FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------------- --------------------
Commission file number 0-19059
Deprenyl Animal Health, Inc.
(Exact name of registrant as specified in its charter)
Missouri 36-3716293
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10955 Lowell, Suite 710
Overland Park, Kansas 66210
(address of principal executive offices)
(Zip Code)
(913) 338-2120
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 subsequent to the distribution of securities under a plan confirmed
by a court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
7,549,698 common shares as of October 15, 1996
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Balance Sheets
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
September 30, December 31,
ASSETS Note 1996 1995
- ------ ---- ---- ----
Current Assets:
Cash and cash equivalents (2) $ 713,555 $ 1,054,759
Receivables:
Draxis Health Inc. -- 431
Prepaid expenses 3,108 1,832
Inventories (3) 298,619 --
----------- -----------
Total Current Assets 1,015,282 1,057,022
Furniture, equipment and leasehold
improvements, net of accumulated
depreciation and amortization 80,228 55,575
Other Assets:
Intangibles (4) 464,319 442,877
Other 4,018 4,618
----------- -----------
Total Assets $ 1,563,847 $ 1,560,092
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 45,574 $ 135,963
----------- -----------
Total Current Liabilities 45,574 135,963
Notes Payable - Draxis Health Inc. (5) 2,545,000 3,090,000
----------- -----------
Total Liabilities 2,590,574 3,225,963
Commitments
Stockholders' Equity:
Common stock, no par, 20,000,000 shares
authorized, 7,549,698 shares issued and outstanding,
as of September 30, 1996 and 20,000,000 shares
authorized, 6,508,675 shares issued and outstanding,
as of December 31, 1995. 10,263,996 8,599,338
Deficit accumulated during development stage (11,290,723) (10,265,209)
----------- -----------
Total Stockholders' Equity (Deficit) (1,026,727) (1,665,871)
----------- -----------
Total Liabilities and Stockholders' Equity $ 1,563,847 $ 1,560,092
----------- -----------
----------- -----------
The accompanying notes are an integral part of these balance sheets.
1
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
(Stated in U.S. Dollars)
Period From
July 19, 1990 (Date of
Incorporation) to
Three Months Nine Months
Ended September 30, Ended September 30,
------------------------- --------------------------- September 30,
1996 1995 1996 1995 1996
---------- ---------- ----------- ----------- -------------
REVENUE:
Sales $ 33,073 $ - $ 104,233 $ - $ 104,233
Interest and investment income 13,871 12,737 58,321 65,042 1,128,568
Gain on foreign currency exchange - 9 - (68) 15,454
Realized gain on
investment securities - - - - 71,214
Distribution rights - - 468,750 - 468,750
Other - - 305,966 25,000 507,895
---------- ---------- ----------- ----------- ------------
46,944 12,746 937,270 89,974 2,296,114
---------- ---------- ----------- ----------- ------------
EXPENSES:
Research and development 272,046 282,512 889,479 1,103,002 6,530,304
General and administrative 298,682 219,784 907,243 687,608 6,084,284
Interest 47,250 78,295 131,880 234,169 660,402
Depreciation and amortization 11,162 75,415 34,182 101,116 311,847
---------- ---------- ----------- ----------- ------------
629,140 656,006 1,962,784 2,125,895 13,586,837
---------- ---------- ----------- ----------- ------------
NET LOSS $ (582,196) $ (643,260) $(1,025,514) $(2,035,921) $(11,290,723)
---------- ---------- ----------- ----------- ------------
---------- ---------- ----------- ----------- ------------
NET LOSS PER COMMON SHARE $(0.08) $(0.10) $(0.14) $(0.31) $(1.81)
---------- ---------- ----------- ----------- ------------
---------- ---------- ----------- ----------- ------------
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES 7,466,397 6,483,675 7,466,397 6,483,675 6,231,144
---------- ---------- ----------- ----------- ------------
---------- ---------- ----------- ----------- ------------
The accompanying notes are an integral part of these statements.
