and delivery by the Trust of this Agreement or the Stock Registration Rights Agreement or by the performance by the Trust of any provision, condition, covenant or other term hereof or thereof.
(d) Litigation. No litigation, arbitration proceedings or government proceedings are pending against or involve as a party or are threatened against the Trust which could materially adversely affect the ability of the Trust to enter into and to perform its obligations under this Agreement or under the Stock Registration Rights Agreement.
(e) Beneficiaries. The sole trustee of the Trust is Kapoor. The sole beneficiary of the Trust is Kapoor.
(f) Investment Representation. The Trust acknowledges and agrees that, except as provided in the Stock Registration Rights Agreement, the Stock, the Warrant and the shares to be acquired pursuant to the Warrant have not been, and upon their issuance will not be, registered under the Securities Act of 1933, as amended, or under the securities laws of any state, and are being issued and sold in reliance upon exemptions from those laws. The Trust is purchasing such shares and the Warrant for its own account, for investment purposes only, and (subject to the disposition of its property being at all times within its control) not with the view to resale or distribution thereof, or any right or interest therein, and the Trust agrees that it will not offer or sell any such securities, or any right or interest therein, in the absence of registration under such laws or an exemption therefrom, that each certificate representing such shares and the Warrant
will be stamped or otherwise imprinted with a legend to that effect and that stock transfer instructions may be given to Akorn’s transfer agent with respect thereto.
(g) Qualifications of Trust. The Trust, through its Trustee, has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment made pursuant to this Agreement and of making an informed investment decision with respect thereto.
(h) Share Ownership. Until such time as (i) the Warrant has expired unexercised and (ii) Kapoor is no longer a director of Akorn, the Trust and its affiliates will not, without the consent of Akorn, acquire beneficial ownership of securities or other rights having more than 25% of the voting power respecting the election of directors of Akorn, provided, however, that nothing in this Section 4(h) shall preclude the Trust from having beneficial ownership of up to 3,352,327 shares of common stock of Akorn (subject to appropriate adjustment in the case of stock splits or stock dividends), and provided further, however, the Trust shall not be deemed to violate this section by virtue of any repurchase of its capital stock by Akorn.
5. Conditions Precedent to the Obligation of the Trust to Consummate the Transaction . The obligation of the Trust to purchase and pay for the Stock is subject to the satisfaction, at or prior to the Closing, of each of the following conditions.
(a) Representations True. Each of the representations and warranties of Akorn contained in this Agreement or in any schedule, exhibit, certificate, instrument or other document delivered by or on behalf of Akorn in connection herewith shall be true and correct as of the Closing Date;
(b) Covenants Performed. Akorn shall have performed and complied with its covenants, obligations, agreements and conditions required by this Agreement to be performed and complied with on or prior to the Closing; and
(c) Norbrook Agreement. Akorn shall have entered into and consummated the Norbrook Agreement.
6. Other Activities . Akorn hereby acknowledges that the Trust, Kapoor and EJ Financial Enterprises, Inc. engage in a wide variety of investment and financing activities and their relationship with Akorn as set forth in this Agreement and related agreements is not to be deemed exclusive. Without limiting the generality of the foregoing, it is expressly agreed that any such activities relating other than to ophthalmic or injectable pharmaceuticals shall be deemed not to constitute a usurpation of a corporate opportunity of Akorn, a breach of fiduciary duty to Akorn or conflict of interest with Akorn.
7. Miscellaneous .
(a) Amendments. The provisions of this Agreement nay be amended, modified or waived only by written instrument executed by each of the Trust
and Akorn.
(b) Parties in Interest. This Agreement shall inure to benefit of and be binding upon permitted successors and assigns of the Trust and Akorn.
(c) Governing Law. The interpretation, validity and performance of this Agreement shall be construed and governed in accordance with the laws of the State of Louisiana, regardless of the law that might be applied under applicable principles of conflicts of laws.
(d) Waivers. No delay or omission by either party hereto in exercising any right, power or privilege hereunder shall impair such right, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
(e) Entire Agreement. This Agreement contains the entire understanding of the parties and supersedes all prior agreements and understandings relating to the subject matter hereof, and no agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement.
(f) Counterparts. This Agreement may be executed in two or more counterparts, each of which when so executed shall be deemed an original, but all such counterparts together shall constitute one and the same instrument.
(g) Severability. Any provision in this Agreement or any agreement or instrument delivered pursuant hereto which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. The parties shall endeavor in good faith negotiations to replace any prohibited or unenforceable provision with a valid provision or provisions, the effect of which shall reflect the bargain manifested in the prohibited or unenforceable provision.
(h) Headings. The headings of the sections herein are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions of this Agreement.
(i) Further Assurances. Each party hereto agrees to do such further acts and things, and to execute and deliver such additional agreements and instruments, as any party may reasonably request of the other in connection with the performance, administration or enforcement of this Agreement or the agreements related hereto.
(j) Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by cable, telegram or telex, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows:
if to Akorn:
Akorn, Inc.
100 Akorn Drive
Abita Springs, LA 70420
Attention: Barry LeBlanc, President
with a copy to:
Jones, Walker, Waechter, Poitevent,
Carrere & Denegre
201 St. Charles Avenue
New Orleans, Louisiana 70170
Attention: Carl C. Haneinann, Esq.
if to the Trust:
John N. Kapoor Trust dated September 20, 1989
225 East Deerpath, Suite 250
Lake Forest, IL 60045
Attention: John N. Kapoor, Trustee
with a copy to:
Sidley & Austin
One First National
Chicago, Illinois 60603
Attention: Thomas A. Cole, Esq.
(k) Expenses. Akorn hereby agrees to pay up to $10,000 of the expenses incurred by the Trust in connection with the negotiation, execution and delivery of this Agreement and related agreements. Except as set forth in the preceding sentence, all costs and expenses incurred in connection with the transactions contemplated by this Agreement and related agreements shall be paid by the party incurring such expenses.
IN WITNESS WHEREOF, each party has caused this Stock Purchase Agreement to be executed by its respective officer or trustee thereunto duly authorized as of the date first above written.
|
AKORN, INC.
|
||||
| By: | /s/ Doyle S. Gaw | |||
| Doyle S. Gaw | ||||
| Chairman of the Board | ||||
|
JOHN N. KAPOOR TRUST
DATED SEPTEMBER 20, 1989 |
||||
| By: | /s/ John N. Kapoor | |||
| John N. Kapoor, not individually | ||||
| But solely as Trustee | ||||
EXHIBIT A
COMMON STOCK PURCHASE WARRANT
between
AKORN, INC., a Louisiana Corporation
and
THE JOHN N. KAPOOR TRUST DATED SEPTEMBER 20, 1989
Dated: November 15, 1990
THE SECURITIES EVIDENCED BY THIS CERTIFICATE WERE ACQUIRED FOR INVESTMENT ONLY PURSUANT TO AN INVESTMENT REPRESENTATION ON THE PART OF THE HOLDER HEREOF. THEY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT, AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, OR A NO ACTION LETTER OR INTERPRETIVE OPINION OF THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION THAT SUCH REGISTRATION IS NOT REQUIRED.
COMMON STOCK PURCHASE WARRANT
Dated November 15, 1990
Void After November 15, 1993
AKORN, INC. (the “Company”), a Louisiana corporation, hereby certifies that, for value received, THE JOHN N. KAPOOR TRUST DATED SEPTEMBER 20, 1989 (the “Trust”), or its registered assigns (sometimes hereinafter collectively referred to as the Warrantholder or the “Warrantholders”), is entitled, subject to the terms and conditions set forth in this warrant (said warrant and any warrants issued in exchange herefor or replacements hereof being hereinafter collectively referred to as the “Warrants”), to purchase from the Company, two million (2,000,000) fully paid and nonassessable shares of Common Stock of the Company, without par value (the “Common Stock,” which term is further defined in Paragraph 4(i) hereof), at any time or from time to time until 5:00 p.m. Louisiana local time on November 15, 1993 at the exercise price set forth in Paragraph 2 hereof (the “Exercise Price”), the number of such shares of Common Stock and the Exercise Price being subject to adjustment as provided herein.
1. Exercise of Warrant. The rights represented by this Warrant may be
exercised by the Warrantholders, in whole or in part (but not as to a fractional share of Common Stock), by the presentation and surrender of this Warrant with written notice of Warrantholders’ election to purchase, substantially in the form of Exhibit A hereto, at the office of the Company, 100 Akorn Drive, Abita Springs, Louisiana 70420, marked to the attention of the Company’s President, or at such other address as the Company may designate by notice in writing to the Warrantholders at the address of each Warrantholder appearing on the books of the Company and upon payment to the Company of the Exercise Price for such shares of Common Stock. Such payment shall be made by check payable to the order of the Company. The Company agrees that the shares so purchased (the “Warrant Shares”) shall be deemed to have been issued to the Warrantholders who are the record owners of such Warrant Shares as of the close of business on the date on which this Warrant shall have been surrendered together with the aforementioned written notice of election to purchase, and payment for such Warrant Shares shall have been made as aforesaid. Certificates for the Warrant Shares so purchased shall be delivered to the Warrantholder within a reasonable time, not exceeding five days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the number of shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the Warrantholdcr within such time.
2. Exercise Price. Subject to adjustment as provided herein, the Exercise Price for the purchase of the Warrant Shares shall be $1.50 per share for Warrant Shares purchased prior to 5:00 p.m. Louisiana local time on November 15, 1991, $1.75 per share for Warrant Shares purchased after 5:00 p.m. Louisiana local time on November 15, 1991 but prior to 5:00 p.m. Louisiana local time on November 15, 1992 and $2.00 per share for Warrant Shares purchased after 5:00 p.m. Louisiana local time on November 15, 1992 but prior to 5:00 p.m. Louisiana local time on November 15, 1993.
3. Warrantholders Not Deemed Stockholders. Subject to the provisions of the Company’s Articles of Incorporation and By-laws, copies of which have been delivered to the Warrantholders, the Warrantholders shall not be entitled to vote or receive dividends or be deemed the holders of Common Stock, nor shall anything
contained herein be construed to confer upon the Warrantholders, as holders of Warrants, any of the rights of a stockholder of the Company or any right to vote upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends, except as otherwise provided herein, until this Warrant shall have been exercised and the Warrant Shares receivable upon the exercise hereof shall have become deliverable as provided in Paragraph 1 above.
4. Adjustment of Number of Shares. Exercise Price and Nature of Securities Issuable Upon Exercise of Warrants.
a. Exercise Price; Adjustment of Number of Shares. Each of the Exercise Prices set forth in Paragraph 2 hereof (except for any Exercise Price the exercise period relating to which has expired) shall be subject to adjustment from time to time as hereinafter provided. Upon each adjustment of the Exercise Price, the Warrantholders shall thereafter be entitled to purchase at the Exercise Price resulting from such adjustment and during the exercise period relating to such Exercise Price, a number of shares obtained by multiplying the Exercise Price immediately prior to such adjustment applicable to such period by the number of shares purchasable pursuant hereto during such period immediately prior to such adjustment and dividing the product thereof by the Exercise Price for such period resulting from such adjustment.
b. Adjustment of Exercise Price Upon Issuance of Common Stock. Except for shares of Common Stock of the Company issuable pursuant to warrants and options outstanding as of the date hereof or currently issuable pursuant to presently existing employee benefit plans of the Company, if and whenever after the date hereof the Company shall issue or sell Additional Shares of Common Stock (as defined below) without consideration or for a consideration per share less than the greater of (i) Exercise Price and (ii) Fair Value (as defined below) per share (except upon exercise of this Warrant), successively upon each such issuance or sale, the Exercise Price applicable to
each exercise period not yet then expired immediately prior to such issuance or sale of such shares shall be reduced to the lowest price calculated pursuant to clause (i) or (ii) below of this Paragraph 4(b) and shall be determined by (i) dividing (A) an amount equal to the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by each such Exercise Price plus (2) the aggregate consideration, if any, received by the Company upon such issue or sale, by (B) the total number of shares of Common Stock outstanding immediately after such issue or sale; or (ii) multiplying each such Exercise Price by a fraction, the numerator of which is (A) the sum of (1) the number of shares of Common Stock outstanding immediately prior to such issue or sale multiplied by the Fair Value per share of Common Stock immediately prior to such issue or sale plus (2) the aggregate consideration, if any, received by the Company upon such issue or sale, divided by (B) the total number of shares of Common Stock outstanding immediately after such issue or sale, and the denominator of which shall be the Fair Value per share of Common Stock immediately prior to such issue or sale.
No adjustment of the Exercise Price, however, shall be made in an amount less than $.0001 per share, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to $.0001 per share or more.
For purposes of this Paragraph 4(b), the date as of which the Fair Value per share of Common Stock shall be computed shall be the day preceding the earlier of the date on which the Company shall (i) enter into a firm contract for the issuance of such shares or (ii) issue such shares. For purposes of this Paragraph 4(b), if the Current Market Value (as defined in Paragraph 6) per share of Common Stock is determinable on the date on which the Fair Value per share of Common Stock is to be determined, the Fair Value per share of Common Stock shall be deemed to be equal to the Current Market Value per share of Common Stock as of the day preceding the earlier of the date on which the Company shall (i) enter a firm contract for the issuance of such shares or (ii) issue such shares.
The provisions of this Paragraph 4(b) shall not apply to any Additional Shares of Common Stock which are distributed to holders of Common Stock pursuant to a stock split for which an adjustment is provided for under Paragraph 4(f).
As used in this Warrant, the following terms shall have the following meanings:
“Additional Shares of Common Stock” shall mean all shares of Common Stock issued or issuable by the Company after the date of this Warrant.
