1 EXHIBIT 10.64 SUBORDINATION AGREEMENT Dated as of March 29, 2000 Among WATSON PHARMACEUTICALS, INC., HALSEY DRUG CO., INC., The Existing Holders (as defined herein) and THE GRANTORS AND GUARANTORS NAMED HEREIN 2 TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS........................................................................................2 SECTION 1.1. Definitions of Certain Terms..............................................................2 SECTION 1.2. Terms Generally...........................................................................3 ARTICLE II STANDBY AND SUBORDINATION..........................................................................4 ARTICLE III PAYMENTS...........................................................................................4 ARTICLE IV SECURITY INTEREST SUBORDINATION....................................................................5 ARTICLE V DISPOSITION OF COLLATERAL..........................................................................5 ARTICLE VI SENIOR DEBT........................................................................................5 ARTICLE VII DEFAULT............................................................................................6 ARTICLE VIII NO COMMITMENT......................................................................................6 ARTICLE IX NO CONTEST.........................................................................................6 ARTICLE X FINANCIAL CONDITION OF BORROWER....................................................................6 ARTICLE XI REVIVOR............................................................................................6 ARTICLE XII REPRESENTATIONS AND WARRANTIES.....................................................................7 SECTION 12.1. Representations and Warranties of the Existing Holders....................................7 SECTION 12.2. Representations and Warranties of Each Party..............................................7 ARTICLE XIII EXISTING INTERCREDITOR AGREEMENT...................................................................7 ARTICLE XIV MISCELLANEOUS......................................................................................7 SECTION 14.1. No Individual Action......................................................................7 SECTION 14.2. Successors and Assigns....................................................................7 SECTION 14.3. Notices...................................................................................7 SECTION 14.4. Termination...............................................................................8 SECTION 14.5. Applicable Law............................................................................8 SECTION 14.6. Amendments and Waivers of Agreement and Support Documents.................................8 SECTION 14.7. Waiver of Rights..........................................................................8 SECTION 14.8. Severability..............................................................................8 3 SECTION 14.9. Waiver of Jury Trial.......................................................................9 SECTION 14.10. Counterparts; Effectiveness................................................................9 SECTION 14.11. Section Headings...........................................................................9 SECTION 14.12. Complete Agreement.........................................................................9 4 SUBORDINATION AGREEMENT This SUBORDINATION AGREEMENT (the "Agreement") is dated as of March 29, 2000 and is entered into by and among (i) WATSON PHARMACEUTICALS, INC., a Nevada corporation ("Watson"), (ii) HALSEY DRUG CO., INC., a New York corporation (the "Company"), (iii) the holders of the 5% Convertible Senior Secured Debentures issued by the Company pursuant to the Debenture and Warrant Purchase Agreement, dated March 10, 1998 (the "Galen Debenture Agreement"), by and among the Company, Galen Partners III, L.P. and the other signatories thereto, listed on Schedule 4 attached hereto (such holders, the "GALEN INVESTOR GROUP"), (iv) the holders of the 5% Convertible Senior Secured Debentures issued by the Company pursuant to the Debenture and Warrant Purchase Agreement, dated May 26, 1999 (the "Oracle Debenture Agreement"), by and among the Company, Oracle Strategic Partners, L.P. and the other signatories thereto, listed on Schedule 4 attached hereto (such holders, the "ORACLE INVESTOR GROUP"), and (v) the Grantors and Guarantors listed on the signature pages hereof. Certain capitalized terms used herein have the meanings ascribed thereto in Section 1.1. RECITALS A. Watson and the Company have entered into that certain Loan Agreement, dated as of March 29, 2000 (the "Loan Agreement"), pursuant to which Watson agreed to loan the Company the principal amount of Seventeen Million Five Hundred Thousand Dollars ($17,500,000) (the "Loan"). B. The Company has issued its 5% Convertible Senior Secured Debentures Due March 15, 2003 to the Galen Investor Group pursuant to the Galen Debenture Agreement (such debentures, the "Galen Debentures") and to the Oracle Investor Group pursuant to the Oracle Debenture Agreement (such debentures, the "Oracle Debentures," and collectively with the Galen Debentures, the "Existing Debentures"). The holders of the Existing Debentures as of a given date are sometimes referred to herein as the "Existing Holders", and the Existing Holders and Watson are sometimes referred to herein collectively as the "Secured Creditors". C. The Company and certain of its affiliates have entered into the Existing Security Documents and Existing Guaranty Agreements pursuant to which the Company and such affiliates secured the Company's obligations under the Existing Debentures and guarantied the payment and performance of such obligations. D. In connection with the execution of the Loan Agreement, the Company and Watson will be entering into new