2
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
Period From
July 19, 1990
Period Ended September 30, (Date of Incorporation)
------------------------------ to September 30,
1996 1995 1996
------------ ------------ -----------------------
OPERATING ACTIVITIES:
Net loss $(1,025,514) $(2,035,921) $(11,290,723)
Adjustments to reconcile
net loss to cash used in
operating activities:
Depreciation and
amortization 34,182 119,840 311,847
Amortization of unearned supply
agreement consideration -- -- 653,500
Amortization of premium on
investment securities -- -- 52,533
Realized gain on
investment securities (gross) -- -- (71,214)
Compensation expense
resulting from stock
issued at price below
estimated market value -- -- 423,746
Amortization of unearned
compensation resulting
from stock option grants -- -- 620,140
Benefit resulting from
increase in exercise
price of stock options -- -- (16,640)
(Gain) loss on foreign
currency exchange -- 68 (15,454)
Changes in operating
accounts:
Receivable from Draxis
Health Inc. 431 (104) --
Prepaid expenses (1,276) 148 (3,108)
Inventory (298,619) (45,500) (298,619)
Accrued interest
receivable -- 49,186 --
Other assets 600 -- (4,018)
Accounts payable and
accrued expenses (90,389) 20,413 50,713
----------- ----------- ------------
Net cash used in
operating activities (1,380,585) (1,891,870) (9,587,297)
----------- ----------- ------------
INVESTING ACTIVITIES:
Purchases of furniture,
equipment and leasehold
improvements (40,111) (35,913) (166,383)
Purchases of investment
securities -- -- (20,054,735)
Proceeds from sales of
investment securities -- 2,219,185 19,898,024
Expenditures for intangible
assets (40,166) (42,687) (508,093)
Investment in Phoenix
Scientific, Inc. -- -- 175,390
----------- ----------- ------------
Net cash provided by (used in)
investing activities (80,277) 2,140,585 (655,797)
----------- ----------- ------------
3
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Statements of Cash Flows
(Stated in U.S. Dollars)
- --------------------------------------------------------------------------------
Period From
July 19, 1990
Period Ended September 30, (Date of Incorporation)
-------------------------- to September 30,
1996 1995 1996
----------- --------- -----------------------
FINANCING ACTIVITIES:
1994 Loan from Draxis Health Inc. $ (955,000) $ -- $ 1,545,000
1996 Loan from Draxis Health Inc. 1,000,000 1,000,000
Debt issuance costs -- -- (142,158)
Deferred stock offering
costs -- -- (1,458,227)
Advances from Draxis
Animal Health (Canada) Inc. (140,000) -- 139,724
Advances from Draxis Health Inc. (450,000) -- --
Repayments of advances from
Draxis Animal Health (Canada) Inc. -- -- (10,000)
Issuance of common stock 1,664,658 -- 9,866,856
---------- --------- -----------
Net cash provided by
financing activities 1,119,658 -- 10,941,195
---------- --------- -----------
EFFECT OF EXCHANGE RATES
ON CASH -- (68) 15,454
---------- --------- -----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (341,204) 248,647 713,555
CASH AND CASH EQUIVALENTS:
Beginning of period 1,054,759 240,902 --
---------- --------- -----------
End of period $ 713,555 $ 489,549 $ 713,555
---------- --------- -----------
---------- --------- -----------
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION:
Issuance of common stock for
intangibles acquired and
other noncash consideration $ -- $ -- $ 267,958
---------- --------- -----------
---------- --------- -----------
Reduction of amounts payable
in exchange for equipment $ -- $ -- $ 5,139
---------- --------- -----------
---------- --------- -----------
Deferred stock offering costs
offset against common stock $ -- $ -- $ 1,551,564
---------- --------- -----------
---------- --------- -----------
Investment in Phoenix
Scientific, Inc. financed by
obligations under contract $ -- $(600,000) $ --
---------- --------- -----------
---------- --------- -----------
Interest paid $ 131,880 $ 215,445 $ 436,229
---------- --------- -----------
---------- --------- -----------
There have been no income taxes
paid.
The accompanying notes are an integral part of these statements.
4
DEPRENYL ANIMAL HEALTH, INC.