“Fair Value” means the Fair Value of the appropriate security, property, assets, business or entity as determined in accordance with the following procedure: The Company and the holders of the Warrants and Warrant Shares, as applicable, shall use their best efforts to mutually agree to a determination of Fair Value within ten days of the date of the event requiring that such a determination be made. If the Company and such holders are unable to reach agreement within said ten day period, such holders shall, in their sole and absolute discretion, within five days of the expiration of the ten day period above referred to, retain an independent investment banking firm to determine (within thirty days of being retained) the Fair Value of the security, property, assets, business or entity, as the case may be, in question and deliver its opinion in writing to the Company and to such holders. The determination so made will be conclusive and binding on the Company and such holders. The fees and expenses of such determination made by such independent investment banking firm shall be paid by the Company. If there is more than one holder of Warrants, or Warrant Shares entitled to determination of Fair Value in any particular instance, each action to be taken by the holders of such Warrants or Warrant Shares under this Paragraph shall be taken by a majority in interest of such holders and the action taken by the majority (including as to any mutual agreement with the Company with respect to Fair Value and as to any selection of investment banking firms) shall be binding upon all such holders. In case of a determination of the Fair Value per share of Common Stock (i) the Company and such holders shall not take into consideration, and shall instruct any investment banking firm, not to take into consideration, any premium for shares representing control of the Company, any discount for any minority interest therein or any restrictions on transfer under Federal and applicable state securities laws or
otherwise; and (ii) there shall be a rebuttable presumption that the purchase of a security, property, assets, business or entity which is the subject of a determination of Fair Value shall establish the Fair Value of such security, property, assets, business or entity as its purchase price if such purchase is consummated in a negotiated arm’s-length transaction.
c. Further Provisions for Adjustment of Exercise Price Upon Issuance of Additional Shares of Common Stock and Convertible Securities. For purposes of Paragraph 4(b), the following provisions shall also be applicable:
(i) In case at any time on or after the date hereof, the Company shall declare any dividend or any other distribution upon any stock of the Company of any class, payable in Additional Shares of Common Stock or by the issuance of evidence of indebtedness, shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Additional Shares of Common Stock (all such indebtedness and securities being hereinafter referred to as “Convertible Securities”) such declaration or distribution shall be deemed to be an issue or sale (as of the record date) of such Additional Shares of Common Stock without consideration and shall thereby cause an adjustment in the Exercise Price as required by Paragraph 4(b).
(ii) (A) In case at any time on or after the issuance of this Warrant, the Company shall in any manner issue or sell any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, there shall be determined the price per share for which Additional Shares of Common Stock are issuable upon the conversion or exchange thereof, such determination to be made by dividing (a) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof by (b) the maximum aggregate number of Additional Shares of Common Stock issuable upon conversion or exchange of all such Convertible Securities for such minimum aggregate amount of additional consideration; and such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of Additional Shares of
Common Stock at the price per share so determined, and shall thereby cause an adjustment in the Exercise Price, if such an adjustment is required by Paragraph 4(b) hereof.
(B) If such Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration, if any, payable to the Company, or in the rate of exchange upon the conversion or exchange thereof, the adjusted Exercise Price shall, upon any such increase becoming effective, be increased to such Exercise Price as would have been in effect had the adjustments made upon the issuance of such Convertible Securities been made upon the basis of (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such Convertible Securities, (b) the issuance of all Common Stock, all Convertible Securities and all rights and options to purchase Common Stock issued after the issuance of such Convertible Securities, and (c) the original issuance at the time of such change of any such Convertible Securities then still outstanding; provided, however, that any such increase or increases shall not exceed, in the aggregate, the amount of the original reduction of the Exercise Price attributable to the Convertible Securities.
(C) If any rights of conversion or exchange evidenced by such Convertible Securities shall expire without having been exercised, the adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as would have been in effect bad an adjustment with respect to such Convertible Securities been made on the basis that the only Additional Shares of Common Stock issued or sold were those issued upon the conversion or exchange of such Convertible Securities, and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of such Convertible Securities.
(iii) (A) In case at any time on or after the issuance of this Warrant the Company shall in any manner grant or issue any rights or options to subscribe for, purchase or otherwise acquire Additional Shares of Common Stock,
whether or not such rights or options are immediately exercisable, there shall be determined the price per share for which Additional Shares of Common Stock are issuable upon the exercise of such rights or options, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights or options if the maximum number of Additional Shares of Common Stock were issued pursuant to such rights or options for such minimum aggregate amount of additional consideration, by (b) the maximum number of Additional Shares of Common Stock of the Company issuable upon the exercise of all such rights or options for such minimum aggregate amount of additional consideration; and the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of Additional Shares of Common Stock at the price per share so determined, and shall thereby cause an adjustment in the Exercise Price, if such an adjustment is required by Paragraph 4(b) hereof.
(B) If such rights or options shall by their terms provide for an increase or increases, with passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted Exercise Price shall, upon any such increases becoming effective, be increased to such Exercise Price as would have been in effect had the adjustments made upon the issuance of such rights or options been made upon the basis of (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exercise of such rights or options, (b) the issuance of all Common Stock, all rights and options and all Convertible Securities issued after the issuance of such rights and options, and (c) the original issuance at the time of such change of any such rights or options then still outstanding; provided, however, that any such increase or increases in the Exercise Price shall not exceed, in the aggregate, the amount of the original reduction of the Exercise Price attributable to the grant of such rights or options.
(C) If any such rights or options shall expire without having been exercised, the adjusted Exercise Price shall forthwith be readjusted to such
Exercise Price as would have been in effect had an adjustment with respect to such rights or options been made on the basis that the only Additional Shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of such rights or options.
(iv) (A) In case at any time on or after the issuance of this Warrant the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Convertible Securities, there shall be determined the price per share for which Additional Shares of Common Stock are issuable upon the exchange or conversion of such Convertible Securities if such rights or options were exercised, such determination to be made by dividing (a) the total amount, if any, received or receivable by the Company as consideration for the issuance of such rights or options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of such rights or options if the maximum number of Convertible Securities were issued pursuant to such rights or options for such minimum aggregate amount of additional consideration, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exchange or conversion of such Convertible Securities if the maximum number of Additional Shares of Common Stock were issued pursuant to such Convertible Securities for such minimum aggregate amount of additional consideration, by (b) the maximum aggregate number of Additional Shares of Common Stock issuable upon the exchange or conversion of the Convertible Securities for such minimum aggregate amount of additional consideration; and the issue or sale of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of Additional Shares of Common Stock at the price per share so determined, and thereby shall cause an adjustment in the Exercise Price, if such an adjustment is required by Paragraph 4(b).
(B) If such rights or options to subscribe for or otherwise acquire Convertible Securities shall by their terms provide for an increase or increases, with the passage of time, in the amount of additional consideration payable to
the Company upon the exercise, exchange or conversion thereof, the adjusted Exercise Price shall, forthwith upon any such increase becoming effective, be increased to such Exercise Price as would have been in effect had the adjustments made upon the issuances of such rights or options been made upon the basis of (a) the issuance of the number of shares of Common Stock theretofore actually delivered upon the exchange or conversion of such Convertible Securities (b) the issuances of all Common Stock and all rights, options and Convertible Securities issued after the issuance of such rights and options and (c) the original issuances at the time of such change of any such rights, options and Convertible Securities issued upon exercise of such rights or options which are then still outstanding; provided, however, that any such increase or increases shall not exceed, in the aggregate, the amount of the original reduction of the Exercise Price attributable to the grant of such rights or options.
(C) If any such rights, options or rights of conversion or exchange of such Convertible Securities shall expire without having been exercised, exchanged or converted, the adjusted Exercise Price shall forthwith be readjusted to such Exercise Price as would have been in effect had an adjustment been made with respect to such rights, options or rights of conversion or exchange of such Convertible Securities on the basis that the only Additional Shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and exchange or conversion of such Convertible Securities and that they were issued or sold for the consideration actually received by the Company upon exercise of such rights and options and exchange or conversion of such Convertible Securities, plus the consideration, if any, actually received by the Company for the granting of such rights, options or Convertible Securities.
(v) In any case where an adjustment has been made in the Exercise Price upon the issuance of Convertible Securities or any rights or options to purchase Convertible Securities or Additional Shares of Common Stock pursuant to this Paragraph 4(c), no further adjustment shall be made at the time of the conversion of any such Convertible Securities or at the time of the exercise of any such rights or options. Where no such adjustment has been made at the time of issuance, an adjustment shall be
made at the time of the conversion of any such Convertible Securities or at the time of the exercise of any such rights or options if such an adjustment is required by Paragraph 4(b).
(vi) In case at any time on or after the issuance of this Warrant shares of Common Stock or Convertible Securities or any rights or options to acquire Additional Shares of Common Stock or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash payable to the Company shall be deemed to be the Fair Value of such consideration. Whether or not the consideration so received is cash, the amount thereof shall be determined after deducting therefrom any expenses incurred or any underwriting commissions or concessions or discounts paid or allowed by the Company in connection therewith.
(vii) In case at any time the Company shall fix a record date of the holders of its Common Stock for the purpose of entitling them (a) to receive a dividend or other distribution payable in Common Stock, Convertible Securities or rights or options to purchase either thereof, or (b) to subscribe for or purchase Common Stock, Convertible Securities or rights or options to purchase either thereof, then such record date shall be deemed to be the date of the issue or sale of the shares of Common Stock deemed, pursuant to this Paragraph 4(c), to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.
(viii) The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock for the purposes of this paragraph 4(c).
d. Reorganization, Reclassification, Consolidation, Merger or Sale. If any capital reorganization or reclassification of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization,
reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Warrantholders shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in this Warrant upon exercise of this Warrant and in lieu of the Warrant Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, cash or assets as may be issued or payable with respect to or in exchange for a number of outstanding shares of Common Stock equal to the number of Warrant Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, and in any such case appropriate provision shall be made with respect to the rights and interest of the Warrantholders to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Exercise Price and of the number of Warrant Shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock or securities thereafter deliverable upon the exercise hereof. The Company shall not effect any consolidation, merger or sale of all or substantially all of the assets of the Company unless prior to or simultaneous with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation, merger or purchase of such assets shall assume, by written instrument executed and mailed or delivered to the Warrantholders, the obligation to deliver to such Warrantholders such cash (or cash equivalent), shares of stock, securities, cash or assets as, in accordance with the foregoing provisions, the Warrantholders may be entitled to receive and containing the express assumption of such successor corporation of the due and punctual performance and observance of each provision of this Warrant to be performed and observed by the Company and of all liabilities and obligations of the Company hereunder.
In case any Additional Shares of Common Stock or Convertible Securities or any rights or options to purchase any Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger of another corporation into the Company, the amount of consideration therefor shall be deemed to be the Fair Value of such portion of the assets of such merged corporation as the Board of Directors of the Company shall in good faith determine to be attributable to such Additional Shares of Common Stock, Convertible Securities or rights or options, as the case may be, and the
Exercise Price shall be adjusted in accordance with this Paragraph 4(d).
e. Company to Prevent Dilution. In case at any time or from time to time conditions arise by reason of action taken by the Company which are not adequately covered by the provisions of this Paragraph 4, and which might materially and adversely affect the exercise rights of the Warrantholders under any provision of this Warrant, unless the adjustment necessary shall be agreed upon by the Company and the Warrantholders, the Board of Directors of the Company shall appoint a firm of independent certified public accountants of recognized standing, reasonably acceptable to the Warrantholders, who at the Company’s expense shall give their opinion upon the adjustment, if any, on a basis consistent with the standards established in the other provisions of this Paragraph 4, necessary with respect to the Exercise Price and the number of Warrant Shares purchasable upon exercise of the Warrants, so as to preserve, without dilution, the exercise rights of the Warrantholders. Upon receipt of such opinion, such Board of Directors shall forthwith make the adjustments described therein.
Nothing contained in this Paragraph 4(e) shall require the Exercise Price to be adjusted in the event that the Company shall declare or pay any quarterly cash dividend or distribution upon any stock of the Company of any class which does not exceed the greater of (i) $.017 per share and (ii) 125% of the amount of any quarterly cash dividend paid with respect to the same quarter in the immediately preceding fiscal year of the Company.
f. Stock Splits and Reverse Stock Splits. In case at any time the Company shall subdivide its outstanding shares of Common Stock into a greater number of shares, the Exercise Price in effect immediately prior to such subdivision shall be proportionately reduced and the number of Warrant Shares purchasable pursuant to this Warrant immediately prior to such subdivision shall be proportionately increased, and conversely, in case at any time the Company shall combine its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect immediately prior to such combination shall be proportionately increased and the number of Warrant Shares purchasable upon the exercise of this Warrant immediately prior to such
combination shall be proportionately reduced.
g. Dissolution. Liquidation and Wind-Up. In case the Company shall, at any time prior to the expiration of this warrant and prior to the exercise thereof, dissolve, liquidate or wind up its affairs, the Warrantholders shall be entitled, upon the exercise of this Warrant, to receive, in lieu of the Warrant Shares which such Warrantholders would have been entitled to receive, the same kind and amount of assets as would have been issued, distributed or paid to such Warrantholders upon any such dissolution, liquidation or winding up with respect to such Warrant Shares, had such Warrantholders been the holders of record of the Warrant Shares receivable upon the exercise of this Warrant on the record date for the determination of those persons entitled to receive any such liquidating distribution. After any such dissolution, liquidation or winding up which shall result in any cash distribution in excess of the Exercise Price provided for by this Warrant, the Warrantholders may, at each such Warrantholder’s option, exercise the same without making payment of the Exercise Price, and in such case the Company shall, upon the distribution to said Warrantholders, consider that said Exercise Price has been paid in full to it and in making settlement to said Warrantholders, shall deduct from the amount payable to such Warrantholders an amount equal to such Exercise Price.
h. Accountants’ Certificate. In each case of an adjustment in the number of Warrant Shares or other stock, securities or property receivable upon the exercise of this Warrant, the Company at its expense shall compute, and upon the Warrantholder’s request shall at its expense cause independent public accountants of recognized standing selected by the Company and acceptable to the Warrantholders to certify such computation, such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment and showing in detail the facts upon which such adjustment is based, including a statement of (a) the consideration received or to be received by the Company for any Additional Shares of Common Stock, rights, options or Convertible Securities issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock of each class outstanding or deemed to be outstanding, (c) the adjusted Exercise Price and (d) the number of Warrant Shares
issuable upon exercise of this Warrant. The Company will forthwith mail a copy of each such certificate to each Warrantholder.
i. Definition of Common Stock. As used herein, the term “Common Stock” shall mean and include the Company’s authorized common stock of any class or classes and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage of par value in respect of the rights of the holders thereof to participate in dividends and in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company, and shall include any common stock of any class or classes resulting from any reclassification or reclassifications thereof.