security documents (the "Watson Security Documents"). E. As an inducement to make the Loan, the Galen Investor Group and the Oracle Investor Group agree that (i) as among the Secured Creditors, Watson's security interest in the Collateral shall rank first in priority among the Secured Creditors; and (ii) proceeds received from enforcement of the Watson Security Documents and the Existing Security Documents will be applied first to the payment of the Company's obligations in respect of the Loan, and second, to the extent of any remaining proceeds, to the payment of the Company's obligations in respect of the Existing Debentures. The Company's and its affiliates' obligations under the Loan and the Existing Debentures are sometimes referred to collectively herein as the "Secured Obligations". F. The parties hereto desire to set forth their agreement regarding the priority of Watson's security interest and the application to the Secured Obligations of cash received by the 1 5 Secured Creditors from dispositions of Collateral and the enforcement of the Existing Security Documents and the Watson Security Documents and the agreement of Watson, the Galen Investor Group and the Oracle Investor Group as to the decisions relating to the exercise of remedies under this Agreement and the Existing Security Documents and the Watson Security Documents. G. It is a condition precedent to the effectiveness of the Loan Agreement that Watson, the Galen Investor Group, the Oracle Investor Group, the Company and its affiliates shall have entered into this Agreement. In consideration of the above recitals and the mutual covenants contained herein, Watson, the Galen Investor Group, the Oracle Investor Group, the Company and the Grantors and Guarantors hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1. DEFINITIONS OF CERTAIN TERMS. As used herein, the following terms have the meanings set forth below: "Agreement" is defined in the Preamble hereto. "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks are authorized or required to be closed in New York. "Closing Date" means the date on which this Agreement becomes effective in accordance with Section 14.10. "Collateral" means all the properties and assets of whatever nature, tangible or intangible, now owned or existing or hereafter acquired or arising, of any of the Grantors on or in which the Secured Creditors have been granted a lien or security interest pursuant to any of the Existing Security Documents or Watson Security Documents or this Agreement. "Event of Default" means any Event of Default under and as defined in the Loan Agreement or Watson Security Documents. "Existing Guaranty Agreements" means the guaranties and agreements identified on Schedule 1 hereto. "Existing Holders" is defined in the Recitals hereto. "Existing Intercreditor Agreement" means that certain Intercreditor Agreement, effective May 26, 1999, by and among Galen Partners III, L.P., Galen Partners International III, L.P., Galen Employee Fund III, L.P., and Oracle Strategic Partners, L.P. "Existing Security Documents" means the guaranties, mortgages, deeds of trust and security agreements identified on Schedule 1 and Schedule 2 hereto. 2 6 "Grantors" means the Company, Halsey Pharmaceutical, Inc., a Delaware corporation and Houba Inc., an Indiana corporation, and each other subsidiary or affiliate of the Company that is or becomes a party to any Security Document. "Guarantors" means Halsey Pharmaceutical, Inc., a Delaware corporation and Houba Inc., an Indiana corporation, and each other person that is or becomes a party to any Guaranty Agreement. "Loan" is defined in the Recitals hereto. "Loan Agreement" is defined in the Recitals hereto. "Note" means that certain Secured Promissory Note, dated March __, 2000, executed by the Company in favor of Watson in the principal amount of $17,500,000. "Notice of Default" means a notice delivered by any Secured Creditor stating that an Event of Default has been declared and setting forth in reasonable detail the date and nature of such Event of Default. "Secured Creditors" is defined in the Recitals hereto. "Secured Obligations" is defined in the Recitals hereto. "Senior Debt" means, at any time, the sum (without duplication) of the following: (i) the aggregate principal amount of the Loan outstanding at such time and the aggregate amount of accrued unpaid interest thereon at such time; and (ii) the reasonable costs and expenses of enforcement by Watson of its rights and collection with respect to the Loan. "Subordinated Debt" means, at any time, the sum (without duplication) of the following: (i) the aggregate principal amount of the Existing Debentures outstanding at such time and the aggregate amount of accrued unpaid interest thereon at such time; (ii) the aggregate amount of accrued and unpaid fees payable to the Existing Holders, or any of them, under or in connection with the Existing Debentures; and (iii) the aggregate amount of all other monetary obligations of the Company, the Guarantors and the Grantors that are accrued and owing at such time to the Existing Holders, or any of them, under the Existing Debentures (including all security, guaranty and other documents issued or executed in connection with and on the same date as the Existing Debentures) and the Existing Security Documents, including indemnification and expense reimbursement obligations thereunder. "Watson Security Documents" means the guaranties, mortgages, deeds of trust and security agreements identified on Schedule 5. SECTION 1.2. TERMS GENERALLY. The definitions in Section 1.1 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun 3 7 shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." All references herein to Articles and Sections shall be deemed references to Articles and Sections of this Agreement unless the context shall otherwise require. ARTICLE II STANDBY AND SUBORDINATION Except as set forth in Article 3 of this Agreement, the Existing Holders shall not accept or receive, by