UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
Proxy
Statement Pursuant to Section 14(a) of
the
Securities Exchange Act of 1934 (Amendment No. 3)
Filed
by
the Registrant x
Filed
by
a Party other than the Registrant o
Check
the
appropriate box:
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Preliminary
Proxy Statement
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Confidential,
for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
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Definitive
Proxy Statement
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Definitive
Additional Materials
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Soliciting
Material Under Rule 14a-12
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HEALTHCARE
ACQUISITION CORP.
(Name
of
Registrant as Specified In Its Charter)
(Name
of
Person(s) Filing Proxy Statement, if other than the
Registrant)
Payment
of Filing Fee (Check the appropriate box):
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o
No
fee required.
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x
Fee
computed on table below per Exchange Act
Rules 14a-6(i)(1) and 0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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Common
Stock of Healthcare Acquisition Corp.
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(2)
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Aggregate
number of securities to which transaction applies:
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Acquisition
of all of the outstanding securities of PharmAthene,
Inc.
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(3)
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Per
unit price or other underlying value of transaction computed pursuant
to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined):
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N/A
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(4)
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Proposed
maximum aggregate value of transaction:
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$113,375,000
(including up to a maximum of $10,000,000 in milestone
payments, 12,500,000 shares of HAQ common stock valued at $7.27
per share
based upon the closing price on June 27, 2007 and $12,500,000
in 8%
convertible notes) is being paid in exchange for all outstanding
capital
stock, options, warrants and notes.
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(5)
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Total
fee paid:
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| 12,479.00 (previously paid) | ||
| o | Fee paid previously with preliminary materials. | |
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o Check
box if any part of the fee is offset as provided by Exchange
Act
Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its
filing.
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(1)
Amount Previously Paid:
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(2)
Form, Schedule or Registration Statement No.:
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(4)
Date Filed:
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Persons
who are to respond to the collection of information contained
in this form
are not required to respond unless the form displays a currently
valid OMB
control number.
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HEALTHCARE
ACQUISITION CORP.
2116
Financial Center
666
Walnut Street
Des
Moines, Iowa 50309
To
the
Stockholders of Healthcare Acquisition Corp.:
You
are
cordially invited to attend a special meeting of the stockholders of Healthcare
Acquisition Corp., or HAQ, to be held on July 26, 2007. At the meeting you
will
be asked to consider proposals relating to the proposed merger of PAI
Acquisition Corp., referred to in the attached proxy statement as Merger Sub,
a
wholly-owned subsidiary of HAQ, into PharmAthene, Inc., referred to in the
proxy
statement as PharmAthene, resulting in PharmAthene becoming a wholly-owned
subsidiary of HAQ. PharmAthene is a privately-held company engaged in the
biodefense industry, specifically the discovery and development of new human
therapeutics and prophylactics for the treatment and prevention of
morbidity and mortality from exposure to chemical and biological weapons.
The
special meeting will be held at 10:00 a.m., Eastern Time, on July 26, 2007,
at the offices of McCarter & English, LLP, 245
Park
Avenue, 27th
Floor,
New York, NY, 10167-0001 (the
“Special Meeting”). At this important meeting, you will be asked to consider and
vote upon the following proposals:
· the
Merger Proposal-
the
proposed merger with PharmAthene, Inc. (the “Merger”), a Delaware corporation,
pursuant to the Agreement and Plan of Merger, dated as of January 19, 2007,
by
and among HAQ, Merger Sub and PharmAthene, and the transactions contemplated
thereby, whereby PharmAthene will become a wholly-owned subsidiary of HAQ
(“Proposal 1” or the “Merger Proposal”) and the stockholders,
optionholders, warrantholders and noteholders of PharmAthene shall receive
the following consideration (having an aggregate value of $113,375,000 if
the
maximum milestone payments are achieved and paid and assuming a price of
$7.27
per share of HAQ common stock):
| (i) |
an
aggregate of 12,500,000 shares of HAQ common stock;
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| (ii) |
$12,500,000
in 8% convertible notes issued by HAQ; and
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(iii)
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up
to $10,000,000 in milestone payments (if certain conditions are
met).
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·
the
Amendment Proposal - the amendment to HAQ's amended and restated
certificate of incorporation (the “Certificate of Incorporation Amendment”),
to: (i) change HAQ's name from “Healthcare Acquisition Corp.” to
“PharmAthene, Inc.”; (ii) remove certain provisions containing procedural and
approval requirements applicable to HAQ prior to the consummation of the
business combination that will no longer be operative after the consummation
of
the Merger; and (iii) grant to holders of convertible promissory notes
issued in the Merger the right to designate three members to the Board of
Directors of HAQ for so long as at least 30% of the original face value of
such
notes remain outstanding (“Proposal 2” or the “Amendment
Proposal”);
·
the
Incentive Plan Proposal - the
adoption of the 2007 Long-Term Incentive Plan (the “Incentive Plan”) pursuant to
which HAQ will reserve 3,500,000 shares of common stock for issuance pursuant
to
the Plan (“Proposal 3” or the “Incentive Plan Proposal”);
· the
Adjournment Proposal
-
the
adjournment of the Special Meeting (the “Adjournment”), if necessary and
appropriate, for the purpose of soliciting additional proxies if there are
not
sufficient votes for the foregoing proposals (“Proposal 4” or the “Adjournment
Proposal”); and
·
such
other business as may properly come before the meeting or any adjournment or
postponement thereof.
HAQ's
shares of common stock and warrants are listed on the American Stock Exchange
under the symbols HAQ and HAQ-WT, respectively. If each of the Merger Proposal,
the Amendment Proposal and the Incentive Plan Proposal are approved, the
operations and assets of PharmAthene will become those of HAQ, and HAQ's name
will be changed to “PharmAthene, Inc.” upon consummation of the
Merger.
After
careful consideration of the terms and conditions of the proposed merger with
PharmAthene, the Certificate of Incorporation Amendment, the adoption of the
Incentive Plan and the Adjournment, the Board of Directors of HAQ has determined
that such proposals and the transactions contemplated thereby are fair to,
and
in the best interests of, HAQ and its stockholders. Such determination with
respect to the proposed Merger was based upon various factors as described
in
the enclosed Proxy Statement including the Board’s independent analysis of
PharmAthene’s business, technology and future prospects, PharmAthene’s
management and historical investments in PharmAthene by third parties. No
fairness opinion or valuation analysis was sought or obtained by the Board
of
Directors nor did the Board determine a specific value for PharmAthene.
HAQ’s
initial stockholders, including all of its directors and officers and their
affiliates, presently own an aggregate of approximately 19.3% of the outstanding
shares of HAQ common stock which shares were purchased prior to the IPO, and
all
of these stockholders have agreed to vote the shares acquired prior to the
IPO
in accordance with the vote of the majority in interest of all other HAQ
stockholders on the Merger Proposal. In addition, certain members of our Board
of Directors have purchased an additional 250,000 shares (2.14% of the
outstanding shares of common stock of HAQ) and have advised us that they intend
to vote these shares in favor of the Merger.
The
Board
of Directors of HAQ unanimously recommends that you vote or give instruction
to
vote: (i) “FOR” the Merger Proposal; (ii) “FOR” the Amendment
Proposal; (iii) “FOR” the Incentive Plan Proposal; and (iv) “FOR” the
Adjournment Proposal, all as described in Proposals 1, 2, 3 and 4,
respectively, in the attached proxy statement.
Enclosed
is a Notice of Special Meeting and proxy statement containing detailed
information concerning the proposed Merger, the Certificate of Incorporation
Amendment, the Incentive Plan and the Adjournment. Whether or not you plan
to
attend the Special Meeting, we urge you to read this material carefully. We
look
forward to seeing you at the meeting.
Sincerely,
John
Pappajohn
Chairman
of the Board
and
Secretary
Neither
the Securities and Exchange Commission nor any state securities commission
has
determined if the attached proxy statement is truthful or complete. Any
representation to the contrary is a criminal offense.