5. Special Agreements of the Company.
a. Reservation of Shares. The Company covenants and agrees that all Warrant Shares will, upon issuance, be validly issued, fully paid and nonassessable and free from all preemptive rights of any stockholder, and from all taxes, liens and charges with respect to the issue thereof (other than taxes in respect to any transfer occurring contemporaneously with such issue) and that it will obtain, at its sole expense, all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof as may be necessary to enable the Company to perform its obligations under this Warrant. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of the rights represented by this Warrant.
b. Avoidance of Certain Actions. The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, issue or sale of securities or otherwise, avoid or take any action which would have the effect of avoiding the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in carrying out all of the provisions of this Warrant and in taking all of such action as may be necessary or appropriate in order to protect the rights of the
Warrantholders against dilution or other impairment of their rights hereunder.
c. Securing Governmental Approvals. If any Warrant Shares required to be reserved for the purposes of exercise of this Warrant require registration with or approval of governmental authority under any federal law (other than the Securities Act of 1933, as amended (the “Securities Act”)) or under any state law before such Warrant Shares may be issued upon exercise of this Warrant, the Company will, at its expense, as expeditiously as possible, use its best efforts to cause such Warrant Shares to be duly registered or approved, as the case may be.
d. Listing on Securities Exchanges; Registration. If, and so long as, any class of the Company’s Common Stock shall be listed on any national securities exchange (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”)), the Company will, at its expense, obtain and maintain the approval for listing upon official notice of issuance of all such Common Stock receivable upon the exercise of Warrants at the time outstanding and will maintain the listing of such Common Stock after its issuance; and the Company will so list on such national securities exchange, will register under the Exchange Act (or any similar statute then in effect), and will maintain such listing of, any other securities that at any time are issuable upon exercise of this Warrant if and at the time any securities of the same class shall be listed on such national securities exchange by the Company.
e. Communication to Shareholders. Any notice, document or other communication given or made by the Company to holders of Common Stock as such shall at the same time be provided to the Warrantholders.
f. Compliance with Law. The Company shall comply with all applicable laws, rules and regulations of the United States and of all states, municipalities and agencies and of any other jurisdiction applicable to the Company and shall do all things necessary to preserve, renew and keep in full force and effect and in good standing its corporate existence and authority necessary to continue its business.
g. Control Share Acquisition Matters. If any Warrantholder shall
desire to exercise this Warrant in whole or in part and the effect of such exercise would be to cause any shares of the Common Stock of the Company owned by such Warrantholder (including but not limited to shares acquired upon such exercise) to constitute control shares (as defined in Louisiana R.S. 12:135), such Warrantholder may request the Board of Directors of the Company to adopt a bylaw contemplated by Louisiana R.S. 12:140.2 or otherwise take action having the effect of making Louisiana R.S. 12:135 through 140.2 inapplicable to shares of Common Stock owned by such Warrantholder, including shares which would be purchased upon such exercise. If within 30 days from the date of such request such Warrantholder has not been supplied with (i) certified resolutions of the Board of Directors, in form and substance reasonably satisfactory to such Warrantholder, reflecting the adoption of such bylaw or the taking of such action and (ii) an opinion of counsel, in form and substance reasonably satisfactory to such Warrantholder, to the effect that the adoption of such bylaw or the taking of such action has the effect described above, then at any time within 90 days after the expiration of such 30 day period, such Warrantholder may tender such Warrant for cancellation in respect of that number of shares which, when taken together with such Warrantholder’s other ownership of shares of Common Stock, would cause an exercise of this Warrant as a whole to result in a control share acquisition (as defined in Louisiana R.S. 12:135) provided, however, that the Warrantholder may not tender such Warrant for cancellation in respect of any number of shares which exceeds 2.3725% of the maximum number of shares which the Company has had outstanding (assuming full exercise of this Warrant) from the date of this Warrant to the date that the cancellation payment referred to in the next sentence is made. Immediately upon receipt of such tender for cancellation, the Company shall make to such Warrantholder a cancellation payment equal to (a) the number of shares in respect of which this Warrant shall be so cancelled times (b) the difference between (1) the per share Current Market Value on the date on which the request contemplated by the first sentence of this subsection shall have been delivered to the Company and (ii) the per share Exercise Price of tins Warrant in effect on such day. If within such 30 day period such Warrantholder has been supplied with such certified resolutions and such opinion of counsel, then at any time within 90 days after receipt of such items such Warrantholder may tender such Warrant for exercise at the per share
Exercise Price of this Warrant on the date on which the request contemplated by the first sentence of this subsection shall have been delivered to the Company.
6. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon exercise hereof, the Company shall pay to the Warrantholder an amount in cash equal to such fraction multiplied by the current market value (the “Current Market Value”) of one share of Common Stock, determined as follows:
(i) If the Common Stock is listed on a national securities exchange, is admitted to unlisted trading privileges on such exchange or is traded on the NASDAQ/National Market System, the Current Market Value shall be the average of the closing prices per share of the Common Stock as reported in The Wall Street Journal for the last 20 business days prior to the date of exercise of this Warrant;
(ii) If the Common Stock is not so listed, admitted or traded, the Current Market Value shall be the average bid and asked prices for the last 20 business days prior to the date of exercise of this Warrant as furnished by two members of the National Association of Securities Dealers, Inc. selected for that purpose from time to time by the Company and reasonably acceptable to the Warrantholders; or
(iii) If no such bid and asked prices are available as set forth above, Current Market value shall be the Fair Value (as defined in Section 4(b)) per share of Akorn common stock on the day immediately prior to the date of exercise of this Warrant.
7. Notices of Stock Dividends, Subscriptions, Reclassification, Consolidations, Mergers, etc. If at any time: (i) the Company shall declare a cash dividend that exceeds 125% of the amount of any quarterly cash dividend paid with respect to the same quarter in the immediately preceding fiscal year of the Company or a dividend on Common Stock payable otherwise than in cash; or (ii) the Company shall authorize the granting to the holders of Common Stock of rights to subscribe for or purchase any shares of capital stock of any class or of any other rights; or (iii) there shall
be any capital reorganization, or reclassification, or redemption of the capital stock of the Company, or consolidation or merger of the Company with, or sale of all or substantially all of its assets to, another corporation or firm; or (iv) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company, then the Company shall give to the Warrantholders at the addresses of such Warrantholders as shown on the books of the Company, at least ten days prior to the applicable record data hereinafter specified, a written notice summarizing such action or event and stating the record date for any such dividend or rights (or, if a record date is not to be selected, the date as of which the holders of Common Stock of record entitled to such dividend or rights are to be determined), the date on which any such reorganization, reclassification, consolidation, merger, sale of assets, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected the holders of Common Stock of record shall be entitled to effect any exchange of their shares of Common Stock for cash (or cash equivalent) securities or other property deliverable upon any such reorganization, reclassification, consolidation, merger, sale of assets, dissolution, liquidation or winding up.
8. Registered Holder; Transfer of Warrants or Warrant Shares; Investment Representation.
a. Maintenance of Registration Books; Ownership of this Warrant. The Company shall keep at its principal office in the City of Abita Springs, Louisiana, a register in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration, transfer and exchange of this Warrant. The Company shall not at any time, except upon the dissolution, liquidation or winding-up of the Company, close such register so as to result in preventing or delaying the exercise or transfer of this Warrant.
The Company may deem and treat the person in whose name this Warrant is registered as the holder and owner hereof (notwithstanding any notations of ownership or writing hereon made by anyone other than the Company) for all purposes and shall not be affected by any notice to the contrary, until presentation of this Warrant for registration
or transfer as provided in this Paragraph 8.
b. Exchange and Replacement. This Warrant is exchangeable upon surrender hereof by the registered holder to the Company at its principal office for new Warrants of like tenor and date representing in the aggregate the right to purchase the number of Warrant Shares purchasable hereunder, each of such new Warrants to represent the right to purchase such number of Warrant Shares as shall be designated by said registered holder at the time of surrender. Subject to compliance with the provisions of Paragraph 8 and 9, this Warrant and all rights hereunder are transferable in whole or in part upon the books of the Company by the registered holder hereof in person or by duly authorized attorney, and a new Warrant shall be made and delivered by the Company, of the same tenor and date as this Warrant but registered in the name of the transferee, upon surrender of this Warrant, duly endorsed, to said office of the Company. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, upon delivery to the Company by the Warrantholder of an indemnification agreement satisfactory to the Company, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant, without requiring the posting of any bond or the giving of any other security. This Warrant shall be promptly cancelled by the Company upon the surrender hereof in connection with any exchange, transfer or replacement. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, execution and delivery of Warrants pursuant to this Paragraph 8.
c. Warrants and Warrant Shares Not Registered. The holder of this Warrant, by accepting this Warrant, represents and acknowledges that this Warrant and the Warrant Shares are not being registered under the Securities Act on the grounds that the issuance of this Warrant and the offering and sale of such Warrant Shares are exempt from registration under Section 4(2) of the Securities Act as not involving any public offering.
Notwithstanding any provisions contained in this Warrant to the contrary, this
Warrant and the Warrant Shares shall not be transferable except upon the conditions specified in Paragraph 8 and 9, which conditions are intended, among other things, to insure compliance with the provisions of the Securities Act in respect of the transfer of this Warrant or of such Warrant Shares.
d. Investment Representations. The Trust represents and warrants to the Company that this Warrant is being acquired by it for its own account for investment purposes only and (subject to the disposition of its property being at all times within its control) not with a view to resale, distribution or other disposition thereof; any Warrant Shares which may be issued to the Trust, or its nominee, upon exercise of this Warrant will be acquired by it for its own account for investment purposes only and (subject to the disposition of its property being at all times within its control) not with a view to resale, distribution or other disposition thereof; the Trust is able to bear the economic risk of investment in this Warrant and said shares, can afford to sustain a total loss on such investment, and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the proposed investment; and the Trust understands that there is no public market for this Warrant or the Warrant Shares and that there may never be a public market for this Warrant or the Warrant Shares, and, therefore, the Trust may have to bear the risk of its investment in this Warrant and any Warrant Shares for an indefinite period of time.
9. Legends; Restrictions on Transfer.
a. Warrant Legend. Each Warrant shall be stamped or otherwise imprinted with the legend set forth on the first page of this Warrant.
b. Warrant Shares Legend. Bach stock certificate representing Warrant Shares shall be stamped or otherwise imprinted with the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY TRANSFER
THEREOF IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE WARRANT TO PURCHASE SHARES OF STOCK, WITHOUT PAR VALUE, OF THE COMPANY, DATED AS OF NOVEMBER 15, 1990, ORIGINALLY ISSUED BY AKORN, INC. (“THE COMPANY”) TO THE JOHN N. KAPOOR TRUST DATED SEPTEMBER 20, 1989. A COPY OF THE FORM OF SUCH WARRANT IS ON FILE WITH THE COMPANY’S SECRETARY AT THE COMPANY’S PRINCIPAL EXECUTIVE OFFICE AND WILL BE FURNISHED WITHOUT CHARGE TO THE HOLDER OF THIS CERTIFICATE UPON WRITTEN BEQUEST TO THE SECRETARY AT SUCH OFFICE.
c. Notice of Proposed Transfer. Prior to any proposed transfer of this Warrant or any Warrant Shares, the Warrantholder or the holder of Warrant Shares, as the case may be, shall give written notice to the Company of its intention to effect such transfer. Each such notice shall describe the manner of the proposed transfer and, if requested by the Company, shall be accompanied by an opinion of counsel satisfactory to the Company to the effect that the proposed transfer may be effected without registration under the Securities Act or qualification under any applicable state securities law (which opinion as to state securities laws shall be at the expense of the Company), whereupon such Warrantholder or holder of Warrant Shares shall be entitled to transfer such securities in accordance with the terms of its notice. Each Warrant and each certificate for Warrant Shares transferred as above provided shall bear, respectively, the legends set forth in Paragraph 9(a) and 9(b), except that such Warrant or certificate shall not bear such legend if (i) such transfer is in accordance with the provisions of Rule 144 (or any other rule permitting public sale without registration under the Securities Act) or (ii) the opinion of counsel referred to above is to the further effect that the transferee and any subsequent transferee (other than an affiliate of the Company) would be entitled to transfer such securities in a public sale without registration under the Securities Act. In addition, new securities shall be issued without such legends if such legends may be
properly removed under the terms of Rule 144(k) promulgated under the Securities Act.
d. Further Limitations on Transfer. The Warrantholder shall not transfer this Warrant to any person except to the beneficiaries of the Trust who are members of John N. Kapoor’s immediate family or to not more than eight employees of EJ Financial or its affiliates.
10. Miscellaneous Provisions.
a. Governing Law. This Warrant shall be deemed to have been made in the State of Louisiana and the validity of this Warrant, the construction, interpretation, and enforcement thereof, and the rights of the parties thereto shall be determined under, governed by, and construed in accordance with the internal laws of the State of Louisiana, without regard to principles of conflicts of law.
b. Notices. All notices hereunder shall be in writing and shall be deemed
to have been given three days after being mailed by certified mail, addressed
to the address below stated of the party to which notice is given, or to such
changed address as such party may have fixed by notice (provided, however, that
any notice of change of address shall be effective only upon receipt):
To the Company:
Akorn, Inc.
100 Akorn Drive
Abita Springs, Louisiana 70420
Attn: Barry LeBlanc, President
With a copy to:
Mr. Carl C. Hanernann
Jones, Walker, Waechter, Poitevent,
Carrexc & Demegre
201 St. Charles Avenue, 51st Floor New
Orleans, Louisiana 70170
To the Warrantholders or
At the addresses of such
holders of Warrant Shares:
holders as they appear on the records of
the Company
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With a copy to: | Mr. Thomas A. Cole | ||
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Sidley & Austin | |||
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One First National Plaza | |||
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Chicago, Illinois 60603 |
c. Assignment. This Warrant shall be binding upon and inure to the benefit of the Company, the Warrantholders and the holders of Warrant Shares and the permitted successors, assigns and transferees of the Company, the Warrantholders and the holders of Warrant Shares.
d. Attorneys’ Fees. If any legal action or any arbitration or other proceeding is brought for the enforcement of this Warrant, or because of an alleged dispute, breach, default, or misrepresentation in connection with any of the provisions of this Warrant, the successful or prevailing party or parties shall be entitled to recover such reasonable attorneys’ fees and other costs incurred in that action or proceeding, in addition to any other relief to which it or they may be entitled, as may be ordered in connection with such proceeding.
e. Entire Agreement; Amendments and Waivers. This Warrant sets forth the entire understanding of the parties with respect to the transactions contemplated hereby. The failure of any party to seek redress for the violation or to insist upon the strict performance of any term of this Warrant shall not constitute a waiver of such term and such party shall be entitled to enforce such term without regard to such forbearance. This Warrant may be amended, the Company may take any action herein prohibited or omit to take action herein required to be performed by it, and any breach of or compliance with any covenant, agreement, warranty or representation may be waived, only if the Company has obtained the written consent or written waiver of the majority in interest of the Warrantholders, and then such consent or waiver shall be effective only in the specific instance and for the specific purpose for which given.
f. Severability. If any term of this Warrant as applied to any person or to any circumstance is prohibited, void, invalid or unenforceable in any jurisdiction, such term shall, as to such jurisdiction, be ineffective to the extent of such prohibition or
invalidity without in any way affecting any other term of this Warrant or affecting the validity or enforceability of this Warrant or of such provision in any other jurisdiction.
g. Headings. The headings in this Warrant are inserted only for convenience of reference and shall not be used in the construction of any of its terms.
h. Nonwaiver; Cumulative Remedies. No course of dealing or any delay or failure to exercise any right hereunder on the part of any Warrantholder or any holders of Warrant Shares shall operate as a waiver of such right or otherwise prejudice the rights, powers or remedies of such Warrantholder or such holders of Warrant Shares. The rights and remedies provided in this Warrant are cumulative and are in addition to all rights and remedies which each Warrantholder and each holder of Warrant Shares may have in law or in equity or by statute or otherwise.
i. Construction. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, the singular include the plural, and the part include the whole; the term including is not limiting, and the term or has the inclusive meaning represented by the phrase “and/or.” The words “hereof,” “herein,” “hereby,” “hereunder,” and other similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer on the 15th day of November, 1990.