setoff or in any other manner, as against the Company or the Guarantors, the whole or any part of the Subordinated Debt owing to the Existing Holders from the Company or the Guarantors, or any of their respective predecessors, successors or assigns, including, without limitation, a receiver, trustee or debtor in possession under the Existing Debentures or any note, guaranty or other instrument or agreement executed by the Company or the Guarantors in favor of the Existing Holders, or otherwise, whether the sums represent principal, interest, costs, attorneys' fees or charges, or other obligations due or not due, whether incurred directly or indirectly, and whether absolute or contingent unless and until the Senior Debt has been fully paid and satisfied. ARTICLE III PAYMENTS So long as no Event of Default shall have occurred and be continuing under the Loan Agreement, the Company may pay to the Existing Holders, and the Existing Holders may accept or receive regularly scheduled payments in respect of the Subordinate Debt; provided, however, that the aggregate amount of payments (in any form) which may be made to and accepted by the Existing Holders shall not exceed the sum of Six Hundred and Twenty-Five Thousand Dollars ($625,000) on any Interest Payment Date (as such term is defined in the Existing Debentures) and any arrearages thereon, and provided, further, however, that certain holders of the Existing Debentures designated on Schedule 4 attached hereto have agreed that, on each Interest Payment Date while any of the Senior Debt is outstanding , such holders shall receive such payments in the capital stock and/or like debenture instruments of Borrower and not in cash or cash equivalents. Watson shall provide notice to Oracle Strategic Partners, L.P., Galen Partners III, L.P., Galen Employee Fund III, L.P., and Galen Partners International III, L.P. of any Event of Default prior to its enforcement of its remedies hereunder, provided however, that nothing herein shall impair Watson's ability to act immediately after transmitting such notice. Except as to payments which the Existing Holders are permitted to accept or receive pursuant to this Article 3, the Existing Holders shall receive and hold all other payments or distributions received prior to the satisfaction of the Senior Debt in trust for the benefit of Watson and shall forthwith deliver the same to Watson in the same form received (except for the endorsement or assignment in favor of Watson where necessary) for application to the Senior Debt and, until so delivered, shall not be commingled with other funds or property of the Existing Holders. Upon any Event of Default under the Existing Debentures or the Support Documents, any Existing Holder may file, prosecute and obtain a judgment in a lawsuit against the Company or the Guarantors; provided, however, that the Existing Holders shall not commence foreclosure on any judgment lien obtained in connection therewith or otherwise exercise any remedy with respect thereto, including, without limitation, filing any petition in bankruptcy with respect to the Company or the Guarantors, unless and until all Senior Debt has been fully paid and satisfied. 4 8 ARTICLE IV SECURITY INTEREST SUBORDINATION All security interests acquired by Watson through the Watson Security Documents, to the extent securing the Senior Debt, in the Collateral shall at all times be prior and superior to any lien, ownership interest, security interest or other interest or claim now held or hereafter acquired by the Existing Holders in the Collateral (the "Subordinate Interest"). Said priority shall be applicable irrespective of the time or order of attachment or perfection of any security interest or the time or order of filing of any financing statements or other documents, or any statutes, rules of law, or court decisions to the contrary. Upon any disposition of any of the Collateral by Watson, the Existing Holders agree, if requested by Watson, to execute and immediately deliver any and all releases or other documents or agreements which Watson deems necessary to accomplish a disposition thereof free of the Subordinate Interest. ARTICLE V DISPOSITION OF COLLATERAL The Existing Holders agree that, until Watson has received payment in full of all Senior Debt, Watson may dispose of, and exercise any other rights with respect to, any or all of the Collateral, free of the Subordinate Interest; provided, that the Existing Holders retain any rights they may have as a junior secured creditor with respect to the surplus, if any, arising from any such disposition or enforcement. The Existing Holders agree that any funds of the Company or the Guarantors which it obtains through the exercise of any right of setoff or other similar right constitute Collateral, and the Existing Holders shall immediately pay such funds to Watson to be applied to the outstanding Senior Debt. ARTICLE VI SENIOR DEBT Until Watson has received payment in full of all Senior Debt, the Existing Holders agree that, in addition to any other rights that Watson may have, at law or in equity, Watson may at any time, and from time to time, without the Existing Holders' consent and without notice to the Existing Holders, renew or extend, but not increase, any of the Senior Debt or that of any other person at any time directly or indirectly liable for the payment of any Senior Debt, accept partial payments of the Senior Debt, settle, release (by operation of law or otherwise), compound, compromise, collect or liquidate any of the Senior Debt, change, alter or vary the interest charge on, or any other terms or provisions of the Senior Debt or any present or future instrument, document or agreement between the Senior Lender and the Company or the Guarantors, and take any other action or omit to take any other action with respect to the Senior Debt or the Collateral as Watson may deem necessary or advisable in its sole discretion. The Existing Holders waive any right to require Watson to marshal any assets in favor of the Existing Holders or against or in payment of any or all of the Senior Debt. The Existing Holders further waive any defense arising by reason of any claim or defense based upon an election of remedies by Watson which in any manner impairs, affects, reduces, releases, destroys and/or extinguishes any of the Existing Holders' subrogation rights, rights to proceed against the Company or the Guarantors for reimbursement, and/or any other rights of any of the Existing Holders. 