(A DEVELOPMENT STAGE COMPANY)
Notes to Financial Statements
(Unaudited)
1. The Balance Sheets as of September 30, 1996 and 1995, the Statements of
Operations for the three and nine months ended September 30, 1996 and 1995,
and for the period from July 19, 1990 (date of incorporation) to September
30, 1996, and the Statements of Cash Flows for the nine months ended
September 30, 1996 and 1995 and for the period from July 19, 1990 (date of
incorporation) to September 30, 1996 have been prepared by the Company,
without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and changes in cash flows as of
and for all periods presented have been made. Certain amounts included in
the 1995 presentation have been reclassified to conform with the 1996
presentation.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These financial statements
should be read in conjunction with the Company's December 31, 1995
financial statements and notes thereto.
2. As of September 30, 1996, cash and cash equivalents consists of $663,920 in
interest bearing deposits and $49,635 in non-interest bearing deposits.
3. Inventories are priced at the lower of first in - first out (FIFO) cost.
As of September 30, 1996, inventories consist of $87,500 in raw materials
and $211,119 in finished goods.
4. As of September 30, 1996, intangible assets include the unamortized balance
of debt issuance costs totaling $98,469 and costs associated with securing
patents of $365,850.
5. Pursuant to terms of the Draxis Health Inc. (formerly Deprenyl Research
Limited) financing, the Company has notes payable to Draxis Health Inc.
aggregating $2,545,000. In January, 1996, the Company completed an
agreement with Draxis Health Inc. to distribute Anipryl-Registered
Trademark- in Canada. As part of the 10-year exclusive distribution
agreement, Draxis Health Inc. paid an up front fee of $468,750 for
specified Canadian rights to Anipryl-Registered Trademark- as well as
$125,000 for reimbursement of expenses incurred to date to prepare
marketing materials for the Canadian launch of Anipryl-Registered
Trademark-. The companies entered into a revenue sharing formula for
Canadian sales of Anipryl-Registered Trademark-. As part of the
distribution agreement, Draxis Health Inc. converted approximately $1.5
million of the $3 million in loans outstanding into common shares of the
Company. Draxis also provided $1 million of operating capital in the form
of a loan convertible to common shares of the Company. (See Management's
Discussion and Analysis for a detailed description of this transaction.)
6. Net loss per common share is based on the weighted average number of shares
outstanding during each period.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Financial Statements and Notes to Financial Statements for the year ended
December 31, 1995, as well as Management's Discussion and Analysis in the
Company's Form 10-K.
The Company was formed on July 19, 1990 to assume the rights and continue the
development and marketing research regarding the use of l-deprenyl (Anipryl-
Registered Trademark-) in animals previously performed by Deprenyl Animal Health
(Canada) Inc. (DAH (Canada)), a wholly-owned subsidiary of Draxis Health Inc.
(Draxis). Draxis Pharmaceutica Inc. ("DPI"), also a wholly-owned subsidiary of
Draxis, currently holds approximately a 30% equity interest in the Company and
Draxis, LLC, a Delaware limited liability company owned 90% by Draxis and 10% by
DPI, currently holds approximately a 14% equity interest in the Company. Thus,
Draxis affiliates currently own approximately 44% equity interest in the
Company. DPI holds convertible debt that could increase the ownership of Draxis
affiliates to approximately 52% of the Company.
FINANCIAL CONDITION
Total assets increased during the period from $1,560,092 as of December 31, 1995
to $1,563,847 as of September 30, 1996, due primarily to financing received in
accordance with the Draxis Distribution Agreement (see discussion below). Also
during the quarter, the Company made additional sales of its product to Draxis
and continues to build inventory levels.
Intangible assets increased from $442,877 as of December 31, 1995 to $464,319 as
of September 30, 1996 primarily due to the Company's program to obtain worldwide
patent and trademark coverage for Anipryl-Registered Trademark-. Amortization
of debt issuance costs associated with the 1994 and 1996 Draxis Financing, as
defined below, also continue to reduce amounts recorded as intangible assets.