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Company:
AKORN, INC. |
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| By: | ||||
| Barry D. LeBlanc, President | ||||
EXHIBIT A
NOTICE OF EXERCISE FORM
(To be executed only upon partial or full
exercise of the within Warrant)
The undersigned registered holder of the within Warrant irrevocably exercises the within Warrant for and purchases shares of Common Stock of Akorn, Inc. and herewith makes payment therefor in the amount of $ , all at the price and on the terms and conditions specified in the within Warrant, and requests that a certificate (or certificates in denominations of shares) for the shares of Common Stock of Akorn, Inc. hereby purchased be issued in the name of and delivered to (choose one) (a) the undersigned or (b) , whose address is and, if such shares of Common Stock shall not include all the shares of Common Stock issuable as provided in the within Warrant, that a new Warrant of like tenor for the number of shares of Common Stock of Akorn, Inc. not being purchased hereunder be issued in the name of and delivered to (choose one) (a) the undersigned or (b) , whose address is
By:
(Signature of Registered Holder)
Signature Guaranteed:
EXHIBIT B
CONSULTING AGREEMENT
This CONSULTING AGREEMENT, dated as of November 15, 1990, is entered into by and between EJ Financial Enterprises, Inc., a Delaware corporation (“EJ Financial”), and Akorn, Inc., a Louisiana corporation (“Akorn”).
WITNESSETH
WHEREAS, Akorn has requested that EJ Financial provide to Akorn certain consulting services described herein commencing on the date hereof; and
WHEREAS, EJ Financial is willing to provide to Akorn such services on the terms and conditions herein provided.
NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:
1. Consulting Services . Akorn hereby retains EJ Financial as an independent consultant to provide management consulting services relating to strategic corporate objectives of Akorn (the “Consulting Services”), and EJ Financial hereby agrees to provide Akorn with such Consulting Services, upon the terms and subject to the conditions hereinafter set forth.
2. Position and Duties . EJ Financial shall serve only as a consultant to Akorn with respect to the Consulting Services. Nothing herein shall be deemed to cause EJ Financial or any of its directors, officers or employees to be considered an agent of Akorn. Akorn acknowledges that EJ Financial and its directors, officers and employees may provide consulting services to other entities, serve as members of certain other corporate boards of directors and engage in other business activities.
3. Term . The term of the consulting arrangement hereunder shall commence on the date hereof and continue until December 31, 1993 (the “Term”), unless earlier terminated pursuant to Section 6.
4. Compensation . In consideration for the Consulting Services provided by EJ Financial hereunder, Akorn shall pay to EJ Financial a fixed monthly consulting fee equal to $4,167 per calendar month ($50,000 per year) payable in arrears on the last business day of each month during the Term (collectively, the “Monthly Payments”). In the case of any month in which this Agreement is not in effect for the full month, such consulting fee shall he prorated based on the number of days in the month with respect to which this Agreement is in effect.
5. Akorn shall promptly reimburse EJ Financial for all reasonable expenses incurred by EJ Financial or any of its directors, officers or employees in the
performance of its duties hereunder, including, but not limited to, travel expenses between Chicago, Illinois and New Orleans, Louisiana, and living expenses while away from home in the service of Akorn; provided, that such expenses in excess of $200 shall have been approved in writing by John Kapoor, Barry LeBlanc and Doyle Gaw prior to the incurrence thereof. In addition, EJ Financial shall comply with such requirements with respect to expenses as Akorn may reasonably establish in writing from time to time in respect of Akorn’s executive officers.
6. Termination . This Consulting Agreement shall commence on the date hereof and continue until all of the parties’ obligations hereunder have been fulfilled, except that this Consulting Agreement (other than Sections 7 and 8) shall terminate 30 days after the delivery by either party of a notice to the effect that such party has determined to terminate this Consulting Agreement. EJ Financial shall not be entitled to any compensation or severance pay or other termination benefits upon any termination of this Consulting Agreement; provided, however, that EJ Financial shall be entitled to receive any Monthly Payments owed to it by Akorn with respect to any period prior to such termination. Termination pursuant to this Section 6 shall be the sole remedy of Akorn for a failure of EJ Financial to provide the Consulting Services as described in Section 1 hereof.
7. Confidential Information . EJ Financial recognizes and acknowledges that certain assets of Akorn and its affiliates, including, without limitation, information regarding customers, pricing policies, methods of operation, proprietary computer programs, sales, products, profits, costs, markets, key personnel, formulae, product applications, technical processes, trade secrets and any reports prepared by EJ Financial or any of its directors, officers or employees delivered to Akorn hereunder (hereinafter called “Confidential Information”) are valuable, special, and unique assets of Akorn and its affiliates. Neither EJ Financial nor any director, officer or employee thereof shall, during or after the term of this Agreement, disclose any part of the Confidential Information to any person, firm, corporation, association, or any other entity for any reason or purpose whatsoever, directly or indirectly, except as may be directed in writing by the management of Akorn, unless and until such Confidential Information becomes publicly available other than as a consequence of the breach by EJ Financial or any director, officer or employee thereof of their confidentiality obligations hereunder or unless and only to the extent that such disclosure is required by applicable law.
8. Indemnification . In the event that EJ Financial or any director, officer or employee thereof becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed claim, action, suit or proceeding or investigation, whether civil, criminal, administrative, investigative or otherwise (the “Indemnification Claim”) by reason of or arising out of this Consulting Agreement, Akorn shall indemnify, defend and hold harmless EJ Financial or such director, officer or employee thereof to the fullest extent permitted by law as soon as practicable but in any event no later than thirty days after written demand is presented to Akorn, against any and all losses, claims, damages, expenses, liabilities or judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with
or in respect of such losses, claims, damages, expenses, liabilities or judgments, fines, penalties and amounts paid in settlement) of or arising from such Indemnification Claim. For purposes of this Section 8, the terms “expenses” shall include attorney’s fees and all other costs, expenses and obligations, in each case reasonably paid or incurred in connection with investigating, defending, prosecuting, being a witness in or participating in any Indemnification Claim. If so requested by EJ Financial or any director, officer or employee thereof in writing, Akorn shall advance (within two business days of such request) any and all such expenses to EJ Financial or such director, officer or employee thereof.
Notwithstanding the foregoing, (i) with respect to any Indemnification Claim brought or made by Akorn or an affiliate thereof, Akorn shall have no obligation to indemnify EJ Financial or any director, officer or employee thereof in the event that it is finally judicially determined that such Indemnification Claim arose primarily out of the gross negligence or intentional misconduct of EJ Financial or such director, officer or employee thereof and (ii) with respect to any Indemnification Claim brought or made by any person or entity other than Akorn or an affiliate thereof, Akorn shall have no obligation to indemnify EJ Financial or any director, officer or employee thereof in the event that it is finally judicially determined that such Indemnification Claim arose primarily out of the intentional misconduct of EJ Financial or such director, officer or employee thereof.
In the event that Akorn has advanced expenses to EJ Financial or any director, officer or employee thereof and it is finally judicially determined, in the case of any Indemnification Claim referred to in clause (i) of the preceding paragraph, that such Indemnification Claim arose primarily out of the gross negligence or intentional misconduct of EJ Financial or such director, officer or employee thereof, or, in the case of any Indemnification Claim referred to in clause (ii) of the preceding paragraph, that such Indemnification claim arose primarily out of the intentional misconduct of EJ Financial or such director, officer or employee thereof, EJ Financial hereby undertakes promptly, but in no event later than thirty days following such final judicial determination, to reimburse Akorn for any such expenses advanced.
9. General .
Notices. All notices and other communication hereunder shall be in writing or by written telecommunication, and shall be deemed to have been duly given when delivered by United States certified or registered mail, return receipt requested, postage prepaid to the relevant address set forth below, or to such other address as the recipient of such notice or communication shall have specified to the other party hereto in accordance with this Section 9(a), except that no notice of change of address shall be effective until receipt thereof:
if to Akorn, to:
100 Akorn Drive
Abita Springs, LA. 70420
Attn: Barry LeBlanc, President
with a copy to:
Jones, Walker, Waechter,
Poitevent, Carrere & Denegre
Place St. Charles
201 St. Charles Avenue
New Orleans, LA 70170
Attn: Carl C. Hanemann, Esq.
if to EJ Financial, to:
225 East Deerpath Drive
Suite 250
Lake Forest, IL 60045
Attn: John N. Kapoor, President
with a copy to:
Sidley & Austin
One First National Plaza
Chicago, IL 60603
Attn: Thomas A. Cole, Esq.
a. Severability. If any provision of this Consulting Agreement is or becomes invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired and such remaining provisions shall remain in full force and effect.
b. Waivers. No delay or omission by either party hereto in exercising any right, power or privilege hereunder shall impair such right, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this consulting Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
c. Counterparts. This Consulting Agreement may be executed in two counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
d. Entire Agreement. This Consulting Agreement contains the entire understanding of the parties, supersedes all prior agreements and understandings relating to the subject matter hereof and no agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Consulting Agreement.
e. Amendment. No provisions of this Consulting Agreement may be modified, waived or discharged unless such waiver, amendment, modification or discharge is agreed to in writing signed by each of the parties hereto.
f. Governing Law. The interpretation, validity and performance of this Consulting Agreement shall be construed and governed in accordance with the laws of the State of Louisiana, regardless of the law that might be applied under applicable principles of conflicts of laws.
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto have caused this Consulting Agreement to be duly executed as of the date and year first above written.
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AKORN, INC.
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| By: | ||||
| Doyle S. Gaw | ||||
| Chairman of the Board | ||||
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EJ FINANCIAL ENTERPRISES, INC.
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| By: | ||||
| John N. Kapoor, | ||||
| President | ||||
EXHIBIT D
[Letterhead of Jones, Walker, Waechter,
Poitevent, Carrere & Denegre]
November 15, 1990
To the John N. Kapoor Trust
dated September 20, 1989
Gentlemen:
We have acted as counsel for Akorn, Inc., a Louisiana corporation (“Akorn”), in connection with the negotiation, execution and delivery of the following agreements and documents:
(a) the Stock Purchase Agreement dated as of November 15, 1990 (the “Agreement”) between Akorn and the John N. Kapoor Trust dated September 20, 1989 (the “Trust”);
(b) the Common Stock Purchase Warrant dated as of November 15, 1990, in the form of Exhibit A to the Agreement (the “Warrant”) executed and delivered by Akorn;
(c) the Consulting Agreement dated as of November 15, 1990, in the form of Exhibit B to the Agreement (the “Consulting Agreement”) between Akorn and EJ Financial Enterprises, Inc.; and
(d) the Stock Registration Rights Agreement dated as of November 15, 1990, in the form of Exhibit C to the Agreement (the “Stock Registration Rights Agreement”) between Akorn and the Trust.
All capitalized terms used herein without definition shall have the meanings set forth in the Agreement.
In rendering the following opinions, we have examined the executed Warrant, executed counterparts of the Agreement, the Consulting Agreement and the Stock Registration Rights Agreement, and such other records and documents as we have deemed necessary for purposes of our opinions hereafter expressed. As to various questions of fact material to such opinions, we have relied upon certificates of public officials and certificates of officers of Akorn which refer to the Agreement, which are
dated the date hereof and which are attached hereto.
Based upon such examination and review and having due regard for such legal considerations as we deem relevant, we are of the opinion that:
1. Akorn is a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana, has the corporate power to own its property and carry on its business as now being conducted, and has the corporate power and authority to enter into the Agreement, the Consulting Agreement and the Stock Registration Rights Agreement and to execute and deliver the Warrant.
2. The execution and delivery of the Agreement, the Warrant, the Consulting Agreement and the Stock Registration Rights Agreement and the performance by Akorn of its obligations thereunder have been duly authorized by all necessary corporate action, and the Agreement, the Warrant, the consulting Agreement and the Stock Registration Rights Agreement have each been duly executed and delivered by Akorn and each constitutes the legal, valid and binding obligation of Akorn, enforceable in accordance with its terms, subject only to applicable bankruptcy, insolvency, moratorium or similar laws affecting the rights of creditors generally and to general principles of equity.
3. The Stock has been duly authorized and is validly issued, fully paid, non-assessable and free of preemptive rights. There are no transfer or similar taxes with respect to the sale and delivery to you of the Stock or the Warrant. The shares of common stock of Akorn issuable upon the exercise of the Warrant have been (i) duly and validly authorized and reserved for issuance upon such exercise and (ii) when issued upon such exercise in accordance with the terms of the Warrant will have been duly and validly issued and fully paid and will be non-assessable and free of preemptive rights.
4. Akorn has duly authorized the exemption of any business combination involving transactions with the Trust or John Kapoor or any other beneficiaries of the Trust or any of its, his or their existing or future affiliates from the requirements of Louisiana R.S. 12:133, and such authorization is effective to exempt any such business combination from such requirements.
5. The acquisition by the Trust of the Stock, together with the Warrant and the right to acquire shares of common stock of Akorn as contemplated thereby, does not constitute a “control share acquisition” within the meaning of Louisiana R.S. 12:135 through 12:140.2., presuming that the Trust, upon its acquisition of the Stock and of the Warrant, (i) will not own any other shares of Akorn common stock and (ii) may not exercise or direct the exercise, directly or indirectly, alone or as part of a group, of voting power with respect to any other shares of Akorn common stock.
6. There is no charter, by-law or capital stock provision of Akorn, and no provision of any indenture or agreement to which Akorn is a party or under which Akorn is obligated, nor is there any statute, rule or regulation, or any judgment, decree or order of any court or agency, known to us to be binding on Akorn which would be
contravened by the execution and delivery by Akorn of the Agreement, the Warrant, the Consulting Agreement or the Stock Registration Rights Agreement or by the performance by Akorn of any provision, condition, covenant or other term thereof.
The opinions expressed herein are limited to the federal laws of the United States and to the internal laws of the State of Louisiana as applied to commercial transactions within that state.