5 9 ARTICLE VII DEFAULT The Existing Holders shall promptly give Watson written notice of any Event of Default by the Company or the Guarantors on any obligation secured by the Subordinate Interest. ARTICLE VIII NO COMMITMENT It is understood and agreed that this Agreement shall in no way be construed as a commitment or agreement by Watson to continue financing arrangements with the Company or the Guarantors. ARTICLE IX NO CONTEST The Existing Holders shall not contest the validity, perfection, priority or enforceability of any lien or security interest granted to Watson to secure the Senior Debt pursuant to the Watson Security Documents. ARTICLE X FINANCIAL CONDITION OF BORROWER The Existing Holders are presently informed of the financial condition of the Company and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of non-payment of the Senior Debt and the Subordinated Debt. The Existing Holders acknowledge that they are each entitled to keep themselves informed under the terms of the Existing Debentures and the Existing Security Documents as to the Company's financial condition and all other circumstances which bear upon the risk of non-payment of the Senior Debt and the Subordinated Debt or the Existing Holders' compliance with their obligations hereunder. Except as otherwise specifically provided herein, the Existing Holders waive any right to require Watson to disclose to them any information which Watson may now or hereafter acquire concerning the Company or the Guarantors. ARTICLE XI REVIVOR If any payment made on any of the Senior Debt shall for any reason be required to be returned by Watson, whether on the ground that such payment constituted a preference or for any other reason, then for purposes of this Agreement, such payment on the Senior Debt shall be treated as not having been made, and this Agreement shall in all respects be effective with respect to such Senior Debt as though such payment had not been made. 6 10 ARTICLE XII REPRESENTATIONS AND WARRANTIES SECTION 12.1. REPRESENTATIONS AND WARRANTIES OF THE EXISTING HOLDERS. The Existing Holders represent and warrant that they have not heretofore transferred or assigned the Subordinate Interest or any financing statement naming any Grantor as debtor and any Existing Holder as secured party, and that they will not do so without first delivering a copy of this Agreement to the proposed transferee or assignee. SECTION 12.2. REPRESENTATIONS AND WARRANTIES OF EACH PARTY. Each party hereto represents and warrants to the other parties hereto that (a) the execution, delivery and performance of this Agreement (i) have been duly authorized by all requisite corporate action on its part and (ii) will not contravene any provision of its charter or by-laws or any order of any court or other governmental authority having applicability to it or any applicable law, and (b) this Agreement has been duly executed and delivered by it and constitutes its legal, valid and binding obligation. ARTICLE XIII EXISTING INTERCREDITOR AGREEMENT The parties hereto acknowledge the existence of the Existing Intercreditor Agreement. Nothing herein shall be deemed to rescind any portion of the Existing Intercreditor Agreement and such agreement shall remain in full force except as modified by the terms of this Agreement. ARTICLE XIV MISCELLANEOUS SECTION 14.1. NO INDIVIDUAL ACTION. No Secured Creditor may require any other Secured Creditor to take or refrain from taking any action hereunder or under any of the Support Documents or with respect to any of the Collateral except as and to the extent expressly set forth in this Agreement. SECTION 14.2. SUCCESSORS AND ASSIGNS. This Agreement shall be binding on and inure to the benefit of each of the Secured Creditors and their respective successors and permitted assigns; provided, however, that, except as provided in the next sentence, no Existing Holder may assign its rights or obligations hereunder. The rights and obligations of any Existing Holder under this Agreement may be assigned, and the term "Existing Holder" as used in this Agreement shall include, any assignee, transferee or successor of such Existing Holder under the Existing Debentures by the execution of a Joinder Agreement by such assignee, transferee or successor, and any such assignee, transferee or successor shall thereupon become an Existing Holder under and a party to this Agreement. This Agreement is not intended to confer any benefit on, or create any obligation of any Secured Creditor to, the Company or any third party, including the Guarantors and other Grantors. SECTION 14.3. NOTICES. Notices and other communications provided for herein or in any Watson Security Document shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telex or telecopy, as follows: 7 11 (a) if to any Existing Holder, to it as set forth opposite its signature on the signature pages hereto; (b) if to Watson, to 311 Bonnie Circle, Corona, California, 91720, fax no. (909) 270-1096, to the attention of Mr. Robert Funsten, General Counsel; and (c) if to the Company, to 695 No. Perryville Road, Rockford, Illinois 61107, fax no. (815) 399-9710, to the attention of Mr. Michael Reicher, Chief Executive Officer any Grantor, or any Guarantor, to it as specified in the Support Document to which it is a party. (d) if to the other Grantors and Guarantors, as applicable to: (i) Houba, Inc., 16235 State Road, #17, Culver, Indiana 46511, fax no: ____________, to the attention of Mr. Michael Reicher, Chief Executive Officer; or (ii) Halsey Pharmaceutical, Inc., 695 No. Perryville Road, Rockford, Illinois 61107, fax no. (815) 399-9710, to the attention of Mr. Michael Reicher, Chief Executive Officer. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telex or telecopy, or on the date five Business Days after dispatch by certified or registered mail if mailed, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 14.3 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 14.3. SECTION 14.4. TERMINATION. This Agreement shall terminate automatically upon the indefeasible payment in full of the Senior Debt. SECTION 14.5. APPLICABLE LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES. SECTION 14.6. AMENDMENTS AND WAIVERS OF AGREEMENT AND SUPPORT DOCUMENTS. No amendment or waiver of any provision of this Agreement or any Support Document shall in any event be effective unless the same shall be in writing and signed by the Secured Creditors; provided, however, that no such amendment or waiver which materially affects the duties of the Company shall be effective without the prior written consent of the Company. No waiver of any provision of this Agreement and no consent to any departure by any party hereto from the provisions hereof shall be effective unless such waiver or consent shall be set forth in a written instrument executed by the party against which it is sought to be enforced, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on any party hereto in any case shall entitle such party to any other or further notice or demand in the same, similar or other circumstances. SECTION 14.7. WAIVER OF RIGHTS. Neither any failure nor any delay on the part of any party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof, and a single or partial exercise thereof shall not preclude any other or further exercise or the exercise of any other right, power or privilege. SECTION 14.8. SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and 8 12 enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provision. SECTION 14.9. WAIVER OF JURY TRIAL. NEITHER THE COMPANY, THE SECURED CREDITORS OR ANY GRANTOR OR GUARANTOR, NOR ANY ASSIGNEE, SUCCESSOR, HEIR OR PERSONAL REPRESENTATIVE OF THE COMPANY, ANY SECURED CREDITOR, OR ANY GRANTOR OR GUARANTOR SHALL SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER LITIGATION PROCEDURE BASED UPON OR ARISING OUT OF OR OTHERWISE RELATING TO THIS AGREEMENT, THE SUPPORT DOCUMENTS, ANY RELATED INSTRUMENT OR AGREEMENT, ANY COLLATERAL FOR ALL OR ANY PART OF THE LOAN AGREEMENT OBLIGATIONS OR EXISTING DEBENTURE OBLIGATIONS, OR THE DEALINGS OR THE RELATIONSHIP BETWEEN OR AMONG SUCH PERSONS. THE COMPANY, EACH SECURED CREDITOR AND EACH GRANTOR AND GUARANTOR HEREBY WAIVE ANY AND ALL RIGHT TO ANY SUCH JURY TRIAL. NEITHER THE COMPANY, ANY SECURED CREDITOR NOR ANY GRANTOR OR GUARANTOR SHALL SEEK TO CONSOLIDATE ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS SECTION HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND THE PROVISIONS OF THIS AGREEMENT SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. SECTION 14.10. COUNTERPARTS; EFFECTIVENESS. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument. This Agreement shall become effective on the date (the "Closing Date") this Agreement shall have been executed and delivered by each party identified in the introductory paragraph hereto. SECTION 14.11. SECTION HEADINGS. The Article and Section headings used herein are for convenience of reference only and are not to affect the construction of or be taken into consideration in interpreting this Agreement. SECTION 14.12. COMPLETE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior representations, negotiations, writings, memoranda and agreements. To the extent any provision of this Agreement conflicts with any of the documents referenced herein, the provisions of this Agreement shall be controlling. [signature pages to follow] 9 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers all as of the day and year first above written. "WATSON" "THE COMPANY" WATSON PHARMACEUTICAL, INC., HALSEY DRUG CO., INC., a Nevada corporation a New York corporation /s/ Robert C. Funsten /s/ Michael Reicher - ---------------------- ---------------------- By: By: Its: Senior Vice President Its: Chief Executive Officer "GRANTOR/GUARANTOR" "GRANTOR/GUARANTOR" HOUBA, INC., HALSEY PHARMACEUTICAL, INC., an Indiana corporation a Delaware corporation /s/ Michael Reicher /s/ Michael Reicher - ---------------------- ---------------------- By: By: Its: Chief Executive Officer Its: Chief Executive Officer ORACLE STRATEGIC PARTNERS, L.P. GALEN PARTNERS III, L.P. By: Oracle Strategic Capital L.L.C., By: Claudius, L.L.C., General Partner General Partner 610 Fifth Avenue, 5th Fl. 712 Fifth Avenue New York, New York 10019 New York, New York 10019 /s/ Larry Feinberg /s/ Shrini Conjeevaram - ---------------------- ---------------------- By: By: Its: Managing Member Its: General Partner GALEN EMPLOYEE FUND III, L.P. By: Wesson Enterprises, Inc. GALEN PARTNERS INTERNATIONAL, III, L.P. 610 Fifth Avenue, 5th Floor By: Claudius, L.L.C., General Partner New York, New York 10020 610 Fifth Avenue, 5th Floor New York, New York 10020 /s/ Bruce F. Wesson /s/ Shrini Conjeevaram - ---------------------- ---------------------- By: By: Its: General Partner Its: General Partner 10 14 ALAN SMITH PATRICK COYNE 21 Bedlow Avenue 477 Margo Lane Newport, Rhode Island 02840 Berwyn, Pennsylvania 19312 /s/ Alan Smith /s/ Patrick Coyne - ---------------------------- ---------------------------- MICHAEL WEISBROT SUSAN WEISBROT 1136 Rock Creek Road 1136 Rock Creek Road Gladwyne, Pennsylvania 19035 Gladwyne, Pennsylvania 19035 /s/ Michael Weisbrot /s/ Susan Weisbrot - ---------------------------- ---------------------------- GREG WOOD DENNIS ADAMS c/o D.R. International 120 Kynlyn Road 7474 No. Figueroa Street Radnor, Pennsylvania 19312 Los Angeles, California 90041 /s/ Greg Wood /s/ Dennis Adams - ---------------------------- ---------------------------- BERNARD