The
proxy
statement is dated July 6, 2007 and is first being mailed to HAQ stockholders
on
or about July 9, 2007.
IF
YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW YOU WISH TO VOTE, YOU
WILL NOT BE ELIGIBLE TO HAVE YOUR SHARES CONVERTED INTO A PRO RATA PORTION
OF
THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE NET PROCEEDS OF HAQ’S
INITIAL PUBLIC OFFERING ARE HELD. YOU MUST AFFIRMATIVELY VOTE AGAINST THE MERGER
PROPOSAL AND DEMAND THAT HAQ CONVERT YOUR SHARES INTO CASH NO LATER THAN THE
CLOSE OF THE VOTE ON THE MERGER PROPOSAL TO EXERCISE YOUR CONVERSION RIGHTS.
SEE
“SPECIAL MEETING OF HAQ STOCKHOLDERS — CONVERSION RIGHTS” FOR MORE SPECIFIC
INSTRUCTIONS.
SEE
ALSO “RISK FACTORS” FOR A DISCUSSION OF VARIOUS FACTORS THAT YOU SHOULD CONSIDER
IN CONNECTION WITH THE MERGER.
2116
Financial Center
666
Walnut Street
Des
Moines, Iowa 50309
NOTICE
OF SPECIAL MEETING OF STOCKHOLDERS
TO
BE HELD ON JULY 26, 2007
TO
THE
STOCKHOLDERS OF HEALTHCARE ACQUISITION CORP.:
NOTICE
IS
HEREBY GIVEN that a special meeting of stockholders (the “Special Meeting”),
including any adjournments or postponements thereof, of Healthcare Acquisition
Corp., a Delaware corporation (“HAQ”), will be held at 10:00 a.m., Eastern
Time, on July 26, 2007, at the offices of at the offices of McCarter &
English, LLP, 245
Park
Avenue, 27th
Floor,
New York, NY, 10167-0001,
at
which you will be asked to consider and vote upon the following:
· the
Merger Proposal -
the
proposed merger with PharmAthene, Inc. (the “Merger”), a Delaware corporation,
pursuant to the Agreement and Plan of Merger, dated as of January 19, 2007,
by
and among HAQ, Merger Sub and PharmAthene, and the transactions contemplated
thereby, whereby PharmAthene will become a wholly-owned subsidiary of HAQ
(“Proposal 1” or the “Merger Proposal”) and the stockholders,
optionholders, warrantholders and noteholders of PharmAthene shall receive
the following consideration (having an aggregate value of $113,375,000 if
the
maximum milestone payments are achieved and paid and assuming a price of
$7.27
per share of HAQ common stock):
| (i) |
an
aggregate of 12,500,000 shares of HAQ common stock;
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(ii)
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$12,500,000
in 8% convertible notes issued by HAQ;
and
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(iii)
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up
to $10,000,000 in milestone payments (if certain conditions are
met).
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·
the
Amendment Proposal - the amendment to HAQ's amended and restated
certificate of incorporation (the “Certificate of Incorporation Amendment”),
to: (i) change HAQ's name from “Healthcare Acquisition Corp.” to
“PharmAthene, Inc.”; (ii) remove certain provisions containing procedural and
approval requirements applicable to HAQ prior to the consummation of the
business combination that will no longer be operative after the consummation
of
the Merger; and (iii) grant to holders of convertible promissory notes
issued in the Merger the right to designate three members to the Board of
Directors of HAQ for so long as at least 30% of the original face value of
such
notes remain outstanding (“Proposal 2” or the “Amendment
Proposal”);
·
the
Incentive Plan Proposal - the
adoption of the 2007 Long-Term Incentive Plan (the “Incentive Plan”) pursuant to
which HAQ will reserve 3,500,000 shares of common stock for issuance pursuant
to
the Plan (“Proposal 3” or the “Incentive Plan Proposal”);
·
the
Adjournment Proposal
-
the
adjournment of the Special Meeting (the “Adjournment”), if necessary and
appropriate, for the purpose of soliciting additional proxies if there are
not
sufficient votes for the foregoing proposals (“Proposal 4” or the “Adjournment
Proposal”); and
· such
other business as may properly come before the meeting or any adjournment or
postponement thereof.
These
proposals are described in the attached proxy statement which HAQ urges you
to
read in its entirety before voting.
Each
of
the Amendment Proposal and the Incentive Plan Proposal are conditioned upon
the approval of the Merger Proposal and, in the event the Merger Proposal
does
not receive the necessary vote to approve that proposal, then HAQ will not
complete any of the transactions identified in any of the proposals. If the
Merger proposal is approved but the Amendment Proposal or Incentive Plan
are not
approved, we may still consummate the Merger if PharmAthene waives these
conditions.
Adoption
of the Adjournment Proposal is not conditioned upon the adoption of any of
the
other proposals.
No
fairness opinion or valuation analysis from an independent third party was
obtained with respect to the Merger Proposal nor did the Board determine a
specific value for PharmAthene. The Board of Directors of HAQ has determined
that the fair market value of PharmAthene exceeds 80% of HAQ’s net assets and
that the terms of the Merger are in the best interest of and fair to the
stockholders. Such determination with respect to the proposed Merger and the
consideration being paid for PharmAthene was based upon various factors as
described in the enclosed Proxy Statement including the Board’s independent
analysis of PharmAthene’s business, technology and future prospects,
PharmAthene’s management and historical investments in PharmAthene by third
parties.
The
Board
of Directors of HAQ has fixed the close of business on June 15, 2007, as the
record date (the “Record Date”) for the determination of stockholders entitled
to notice of and to vote at the Special Meeting and at any adjournment thereof.
A list of the stockholders entitled to vote as of the Record Date at the Special
Meeting will be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours for a period of ten
calendar days before the Special Meeting at HAQ’s offices at 2116 Financial
Center, 666 Walnut Street, Des Moines, Iowa, 50309 and at the time and place
of
the meeting during the duration of the meeting.
HAQ
will
not transact any other business at the Special Meeting, except for business
properly brought before the Special Meeting, or any adjournment or postponement
thereof, by HAQ's Board of Directors.
Your
vote is important.
Please
sign, date and return your proxy card as soon as possible to make sure that
your
shares are represented at the Special Meeting. If you are a stockholder of
record of HAQ common stock, you may also cast your vote in person at the Special
Meeting. If your shares are held in an account at a brokerage firm or bank,
you
must instruct your broker or bank on how to vote your shares.
For
purposes of Proposal 1, under our certificate of incorporation, approval of
the Merger Proposal will require (i) the affirmative vote of a majority of
the
shares of HAQ’s common stock issued in our initial public offering completed in
July 2005 (“IPO”) that vote on this proposal at the Special Meeting; and
(ii) less than 20% of the shares of HAQ’s common stock issued in HAQ's IPO
vote against the Merger Proposal and elect a cash conversion of their shares.
For purposes of Proposal 2, the affirmative vote of a majority of the
shares of HAQ’s common stock issued and outstanding as of the Record Date is
required to approve the Amendment Proposal. For purposes of Proposal 3, the
affirmative vote of a majority of the shares of HAQ’s common stock that are
present in person or by proxy and entitled to vote at the Special Meeting is
required to approve the Incentive Plan Proposal. For purposes of Proposal 4,
the
affirmative vote of a majority of the shares of HAQ’s common stock that are
present in person or by proxy and entitled to vote is required to approve the
adjournment of the Special Meeting. Each
of
the Amendment Proposal and the Incentive Plan Proposal are conditioned upon
the
approval of the Merger Proposal and, in the event the Merger Proposal does
not
receive the necessary vote to approve that proposal, then HAQ will not complete
any of the transactions identified in any of the proposals. If the Merger
Proposal is approved but the Amendment Proposal or Incentive Plan are not
approved, we may still consummate the Merger if these proposals, which are
conditions to the Merger, are waived by the parties.