This opinion is rendered solely for your benefit and the benefit of the beneficiaries of the Trust in connection with the subject transactions and may not be relied upon by you or such beneficiaries for any other purpose or furnished to, used, circulated, quoted or relied upon by any other person for any purpose without our prior written consent.
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Very truly yours, |
EXHIBIT E
Certain shares of capital stock of Akorn may have been issued in violation of preemptive rights. In the event that Akorn shall make a cash payment or payments to any third party (including payments of Akorn’s expenses) as a result of any such alleged or actual violation, Akorn shall deliver to the Trust (and, in the event of a distribution of shares of common stock of Akorn owned by the Trust, or an assignment of its rights under the Warrant or the Warrant, to beneficiaries of the Trust who are members of Kapoor’s immediate family or up to eight employees of EJ Financial, such distributees or assignees) that number of additional shares of common stock of Akorn determined by (i) dividing the amount of each such cash payment by the Current Market Value and (ii) multiplying the result by the percentage of the outstanding common stock of Akorn then beneficially owned by the Trust and such distributees and assignees, assuming full exercise of the Warrant (the “Applicable Percentage”). In the event that Akorn shall from time to time issue shares of its common stock to any third party as a result of any such alleged or actual violation, Akorn shall deliver to the Trust (and such distributees and assignees) that number of additional shares of common stock of Akorn such that after each such issuance the ratio of the number of shares of common stock of Akorn held by the Trust (and such distributees and assignees) as compared to the total number of shares of common stock of Akorn then outstanding, in each case assuming exercise of the Warrant, shall be equal to the ratio of the number of shares of common stock of Akorn held by the Trust (and such distributees and assignees) prior to such issuance as compared to the total number of shares of common stock of Akorn outstanding prior to such issuance. In the event that Akorn shall from time to time make any payment in property other than in cash or shares of its common stock to any third party as a result of any such alleged or actual violation, Akorn shall deliver to the Trust (and such distributees and assignees) that number of additional shares of common stock of Akorn determined by (1) dividing the Fair Value (as defined in the Warrant) of such other property by the Current Market Value and (ii) multiplying the result by the Applicable Percentage. In connection with issuing any such additional shares in satisfaction of its obligations hereunder, Akorn shall take all actions necessary to cause (i) the receipt of such shares not to constitute a control share acquisition (as defined in Louisiana R.S. 12:135), (ii) the shares received to enjoy full voting and economic rights attributable to the Akorn common stock generally, (iii) the percentage limitations in Sections 2(i) and 4(h) of the Stock Purchase Agreement to be increased to the percentage of the outstanding common stock of Akorn to be beneficially owned by the. Trust (and such distributees and assignees), assuming full exercise of the Warrant, immediately after such issuance and (iv) Paragraph 4(g) of the Warrant to be amended so that the number of shares permitted to be tendered pursuant to the second sentence of such Paragraph is increased to include all additional shares to be issued to the Trust (and such distributees and assignees) pursuant hereto. Current Market Value as used herein shall be determined as follows:.
| (i) | If the common stock of Akorn is listed on a national securities exchange, is admitted to unlisted trading privileges on such exchange or is traded on the NASDAQ/National Market System, the Current Market Value shall be |
| the average of the closing prices per share of the common stock as reported in The Wall Street Journal for the last 20 business days prior to the earlier of (i) the date of payment to such third party and (ii) the date of the public announcement of such payment (the “Valuation Date”); or | ||||
| (ii) | If the common stock of Akorn is not so listed, admitted or traded, the Current Market Value shall be the average bid and asked prices for the last 20 business days prior to the Valuation Date, as furnished by two members of the National Association of Securities Dealers, Inc. selected for that purpose from time to time by Akorn and reasonably acceptable to the Trust; or | |||
| (iii) | If no such bid and asked prices are available as set forth above, Current Market Value shall be the Fair Value (as defined in Section 4(b) of the Warrant) per share of common stock of Akorn on the Valuation Date. | |||
Akorn agrees that each member of the Board of Directors of Akorn who beneficially owns or who at any time in the past beneficially owned shares with preemptive rights which may have been violated shall, by November 30, 1990, execute and deliver to Akorn a waiver of claims in respect of such preemptive rights with respect to all such shares. Akorn agrees that, by February 15, 1991, it shall either (i) demonstrate to the satisfaction of the Trust that the potential financial exposure to Akorn of unwaived violations of preemptive rights is not material to Akorn or (ii) provide evidence satisfactory to the Trust that Akorn has received binding waivers of claims from persons holding in excess of 60% (in value) of such claims relating to violations of preemptive rights. In the event Akorn shall fail to satisfy the obligations of the preceding sentence, the Trust shall be entitled, at its election, to rescind in full the transactions contemplated by the Stock Purchase Agreement; provided, however, that upon such rescission, the Trust shall not be required to return any expense reimbursements paid under Section 7(k) and the provisions of Section 2(c) shall not terminate.
EXHIBIT F
AKORN, INC.
SUMMARY OF STOCK OPTION AND PURCHASE PLANS
AS OF NOVEMBER 13, 1990
| ISSUED | Issued | |||||||
| AS OF | As of | |||||||
|
PLAN DESCRIPTION
|
11/13/90
|
11/13/90
|
||||||
|
STOCK OPTION PLANS:
|
||||||||
|
1988 Incentive Compensation Program
|
243,469 | 756,531 | ||||||
|
Stock Option Plan for Directors
|
130,000 | 870,000 | ||||||
|
STOCK PURCHASE PLAN:
|
||||||||
|
Employee Stock Purchase Plan
|
6,880 | 993,120 | ||||||
|
|
|
|
||||||
|
|
380,349 | 2,619,651 | ||||||
|
|
|
|
||||||
AKORN, INC.
STOCK OPTION ROLL FORWARD
AS OF NOVEMBER 13, 1990
1991 Activity
| OPTION | EXERCISE | ISSUE | EXPIRATION | Q/S AT | ISSUED | EXPIRED/ | Q/S AT | |||||||||||||||||||||||||
|
HOLDER
|
PRICE
|
DATE
|
DATE
|
6/30/90
|
|
EXERCISED
|
11/13/90
|
|||||||||||||||||||||||||
|
Leblanc, B.
|
2.0000 | 11/7/92 | 50,000 | 50,000 | ||||||||||||||||||||||||||||
|
Leblanc, B.
|
1.7500 | 11/19/98 | 105,669 | 105,669 | ||||||||||||||||||||||||||||
|
Leblanc, B
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Cummingham, J.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Yazbeck, J
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Ellis, G.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Schimek, R.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Campbell, E.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Turner, D.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Noguchi, H.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Gaw, D.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Yannuzzi, L.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Moel, S.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Hoffman, L
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Bruhl, D.
|
1.9375 | 11/3/98 | 10,000 | 10,000 | ||||||||||||||||||||||||||||
|
Leblanc, B.
|
1.5000 | 8/26/89 | 6/26/99 | 23,352 | 23,352 | |||||||||||||||||||||||||||
|
Leblanc, B.
|
1.5000 | 10/25/90 | 10/25/90 | 14,448 | 14,448 | |||||||||||||||||||||||||||
|
Leblanc, B.
|
1.5000 | 10/25/90 | 10/25/95 | 50,000 | 50,000 | |||||||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||||||||
|
|
309,021 | 64,448 | 0 | 373,469 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
||||||||||||||||||||||||||||
EXHIBIT 5.1
[JONES WALKER LETTERHEAD]
September 21, 2004
Akorn, Inc.
2500 Millbrook Drive
Buffalo Grove, Illinois 60089
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have served as special Louisiana counsel to Akorn, Inc., a Louisiana corporation (“Akorn”), in connection with the preparation of portions of the registration statement on Form S-1 (the “Registration Statement”) filed by Akorn with the Securities and Exchange Commission on the date hereof relating to the registration of 62,213,463 shares of the common stock of Akorn, no par value per share (“Common Stock”), that have been issued or are issuable upon the conversion or exercise of the preferred stock, warrants and convertible notes of Akorn described in the Registration Statement (such shares of Common Stock collectively, the “Shares”). The Shares are to be offered and sold by certain security holders of Akorn.
In connection with rendering these opinions, we have examined and relied upon photocopies of the following documents:
(a) Restated Articles of Incorporation of Akorn, dated September 16, 2004 and filed with the Louisiana Secretary of State on September 17, 2004;
(b) Stock Purchase Agreement dated as of November 15, 1990 by and between the John N. Kapoor Trust dated September 20, 1989 (the “Kapoor Trust”) and Akorn;
(c) Common Stock Purchase Warrant between Akorn and the Kapoor Trust dated November 15, 1990;
(d) the form of Warrant Agreement executed by Akorn, as of October 7, 2003, in favor of certain purchasers of the Series A 6.0% Participating Convertible Preferred Stock of Akorn;
(e) the form of Warrant executed by Akorn, as of August 23, 2004, in favor of certain purchasers of the Series B 6.0% Participating Convertible Preferred Stock of Akorn.
(f) the Stock Purchase Warrant, dated as of August 31, 2004, executed by Akorn in favor of AEG Partners LLC, an Illinois limited liability company;
| Page 2 |
(g) the Warrant Agreements, dated as of October 7, 2003, by and between Akorn and each of the Kapoor Trust and Arjun Waney;
(h) the Warrant Agreements, dated as of October 7, 2003, by and between Akorn and each of the Kapoor Trust, Arjun Waney and Argent Fund Management Ltd.;
(i) the Convertible Bridge Loan and Warrant Agreement, dated as of July 12, 2001, the First Amendment to Convertible Bridge Loan and Warrant Agreement, dated as of December 20, 2001, the Second Amendment to Convertible Bridge Loan and Warrant Agreement, dated as of August 31, 2002, the Third Amendment to Convertible Bridge Loan and Warrant Agreement, dated as of December 31, 2002, and the Fourth Amendment to Convertible Bridge Loan and Warrant Agreement, dated as of October 7, 2003, each by and between Akorn and the Kapoor Trust;
(j) the Convertible Promissory Note, dated July 12, 2001, executed by Akorn in favor of the Kapoor Trust and the Allonge to Revolving Note, dated as of December 20, 2001, by and between Akorn and the Kapoor Trust;
(k) the Convertible Promissory Note, dated July 12, 2001, executed by Akorn in favor of the Kapoor Trust and the Allonge to Revolving Note, dated as of December 20, 2001, by and between Akorn and the Kapoor Trust;
(l) the Tranche A Common Stock Purchase Warrant, dated July 12, 2001, executed by Akorn in favor of the Kapoor Trust;
(m) the Tranche B Common Stock Purchase Warrant, dated July 12, 2001, executed by Akorn in favor of the Kapoor Trust;
(n) the Amended and Restated By-laws of Akorn; and
(o) the Officer’s Certificate, dated the date hereof, addressed to us.
In our examination, and for all purposes of the opinions rendered herein, we have assumed without independent investigation (i) the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, the authenticity of the originals of such documents, and the due execution and delivery of all documents where due execution and delivery are a prerequisite to the effectiveness thereof; (ii) compliance by Akorn and the other parties thereto with the provisions of all documents and instruments pursuant to which the Shares are issuable; and (iii) the truth and correctness of the matters of fact set forth in the documents described above.
Based upon the foregoing and subject to the following qualifications and comments, we are of the opinion that:
| Page 3 |
1. The Shares issued as of the date hereof have been duly authorized, validly issued, and fully paid and are nonassessable.
2. The Shares to be issued upon the conversion or exercise of the preferred stock, warrants and convertible notes described in the Registration Statement have been duly authorized, and, if and when issued by Akorn upon such conversion or exercise in accordance with the terms of such instruments, will be validly issued, fully paid and nonassessable.
The foregoing opinion is limited to the Louisiana Business Corporation Law and the federal laws of the United States of America, as currently in effect. We assume no obligation to revise or supplement this opinion should such currently applicable laws be changed by legislative action, judicial decision or otherwise.
This opinion is furnished to you in connection with the filing of the Registration Statement and is not to be used, circulated, quoted or otherwise relied upon for any other purpose.
We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to our name in the prospectus contained therein. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 or the general rules and regulations of the Commission.
|
|
Very truly yours, | |
|
|
||
|
|
Jones, Walker, Waechter, Poitevent
Carrère & Denègre, L.L.P. |
|
|
|
||
|
|
||
|
|
||
|
|
/s/
Carl C. Hanemann
By: Carl C. Hanemann |
Exhibit 10.1
CONSULTING AGREEMENT
This CONSULTING AGREEMENT, dated as of November 15, 1990, is entered into by and between EJ Financial Enterprises, Inc., a Delaware corporation (“EJ Financial”), and Akorn, Inc., a Louisiana corporation (“Akorn”).
WITNESSETH:
WHEREAS, Akorn has requested that EJ Financial provide to Akorn certain consulting services described herein commencing on the date hereof; and
WHEREAS, EJ Financial is willing to provide to Akorn such services on the terms and conditions herein provided.
NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows:
1. Consulting Services. Akorn hereby retains EJ Financial as an independent consultant to provide management consulting services relating to strategic corporate objectives of Akorn (the “Consulting Services”), and EJ Financial hereby agrees to provide Akorn with such Consulting Services, upon the terms and subject to the conditions hereinafter set forth.
2. Position and Duties. EJ Financial shall serve only as a consultant to Akorn with respect to the Consulting Services. Nothing herein shall be deemed to cause EJ Financial or any of its directors, officers or employees to be considered an agent of Akorn. Akorn acknowledges that EJ Financial and its directors, officers and employees may provide consulting services to other entities, serve as members of certain other corporate boards of directors and engage in other business activities.
3. Term. The term of the consulting arrangement hereunder shall commence on the date hereof and continue until December 31, 1993 (the “Term”), unless earlier terminated pursuant to Section 6.
4. Compensation. In consideration for the Consulting Services provided by EJ Financial hereunder, Akorn shall pay to EJ Financial a fixed monthly consulting fee equal to $4,167 per calendar month ($50,000 per year) payable in arrears on the last business day of each month during the Term (collectively, the “Monthly Payments”). In the case of any month in which this Agreement is not in effect for the full month, such consulting fee shall be prorated based on the number of days in the month with respect to which this Agreement is in effect.
5. Expenses. Akorn shall promptly reimburse EJ Financial for all reasonable expenses incurred by EJ Financial or any of its directors, officers or employees in the performance of its duties hereunder, including, but not limited to, travel expenses between Chicago, Illinois and New Orleans, Louisiana, and living expenses while away from home in the service of Akorn; provided, that such expenses in excess of $200 shall have been approved in writing by John Kapoor, Barry LeBlanc and Doyle Gaw prior to the incurrence thereof. In
addition, EJ Financial shall comply with such requirements with respect to expenses as Akorn may reasonably establish in writing from time to time in respect of Akorn’s executive officers.