RESULTS OF OPERATIONS
On October 2, 1995, the Company received regulatory approval from the Canadian
Health Protection Branch Bureau of Veterinary Drugs ("HPB") to market Anipryl-
Registered Trademark- in Canada. The Company had its first veterinary
pharmaceutical product sale for this indication in March, 1996. Management
believes that revenues from the marketing of Anipryl-Registered Trademark- in
Canada should marginally reduce operating losses for 1996.
In January, 1996, in order to obtain working capital through 1996 and to enhance
its capability to market its first approved product in Canada, the Company
signed an agreement with Draxis providing Draxis a ten-year exclusive
distribution right in Canada for Anipryl-Registered Trademark- (the "Draxis
Distribution Agreement") provided that Draxis achieves specified sales targets.
The Company is awaiting action of the U.S. Food and Drug Administration with
regard to its Cushing's disease application and is awaiting action of the HPB
with regard to its canine cognitive dysfunction (senility) application. The
Company is continuing its U.S. pivotal (Phase III equivalent) clinical trial for
canine cognitive dysfunction, at the current time, but lack of funds could
curtail the clinical development of Anipryl-Registered Trademark-. There is no
way to predict when, or if, regulatory approvals might be attained in the U.S.
or the timing or magnitude of the revenues from marketing of the Company's
products in the U.S. or whether any such revenues will ever be realized.
6
Revenues totaled $46,944 and $937,270 for the three and nine months ended
September 30, 1996 compared to $12,746 and $89,974 for the three and nine months
ended September 30, 1995 and $2,296,114 for the period from July 19, 1990 (date
of incorporation) to September 30, 1996. Interest and investment income will
continue to be the Company's primary source of income through 1996, although
revenue from Canadian sales of Anipryl-Registered Trademark- is expected to
increase in the coming months. Canadian sales of Anipryl-Registered Trademark-
for the three and nine months ended September 30, 1996 were $33,073 and
$104,233. Interest income temporarily increased subsequent to the receipt of
funding from the Draxis Distribution Agreement but will continue to decline over
time as a result of fewer funds being available for investment as the Company
continues its Anipryl-Registered Trademark- research and development program.
The Company will also continue to incur interest expense associated with the
1994 and 1996 Draxis Financings. (See discussion of the 1994 and 1996 Draxis
Financings in "Liquidity and Capital Resources" below.) The Company received
other revenue of $125,000 during the nine months ended September 30, 1996, from
Draxis Health Inc. in accordance with the Draxis Distribution Agreement. The
Company also received other revenue of $175,000 during the nine months ended
September 30, 1996, from Hoechst Veterinae in connection with the License and
Supply Agreement the Company signed during 1994.
Total expenses for the three and nine months ended September 30, 1996 were
$629,140 and $1,962,784 while total expenses for the three and nine months ended
September 30, 1995 and for the period from July 19, 1990 (date of incorporation)
to September 30, 1996 were $656,006, $2,125,895, and $13,586,837 respectively.
Total expenses result primarily from research and development expenses
associated with the Company's pivotal (Phase III equivalent) clinical trial
under the Anipryl-Registered Trademark- development program, development of the
marketing and sales plan for the U.S. launch of Anipryl-Registered Trademark-,
general operating expenses and interest expense resulting from the 1994 and 1996
Draxis Financings. Total expenses are expected to increase somewhat during the
remainder of 1996, due to preparation for the U.S. marketing and sales of
Anipryl-Registered Trademark- for Cushing's disease, continuation of the
Anipryl-Registered Trademark- development program and preparation for the
Special Meetings of Shareholders to consider the Draxis Share Exchange.
Operating expenses continue to remain within expectations.
Research and development expenses for the three and nine months ended September
30, 1996 aggregated $272,046 and $889,479 compared to $282,512 and $1,103,002
for the corresponding periods during 1995 and $6,530,304 for the period from
July 19, 1990 (date of incorporation) to September 30, 1996. Research and
development expenses relate primarily to activities required to obtain pre-
marketing regulatory approval for Anipryl-Registered Trademark- for use in pet
dogs.