Therefore, if Proposal 1 is not approved, we will not adopt either the Amendment
Proposal or the Incentive Plan Proposal.
If
the
Merger Proposal is not approved, HAQ will have insufficient time and resources
to seek another suitable business combination and will have to commence the
winding up, dissolution and liquidation of HAQ, including the liquidation of
the
trust account and distribution of the trust proceeds, in accordance with the
terms of HAQ’s amended and restated certificate of incorporation, the agreement
with respect to the trust and Delaware law. In order to do so, under Delaware
law, HAQ will be required to obtain stockholder approval for its plan of
dissolution. The funds held in HAQ’s trust account may not be distributed except
upon HAQ’s dissolution and, unless and until such approval is obtained from its
stockholders, the funds held in HAQ’s trust account will not be released.
Consequently, holders of a majority of HAQ’s outstanding stock must approve its
dissolution in order to receive the funds held in its trust account and the
funds will not be available for any other corporate purpose.
In
addition, each HAQ stockholder who holds shares of common stock issued in HAQ's
IPO or purchased following the IPO in the open market has the right to vote
against the Merger Proposal and, at the same time, demand that HAQ convert
such
stockholder's shares into cash equal to a pro rata portion of the proceeds
in
the trust account, including interest, which as of March 31, 2007 is equal
to
$7.60 per share. If the Merger is not completed, then your shares will not
immediately be converted into cash, even if you so elected because we must
satisfy the liquidation procedures under Delaware law. If the Merger is not
approved, HAQ expects that it will commence the process to seek stockholder
approval for its plan of dissolution and liquidation of the trust account within
5 business days after the Special Meeting. We cannot assure you that our
stockholders will approve our dissolution in a timely manner or will ever
approve our dissolution. As a result, we cannot provide investors with
assurances of a specific time frame for our dissolution. If the holders of
1,880,000 or more shares of HAQ’s common stock, an amount equal to 20% or more
of the total number of shares issued in the IPO, vote against the Merger and
demand conversion of their shares into a pro rata portion of the trust account,
then HAQ will not be able to consummate the Merger. HAQ's initial stockholders,
including all of its directors and officers and their affiliates, own an
aggregate of approximately 19.3% of the outstanding shares of HAQ common stock
which shares were purchased prior to our IPO, and all of these stockholders
have
agreed to vote all of these shares acquired prior to the IPO in accordance
with
the vote of the majority in interest of all other HAQ stockholders on the Merger
Proposal. Additionally, three of our Board members have purchased an additional
250,000 shares of HAQ common stock (2.14% of the total outstanding shares
of common stock of HAQ) and have advised us that they intend to vote such shares
in favor of the Merger.
YOUR
VOTE IS IMPORTANT. WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING OR NOT, PLEASE
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS POSSIBLE IN THE
ENVELOPE PROVIDED. IF YOU RETURN YOUR PROXY CARD WITHOUT AN INDICATION OF HOW
YOU WISH TO VOTE, SINCE IT IS NOT AN AFFIRMATIVE VOTE IN FAVOR OF A RESPECTIVE
PROPOSAL, IT (I) WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER
PROPOSAL BUT WILL NOT HAVE THE EFFECT OF CONVERTING YOUR SHARES INTO A PRO
RATA
PORTION OF THE TRUST ACCOUNT IN WHICH A SUBSTANTIAL PORTION OF THE NET PROCEEDS
OF HAQ'S IPO ARE HELD, UNLESS AN AFFIRMATIVE VOTE AGAINST THE MERGER PROPOSAL
IS
MADE AND
AN AFFIRMATIVE ELECTION TO CONVERT SUCH SHARES OF COMMON STOCK IS MADE ON THE
PROXY CARD, (II) WILL BE TREATED AS A VOTE AGAINST THE AMENDMENT PROPOSAL
AND,
(III) WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE INCENTIVE PLAN
PROPOSAL.
SEE
THE SECTION ENTITLED “RISK FACTORS'' BEGINNING ON PAGE 32 FOR A
DISCUSSION OF VARIOUS FACTORS THAT YOU SHOULD CONSIDER IN CONNECTION WITH THE
MERGER WITH PHARMATHENE SINCE, UPON THE MERGER WITH PHARMATHENE, THE OPERATIONS
AND ASSETS OF HAQ WILL LARGELY BE THOSE OF PHARMATHENE.
The
attached proxy statement incorporates important business and financial
information about HAQ and PharmAthene that is not included in or delivered
with
this document. This information is available without charge to security holders
upon written or oral request. The request should be sent to: Matthew Kinley,
President of HAQ at 2116 Financial Center, 666 Walnut Street, Des Moines, Iowa
50309, or by calling him at (515) 244-5746.
To
obtain
timely delivery of requested materials, security holders must request the
information no later than five days before the date they submit their proxies
or
attend the Special Meeting. The latest date to request the information to be
received timely is July 21, 2007.
We
are
soliciting the proxy on behalf of the Board of Directors, and we will pay all
costs of preparing, assembling and mailing the proxy materials. In addition
to
mailing out proxy materials, HAQ’s officers may solicit proxies by telephone or
fax, without receiving any additional compensation for their services. We have
requested brokers, banks and other fiduciaries to forward proxy materials to
the
beneficial owners of our stock. We have also retained the proxy soliciting
firm
of Morrow & Co., Inc. to solicit proxies on our behalf. If you have any
questions or need assistance in voting your shares, please contact Morrow &
Co. toll free at 800-607-0088; banks and brokers may call
800-654-2468.
By
Order
of the Board of Directors,
John
Pappajohn
Chairman
of the Board
and
Secretary
July
6,
2007
HEALTHCARE
ACQUISITION CORP.
The
Board
of Directors of Healthcare Acquisition Corp., or HAQ, has unanimously approved
the Agreement and Plan of Merger, dated as of January 19, 2007, among HAQ,
Merger Sub and PharmAthene (the “Merger Agreement”) and the Merger contemplated
thereby (the “Merger”), whereby HAQ will acquire all of the outstanding
securities held by the stockholders of PharmAthene and PharmAthene will become
a
wholly-owned subsidiary of HAQ. If the Merger Proposal is not approved, then
the
Merger will not be consummated. In such event, HAQ will have insufficient time
and resources to pursue an alternative business combination and will be forced
to liquidate the trust which was established at the time of HAQ’s initial public
offering and which contains substantially all of the proceeds from the initial
public offering. The liquidation will be in accordance with our existing amended
and restated certificate of incorporation and applicable Delaware law, as
described elsewhere in our proxy statement.
If
the
Merger is consummated and you vote your shares in favor of the Merger Proposal,
you will continue to hold the HAQ securities that you currently own. If the
Merger is consummated but you have voted your shares against the Merger Proposal
and have elected a cash conversion instead, your HAQ shares will be cancelled
and you will receive cash equal to a pro rata portion of the trust account
(totalling approximately $71.4 million) which, as of March 31, 2007, was
equal
to approximately $7.60 per share. The stockholders (including holders of
its
options, warrants and notes) of PharmAthene will receive 12,500,000 shares
of
HAQ common stock, subject to possible adjustment, $12,500,000 in 8% convertible
notes issued by HAQ and possible milestone payments of up to $10,000,000
in
exchange for their shares of capital stock (or applicable options, warrants
or
notes) of PharmAthene. Based upon the closing price of HAQ common stock on
June
27, 2007 of $7.27 per share, assuming the maximum milestone payments
are achieved and paid, the aggregate consideration payable to the PharmAthene
stockholders, optionholders, warantholders and stockholders has a value
of $113,375,000.