6. Termination. This Consulting Agreement shall commence on the date hereof and continue until all of the parties’ obligations hereunder have been fulfilled, except that this Consulting Agreement (other than Sections 7 and 8) shall terminate 30 days after the delivery by either party of a notice to the effect that such party has determined to terminate this Consulting Agreement. EJ Financial shall not be entitled to any compensation or severance pay or other termination benefits upon any termination of this Consulting Agreement; provided, however, that EJ Financial shall be entitled to receive any Monthly Payments owed to it by Akorn with respect to any period prior to such termination. Termination pursuant to this Section 6 shall be the sole remedy of Akorn for a failure of EJ Financial to provide the Consulting Services as described in Section 1 hereof.
7. Confidential Information. EJ Financial recognizes and acknowledges that certain assets of Akorn and its affiliates, including, without limitation, information regarding customers, pricing policies, methods of operation, proprietary computer programs, sales, products, profits, costs, markets, key personnel, formulae, product applications, technical processes, trade secrets and any reports prepared by EJ Financial or any of its directors, officers or employees delivered to Akorn hereunder (hereinafter call “Confidential Information”) are valuable, special, and unique assets of Akorn and its affiliates. Neither EJ Financial nor any director, officer or employee thereof shall, during or after the term of this Agreement, disclose any part of the Confidential Information to any person, firm, corporation, association, or any other entity for any reason or purpose whatsoever, directly or indirectly, except as may be directed in writing by the management of Akorn, unless and until such Confidential Information becomes publicly available other than as a consequence of the breach by EJ Financial or any director, officer or employee thereof of their confidentiality obligations hereunder or unless and only to the extent that such disclosure is required by applicable law.
8. Indemnification. In the event that EJ Financial or any director, officer or employee thereof becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed claim, action, suit or proceeding or investigation, whether civil, criminal, administrative, investigative or otherwise (the “Indemnification Claim”) by reason of or arising out of this Consulting Agreement, Akorn shall indemnify, defend and hold harmless EJ Financial or such director, officer or employee thereof to the fullest extent permitted by law as soon as practicable but in any event no later than thirty days after written demand is presented to Akorn, against any and all losses, claims, damages, expenses, liabilities or judgments, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such losses, claims, damages, expenses, liabilities or judgments, fines, penalties and amounts paid in settlement) of or arising from such Indemnification Claim. For purposes of this Section 8, the terms “expenses” shall include attorney’s fees and all other costs, expenses and obligations, in each case reasonably paid or incurred in connection with investigating, defending, prosecuting, being a witness in or participating in any Indemnification Claim. If so requested by EJ Financial or any director, officer or employee thereof in writing, Akorn shall advance (within two business days of such request) any and all such expenses to EJ Financial or such director, officer or employee thereof.
2
Notwithstanding the foregoing, (i) with respect to any Indemnification Claim brought or made by Akorn or an affiliate thereof, Akorn shall have no obligation to indemnify EJ Financial or any director, officer or employee thereof in the event that it is finally judicially determined that such Indemnification Claims arose primarily out of the gross negligence or intentional misconduct of EJ Financial or such director, officer or employee thereof and (ii) with respect to any Indemnification Claim brought or made by any person or entity other than Akorn or an affiliate thereof, Akorn shall have no obligation to indemnify EJ Financial or any director, officer or employee thereof in the event that it is finally judicially determined that such Indemnification Claim arose primarily out of the intentional misconduct of EJ Financial or such director, officer or employee thereof.
In the event that Akorn has advance expenses to EJ Financial or any director, officer or employee thereof and it is finally judicially determined, in the case of any Indemnification Claim referred to in clause (i) of the preceding paragraph, that such Indemnification /claim arose primarily out of the gross negligence or intentional misconduct of EJ Financial or such director, officer or employee thereof, or, in the case of any Indemnification Claim referred to in clause (ii) of the preceding paragraph, that such Indemnification Claim arose primarily out of the intentional misconduct of EJ Financial or such director, office or employee thereof, EJ Financial hereby undertakes promptly, but in no event later than thirty days following such final judicial determination, to reimburse Akorn for any such expenses advanced.
9. General.
(a) Notices. All notices and other communication hereunder shall be in writing or by written telecommunication, and shall be deemed to have been duly given when delivered by United States certified or registered mail, return receipt requested, postage prepaid to the relevant address set forth below, or to such other address as the recipient of such notice or communication shall have specified to the other party hereto in accordance with this Section 9(a), except that no notice of change of address shall be effective until receipt thereof.
|
if to Akorn, to:
|
||
|
|
100 Akorn Drive | |
|
|
Abita Springs, LA 70430 | |
|
|
Attn: Barry LeBlanc, President | |
|
with a copy to:
|
||
|
|
||
|
|
Jones, Walker, Waechter, | |
|
|
Poitevent, Carrere & Denegre | |
|
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Place St. Charles | |
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201 S. Charles Avenue | |
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New Orleans, LA 70170 | |
|
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Attn: Carl C. Hanemann, Esq. |
3
|
if to EJ Financial, to:
|
||
|
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225 East Deerpath Drive | |
|
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Suite 250 | |
|
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Lake Forest, IL 60045 | |
|
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Attn: John N. Kapoor, President | |
|
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||
|
with a copy to:
|
||
|
|
Sidley & Austin | |
|
|
One First National Plaza | |
|
|
Chicago, IL 60603 | |
|
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Attn: Thomas A. Cole, Esq. |
(b) Severability. If any provision of this Consulting Agreement is or becomes invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions hereof shall not in any way be affected or impaired and such remaining provisions shall remain in full force and effect.
(c) Waivers. No delay or omission by either party hereto in exercising any right, power or privilege hereunder shall impair such right, power or privilege, nor shall any single or partial exercise of any such right, power or privilege preclude any further exercise thereof or the exercise of any other right, power or privilege. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Consulting Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
(d) Counterparts. This Consulting Agreement may be executed in two counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
(e) Entire Agreement. This Consulting Agreement contains the entire understanding of the parties, supersedes all prior agreements and understandings relating to the subject matter hereof and no agreements or representations, oral or otherwise, express or implied with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Consulting Agreement.
(f) Amendment. No provisions of this Consulting Agreement may be modified, waived or discharged unless such waiver, amendment, modification or discharge is agreed to in writing signed by each of the parties hereto.
(g) Governing Law. The interpretation, validity and performance of this Consulting Agreement shall be construed and governed in accordance with the laws of the State of Louisiana, regardless of the law that might be applied under applicable principles of conflicts of laws.
4
IN WITNESS WHEREOF, and intending to be legally bound hereby, the parties hereto have caused this Consulting Agreement to be duly executed as of the date and year first above written.
|
AKORN, INC.
|
||||
| By: | /s/ Doyle S. Gaw | |||
| Doyle S. Gaw | ||||
| Chairman | ||||
|
EJ FINANCIAL ENTERPRISES, INC.
|
||||
| By: | /s/ John N. Kapoor | |||
| John N. Kapoor | ||||
| President | ||||
5
Exhibit 10.2
AMENDED AND RESTATED
AKORN, INC.
1988 INCENTIVE COMPENSATION PROGRAM
1. Purpose . The purpose of this 1998 Incentive Compensation Program (the “Program”) of Akorn, Inc. (the “Company”) is to advance the interests of the Company by furnishing economic incentives in the form of stock options (“Option”) designed to attract, retain and motivate key employees.
2. Administration .
2.1 Composition . The Program shall be administered by a committee consisting of two or more members of the Board (the “Committee”) who are disinterested persons in accordance with Rule 16b-3 under the Securities Exchange Act of 1934.
2.2 Authority . the Committee shall have plenary authority to award Options under the Program, to interpret the Program, to establish any rules or regulations relating to the Program which it determines to be appropriate, and to make any other determination which it believes necessary or advisable for the proper administration of the Program. Its decisions in matters relating to the Program shall be final and conclusive on the company and participants.
3. Eligible Employees . Key employees and consultants of the company (including officers who also serve as directors of the Company) and its subsidiaries shall become eligible to receive Options under the Plan when designated by the Committee. Employees may be designated individually or by groups by categories, as the Committee deems appropriate. With respect to participants no subject to Section 16 of the 1934 Act, the Committee may delegate to appropriate personnel of the company its authority to designate participants and to determine the number of Options to be received by those participants.
4. Shares Subject to the Program .
4.1 Number of Shares. Subject to adjustment as provided in Section 6.5, the number of shares of common stock, no par value, of the Company (“Common Stock”), which may be issued under the Program shall not exceed 4,500,000 shares of Common Stock.
4.2 Cancellation . In the event that an Option granted hereunder expires or is terminated or cancelled unexercised as to any shares of Common Stock, such shares may again be issued under the Program pursuant to Options. The Committee may also determine to cancel, and agree to the cancellation of, Options in order to make a particular participant eligible for the grant of an Option at a lower price than the Option to be cancelled.
4.3 Type of Common Stock . Common Stock issued under the Program in connection with Options may be authorized and unissued shares or issued shares held as treasury shares.
5. Options . An Option is a right to purchase shares of Common Stock from the Company. Each Option granted by the Committee under this Program shall be subject to the following terms and conditions.
5.1 Price . The Option price per share shall be determined by the Committee but shall not be less than 50% of the fair market value on the date of grant of the Option. “Fair Market Value” shall be determined as follows: if the Common Stock is listed on any national exchange or any automatic quotation system which provides sales quotations, the fair market value shall be the closing price quoted on such exchange or quotation system as reported in the Wall Street Journal for the applicable date (i.e. date of grant, exercise or tax withholding) or if there are no trades on such date, then on the preceding date on which a trade did occur, subject to adjustment under Section 6.5.
5.2 Number . The number of shares of Common stock subject to the option shall be determined by the Committee, subject to adjustment as provided in Section 6.5.
5.3 Duration and Time for Exercise . Subject to earlier termination as provided in Section 6.5, the term of each Option shall be determined by the Committee but shall not exceed ten years and one day from the date of grant. Each Option shall become exercisable at such time or times during its term as shall be determined by the Committee at the time of grant. The Committee may accelerate the date on which an Option becomes exercisable.
5.4 Repurchase . Upon approval of the Committee, the Company may repurchase a previously granted Option from a participant by mutual agreement before such Option has been exercised by payment to the participant of the amount per share by which (i) the Fair Market Value (as defined in Section 5.1) of the Common Stock subject to the Option on the date of repurchase exceeds (ii) the Option price.
5.5 Manner of Exercise . An Option may be exercised in whole or in part, by giving written notice to the Company, specifying the number of shares of Common Stock to be purchased and accompanied by the full purchase price for such shares. The Option price shall be payable in United States dollars upon exercise of the Option and may be paid by (i) cash; (ii) uncertified or certified check; (iii) bank draft; (iv) delivery of shares of Common Stock held for a period of six months in payment of all or any part of the Option price, which shares shall be valued for this purpose at the Fair Market Value on the date such Option is exercised; (v) delivery of a properly executed exercise notice together with irrevocable instructions to a broker approved by the Company (with a copy to the Company) to promptly deliver to the Company the amount of sale or loan proceeds to pay the exercise price; (vi) or in such other manner as may be authorized from time to time by the Committee. In the case of delivery to an uncertified check or bank draft upon exercise of an Option, no shares shall be issued until the check or draft has been paid in
2
full. Prior to the issuance of shares of Common Stock upon the exercise of an Option, a participant shall have no rights as a shareholder.
6. General .
6.1 Effective Date . The Program will become effective upon its approval by the affirmative vote of the holders of a majority of the voting power present or represented at a meeting of the shareholders. Unless approved within one year after the date of the Program’s adoption by the Board of Directors, the Program shall not be effective for any purpose. Prior to the approval of the Program by the Company’s shareholders, the Board may award Options, but if such approval is not received in the specified period, then such awards shall be of no effect.
6.2 Duration . The Program shall remain in effect until all options granted under the Program have either been satisfied by the issuance of shares of Common Stock or been terminated under the terms of the Program. No Option may be granted under the Program after the fifteenth anniversary of the date the Program is approved by the Company’s shareholders.
6.3 Non-transferability of Options . No Option may be transferred, pledged or assigned by the holder thereof, (except, in the event of the holder’s death, by will or the laws of descent and distribution) and the Company shall not be required to recognize any attempted assignment of such rights by any participant. During a participant’s lifetime, an Option may be exercised only by him or by his guardian or legal representative.
6.4 Additional Condition . Anything in this Program to the contrary notwithstanding, (a) the Company may, if it shall determine it necessary or desirable for any reason, at the time of award of an Option or the issuance of any shares of Common Stock pursuant to an Option, require the recipient of the Option , as a condition to the receipt thereof or to the receipt of shares of common Stock issued upon exercise thereof, to deliver to the Company a written representation of present intention to acquire the Option or the shares of Common Stock issued pursuant thereto for his own account for investment and not for distribution; and (b) if at any time the company further determines, in its sole discretion, that the listing, registration or qualification (or any updating of any such document) of any Option of the shares of Common Stock issuable pursuant thereto is necessary on any securities exchange or under any federal or state securities or blue sky law, or that the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with the grant of any Option or the issuance of shares of Common Stock upon exercise thereof, such Options shall not be granted or such shares of Common Stock shall not be issued, as the case may be, in whole or in part, unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company.
6.5 Adjustment upon Changes in Capitalization or Control .
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(a) In the event of any recapitalization, stock dividend, stock split, combination of shares or other change in the Common Stock, the number of shares of Common Stock then subject to the Program, shall be adjusted in proportion to the change in outstanding shares of Common Stock. In the event of any such adjustments, the purchase price of any Option and the shares of Common Stock issuable pursuant to any Option shall be adjusted as and to the extent appropriate, in the reasonable discretion of the committee, to provide participants with the same relative rights before and after such adjustment.
(b) If there is proposed a dissolution or liquidation of the company, or a reorganization, merger or consolidation of the Company with one or more corporations in which the Company is not the surviving corporation, or a transfer of substantially all the property or more than two-thirds of the then outstanding shares of the Company to another corporation, the Committee shall cause written notice of the proposed transaction to be given to every participant in the Program not less than 40 days prior to the anticipated effective date of the proposed transaction, and every Incentive Option granted under the Program shall be accelerated and become immediately exercisable in full by such participant prior to a date specified in such notice, which date shall not be more than 10 days prior to the anticipated effective date of the proposed transaction. The participant shall notify the Company, in writing, that he intends to exercise his Options, in whole or in part, and the participant may condition such exercise upon, and provide that such exercise shall become effective at the time immediately prior to, the consummation of the proposed transaction. If the proposed transaction is consummated, each Option, to the extent not previously exercised prior to the date specified in the foregoing notice, shall terminate on the effective date of such consummation. If the proposed transaction is not consummated and the participant has so provided, the Options shall remain unexercised.