SELZ ROBERT W. BAIRD & CO., INC., TTEE c/o Furman Selz FBO Michael K. Reicher IRA 230 Park Avenue c/o Halsey Drug Co., Inc. New York, New York 10069 695 North Perryville Rd. Crimson Building #2 Rockford, Ill. 61107 /s/ Bernard Selz /s/ Michael K. Reicher - ---------------------------- ---------------------------- By: Its: Trustee MICHAEL REICHER PETER CLEMENS c/o Halsey Drug Co., Inc. c/o Halsey Drug Co., Inc. 695 North Perryville Rd. 695 North Perryville Rd. Crimson Building #2 Crimson Building #2 Rockford, Ill. 61107 Rockford, Ill. 61107 /s/ Michael K. Reicher /s/ Peter Clemens - ---------------------------- ---------------------------- 11 15 CONNIE REICHER TRUST c/o Halsey Drug Co., Inc. STEFANIE HEITMEYER 695 North Perryville Rd. c/o Halsey Drug Co., Inc. Crimson Building #2 695 North Perryville Rd. Rockford, Ill. 61107 Crimson Building #2 Rockford, Ill. 61107 /s/ Connie Reicher /s/ Stefanie Heitmeyer - ---------------------------- ---------------------------- By: Its: Trustee DAN HILL HEMANT K. SHAH 6725 Lynch Avenue 29 Chrissy Drive Riverbank, California 95367 Warren, New Jersey 07059 /s/ Dan Hill /s/ Hemant K. Shah - ---------------------------- ---------------------------- VARSHA H. SHAH VARSHA H. SHAH AS CUSTODIAN 29 Chrissy Drive FOR SUMEET H. SHAH Warren, New Jersey 07059 29 Chrissy Drive Warren, New Jersey 07059 /s/ Varshah H. Shah /s/ Varshah H. Shah - ---------------------------- ---------------------------- By: Its: Custodian VARSHA H. SHAH AS CUSTODIAN ILENE RAINISCH FOR SACHIN H. SHAH c/o Alvin Rainisch 29 Chrissy Drive 315 Devon Place Warren, New Jersey 07059 Morganville, New Jersey 07751 /s/ Varshah H. Shah /s/ Ilene Rainisch - ---------------------------- ---------------------------- By: Its: Custodian MICHAEL RAINISCH KENNETH GIMBEL c/o Alvin Rainisch 2455 Montgomery Avenue 315 Devon Place Highland Park, Ill. 60035 Morganville, New Jersey 07751 /s/ Michael Rainisch /s/ Kenneth Gimbel - ---------------------------- ---------------------------- 12 16 KENNETH GIMBEL, IRA ACCOUNT FBO KENNETH GIMBEL 2455 Montgomery Avenue Highland Park, Ill. 60035 - ---------------------------- By: Its: 13 17 SCHEDULE 1 LIST OF EXISTING GUARANTY AGREEMENTS 1. Continuing Unconditional Secured Guaranty by Houba, Inc. dated March 10, 1998. 2. Continuing Unconditional Secured Guaranty by Halsey Pharmaceutical, Inc. dated March 10, 1998. 3. Continuing Unconditional Secured Guaranty by Houba, Inc. dated May 26, 1999. 4. Continuing Unconditional Secured Guaranty by Halsey Pharmaceutical, Inc. dated May 26, 1999. SCHEDULE 1 18 SCHEDULE 2 LIST OF EXISTING SECURITY DOCUMENTS 1. Company General Security Agreement, dated March 10, 1998, between Halsey Drug Co., Inc. and Galen Partners III, L.P., as agent. 2. Guarantors General Security Agreement, dated March 10, 1998, by and among Cenci Powder Products, Inc., Halsey Pharmaceutical, Inc., H.R. Cenci Laboratories, Inc., Houba, Inc., Indiana Fine Chemicals, Inc. and Galen Partners III, L.P., as agent. 3. Stock Pledge Agreement, dated March 10, 1998, between Halsey Drug Co., Inc. and Galen Partners III, L.P., as agent. 4. Company General Security Agreement, dated March 26, 1999, between Halsey Drug Co., Inc. and Oracle Strategic Partners, L.P., as agent. 5. Guarantors General Security Agreement dated, May 26, 1999, by and among Houba, Inc., Halsey Pharmaceutical, Inc. and Oracle Strategic Partners, L.P., as agent. 6. Stock Pledge Agreement, dated May 26, 1999, between Halsey Drug Co., Inc. and Oracle Strategic Partners, L.P., as agent. SCEHDULE 2 19 SCHEDULE 3 EXISTING MORTGAGES AND DEEDS OF TRUST 1. Real estate mortgage, dated May 10, 1998, between Houba, Inc. and Galen Partners III, L.P., as agent, covering the property located at 16235 State Road 17, Culver, Indiana 46511. 2. Real estate mortgage, dated May 26, 1999, between Houba, Inc. and Oracle Strategic Partners, L.P., as agent, covering the property located at 16235 State Road 17, Culver, Indiana 46511. SCHEDULE 3 20 SCHEDULE 4 EXISTING HOLDERS GALEN DEBENTURES Principal Amount of $1.50 $2.375 Name and Address of Purchaser Debenture Purchased Warrants Warrants - ----------------------------- ------------------- -------- -------- Galen Partners III, L.P.* $ 15,423,195 1,557,898 1,557,898 610 Fifth Avenue, 5th Floor New York, New York 10020 Galen Partners International III, L.P.* $ 1,709,167 172,643 172,643 610 Fifth Avenue, 5th Floor New York, New York 10020 Galen Employee Fund III, L.P.* $ 67,638 6,833 6,833 610 Fifth Avenue, 5th Floor New York, New York 10020 Michael Reicher* $ 300,000 30,303 30,303 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Peter Clemens* $ 100,000 10,101 10,101 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Stefanie Heitmeyer $ 20,000 2,020 2,020 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Dan Hill $ 10,000 1,010 1,010 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Purchase Name and Address of Purchaser Price - ----------------------------- ------------------ Galen Partners III, L.P.* $ 15,423,195 610 Fifth Avenue, 5th Floor New York, New York 10020 Galen Partners International III, L.P.* $ 1,709,167 610 Fifth Avenue, 5th Floor New York, New York 10020 Galen Employee Fund III, L.P.