During the three and nine months ended September 30, 1996, the Company incurred
interest expense aggregating $47,250 and $131,880 compared to $78,295 and
$234,169 for the corresponding periods in 1995, and $660,402 for the period from
inception to September 30, 1996. Interest expense is comprised of interest
expense and amortization of debt issuance costs associated with the Draxis
Financings. Debt issuance costs aggregating $155,200 are being amortized over
the term of the debt using the effective interest method. (See discussion of
Draxis Financings in "Liquidity and Capital Resources" below.)
The Company had net losses of $582,196 or $0.08 per share and $1,025,514 or
$0.14 per share for the three and nine month periods ended September 30, 1996
compared to $643,260 or $0.10 per share and $2,035,921 or $0.31 per share for
the three and nine month periods ended September 30, 1995. Net losses for the
period from inception to September 30, 1996 aggregate $11,290,723, or $1.81 per
share.
The Company is in discussions with Hoechst Veterinae to regain the European
rights to the veterinary pharmaceutical Anipryl-Registered Trademark-. The
Company is currently evaluating the best alternatives to accelerate the
availability of Anipryl-Registered Trademark- in Europe.
7
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash equivalents of $713,555
of which $663,920 is held in U.S. and Canadian interest-bearing accounts and
$49,635 is held in U.S. non-interest bearing operating accounts compared to
$489,548 as of September 30, 1995.
In January, 1996, in order to obtain working capital through 1996 and to enhance
its capability to market its first approved product in Canada, the Company
signed an agreement with Draxis providing Draxis a ten-year exclusive
distribution right in Canada for Anipryl-Registered Trademark-. As part of the
Draxis Distribution Agreement, Draxis converted, at the request of the Company,
approximately $1.5 million of debt it had previously loaned the Company in 1994
(the "1994 Draxis Financing") into common stock of the Company at a renegotiated
exercise price of $1.55 per share, and provided another $1 million to the
Company for operating capital in 1996 as convertible debt also with a conversion
price of $1.55 per share (the "1996 Draxis Financing"). The repayment terms for
the 1996 Draxis Financing are substantially equivalent to the terms described
below for the 1994 Draxis Financing, with installment payments commencing
October 1, 1999 and ending October 1, 2003. As a result of the conversion of
debt, Draxis, through its affiliates, now owns approximately 44% of the
Company's common stock, with options to convert the remaining debt that if fully
converted would provide Draxis with an indirect ownership position in the
Company of approximately 52%.
In connection with a Loan Agreement dated August 25, 1992 relating to the
Company's investment in Phoenix Scientific, Inc., the Company was required to
pay Draxis U.S.$250,000 on July 1, 1994 and U.S.$200,000 on October 1, 1994
pursuant to two promissory notes. The Company was also required to pay DAH
(Canada), a wholly-owned subsidiary of Draxis, U.S.$140,000 upon demand
(collectively, the "Notes"). As of March 24, 1994 and subject to certain terms
and conditions, the Company and Draxis entered into the 1994 Draxis Financing
whereby Draxis provided additional funding of U.S.$2,500,000 on May 1, 1994, to
the Company so that the Company could continue pursuing the development and
regulatory approval of Anipryl-Registered Trademark-. Contemporaneously, the
Company paid to Draxis an up-front fee of U.S.$155,200. Pursuant to the 1994
Draxis Financing, Draxis also agreed to extend the repayment of the Notes until
1997. Furthermore, the parties agreed to amend the Notes to provide that all
amounts due thereunder may be converted at the option of Draxis, upon written
notice to the Company, into shares of Common Stock of the Company at U.S.$2.88
per share.
The portion of the 1994 loan, approximately $1.5 million, that was not converted
in the 1996 Draxis Financing as part of the consideration for the Draxis
Distribution Agreement is repayable as to (i) 60% of the outstanding amount in
equal quarterly installments payable on the last day of each quarter commencing
January 1, 1997 and ending January 1, 2001, and (ii) 40% in a lump sum on
January 1, 2001, together with interest thereon payable quarterly on the last
day of each quarter at an annual rate equal to the prime rate plus 1% on the
outstanding principal amount commencing on the date of the loan.