6.6 Option Agreements . The terms of each Option shall be stated in an agreement, the form of which has been approved by the Committee.
6.7 Withholding .
(a) The Company shall have the right to withhold from any shares issuable under the Program or to collect as a condition of issuance, any taxes required by law to be withheld. At any time when a participant is required to pay to the Company an amount required to be withheld under applicable income tax laws upon the exercise of an Option, the Participant may satisfy this obligation in whole or in part by electing (the “Election”) to have the Company withhold from the distribution shares of Common Stock having a value equal to the amount required to be withheld. The value of the shares to be withheld shall be based on the Fair Market Value of the Common Stock on the date that the amount of tax to be withheld shall be determined (“Tax Date”).
(b) Each Election must be made prior to the Tax Date. The Committee may disapprove of any Election, may suspend or terminate the right to
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make Elections, or may provide with respect to any Option that the right to make Elections shall not apply to such Option. An Election is irrevocable.
(c) If a participant is an officer of the Company within the meaning of Section 16 of the 1934 Act, then an Election is subject to the following restrictions:
(1) No Election shall be effective for a Tax Date which occurs within six months of the grant of the award.
(2) The Election either (i) must be made six months prior to the Tax Date, (ii) must be made during a period beginning on the third business day following the date of release for publication of the Company’s quarterly or annual summary statements of earnings and ending on the twelfth business day following such date (a “Window Period”) or (iii) may be made in advance but must take effect during a Window Period.
6.8 No Continued Employment . No participant under the Program shall have any right, because of his or her participation, to continue in the employ of the company for any period of time or to any right to continue his or her present or any other rate of compensation.
6.9 Amendment of the Program . The Board may amend or discontinue the Program at any time; provided, however, that no such amendment or discontinuance shall change or impair, without the consent of the recipient, an Option previously granted; and further provided that if any such amendment requires shareholder approval to meet the requirements of Rule 16b-3 under the Securities Exchange Act of 1934 or any successor rule, such amendment shall be subject to the approval of the shareholders of the Company.
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Exhibit 10.3
AMENDED AND RESTATED
1991 AKORN, INC.
STOCK OPTION PLAN
FOR DIRECTORS
1. Purpose.
The purpose of this 1991 Akorn, Inc Stock Option Plan for Directors (the “Plan”) is to attract and retain the services of experienced and knowledgeable directors of Akorn, Inc. (the “Corporation”) for the benefit of the Corporation and its shareholders by means of stock options and to provide additional incentive for such directors to continue to work for the best interests of the Corporation and its shareholders.
2. Shares Subject to the Plan.
The total number of shares of common stock, no par value per share, of the Corporation (the “Shares”) for which stock options may be granted under the Plan (“Options”) shall not exceed 500,000 in the aggregate, subject to adjustment in accordance with Section 10 hereof. In the event that an Option granted hereunder expires or is terminated or cancelled unexercised as to any Shares, Options to purchase such Shares may again be issued under the Plan. Shares issued under the Plan upon the exercise of Stock Options may be authorized and unissued Shares or issued Shares held as treasury shares.
3. Administration of the Plan.
The Incentive Compensation Committee of the Board of Directors of the Corporation (the “Committee”) shall have the power to construe the Plan, to determine all questions arising thereunder, to set more restrictive Option provisions as provided in Section 4(b) of the Plan and to adopt and amend such rules and regulations for the administration of the Plan as it may deem desirable.
4. Eligibility: Grant of Options.
(a) Until such time as the Plan is terminated, each director of the Corporation shall be automatically granted an Option each year to acquire 5,000 Shares under the Plan on the day following the annual meeting of shareholders. Each person who becomes a director of the Corporation between annual meetings during the term of the Plan will be entitled to receive the pro rata portion of an Option to acquire 5,000 Shares, based on the number of full calendar months during that year that such person will serve as a director.
(b) In addition to the automatic grant of Options provided in Section 4(a) above, the Compensation Committee may, in its sole discretion, grant an Option of no more than 100,000 Shares to a person who becomes a director of the Corporation at any time after the 1991 Annual Meeting of Shareholders, but no member of the Compensation Committee shall be eligible to be granted an Option under this Section 4(b) and any director who is granted an Option under this Section 4(b) shall not be permitted to serve on the Compensation
Committee for one year after grant of an Option under this Section 4(b). The Committee may in its discretion set more restrictive Options terms than the Plan otherwise provides with respect to Options granted under this Section 4(b), including, but not limited to, more restrictive vesting requirements and Option termination provisions and an exercise price in excess of the fair market value of the Shares on the date of grant.
5. Option Agreement.
Each Option granted under the Plan shall be evidenced by an Option agreement (the “Agreement”) duly executed on behalf of the Corporation and by the director to whom such Option is granted. Such Agreements shall (i) comply with and be subject to the terms and conditions of the Plan and (ii) provide that the optionee agrees to continue to serve as a director of the Corporation during the term for which he was elected. Any Agreement may contain such other terms, provisions and conditions not inconsistent with the Plan as may be determined by the Committee. No purported grant of any Option shall be effective until an Agreement shall have been duly executed on behalf of the Corporation and the director to whom the Option is to be granted.
6. Stock Option Exercise Price.
Except as otherwise provided by the Committee in accordance with Section 4(b), the exercise price for a Stock Option granted under the Plan shall be the fair market value of the Shares covered by the Stock Option at the time the Stock Option is granted. For purposes hereof, if the common stock of the Corporation is listed on any national exchange or any automated quotation system which provides sale quotations, the fair market value shall be the closing sale price quoted on such exchange or quotation system as reported in the Wall Street Journal for the trading day next preceding the date of the grant of the Option or if there are no trades on such date then on the preceding date on which a trade did occur.
7. Time and Manner of Exercise of Option.
(a) Except as otherwise provided in Section 10(b) hereof or as otherwise determined by the Committee under Section 4(b) hereof’, Options granted under the Plan shall be exercisable in full six months after the date of grant of the Options and shall remain exercisable during the period ending five years from the date of grant.
(b) To the extent that the right to exercise an Option has accrued and is in effect, the Option may be exercised in full at one time or in part from time to time, by giving written notice, signed by the person or persons exercising the Option to the Corporation, stating the number of Shares with respect to which the Option is being exercised, and accompanied by payment in full for such Shares, which payment may be (i) in cash, by certified or uncertified check, (ii) in whole or in part in Shares owned by the person or persons exercising the Option for a period of six months, valued at Fair Market Value on the trading date next preceding the date of exercise or if there are no trades on such date then on the preceding date on which a trade did occur, or (iii) by delivering a properly executed exercise notice together with irrevocable instructions to a broker approved by the Corporation (with a copy to the Corporation) to promptly deliver to the Corporation the amount of sale or loan proceeds to pay the exercise price.
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The date of exercise shall be the date on which the Corporation receives written notice of exercise. Upon exercise of an Option and payment of the exercise price, delivery of a certificate for paid-up non-assessable Shares shall be made to the person exercising the Option.
8. Terms of Options.
(a) Each Option shall expire five years from the date of grant thereof, but shall be subject to earlier termination as provided in Section 10(b) hereof or as determined by the Committee in connection with the grant of an Option under Section 4(b) hereof.
(b) In the event of the death of an optionee, unless otherwise determined by the Committee with respect to an Option granted under Section 4(b) hereof, the Option granted to such optionee may be exercised during its term to the full number of Shares covered thereby, by the estate of such optionee, or by any person or persons who acquired the right to exercise such Option by bequest or inheritance or by reason of the death of such optionee.
9. Options Not Transferable.
The right of any optionee to exercise an Option granted to him under the Plan shall not be assignable or transferable by such optionee otherwise than by will or the laws of descent and distribution, and any such Option shall be exercisable during the lifetime of such optionee only by him or by his guardian or legal representative. Any Option granted under the Plan shall be null and void and without effect upon the bankruptcy of the optionee, or upon any attempted assignment or transfer, except as herein provided, including without limitation, any purported assignment, whether voluntary or by operation of law, pledge, hypothecation or other disposition, attachment, trustee process or similar process, whether legal or equitable, upon such Option.
10. Adjustments Upon Changes in Capitalization or Control.
(a) In the event that the outstanding Shares are changed into or exchanged for a different number or kind of shares or other securities of the Corporation or of another corporation by recapitalization, reclassification, stock split-up, combination of shares or dividends payable in capital stock, appropriate adjustment shall be made in the total number of Shares issuable under the Plan, the number of Shares issuable upon Options to be granted under the terms hereof and the number and kind of shares as to which outstanding Options, or portions thereof then unexercised shall be exercisable, to the end that the proportionate interest of the optionee shall be maintained as before the occurrence of such event; such adjustment in outstanding Options shall be made without changes in the total price applicable to the unexercised portion of such Options but with a corresponding adjustment in the exercise price for each Option.
(b) If there is proposed a dissolution or liquidation of the Corporation, or a reorganization, merger or consolidation of the Corporation with one or more corporations in which the Corporation is not the surviving corporation, or a transfer of substantially all the property or more than two-thirds of the then outstanding shares of the Corporation to another Corporation, the Board shall cause written notice of the proposed transaction to be given to every optionee under the Plan not less than 40 days prior to the anticipated effective date of the
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proposed transaction, and every Option granted under the Plan shall be immediately exercisable by such optionee prior to a date specified in such notice, which date shall be not more than 10 days prior to the anticipated effective date of the proposed transaction. The optionee shall have the right to exercise the Option to purchase any or all shares of Common Stock then subject to the Option. The optionee shall notify the Corporation, in writing, that he intends to exercise his Option and the optionee may condition such exercise upon, and provide that such exercise shall become effective at the time immediately prior to the consummation of the proposed transaction. If the proposed transaction is consummated, each Option, to the extent not previously exercised prior to the date specified in the foregoing notice, shall terminate on the effective date of such consummation. If the proposed transaction is not consummated and the optionee has so provided, the Option shall remain unexercised.
11. Restriction on Issue of Shares.
(a) Notwithstanding the provisions of Section 7, the Corporation may delay the issuance of Shares covered by the exercise of any Option and the delivery of a certificate for such Shares until one of the following conditions shall be satisfied:
(i) the Shares with respect to which an Option has been exercised are at the time of the issuance of such Shares effectively registered under applicable federal securities acts now in force or hereafter amended; or
(ii) counsel for the Corporation shall have given an opinion, which opinion shall not be unreasonably conditioned or withheld, that such Shares are exempt from registration under applicable federal securities acts now in force or hereafter amended.
(b) It is intended that all exercises of Options shall be effective. Accordingly, the Corporation shall use its best efforts to being about compliance with the above conditions within a reasonable time.
12. Withholding.
The Corporation shall have the right to withhold from any stock issuance under the Plan or to collect as a condition of issuance, any taxes required by law to be withheld.
13. Approval of Stockholders.
The Plan shall be subject to approval by the vote of stockholders holding at least a majority of the voting stock of the Corporation voting in person or by proxy at a duly held stockholders’ meeting within twelve months after the adoption of the Plan by the Board.
14. Expenses of the Plan.
All costs and expenses of the adoption and administration of the Plan shall be borne by the Corporation, and none of such expenses shall be charged to any optionee.
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15. Termination and Amendment of the Plan.
Unless sooner terminated as herein provided, the Plan shall terminate ten (10) years from the date upon which the Plan shall be duly approved by the shareholders. The Board may at any time terminate the Plan or make such modification or amendment thereof as it deems advisable; provided, however, that except as provided in Section 10 the Board may not, without the approval of the shareholders of the Corporation, materially increase the benefits under the Plan, increase the maximum aggregate number of shares for which Options may be granted under the Plan, or permit the granting of Options to anyone other than as provided in Section 4 hereof and provided further that Section 4 of the Plan may not be amended more than once every six months other than to comply with changes in the Internal Revenue Code or the rules thereunder. Termination or any modification or amendment of the Plan shall not, without the consent of an optionee, affect his rights under an Option previously granted to him.
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Exhibit 10.14
ALLONGE TO REVOLVING NOTE
THIS ALLONGE TO CONVERTIBLE PROMISSORY NOTE (the “Allonge”) is made and entered into as of the 20th day of December, 2001, by and between Akorn, Inc., a Louisiana corporation (the “Company”), and The John N. Kapoor Trust Dated September 20, 1989, or its administrators, representatives, successors or assigns (“Holder”).
WITNESSETH:
WHEREAS, the Company made in favor of Holder that certain Convertible Promissory Note dated as of July 21, 2001 (the “Tranche B Note”), in the original principal amount of TWO MILLION and 00/100 Dollars ($2,000,000); a copy of which is attached as Exhibit A hereto and incorporated herein by this reference; and
WHEREAS, in order to extend the maturity date of the Tranche B Note, the parties have agreed to execute this Allonge.
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the undersigned agree as follows:
1. The parties hereby acknowledge and agree to extend the stated maturity date of the Tranche B Note from thirty-six (36) months after the original issuance date of the Tranche B Note (i.e., July 12, 2004) to December 20, 2006 [the same maturity date as the new lenders].
2. The Company hereby agrees to use its best efforts to comply with the National Association of Securities Dealers Rule 4350(i)(1)(A) as to shareholder approval of the issuance of shares of the Company’s common stock in accordance with the Loan Agreement upon conversion of the interest on the Tranche B Note accrued between the initial Repayment Date (as such term was defined in the Convertible Bridge Loan and Warrant Agreement dated as of July 12, 2001 (the “Loan Agreement”) (prior to any amendment thereto), between the Company and the Holder) and the Repayment Date (as such term is defined in the Loan Agreement, as amended).
3. Except as amended or revised by this Allonge, the terms of the Tranche B Note remain in full force and effect as of the date hereof. In the event the terms of the Tranche B Note should conflict with this Allonge, the terms of this Allonge shall control.
4. This Allonge shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to any choice or conflict of law provisions.
5. This Allonge may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, this Allonge to Tranche B Note has been executed and delivered as of the date first above written.
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AKORN, INC.
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THE JOHN N. KAPOOR TRUST DATED SEPTEMBER 20, 1989 | |
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By: /s/ Ben J. Pothast
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By: /s/ John N. Kapoor | |
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Name: Ben J. Pothast
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EXHIBIT A
CONVERTIBLE PROMISSORY NOTE
See Attached.