* $ 67,638 610 Fifth Avenue, 5th Floor New York, New York 10020 Michael Reicher* $ 300,000 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Peter Clemens* $ 100,000 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Stefanie Heitmeyer $ 20,000 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Dan Hill $ 10,000 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 *Agrees to receive interest in capital stock or like kind debentures. SCHEDULE 4 21 Principal Amount of $1.50 $2.375 Name and Address of Purchaser Debenture Purchased Warrants Warrants - ----------------------------- ------------------- -------- -------- Alan Smith $ 10,000 1,010 1,010 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Dennis Adams $ 1,170,000 118,182 118,182 120 Kynlyn Road Radnor, Pennsylvania 19087 Patrick Coyne $ 50,000 5,051 5,051 477 Margo Lane Berwyn, Pennsylvania 19312 Michael Weisbrot and Susan Weisbrot $ 300,000 30,303 30,303 1136 Rock Creek Road Gladwyne, Pennsylvania 19035 Greg Wood $ 100,000 10,101 10,101 1263 East Calaveras Street Altadena, California 91001 Hemant K. Shah and Varsha H. Shah $ 950,000 95,960 95,960 29 Christy Drive Warren, New Jersey 07059 Varsha H. Shah as Custodian for $ 20,000 2,020 2,020 Sumeet H. Shah 29 Christy Drive Warren, New Jersey 07059 Varsha H. Shah as Custodian for $ 20,000 2,020 2,020 Sachin H. Shah 29 Christy Drive Warren, New Jersey 07059 Bernard Selz $ 400,000 40,404 40,404 121 East 73rd Street New York, New York 10021 Name and Address of Purchaser Purchase Price - ----------------------------- ------------------ Alan Smith $ 10,000 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Dennis Adams $ 1,170,000 120 Kynlyn Road Radnor, Pennsylvania 19087 Patrick Coyne $ 50,000 477 Margo Lane Berwyn, Pennsylvania 19312 Michael Weisbrot and Susan Weisbrot $ 300,000 1136 Rock Creek Road Gladwyne, Pennsylvania 19035 Greg Wood $ 100,000 1263 East Calaveras Street Altadena, California 91001 Hemant K. Shah and Varsha H. Shah $ 950,000 29 Christy Drive Warren, New Jersey 07059 Varsha H. Shah as Custodian for $ 20,000 Sumeet H. Shah 29 Christy Drive Warren, New Jersey 07059 Varsha H. Shah as Custodian for $ 20,000 Sachin H. Shah 29 Christy Drive Warren, New Jersey 07059 Bernard Selz $ 400,000 121 East 73rd Street New York, New York 10021 *Agrees to receive interest in capital stock or like kind debentures. SCHEDULE 4 22 Principal Amount of $1.50 $2.375 Name and Address of Purchaser Debenture Purchased Warrants Warrants - ----------------------------- ------------------- -------- -------- Ilene Rainisch $ 25,000 2,525 2,525 315 Devon Place Morganville, New Jersey 07751 Michael Rainisch $ 25,000 2,525 2,525 48 Radford Street Staten Island, New York 10314 Ken Gimbel $ 100,000 10,101 10,101 876 Kimball Road Highland Park, Illinois 60035 Purchase Name and Address of Purchaser Price - ----------------------------- ------------------ Ilene Rainisch $ 25,000 315 Devon Place Morganville, New Jersey 07751 Michael Rainisch $ 25,000 48 Radford Street Staten Island, New York 10314 Ken Gimbel $ 100,000 876 Kimball Road Highland Park, Illinois 60035 *Agrees to receive interest in capital stock or like kind debentures. SCHEDULE 4 23 Debenture Number and Corresponding $1.50 $2.375 Purchase Name and Address of Purchaser Principal Amount Warrants Warrants Price - ----------------------------- ---------------- -------- -------- --------- Galen Partners III, L.P.* No. N-19A 610 Fifth Avenue, 5th Floor $681,105 68,798 68,798 $ 681,105 New York, New York 10020 Galen Partners International III, L.P.* No. N-38 610 Fifth Avenue, 5th Floor $3,073,704 310,476 310,476 $ 3,073,704 New York, New York 10020 Galen Employee Fund III, No. N-20 L.P.* $65,913 6,658 6,658 $ 65,913 610 Fifth Avenue, 5th Floor New York, New York 10020 No. N-39 $297,456 30,044 30,044 $ 297,456 No. N-21 $2,982 301 301 $ 2,982 No. N-40 $13,456 1,361 1,361 $ 13,456 Michael Reicher* No. N-22 c/o Halsey Drug Co., Inc. $50,000 5,026 5,026 $ 50,000 1827 Pacific Street Brooklyn, New York 11233 Robert W. Baird & Co., Inc. TTEE, No. N-22A FBO Michael K. Reicher IRA, $22,115 2,258 2,258 $ 22,115 Account Number 7026-6907 c/o Halsey Drug Co., Inc. 1827 Pacific Street Brooklyn, New York 11233 Peter Clemens* No. N-23 c/o Halsey Drug Co., Inc. $24,038 2,428 2,428 $ 24,038 1827 Pacific Street Brooklyn, New York 11233 *Agrees to receive interest in capital stock or like kind debentures. SCHEDULE 4 24 Debenture Number and Corresponding $1.50 $2.375 Purchase Name and Address of Purchaser Principal Amount Warrants Warrants Price - ----------------------------- ---------------- -------- -------- ----------- Stefanie Heitmeyer No. N-24 c/o Halsey Drug Co., Inc. $4,808 486 486 $ 4,808 1827 Pacific Street Brooklyn, New York 11233 Dan Hill No. N-25 c/o Halsey Drug Co., Inc. $2,404 243 243 $ 2,404 1827 Pacific Street Brooklyn, New York 11233 Alan Smith No. N-29 c/o Halsey Drug Co., Inc. $2,404 243 243 $ 2,404 1827 Pacific Street Brooklyn, New York 11233 Dennis Adams No. N-31 120 Kynlyn Road $281,250 28,409 28,409 $ 281,250 Radnor, Pennsylvania 19087 Patrick Coyne No. N-32 477 Margo Lane $12,019 1,214 1,214 $ 12,019 Berwyn, Pennsylvania 19312 Michael Weisbrot and Susan Weisbrot No. N-33 1136 Rock Creek Road $72,115 7,284 7,284 $ 72,115 Gladwyne, Pennsylvania 19035 Greg Wood 1263 East Calaveras Street No. N-26 Altadena, California 91001 $24,038 2,428 2,428 $ 24,038 Hemant K. Shah and Varsha H. Shah No. N-34 29 Christy Drive $228,365 23,067 23,067 $ 228,365 Warren, New Jersey 07059 Varsha H. Shah as Custodian for Sumeet H. Shah No. N-35 29 Christy Drive $4,808 486 486 $ 4,808 Warren, New Jersey 07059 *Agrees to receive interest in capital stock or like kind debentures. SCHEDULE 4 25 Debenture Number and Corresponding $1.50 $2.375 Purchase Name and Address of Purchaser Principal Amount Warrants Warrants Price - ----------------------------- ---------------- -------- -------- ----------- Varsha H. Shah as Custodian for Sachin H. Shah No. N-36 29 Christy Drive $4,808 486 486 $ 4,808 Warren, New Jersey 07059 Bernard Selz No. N-37 121 East 73rd Street $96,154 9,712 9,712 96,154 New York, New York 10021 $ Ilene Rainisch No. N-27 315 Devon Place $6,010 607 607 6,010 Morganville, New Jersey 07751 $ Michael Rainisch No. N-28 48 Radford Street $6,010 607 607 6,010 Staten Island, New York 10314 Ken Gimbel No. N-30 876 Kimball Road $24,038 2,428 2,428 $ 24,038 Highland Park, Illinois 60035 *Agrees to receive interest in capital stock or like kind debentures. SCHEDULE 4 26 EXISTING HOLDERS ORACLE DEBENTURES - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- Principal Oracle Debentures Amount of Debenture $1.404 $2.285 Name and Address of Purchaser Purchased Warrants Warrants ----------------------------- --------- -------- -------- - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 1. Oracle Strategic Partners, L.P.