HAQ's
common stock and warrants are currently listed on the American Stock Exchange
under the symbols HAQ and HAQ-WT, respectively. Upon consummation of the Merger,
PharmAthene will become HAQ's wholly-owned subsidiary and HAQ's name will be
changed to “PharmAthene, Inc.” We will also change the current name of
PharmAthene to a name to be determined after the closing. HAQ's common
stock and warrants will continue to be traded on the American Stock Exchange,
although we anticipate seeking to change our trading symbols.
We
believe that, generally, for U.S. federal income tax purposes, the Merger with
PharmAthene will have no direct tax effect on stockholders of HAQ. However,
if
you vote against the Merger Proposal and elect a cash conversion of your shares
of HAQ common stock into your pro-rata portion of the trust account and as
a
result receive cash in exchange for your HAQ shares, there may be certain tax
consequences, such as realizing a loss or gain on your investment in HAQ’s
shares.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING YOUR PARTICULAR TAX
CONSEQUENCES.
This
proxy statement provides you with detailed information about the proposed
Merger, the proposed Certificate of Incorporation Amendment, the proposed
Incentive Plan, the proposed Adjournment and the Special Meeting. We encourage
you to carefully read this entire document and the documents incorporated
by
reference, including the Merger Agreement, the form of Certificate of
Incorporation Amendment and the proposed Incentive Plan which are attached
hereto as Annexes A, B and C, respectively.
YOU SHOULD ALSO CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON
PAGE 32.
The
Merger cannot be consummated unless at least a majority of the shares of HAQ's
common stock issued in HAQ's IPO and voting at the Special Meeting (whether
in
person or by proxy) approve and adopt the Merger Agreement and less than 20%
of
the shares of HAQ's common stock issued in HAQ's IPO vote against the
Merger
Proposal and elect a cash conversion of their shares.
HAQ’s
Board of Directors unanimously approved the Merger Agreement and the proposed
Merger, the Certificate of Incorporation Amendment, adoption of the proposed
Incentive Plan and unanimously recommends that you vote or instruct your vote
to
be cast “FOR” Proposal 1, the Merger Proposal, “FOR” Proposal 2, the Amendment
Proposal, “FOR” Proposal 3, the Incentive Plan Proposal and “FOR” Proposal 4,
the Adjournment Proposal.
This
proxy statement incorporates important business and financial information about
HAQ and PharmAthene that is not included in or delivered with this document.
This information is available without charge to security holders upon written
or
oral request. The request should be sent to:
Matthew
Kinley, President
Healthcare
Acquisition Corp.
2116
Financial Center
666
Walnut Street
Des
Moines, Iowa 50309
(515)
244-5746
To
obtain
timely delivery of requested materials, security holders must request the
information no later than five days before the date they submit their proxies
or
attend the Special Meeting. The latest date to request the information to be
received timely is July 21, 2007.
We
are
soliciting the enclosed proxy card on behalf of the Board of Directors of HAQ,
and we will pay all costs of preparing, assembling and mailing the proxy
materials. In addition to mailing out proxy materials, our officers may solicit
proxies by telephone or fax, without receiving any additional compensation
for
their services. We have requested brokers, banks and other fiduciaries to
forward proxy materials to the beneficial owners of our stock. We have also
retained the proxy soliciting firm of Morrow & Co., Inc. to solicit proxies
on our behalf and expect the costs of such retention not to exceed approximately
$30,000.
THIS
PROXY STATEMENT IS DATED JULY 6, 2007, AND IS FIRST BEING MAILED TO HAQ
STOCKHOLDERS ON OR ABOUT JULY 9, 2007.
TABLE
OF CONTENTS
|
|
Page
|
|||
|
SUMMARY
OF THE MATERIAL TERMS OF THE MERGER
|
1
|
|||
|
QUESTIONS
AND ANSWERS ABOUT THE PROPOSALS
|
3
|
|||
|
SUMMARY
OF THE PROXY STATEMENT
|
12
|
|||
|
THE
MERGER PROPOSAL
|
12
|
|||
|
THE
AGREEMENT AND PLAN OF MERGER
|
12
|
|||
|
OUR
STOCK OWNERSHIP
|
14
|
|||
|
DATE,
TIME AND PLACE OF SPECIAL MEETING OF OUR STOCKHOLDERS
|
14
|
|||
|
RECORD
DATE
|
14
|
|||
|
QUORUM
AND VOTE REQUIRED
|
14
|
|||
|
PROXIES
|
14
|
|||
|
TAX
CONSEQUENCES
|
15
|
|||
|
ACCOUNTING
TREATMENT
|
15
|
|||
|
RISK
FACTORS
|
15
|
|||
|
RELATION
OF PROPOSALS
|
15
|
|||
|
APPROVAL
OF PHARMATHENE’S STOCKHOLDERS
|
15
|
|||
|
CONVERSION
RIGHTS
|
15
|
|||
|
DISSENTERS'
OR APPRAISAL RIGHTS
|
16
|
|||
|
PROXIES
AND
SOLICITATION COSTS
|
16
|
|||
|
STOCK
OWNERSHIP
|
17
|
|||
|
REASONS
FOR THE MERGER
|
18
|
|||
|
HAQ’S
BOARD OF DIRECTORS’ RECOMMENDATION
|
19
|
|||
|
INTERESTS
OF HAQ DIRECTORS AND OFFICERS IN THE MERGER
|
20
|
|||
|
INTERESTS
OF PHARMATHENE DIRECTORS AND OFFICERS IN THE MERGER
|
21
|
|||
|
INTEREST
OF MAXIM GROUP LLC IN THE MERGER; FEES
|
22
|
|||
|
INTEREST
OF THE BEAR STEARNS COMPANIES, INC. IN THE MERGER; FEES
|
22
|
|||
|
CONDITIONS
TO THE CONSUMMATION OF THE MERGER
|
22
|
|||
|
TERMINATION,
AMENDMENT AND WAIVER
|
23
|
|||
|
REGULATORY
MATTERS
|
24
|
|||
|
THE
AMENDMENT PROPOSAL
|
24
|
|||
|
THE
INCENTIVE PLAN PROPOSAL
|
24
|
|||
|
THE
ADJOURNMENT PROPOSAL
|
24
|
|||
|
SELECTED
HISTORICAL FINANCIAL INFORMATION
|
25
|
|||
| HEALTHCARE ACQUISITION CORP SELECTED FINANCIAL DATA |
26
|
|||
|
PRO
FORMA CAPITALIZATION OF COMBINED COMPANY
|
30
|
|||
|
MARKET
PRICE INFORMATION AND DIVIDEND DATA FOR HAQ SECURITIES
|
31
|
|||
|
RISK
FACTORS
|
32
|
|||
|
RISKS
PARTICULAR TO THE MERGER
|
32
|
|||
|
RISKS
RELATED TO THE BUSINESS OF PHARMATHENE
|
34
|
|||
|
LEGAL
AND REGULATORY RISKS OF DEVELOPMENT STAGE BIOTECHNOLOGY
COMPANIES
|
38
|
|||
|
RISKS
RELATING TO HAQ’S BUSINESS
|
42
|
|
||
|
FORWARD-LOOKING
STATEMENTS
|
49
|
|||
|
THE
HAQ SPECIAL MEETING OF STOCKHOLDERS
|
51
|
|||
|