In addition, the remaining portion of the 1994 loan may be converted, upon
written notice to the Company, into: (a) shares of Common Stock of the Company
at U.S.$2.88 per share; or (b) a participation interest, in increments of
U.S.$250,000, payable in annual installments until December 31, 2003.
Participation Interest is defined as an entitlement to receive an amount per
annum until December 31, 2003 equal to (i) 28% of the converted principal and
unpaid and accrued interest commencing the date of conversion by Draxis, if
Draxis converts prior to the receipt by the Company of FDA approval of Anipryl-
Registered Trademark- but after receipt of HPB approval of Anipryl-Registered
Trademark-; or (ii) 20% of the converted principal and unpaid and accrued
interest commencing the date of conversion by Draxis, if Draxis converts after
the receipt by the Company of FDA approval of Anipryl-Registered Trademark- and
HPB approval of Anipryl-Registered Trademark-. Participation interest payments
will decrease to 2/3 of the
8
amount required to be paid for the year ending December 31, 2004, and to 1/3 of
such amount for the year ending December 31, 2005.
In the event a participation interest payment exceeds 50% of the Company's pre-
tax net income during any fiscal year, the difference between the participation
interest payment and 50% of such pre-tax net income shall be paid in the form of
shares of the Company at the average price of U.S.$2.88 per share. Draxis has
further agreed not to convert more than 50% of the loan into a participation
interest in any calendar year. The 1996 Draxis Financing does not contain a
provision for conversion into a participation interest. Under certain terms and
conditions, the Company shall be required to register any shares acquired by
Draxis under any of the above-mentioned terms with the Securities and Exchange
Commission.
The Company agrees that any additional debt which may be incurred by the
Company, with a repayment term exceeding one year, shall be subordinated to the
Company's outstanding indebtedness to Draxis. The Company may prepay any
amounts outstanding at sixty (60) days written notice to Draxis, during which
time Draxis retains the right to exercise any remaining conversion privileges.
The ability of the Company to achieve its goal of bringing Anipryl-Registered
Trademark- to the U.S. market for use in dogs is dependent, in part, upon the
Company's ability to raise adequate funding and to gain FDA regulatory approval
of its product. The remaining capital will not be sufficient to implement the
Company's objective of obtaining pre-marketing approval of Anipryl-Registered
Trademark- in the U.S. The Company has invested the proceeds from its financing
activities primarily in short-term or liquid investments, so that the Company
will be able to access its cash requirements as needed for its development plan
during 1996. Insufficient funding may require the Company to delay or eliminate
expenditures relating to the marketing of the product and further development.
The Board of Directors appointed a committee of independent members to evaluate
any proposal for additional funding that may arise. The Committee retained an
investment banking firm to assist with the analysis and negotiations of any such
proposals.
On July 25, 1996, the Boards of Directors of the Company and Draxis voted to
recommend to the respective shareholders of each company the approval of an
Exchange Agreement ( the "Exchange Agreement") executed on the same date by and
among Draxis, DPI and the Company. Pursuant to the Exchange Agreement, all
outstanding shares of the Company's common stock other than those owned by DPI
or Draxis, LLC, and other than dissenters' shares would be exchanged (the
"Exchange") for shares of common stock of Draxis on a 1.35 to 1 ratio, with each
shareholder of the Company receiving 1.35 shares of Draxis. The same ratio
would be applicable to options and warrants to acquire the Company's common
shares. An Independent Committee of the Company's Board of Directors approved
the Exchange Agreement and the Company's independent investment bankers
delivered an opinion that the Exchange was fair, from a financial point of view,
to shareholders.