* $ 5,000,000.00 505,050 505,050 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 2. Oracle Strategic Partners, L.P.* $ 5,000,000.00(1) 1,010,100 1,010,100 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 3. Galen Partners III, L.P.* $ 5,964,583.09(2) 602,483 602,483 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 4. Galen Partners International III, L.P.* $ 539,900.40(3) 54,535 54,535 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 5. Galen Employee Fund III, L.P.* $ 24,424.10(4) 2,467 2,467 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 6. Patrick Coyne $ 51,178.08(5) 5,169 5,169 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 7. Alan Smith $ 13,358.08(6) 1,349 1,349 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 8. Michael and Susan Weisbrot $ 564,446.96(7) 57,015 57,015 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 9. Greg Wood $ 204,712.33(8) 20,678 20,678 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 10. Dennis Adams $ 300,000.00 30,303 30,303 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- 11. Bernard Selz $ 200,000.00 20,202 20,202 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- Total $ 17,862,603.04 2,309,351.00 2,309,351.00 - --------------------------------------------------------- ------------------------------ ----------------------- ------------------- Oracle Debentures Name and Address of Purchaser Purchase Price ----------------------------- -------------- - ------------------------------------------------------------- ----------------------------- 1. Oracle Strategic Partners, L.P.* $ 5,000,000.00 - ------------------------------------------------------------- ----------------------------- 2. Oracle Strategic Partners, L.P.* $ 5,000,000.00 - ------------------------------------------------------------- ----------------------------- 3. Galen Partners III, L.P.* $ 5,964,583.09 - ------------------------------------------------------------- ----------------------------- 4. Galen Partners International III, L.P.* $ 539,900.40 - ------------------------------------------------------------- ----------------------------- 5. Galen Employee Fund III, L.P.* $ 24,424.10 - ------------------------------------------------------------- ----------------------------- 6. Patrick Coyne $ 51,178.08 - ------------------------------------------------------------- ----------------------------- 7. Alan Smith $ 13,358.08 - ------------------------------------------------------------- ----------------------------- 8. Michael and Susan Weisbrot $ 564,446.96 - ------------------------------------------------------------- ----------------------------- 9. Greg Wood $ 204,712.33 - ------------------------------------------------------------- ----------------------------- 10. Dennis Adams $ 300,000.00 - ------------------------------------------------------------- ----------------------------- 11. Bernard Selz $ 200,000.00 - ------------------------------------------------------------- ----------------------------- Total $ 17,862,603.04 - ------------------------------------------------------------- ----------------------------- - -------------------- 1 Intentionally omitted. 2 Consists of the surrender of convertible bridge notes in the principal amount of $5,590,917 plus accrued and unpaid interest of $373,666.09. 3 Consists of the surrender of convertible bridge notes in the principal amount of $506,077 plus accrued and unpaid interest of $33,823.40. 4 Consists of the surrender of convertible bridge notes in the principal amount of $22,894 plus accrued and unpaid interest of $1,530.10. 5 Consists of (i) the surrender of convertible bridge notes in the principal amount of $25,000 plus accrued and unpaid interest of $1,178.08 and (ii) an additional investment of $25,000. 6 Consists of the surrender of convertible bridge notes in the principal amount of $13,000 plus accrued and unpaid interest of $358.08. 7 Consists of (i) the surrender of convertible bridge notes in the principal amount of $351,222 plus accrued and unpaid interest of $13,224.96 and (ii) an additional investment of $200,000. 8 Consists of (i) the surrender of convertible bridge notes in the principal amount of $100,000 plus accrued and unpaid interest of $4,712.33 and (ii) an additional investment of $100,000. *Agrees to receive interest in capital stock or like kind debentures. SCHEDULE 4 27 EXHIBIT A FORM OF JOINDER AGREEMENT Reference is made to that certain Subordination Agreement, dated as of March __, 2000 (the "Subordination Agreement"), by and among Watson Pharmaceuticals, Inc., a Nevada corporation, Halsey Drug Co., Inc., a New York corporation ("Halsey"), Galen Partners III, L.P., as Agent of the holders of the Galen Debentures, the Oracle Investor Group and the Grantors and Guarantors listed on the signature pages thereof. All capitalized terms used but not defined herein have the respective meanings ascribed thereto in the Subordination Agreement. This agreement is a Joinder Agreement referred to in Section 14.2 of the Subordination Agreement. The undersigned hereby agrees that it is a party to the Subordination Agreement and is therefore bound by, and subject to, the terms of the Subordination Agreement, and that it is an "Existing Holder" under, and as defined, therein. The undersigned certifies that on or about the date hereof it is the holder of the following obligations of the Company outstanding under the Existing Debentures, as applicable. [describe obligations] The address for notices to the undersigned pursuant to the Subordination Agreement is as follows: [set forth address for notices] Very truly yours, [CREDITOR] By ------------------------------------------ Name: Title: EXHIBIT A 28 SCHEDULE 5 WATSON SECURITY DOCUMENTS Watson Security Agreement Watson Stock Pledge Agreement Watson Guaranty Watson Guarantors Security Agreement Deed of Trust on Culver, Indiana Property Deed of Trust Subordination EXHIBIT A