THE
HAQ SPECIAL MEETING
|
51
|
|||
|
DATE,
TIME AND PLACE
|
51
|
|||
|
PURPOSE
OF THE SPECIAL MEETING
|
51
|
|||
|
RECORD
DATE, WHO IS ENTITLED TO VOTE
|
52
|
|||
|
VOTING
YOUR SHARES
|
52
|
|||
|
NO
ADDITIONAL MATTERS MAY BE PRESENTED AT THE SPECIAL MEETING
|
52
|
|||
|
REVOKING
YOUR PROXY
|
53
|
|||
|
QUORUM;
VOTE REQUIRED
|
53
|
|||
|
ABSTENTIONS
AND BROKER NON-VOTES
|
53
|
|||
|
CONVERSION
RIGHTS
|
54
|
|||
|
DISSENTERS'
OR APPRAISAL RIGHTS
|
54
|
|||
|
SOLICITATION
COSTS
|
54
|
|||
|
STOCK
OWNERSHIP
|
55
|
|||
i
|
PROPOSAL 1
- THE MERGER PROPOSAL
|
57
|
|||
|
GENERAL
DESCRIPTION OF THE MERGER
|
57
|
|||
|
BACKGROUND
OF THE MERGER
|
57
|
|||
|
INTERESTS
OF HAQ DIRECTORS AND OFFICERS IN THE MERGER
|
65
|
|||
|
HAQ’S
REASONS FOR THE MERGER AND RECOMMENDATION OF THE HAQ BOARD
|
66
|
|||
|
SATISFACTION
OF THE 80% REQUIREMENT
|
71
|
|||
|
UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
|
71
|
|||
|
ACCOUNTING
TREATMENT OF THE MERGER
|
72
|
|||
|
REGULATORY
MATTERS
|
72
|
|||
|
CONSEQUENCES
IF REQUIRED VOTE MERGER PROPOSAL IS NOT APPROVED
|
72
|
|||
|
REQUIRED
VOTE
|
73
|
|||
|
RECOMMENDATION
|
73
|
|||
|
THE
AGREEMENT AND PLAN OF MERGER
|
74
|
|||
|
GENERAL
|
74
|
|||
|
STOCK
CONSIDERATION
|
74
|
|||
|
8%
CONVERTIBLE NOTES TO BE ISSUED AND NOTE EXCHANGE
|
76
|
|||
|
MILESTONE
PAYMENTS
|
78
|
|||
|
EFFECT
OF MERGER ON PHARMATHENE OPTIONS
|
79
|
|||
|
REPRESENTATIONS
AND WARRANTIES OF THE PARTIES
|
79
|
|||
|
COVENANTS
AND AGREEMENTS
|
81
|
|||
|
OPERATIONS
AFTER THE MERGER
|
85
|
|||
|
CONDITIONS
TO THE COMPLETION OF THE MERGER
|
85
|
|||
|
MATERIALITY
AND MATERIAL ADVERSE EFFECT
|
86
|
|||
|
TERMINATION
|
87
|
|||
|
INDEMNIFICATION
OF CLAIMS AND ESCROW OF SHARES
|
88
|
|||
|
REPRESENTATIVE
|
88
|
|||
|
ASSIGNMENT
|
88
|
|||
|
FURTHER
ASSURANCES
|
88
|
|||
|
OTHER
AGREEMENTS RELATED TO THE MERGER
|
89
|
|||
|
REGISTRATION
RIGHTS AGREEMENT
|
89
|
|||
|
LOCK-UP
AGREEMENTS
|
89
|
|||
|
EMPLOYMENT
AGREEMENTS
|
89
|
|||
|
PROPOSAL 2
- THE AMENDMENT PROPOSAL
|
90
|
|||
|
GENERAL
|
90
|
|||
|
REQUIRED
VOTE
|
92
|
|||
|
RECOMMENDATION
|
92
|
|||
|
PROPOSAL 3
- THE INCENTIVE PLAN PROPOSAL
|
93
|
|||
|
GENERAL
|
93
|
|||
|
REQUIRED
VOTE
|
98
|
|||
|
RECOMMENDATION
|
99
|
|||
|
PROPOSAL
4 - THE ADJOURNMENT PROPOSAL
|
100
|
|||
|
GENERAL
|
100
|
|||
|
REQUIRED
VOTE
|
100
|
|||
|
RECOMMENDATION
|
100
|
|||
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF PHARMATHENE
|
101
|
|||
|
INFORMATION
ABOUT PHARMATHENE
|
111
|
|||
| PHARMATHENE EXECUTIVE COMPENSATION |
124
|
|||
|
INFORMATION
ABOUT HAQ
|
130
|
|||
|
HAQ’S
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS OF HAQ
|
131
|
|||
|
UNAUDITED
PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION AS
OF
MARCH 31, 2007
|
134
|
|||
|
DIRECTORS
AND MANAGEMENT OF HAQ FOLLOWING THE MERGER WITH
PHARMATHENE
|
142
|
|||
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
|
149
|
|||
|
BENEFICIAL
OWNERSHIP OF SECURITIES
|
152
|
|||
|
PRICE
RANGE OF SECURITIES AND DIVIDENDS
|
157
|
|||
|
DESCRIPTION
OF SECURITIES
|
158
|
|||
|
STOCKHOLDER
PROPOSALS
|
160
|
|||
|
WHERE
YOU CAN FIND MORE INFORMATION
|
160
|
|||
|
INDEX
TO FINANCIAL STATEMENTS
|
ii
|
ANNEXES
|
||||
|
Annex
A - Agreement and Plan of Merger
|
||||
|
Annex
B - Form of Amendment to the Amended and Restated Certificate of
Incorporation
|
||||
|
Annex
C - Form of 2007 Long-Term Incentive Plan
|
iii
SUMMARY
OF THE MATERIAL TERMS OF THE MERGER
This
Summary, together with the sections entitled “Questions and Answers About the
Merger and the Special Meeting” and “Summary of the Proxy Statement,” summarizes
certain material information contained in this proxy statement. You should
carefully read this entire proxy statement for a more complete understanding
of
the matters to be considered at the Special Meeting of
stockholders.
|
|
•
|
Pursuant
to a Merger Agreement, HAQ will acquire all of the outstanding securities
held by the stockholders of PharmAthene (other than those securities
being
cancelled) and PharmAthene will become a wholly-owned subsidiary
of HAQ.
For more information about the Merger, see the section entitled “The
Merger Proposal” beginning on page 57 and the Merger Agreement that is
attached as Annex A to this proxy statement.
|
|
|
•
|
At
the Special Meeting of stockholders to be held on July 26, 2007,
you will
be asked, among other things, to approve the Merger. For more information
about the Special Meeting, see the section entitled “The HAQ Special
Meeting of Stockholders” beginning on page 51.
|
|
|
•
|
We
are a special purpose acquisition company organized under the laws
of
Delaware on April 25, 2005. We were formed to effect an acquisition,
merger, capital stock exchange, asset acquisition or other similar
business combination with an operating business in the healthcare
industry. For more information about us, see the section entitled
“Information About HAQ” beginning on page 130.
|
|
|
||
|
|
•
|
PharmAthene
is a privately-held Delaware company engaged in the biodefense industry,
specifically the discovery and development of novel human therapeutics
and
prophylactics for the treatment and prevention of
morbidity and mortality from exposure to biological and chemical
weapons.
For more information about PharmAthene, see the sections entitled
“Unaudited Pro Forma Condensed Combined Financial Statements,”
“Information About PharmAthene,” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations of PharmAthene” beginning
on pages 134, 111, and 101, respectively. Also see PharmAthene’s financial
statements beginning on page F-2.
|
|
|
•
|
At
the closing of the Merger, stockholders, optionholders, warrantholders
and
noteholders of PharmAthene will receive an aggregate of 12,500,000
shares
of HAQ common stock, subject to possible adjustment as set forth
in the
Merger Agreement, $12,500,000 in 8% convertible notes issued by
HAQ; and
up to $10,000,000 in milestone payments (if certain conditions
are met).