EXHIBIT 10.15
ALLONGE TO REVOLVING NOTE
THIS ALLONGE TO CONVERTIBLE PROMISSORY NOTE (the “Allonge”) is made and entered into as of the 20th day of December, 2001, by and between Akorn, Inc., a Louisiana corporation (the “Company”), and The John N. Kapoor Trust Dated September 20, 1989, or its administrators, representatives, successors or assigns (“Holder”).
WITNESSETH:
WHEREAS, the Company made in favor of Holder that certain Convertible Promissory Note dated as of July 21, 2001 (the “Tranche A Note”), in the original principal amount of THREE MILLION and 00/100 Dollars ($3,000,000); a copy of which is attached as Exhibit A hereto and incorporated herein by this reference; and
WHEREAS, in order to extend the maturity date of the Tranche A Note, the parties have agreed to execute this Allonge.
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the undersigned agree as follows:
1. The parties hereby acknowledge and agree to extend the stated maturity date of the Tranche A Note from thirty-six (36) months after the original issuance date of the Tranche A Note (i.e., July 12, 2004) to December 20, 2006 [the same maturity date as the new lenders].
2. The Company hereby agrees to use its best efforts to comply with the National Association of Securities Dealers Rule 4350(i)(1)(A) as to shareholder approval of the issuance of shares of the Company’s common stock in accordance with the Loan Agreement upon conversion of the accrued interest on the Tranche A Note.
3. Except as amended or revised by this Allonge, the terms of the Tranche A Note remain in full force and effect as of the date hereof. In the event the terms of the Tranche A Note should conflict with this Allonge, the terms of this Allonge shall control.
4. This Allonge shall be governed by and construed in accordance with the laws of the State of Illinois, without regard to any choice or conflict of law provisions.
5. This Allonge may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
IN WITNESS WHEREOF, this Allonge to Tranche A Note has been executed and delivered as of the date first above written.
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AKORN, INC.
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THE JOHN N. KAPOOR TRUST DATED
SEPTEMBER 20, 1989 |
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By: /s/ Ben J. Pothast
Name: Ben J. Pothast |
By: /s/ John N. Kapoor
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EXHIBIT A
CONVERTIBLE PROMISSORY NOTE
See Attached.
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Exhibit 10.16
FIRST AMENDMENT TO CONVERTIBLE BRIDGE LOAN AND WARRANT
AGREEMENT
THIS FIRST AMENDMENT TO CONVERTIBLE BRIDGE LOAN AND WARRANT AGREEMENT (this “Amendment”) is entered into as of December 20, 2001 by and between Akorn, Inc., a Louisiana corporation (the “Company”), and The John N. Kapoor Trust Dated September 20, 1989 (the “Lender”).
WITNESSETH:
WHEREAS, the Company and the Lender are parties to that certain Convertible Bridge Loan and Warrant Agreement dated as of July 12, 2001 (the “Agreement”); and
WHEREAS, the Company and the Lender wish to amend the Agreement.
NOW, THEREFORE, for and in consideration of the promises and mutual agreements herein contained and for the purposes of setting forth the terms and conditions of this Amendment, the parties, intending to be bound, hereby agree as follows:
1. Incorporation of the Agreement. All capitalized terms which are not defined hereunder shall have the same meanings as set forth in the Agreement. To the extent any terms and provisions of the Agreement are inconsistent with the amendments set forth in Paragraph 2 below, such terms and provisions shall be deemed superseded hereby. Except as specifically set forth herein, the Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto.
2. Amendment of the Agreement.
a. The definition of “Prime Rate” set forth in Section 1 of the Agreement is hereby amended and restated in its entirety as follows:
“Prime Rate” shall mean (a) a rate per year equal to that rate of interest per year announced from time to time by The Northern Trust Company, an Illinois banking corporation (the “Bank”), called its prime rate, which rate at any time may not be the lowest rate charged by the Bank, plus (b) three percent (3%) per annum.”
b. The first sentence of Section 3 of the Agreement is hereby amended and restated in its entirety as follows:
“Subject to the Subordination Agreement (as defined herein), the term of each of the Tranche A Loan and the Tranche B Loan will commence on the date of issuance (the “Issuance Date”) of the Tranche A Note and the Tranche B Note, respectively, and will end on December 20, 2006 (the “Repayment Date”).”
c. The first sentence of Section 5(a) of the Agreement is hereby amended and restated in its entirety as follows:
“The Outstanding Balance plus accrued interest, if any, on the Tranche A Loan shall be convertible, in whole or in part, into Common Stock at the option of the Lender at any time during the period commencing on the Tranche A Note Issuance Date and ending on the Tranche A Repayment Date at a conversion price of $2.28 per share of Common Stock.
d. The first sentence of Section 5(b) of the Agreement is hereby amended and restated in its entirety as follows:
“The Outstanding Balance plus accrued interest, if any, on the Tranche B Loan shall be convertible, in whole or in part, into Common Stock at the option of the Lender at any time during the period commencing on the Tranche B Note Issuance Date and ending on the Tranche B Repayment Date at a conversion price of $1.80 per share of Common Stock.”
e. Section 9(e) of the Agreement is hereby amended and restated in its entirety as follows:
“The Company shall have failed to obtain all necessary shareholder and third party consents to the Tranche A Loan, Tranche B Loan, the issuance of the Tranche A Note and the issuance of the Tranche B Note on or prior to August 31, 2002.”
f. Section 10.14 of the Agreement is hereby amended and restated in its entirety as follows:
“Subordination. The indebtedness evidenced by the Notes shall be subordinated to that certain indebtedness of the Company pursuant to (a) that certain Subordination and Standby Agreement dated as of July 12, 2001 (the “Northern Subordination Agreement”), executed by the Lender in favor of The Northern Trust Company and acknowledged by the Company and Akorn (New Jersey), Inc., and (b) that certain Subordination and Intercreditor Agreement dated as of December 20, 2001 (the “NeoPharm Subordination Agreement” and together with the Northern Subordination Agreement, the “Subordination Agreement”), executed by the Lender in favor of NEOPHARM, INC., a Delaware corporation.”
3. Effectuation. The amendments to the Agreement contemplated by this Amendment shall be deemed effective immediately upon the full execution of this Amendment and without any further action required by the parties hereto. There are no conditions precedent or subsequent to the effectiveness of this Amendment.
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4. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. One or more counterparts of this Amendment may be delivered by facsimile, with the intention that delivery by such means shall have the same effect as delivery of an original counterpart thereof.
[SIGNATURE PAGE FOLLOWS]
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SIGNED AND SEALED as of this 20th day of December, 2001.
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AKORN, INC.
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THE JOHN N. KAPOOR TRUST DATED SEPTEMBER 20, 1989 | |
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By: /s/ Ben J. Pothast
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Name: Ben J. Pothast
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EXHIBIT 10.19
SECOND AMENDMENT
TO
CONVERTIBLE BRIDGE LOAN AND WARRANT AGREEMENT
THIS SECOND AMENDMENT TO CONVERTIBLE BRIDGE LOAN AND WARRANT AGREEMENT (this “Amendment”) is entered into as of the 31st day of August, 2002 by and between Akorn, Inc., a Louisiana corporation (the “Company”), and the John N. Kapoor Trust dated 9/20/89 (the “Lender”).
WITNESSETH:
WHEREAS , the Company and the Lender are parties to that certain Convertible Bridge Loan and Warrant Agreement dated as of July 12, 2001, as amended by the First Amendment to Convertible Bridge Loan and Warrant Agreement dated December 20, 2001 (collectively the “Agreement”); and
WHEREAS , the Company and the Lender wish to amend the Agreement.
NOW, THEREFORE , for and in consideration of the promises and mutual agreements herein contained and for the purposes of setting forth the terms and conditions of this Amendment, the parties, intending to be bound, hereby agree as follows:
| 1. | Incorporation of the Agreement. All capitalized terms which are not defined hereunder shall have the same meanings as set forth in the Agreement. To the extent any terms and provisions of the Agreement are inconsistent with the amendment set forth in Paragraph 2 below, such terms and provisions shall be deemed superceded hereby. Except as specifically set forth herein, the Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto. | |||
| 2. | Amendment of the Agreement. Section 9(e) of the Agreement is hereby amended and restated in its entirety as follows: | |||
| “The Company shall have failed to obtain all necessary shareholder and third party consents to the Tranche A Loan, Tranche B Loan, the issuance of the Tranche A Note and the issuance of the Tranche B Note on or prior to December 31, 2002.” | ||||
| 3. | Effectuation. The amendment to the Agreement contemplated by this Amendment shall be deemed effective as of the date hereof upon the full execution of this Amendment and without any further action required by the parties hereto. There are no conditions precedent or subsequent to the effectiveness of this Amendment. | |||
| 4. | Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall | |||
| constitute one and the same instrument. One or more counterparts of this Amendment may be delivered by facsimile, with the intention that delivery by such means shall have the same effect as delivery of an original counterpart thereof. |
Signed and sealed as of the 31st day of August 2002.
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AKORN, INC.
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THE JOHN N. KAPOOR TRUST DTD.
9/20/89 |
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By: /s/ Ben Pothast
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By: /s/ John N. Kapoor
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Name: Ben Pothast
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Name:
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Its: CFO
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EXHIBIT 10.22
THIRD AMENDMENT TO CONVERTIBLE BRIDGE LOAN
AND WARRANT AGREEMENT
THIS THIRD AMENDMENT TO CONVERTIBLE BRIDGE LOAN AND WARRANT AGREEMENT (this “Amendment”) is entered into as of the 31st day of December, 2002 by and between Akorn, Inc., a Louisiana corporation (the “Company”), and the John N. Kapoor Trust dated 9/20/89 (the “Lender”).
WITNESSETH:
WHEREAS , the Company and the Lender are parties to that certain Convertible Bridge Loan and Warrant Agreement dated as of July 12, 2001, as amended by the First Amendment to Convertible Bridge Loan and Warrant Agreement dated December 20, 2001 and the Second Amendment to Convertible Bridge Loan and Warrant Agreement dated as of August 31, 2002 (collectively the “Agreement”); and
WHEREAS , the Company and the Lender wish to further amend the Agreement.
NOW, THEREFORE , for and in consideration of the promises and mutual agreements herein contained and for the purposes of setting forth the terms and conditions of this Amendment, the parties, intending to be bound, hereby agree as follows:
| 1. | Incorporation of the Agreement. | |||
| All capitalized terms which are not defined hereunder shall have the same meanings as set forth in the Agreement. To the extent any terms and provisions of the Agreement are inconsistent with the amendment set forth in Paragraph 2 below, such terms and provisions shall be deemed superceded hereby. Except as specifically set forth herein, the Agreement shall remain in full force and effect and its provisions shall be binding on the parties hereto. | ||||
| 2. | Amendment of the Agreement. | |||
| Section 9(e) of the Agreement is hereby amended and restated in its entirety as follows: | ||||
| “The Company shall have failed to obtain all necessary shareholder and third party consents to the Tranche A Loan, Tranche B Loan, the issuance of the Tranche A Note and the issuance of the Tranche B Note on or prior to June 30, 2003.” | ||||
| 3. | Effectuation. | |||
| The amendment to the Agreement contemplated by this Amendment shall be deemed effective as of the date hereof upon the full execution of this Amendment and without any further action required by the parties hereto. There are no conditions precedent or subsequent to the effectiveness of this Amendment. | ||||
| 4. | Counterparts. | |||
| This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. One or more counterparts of this Amendment may be delivered by facsimile, with the intention that delivery by such means shall have the same effect as delivery of an original counterpart thereof. | ||||
Signed and sealed as of the 31st day of December 2002.
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COMPANY:
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HOLDER: | |
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AKORN, INC.
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THE JOHN N. KAPOOR TRUST DTD.
9/20/89 |
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By: /s/ Ben Pothast
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By: /s/ John Kapoor
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Name: Ben Pothast
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Name: John Kapoor
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Its: CFO
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Its: Trustee |
2
EXHIBIT 10.34
October 7, 2003
Via Facsimile (847/279-6123) and
Certified Mail/Return Receipt Requested
Akorn, Inc.
2500 Millbrook Drive
Buffalo Grove, Illinois 60089
Attention: President
Re: Limited Waiver
Ladies and Gentlemen:
Reference is hereby made to that certain Convertible Bridge Loan and Warrant Agreement dated as of July 12, 2001, as amended from time to time (collectively, the “Loan Agreement”), by and between Akorn, Inc., a Louisiana corporation (“Borrower”), and The John N. Kapoor Trust Dated September 20, 1989 (the “Lender”), pursuant to which the Lender made certain loans and other extensions of credit available to Borrower evidenced by (a) that certain Convertible Promissory Note dated as of July 12, 2001, in favor of the Lender in the original principal amount of $3,000,000; and (b) that certain Convertible Promissory Note dated as of July 12, 2001, in favor of the Lender in the original principal amount of $2,000,000. Terms not otherwise defined herein shall have the meanings assigned to such terms in the Loan Agreement.
In connection with Borrower’s defaults under the Agreement on or prior to the date hereof, subject to Borrower’s execution of the amendment attached hereto as Exhibit A, the Lender hereby waives (i) all defaults by Borrower under the Loan Agreement including, without limitation, Sections 9(c) and 9(e) thereof, and (ii) all default interest that has accrued under the Notes as a result of such defaults.
The limited waiver set forth above shall be limited precisely as written and shall not be construed to constitute a waiver for any other purpose or otherwise be deemed an amendment of the Agreement. Except as otherwise provided herein, all terms and conditions of the Agreement shall remain in full force and effect and the parties shall have all of the rights and remedies thereunder.
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Sincerely,
THE JOHN N. KAPOOR TRUST DATED SEPTEMBER 20, 1989 |
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| By: | /s/ John N. Kapoor | |||
| Name: | ||||
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| Title: | ||||
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cc:
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Neopharm, Inc. (via facsimile, 847/295-8854)
Dana S. Armagno, Esq. |
EXHIBIT 23.1
CONSENT
Akorn, Inc.
Buffalo Grove, Illinois
We hereby consent to the use in the Prospectus constituting a part of the Registration Statement of our report dated February 20, 2004, relating to the consolidated financial statements of Akorn, Inc. which is contained in that Prospectus. Our report contains an explanatory paragraph regarding Akorn, Inc.’s ability to continue as a going concern.
We also consent to the reference to us under the caption “Experts” in the Prospectus.
/s/ BDO Seidman, LLP
Chicago, Illinois
September 16, 2004
EXHIBIT 23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statement of Akorn, Inc. on Form S-1
of our report dated May 9, 2003 (which report expresses an unqualified opinion
and includes an explanatory paragraph relating to the Company’s ability to
continue as a going concern), appearing in this Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading “Experts” in such
Prospectus.
/s/ Deloitte & Touche LLP
Chicago, Illinois
September 16, 2004