If the Exchange Agreement is adopted by the shareholders and implemented, Draxis
will commit, subject to standard business judgment, approximately $10 million to
the Company to complete the process of obtaining approval from the U.S. Food and
Drug Administration to launch Anipryl-Registered Trademark- in the United States
and to acquire new veterinary products, as appropriate. Additionally, the
Company would be given operational control over the development, marketing and
distribution of Anipryl-Registered Trademark- and any other veterinary product
including, without limitation, research and development, regulatory affairs,
manufacturing, business development and finance and specifically including the
U.S. launch and subsequent marketing, sales and distribution of Anipryl-
Registered Trademark- or any other veterinary product. The Company will also be
entitled to nominate a director to the Board of Directors of Draxis to serve
until the next annual meeting of the shareholders of Draxis, at which time
Draxis has agreed to nominate for one term a director selected by the Company
and agreeable to Draxis.
9
Under the Exchange Agreement, if adopted by the shareholders, all shares of the
Company stock exchanged for shares of Draxis would be acquired by DPI. The
Exchange Agreement requires the following steps:
1. The Company has created a new wholly owned subsidiary under the laws
of the State of Louisiana ("DAHI Louisiana").
2. The shareholders of the Company, at a special meeting called for
November 26, 1996 to approve the proposals set forth in the Exchange
Agreement, will vote on a proposal to merge the Company, which is
currently a Missouri corporation, into DAHI Louisiana (the "Re-
incorporation Merger"). Such proposal requires a vote of two-thirds
of the outstanding shares of the Company and a vote of a majority of
the shares not owned by Draxis or Draxis affiliates and could generate
dissenters' rights.
3. If the Re-incorporation Merger is approved, the Company's
shareholders, through a proxy issued by the Company as the only owner
of DAHI Louisiana shares, will then vote on a proposal to adopt a
Mandatory Share Exchange ( the "Mandatory Share Exchange") pursuant to
Section 116 of the Louisiana Business Corporation Law.
4. If the Mandatory Share Exchange is adopted by the vote of two-thirds
of the Company's outstanding shares and a majority of the Company's
outstanding shares not owned by Draxis affiliates, all shares of
Company stock not owned by the Draxis affiliates would be purchased by
DPI in exchange for the issuance to the Company's shareholders of
shares of Draxis stock on a 1.35 to 1 ratio, except for those who
perfect dissenters' rights with respect to the Re-incorporation
Merger. Such dissenters will receive cash for the "fair value" of
their shares.
The Exchange Agreement was made subject to numerous conditions to closing,
including among other things, that the parties receive opinions from tax
advisors that the exchange will be tax free to U.S. shareholders of the Company.
It is anticipated that the Exchange will be taxable to Company shareholders
residing in Canada and perhaps other jurisdictions.
The Exchange Agreement provides that it may be terminated by either party in
certain circumstances including upon a breach by the other party and in the
event that the Exchange has not occurred by January 31, 1997. The Company has
the right to abandon the plan contemplated by the Exchange Agreement under
certain circumstances, but if it so elects, it must pay Draxis a one million
dollar fee and must reimburse Draxis up to $750,000 for professional expenses
incurred by Draxis in the adoption and execution of the Exchange Agreement.
Effective October 24, 1996, the Company and Draxis filed with the SEC a Joint
Management Proxy Statement - Prospectus disclosing the terms of the Exchange
Agreement. Special Meetings of Shareholders for the Company and DAHI Louisiana
are scheduled for November 26, 1996.
It is not possible at this time to predict with assurance whether any of these
activities will result in additional funding for the Company. It is anticipated
that the Company will incur substantial professional fees throughout the
remainder of 1996 in taking the corporate actions contemplated by the Exchange
Agreement. Based upon the Company's current level of expenditures, the Company
has funds to support its development program through year-end 1996.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Statements relating to anticipated revenues included in the "Results of
Operations" section above constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended
10
and Section 21E of the Securities Exchange Act of 1934 and are subject to the
safe harbors created thereby. Actual operating results of the Company could
differ materially from anticipated results, as a result of, among other things,
the Company's need to obtain U.S. Food and Drug Administration regulatory
approval for its product and the ability to raise additional financing.
PART II. - OTHER INFORMATION
ITEM 1-6. NONE
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DEPRENYL ANIMAL HEALTH, INC.
Date Nov. 14, 1996 By: /s/ David R. Stevens
------------------------- ------------------------------------
David R. Stevens
President, Chief Executive Officer, and
Chief Financial Officer