The total merger consideration has an aggregate value of $113,375,000
(based upon the closing price of HAQ common stock on June 27, 2007
of
$7.27 per share and if the maximum milestone payments are achieved
and paid). For more information about the merger consideration,
see the
section entitled “The Agreement and Plan of Merger” beginning on
page 74.
|
|
|
•
|
At
the closing, the
stockholders (including option holders and warrant holders of PharmAthene)
will place 1,375,000 shares of HAQ common stock to be issued in the
Merger
into escrow which shares will be the sole and exclusive source for
satisfying any indemnification claims. The indemnification obligations
are
subject to the limitation that we incur damages of at least $500,000
prior
to making any claim. Further, the ability to be indemnified is subject
to
a limitation of the shares held in escrow. For more information about
indemnification, see the section entitled“The
Agreement and Plan Merger — Indemnification of Claims and Escrow of
Shares” beginning on page 88.
|
|
•
|
At
the closing, all series of preferred stock of PharmAthene will be
surrendered for conversion into shares of HAQ common stock, and the
preferred stock will be cancelled. Additionally, a total of 16,118,359
warrants held by the holders of the PharmAthene preferred stock will
be
cancelled, as well as all related agreements previously entered into
by
the holders of the preferred stock and PharmAthene.
|
|
|
•
|
At
the effective time of the Merger, the 22,108,669 shares of PharmAthene
common stock (representing 12,483,472 issued and outstanding shares
of
common stock and 9,625,197 shares of common stock underlying existing
common stock options and common stock warrants) will convert into
approximately 1,100,422 shares of HAQ common stock, or a 20.08 to
1
exchange ratio; the 16,442,000 issued and outstanding shares of
PharmAthene Series A Convertible Preferred Stock will convert into
approximately 1,870,700 shares of HAQ common stock, or a 8.79 to
1
exchange ratio; the 30,448,147 issued and outstanding shares of
PharmAthene Series B Convertible Preferred Stock will convert into
approximately 5,498,500 shares of HAQ common stock, or a 5.54 to
1
exchange ratio; the 17,976,586 shares of PharmAthene Series C Convertible
Preferred Stock (representing 17,538,133 issued and outstanding shares
of
Series C Convertible Preferred Stock and 438,457 shares of Series
C
convertible Preferred Stock underlying Warrants) will convert into
approximately 4,030,300 shares of HAQ common stock, or a 4.46 to
1
exchange ratio. For more information about the stock consideration
with
respect to the Merger Proposal, see the section entitled “Stock
Consideration” beginning on
page 74.
|
1
|
|
•
|
After
we complete the Merger with PharmAthene, officers of PharmAthene
will
continue as before the Merger. Our Board will be reconstituted, and
will
be comprised of seven persons, only two of whom will be continuing
Board
members of HAQ. For more information about management, see the section
entitled “Directors and Management of HAQ Following the Merger with
PharmAthene” on page 142.
|
|
|
•
|
Our
management and Board considered various factors in determining to
enter
into a business combination with PharmAthene and to approve the Merger
Agreement. Although the Board of Directors of HAQ did not obtain
a
fairness opinion or report with respect to the valuation of PharmAthene
or
its value from an independent third party, and did not determine a
specific value for PharmAthene, the Board believes that the terms
of the
Merger are fair and in the best interests of the stockholders. Prior
to the commencement of formal negotiations, the HAQ Board determined
a range of values for PharmAthene of between $101.4 million and $168.8
million. The Board based its determination upon various factors as
described in the enclosed Proxy Statement including the Board’s
independent analysis of PharmAthene’s business, technology and future
prospects, PharmAthene’s management and historical investments in
PharmAthene by third parties. See the section entitled “HAQ’s Reasons for
the Merger and Recommendation of the HAQ Board” beginning on page 66.
|
|
|
||
|
|
•
|
The
Merger with PharmAthene involves numerous risks. For more information
about these risks, see the section entitled “Risk Factors” beginning on
page 32.
|
2
QUESTIONS
AND ANSWERS ABOUT THE PROPOSALS
Why
am I receiving this proxy statement?
HAQ
and
PharmAthene have agreed to a business combination under the terms of an
Agreement and Plan of Merger, dated January 19, 2007, among HAQ, PAI Acquisition
Corp., a newly-formed subsidiary of HAQ (“Merger Sub”) and PharmAthene, Inc.
(“PharmAthene”) pursuant to which Merger Sub will be merged (the “Merger”) with
and into PharmAthene. This agreement is referred to as the Merger Agreement.
A
copy of the Merger Agreement is attached to this proxy statement as Annex A,
which we encourage you to review in its entirety.
For
purposes of Proposal 1, under our certificate of incorporation, approval of
the Merger Proposal will require (i) the affirmative vote of a majority of
the
shares of HAQ’s common stock issued in our IPO that vote on this proposal at the
Special Meeting; and (ii) that not more than 20% of the shares of HAQ’s common
stock issued in HAQ's IPO vote against the Merger Proposal and elect a cash
conversion of their shares.
HAQ
will
hold a Special Meeting of its stockholders to obtain this approval. This proxy
statement contains important information about the proposed merger and the
Amendment Proposal and the Incentive Plan Proposal. You should read it
carefully.
Your
vote
is important. We encourage you to vote as soon as possible after carefully
reviewing this proxy statement.
What
is being voted on?
There
are
four proposals on which you are being asked to vote. The first proposal is
to
approve and adopt a Merger Agreement and the transactions contemplated thereby.
As a consequence of the Merger, PharmAthene will become a wholly-owned
subsidiary of HAQ.
The
second proposal is to approve an amendment to HAQ's amended and restated
certificate of incorporation, subject to consummation of the Merger,
to:
· change
HAQ's name to “PharmAthene, Inc.” after the Merger;
· remove
certain provisions that will no longer be operative to HAQ as an operating
company upon consummation of the Merger; and
· grant
to the holders of the 8% convertible notes to be issued as part of the
Merger the right to designate three members to the Board of Directors of HAQ
(
and two out of three members of each Board committee) for so long as at least
30% of the original face value of such notes remain outstanding.
The
third
proposal is to approve the adoption of the 2007 Long-Term Incentive Plan, or
the
Incentive Plan, pursuant to which 3,500,000 of shares of HAQ common stock will
be reserved for issuance in accordance with the terms of the Incentive Plan
(including approximately 465,961 shares reserved to honor options issued by
PharmAthene which will be assumed by HAQ pursuant to the Merger Agreement).
The
fourth proposal is to approve the adjournment of the Special Meeting to a later
date or dates, if necessary, to permit further solicitation and vote of proxies
in the event that, based upon the tabulated vote at the time of the Special
Meeting, HAQ would not have been authorized to consummate the
Merger.
It
is
important for you to note that in the event the Merger Proposal does not receive
the necessary vote to approve such proposal, then HAQ will not consummate that
proposal or the other proposals and HAQ will be forced to liquidate. If the
Incentive Plan Proposal or the Amendment Proposal is not approved, but the
Merger Proposal is approved, HAQ may still consummate the Merger if the
conditions in the Merger Agreement requiring approval of these proposals are
waived.
3
What
is a quorum?
A
quorum
is the number of shares that must be represented, in person or by proxy, in
order for business to be transacted
at the Special Meeting.
More
than
one-half of the total number of shares of our common stock outstanding as of
the
record date (a quorum) must be represented, either in person or by proxy, in
order to transact business at the Special Meeting. Abstentions and broker
non-votes are counted for purposes of determining the presence of a quorum.
If
there is no quorum, a majority of the shares present at the Special Meeting
may
adjourn the Special Meeting to another date.
However,
in order to vote on Proposal 1, more than one-half of the shares of our common
stock purchased in our IPO must be represented (4,700,001 shares), because
only
the holders of those shares may vote on the Merger Proposal.
Why
is HAQ proposing the Merger, the Certificate
of Incorporation Amendment and the adoption of the Incentive
Plan?
HAQ
is a
blank-check company formed specifically as a vehicle for the acquisition of
or
merger with a business whose fair market value is at least equal to 80% of
the
net assets of HAQ at the time of the transaction. In the course of HAQ's search
for a business combination partner, HAQ was introduced to PharmAthene, a company
which the Board of Directors of HAQ believes has significant growth potential.
PharmAthene is in the business of discovering and developing novel human
therapeutics and prophylactics for the treatment and prevention of morbidity
from exposure to biological and chemical weapons. The Board of Directors of
HAQ
found PharmAthene to be an attractive merger partner because of the industry
in
which it operates, its existing products, growth prospects and management team,
among other factors. As a result, HAQ believes that the Merger will provide
HAQ
stockholders with an opportunity to participate in a company with significant
growth potential. The Certificate of Incorporation Amendment is being undertaken
because upon consummation of the Merger, (i) management desires the name of
the
business to reflect its operations, (ii) there are provisions in the certificate
of incorporation which will no longer be applicable and, (iii) pursuant to
the
terms of the Merger Agreement, HAQ has agreed that, as a consequence of the
Merger, noteholders will have the right to appoint three (3) members to the
Board of Directors. The adoption of the Incentive Plan is being undertaken
because the Board of Directors of HAQ deems it beneficial for the combined
company going forward following the Merger to have incentives available to
attract and retain employees and to honor options held by PharmAthene employees
which will be assumed as part of the Merger.
What
vote is required in order to approve the Merger Proposal?
The
approval of the Merger Proposal will require the affirmative vote of a majority
of the votes cast at the Special Meeting of the shares of common stock issued
as
part of HAQ's IPO. We issued 9,400,000 shares as part of our IPO. In
addition, stockholders owning less than 20% of such shares (1,880,000
shares) may vote against the Merger and elect to convert their shares into
cash
from the trust account.
What
happens if I vote against the Merger?
Each
HAQ
stockholder who holds shares of common stock either issued in HAQ's IPO or
purchased following such offering in the open market has the right to vote
against the Merger Proposal and, at the same time, demand that HAQ convert
such
stockholder's shares into an amount of cash equal to a pro rata portion of
the
trust account. These shares will be converted into cash only if the Merger
is
consummated. Based on the amount of cash held in the trust account as of March
31, 2007 (approximately $71.4 million) without taking into account any
interest accrued after such date, stockholders who vote against the Merger
Proposal and elect to convert such stockholder's shares as described above
will
be entitled to convert each share of common stock that it holds into
approximately $7.60 per share. However, if the holders of 1,880,000 or more
shares of common stock issued in HAQ's IPO (an amount equal to 20% or more
of
the total number of shares issued in the IPO), vote against the Merger and
demand conversion of their shares into a pro rata portion of the trust account,
then HAQ will not be able to consummate the Merger and we will be required,
because of the lack of time to identify another potential target and negotiate
a
transaction, to liquidate.
4
How
is Management of HAQ voting?
HAQ's
initial stockholders, including all of its directors and officers, who purchased
or received shares of common stock prior to HAQ's IPO, presently, together
with
their affiliates, own an aggregate of approximately 19.3% of the outstanding
shares of HAQ common stock and all of these stockholders have agreed
to vote all of these shares acquired prior to the IPO in accordance with
the vote of the majority interest of all other HAQ stockholders on the Merger
Proposal. Additionally, three of our Board members have purchased an
additional 250,000 shares (2.14% of the outstanding shares of common stock
of
HAQ) and have advised us that they intend to vote such shares in favor of the
Merger.
What
vote is required in order to approve the Amendment
Proposal?
The
approval of the Amendment Proposal will require the affirmative vote of a
majority of the shares of HAQ's common stock issued and outstanding as of the
Record Date. The officers and directors of HAQ intend to vote all of their
shares of common stock in favor of this proposal.
What
vote is required in order to approve the Incentive Plan
Proposal?
The
approval of the Incentive Plan Proposal will require the affirmative vote of
a
majority of the votes cast at the Special Meeting. The officers and directors
of
HAQ intend to vote all of their shares of common stock in favor of this
proposal.
What
vote is required in order to approve the Adjournment
Proposal?
Adoption
of the Adjournment Proposal requires the affirmative vote of a majority of
shares of HAQ's common stock present in person or by proxy and entitled to
vote
at the Special Meeting. Adoption of the Adjournment Proposal is not conditioned
upon the adoption of any of the other proposals.
If
I am not going to attend the Special Meeting of stockholders in person, should
I
return my proxy card instead?
Yes.
Whether or not you plan to attend the Special Meeting, after carefully reading
and considering the information contained in this proxy statement, please
complete and sign your proxy card. Then return the enclosed proxy card in the
return envelope provided herewith as soon as possible, so that your shares
may
be represented at the Special Meeting.
What
will happen if I abstain from voting or fail to vote?
An
abstention or failure to vote by a HAQ stockholder will not be counted towards
the vote total for the Merger Proposal, and your shares of common stock will
not
be converted into a pro rata portion of the funds in the trust account. An
abstention or failure to vote will have the effect of voting against the
Amendment Proposal and the Adjournment Proposal. An abstention will have the
effect of voting against the Incentive Plan.
As
long
as a quorum is established at the Special Meeting, a failure to vote will
have
no impact upon the approval of the Merger Proposal or the Incentive Plan
Proposal but as the Amendment Proposal requires a majority of all outstanding
shares of common stock, and the Adjournment Proposal requires the affirmative
vote of a majority of the shares of HAQ's common stock present in person
or by
proxy and entitled to vote at the Special Meeting, a failure to vote will
have
the effect of a vote against each of the Amendment Proposal and the Adjournment
Proposal. Failure to vote will not have the effect of converting your shares
into a pro rata portion of the trust account.
If
my shares are held in “street name'' by my broker, will my broker vote my shares
for me?
If
you
hold your shares in “street name,” your bank or broker cannot vote your shares
with respect to the Merger Proposal, the Amendment Proposal, the Incentive
Plan
Proposal or the Adjournment Proposal without specific instructions from you,
which are sometimes referred to in this proxy statement as the broker “non-vote”
rules. If you do not provide instructions with your proxy, your bank or
broker may deliver a proxy card expressly indicating that it is NOT voting
your
shares; this indication that a bank or broker is not voting your shares is
referred to as a “broker non-vote.” Broker non-votes will be counted for the
purpose of determining the existence of a quorum, but will not count for
purposes of determining the number of votes cast at the Special Meeting. Your
broker can vote your shares only
if you
provide instructions on how to vote. You should instruct your broker to vote
your shares in accordance with directions you provide to your broker. If you
hold your shares in street name you can obtain physical delivery of the shares
into your name, and then vote your shares yourself. In order to obtain shares
directly into your name, you must contact your brokerage house representative.
Brokerage firms may assess a fee for your conversion; the amount of such fee
varies from firm to firm.
5
What
do I do if I want to change my vote?
If
you
wish to change your vote, please send a later-dated, signed proxy card to our
corporate Secretary, John Pappajohn at HAQ prior to the date of the Special
Meeting or attend the Special Meeting and vote in person. You also may revoke
your proxy by sending a notice of revocation to John Pappajohn at the address
of
HAQ's corporate headquarters, provided such revocation is received prior to
the
Special Meeting.
Will
I receive anything in the Merger?
If
the
Merger is consummated and you vote your shares for the Merger Proposal or
you
abstain, you will continue to hold the HAQ securities that you currently
own. If
the Merger is consummated but you have voted your shares against the Merger
Proposal and have elected a cash conversion instead, and you timely deliver
your
stock certificate for conversion, your shares of HAQ common stock will be
cancelled and you will receive cash equal to a pro rata portion of the trust
account, which, as of March 31, 2007, was equal to approximately $7.60 per
share. Because HAQ is acquiring all of the outstanding securities of
PharmAthene, the stockholders (and certain optionholders and warrantholders)
and
noteholders of PharmAthene will receive 12.5 million shares of HAQ common
stock,
subject to adjustment, 8% convertible notes in the amount of $12,500,000
and up
to $10,000,000 in milestone payments, as applicable in exchange for their
shares
(or applicable options or warrants) of capital stock of PharmAthene and in
replacement of currently outstanding notes. Based
upon the closing price of HAQ common stock at the time of the execution of
the
Merger Agreement on January 19, 2007, ($7.46), the total aggregate value
of the
consideration was $115,750,000. The total merger consideration has an
aggregate value of $113,375,000 (based upon the closing price of HAQ’s common
stock on June 27, 2007 of $7.27 per share and assuming the maximum milestone
payments are achieved and paid).
How
is HAQ paying for the Merger?
HAQ
will
be issuing new shares of its common stock and 8% convertible notes to finance
the Merger and is not required to utilize cash for the transaction. Further,
as
described elsewhere in this proxy statement, the PharmAthene stockholders may
also receive milestone payments based upon future revenues of the post-merger
company. Assuming the Merger Proposal is approved, a portion of the funds from
HAQ’s IPO, now held in trust, will be used to pay certain expenses related to
the Merger including fees with respect to listing the Merger related HAQ common
stock issued as merger consideration on the American Stock Exchange, accounting
and legal fees and payments to those stockholders who (i) vote against the
Merger and (ii) elect to convert their shares into cash.
Are
PharmAthene stockholders or noteholders required to approve the
Merger?
Yes.
All
of the holders of PharmAthene’s preferred stock, and more than 80% of the
holders of the common stock of PharmAthene, have already executed irrevocable
consents approving and adopting the Merger Agreement and the transactions
contemplated thereby. Accordingly, there are no additional approvals required
by
PharmAthene to consummate the Merger. In addition, holders of substantially
all
of the PharmAthene Notes have agreed to exchange their PharmAthene Notes
(principal and interest) for the new notes to be issued by HAQ.
What
will happen in the Merger?
PAI
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
HAQ
formed for the purpose of consummating the Merger (which we also refer to as
“Merger Sub”), will merge with and into PharmAthene with PharmAthene being the
surviving corporation. As a consequence of the Merger, the following will occur:
| · |
PharmAthene
will be a wholly-owned subsidiary of HAQ;
|
| · |
the
stockholders of PharmAthene will receive shares of HAQ common stock;
|
6
| · |
the
option and warrant holders of PharmAthene will receive options and
warrants to purchase shares of HAQ common stock in exchange for their
equity interests in PharmAthene;
|
| · |
the
holders of the 8% convertible notes of PharmAthene will exchange
their
notes (principal and interest) for $12,500,000 of 8% convertible
notes
issued by HAQ;
|
| · |
at
the closing, all series of preferred stock of PharmAthene will be
surrendered for conversion into shares of HAQ Common Stock, and the
preferred stock will be cancelled. Additionally, a total of 16,118,359
warrants held by the holders of the PharmAthene preferred stock will
be
terminated, as well as all related agreements previously entered
into by
the holders of the preferred stock and PharmAthene;
|
| · |
the
Board of HAQ will be restructured and reconstituted to provide that
the
Board will be comprised of seven persons, and the holders of the
8% notes
to be issued to the PharmAthene note holders will have the right
to
appoint up to three directors.
|
Has
HAQ received an independent valuation or fairness opinion with respect to the
Merger Proposal?
No. Our
Board of Directors has determined that the fair market value of PharmAthene
exceeds 80% of our net assets as was represented in the prospectus relating
to
our IPO and required by our amended and restated certificate of incorporation.
The Board also determined that the terms of the Merger were fair to HAQ and
its
stockholders and that the amount of consideration being paid was fair. The
terms
of the Merger were determined based upon arm’s-length negotiations between us
and the management of PharmAthene, who had no prior dealings with us or our
officers or directors. Some of our officers and directors, including John
Pappajohn, our Chairman, Derace L. Schaffer, M.D., our Chief Executive Officer,
and Matthew Kinley, our President, have extensive industry and deal-making
experience. Further, obtaining a valuation or fairness opinion is not required
under our amended and restated certificate of incorporation or under the
Delaware General Corporation Law. Under the circumstances, our Board of
Directors believed that the aggregate consideration for the Merger appropriately
reflected PharmAthene’s fair market value and that obtaining an
independent valuation or fairness opinion was unnecessary.
How
did HAQ’s Board of Directors arrive at a valuation of PharmAthene and did the
Board of Directors assign a value to PharmAthene?
HAQ’s
Board had commenced its negotiations for PharmAthene based on analyses
undertaken using publicly available information regarding PharmAthene, certain
internally generated information that had been furnished by PharmAthene’s
management prior to formal negotiations and some preliminary
comparisons to other companies. HAQ’s Board of Directors considered the nature
of PharmAthene’s business and assets, including its potential sales, its
business plan and forecasts, potential earnings, cash flow and book value
of
assets. In addition, the Board reviewed PharmAthene’s current capitalization and
resulting operating losses, and the liabilities to be assumed in arriving
at a
valuation of PharmAthene. The publicly available information was, to a large
extent, the information contained in a business combination proxy statement
that
had been filed by SIGA Technologies, Inc. in connection with a proposed merger
transaction with PharmAthene which ultimately was terminated. The internally
prepared materials furnished by PharmAthene included projections and business
summaries prepared by PharmAthene’s management. The Board of Directors
determined that the value of PharmAthene was in the range of between $101.4
million and $168.8 million and believed that the negotiated purchase price
was
fair to HAQ and its stockholders. Based
upon the closing price of HAQ common stock at the time of the execution of
the
Merger Agreement on January 19, 2007 ($7.46), the total aggregate value of
the
consideration was $115,750.00. The total merger consideration has an
aggregate value of $113,375,000 (based upon the closing price of HAQ common
stock on June 27, 2007 of $7.27 per share and assuming maximum milestone
payments are achieved and paid). We refer you to the more detailed discussions
under the headings “Background of the Merger” and “HAQ’s Reasons for the Merger
and Recommendation of the HAQ Board.”
What
will PharmAthene stockholders receive in the Merger?
The
total
merger consideration has an aggregate value of $113,375,000 (based upon the
closing price of HAQ’s common stock price on June 27, 2007 of $ 7.27 per share
and assuming maximum milestone payments are achieved and paid).
The
Merger Agreement provides that the holders of PharmAthene capital stock
(including holders of warrants and options) and outstanding noteholders will
receive the following consideration:
7
| · |
an
aggregate of 12,500,000 shares of HAQ common stock, subject to possible
adjustment;
|
| · |
$12,500,000
of 8% convertible notes will be issued by HAQ; and
|
| · |
up
to $10,000,000 in milestone payments may be paid (if certain conditions
are met).
|
The
Merger Agreement provides that the holders of PharmAthene immediately prior
to
the Merger will initially own up to approximately 52% of the issued and
outstanding shares of HAQ capital stock after the Merger (assuming all
PharmAthene options and warrants assumed by HAQ are exercised and excluding
as
outstanding for purposes of the calculation securities issuable upon exercise
of
HAQ’s outstanding warrants, upon exercise of the purchase option issued to
underwriters in HAQ’s IPO and upon conversion of the 8% convertible notes to be
issued in the Merger). Since HAQ has outstanding warrants to purchase 9.4
million shares of common stock and a unit purchase option to purchase
225,000
units, each unit consisting of one share of common stock and one
warrant,
holders
of PharmAthene securities will own as much as 39% of the aggregate issued and
outstanding shares of HAQ capital stock after taking into account such
securities (assuming all PharmAthene options and warrants assumed by HAQ are
exercised and including securities issuable upon the conversion of the 8%
convertible notes to be issued in the Merger).
If
the
entire aggregate principle amount of the 8% convertible notes ($12,500,000)
issued by HAQ in the Merger are converted in their entirety, the holders will
own an additional 1,250,000 shares of HAQ common stock subsequent to the Merger.
The holders of HAQ capital stock immediately prior to the Merger will own the
balance of the issued and outstanding shares of HAQ capital stock. Therefore,
the holders of HAQ capital stock immediately prior to the Merger will experience
substantial dilution of their ownership interest as a result of the
Merger.
Will
fractional shares of HAQ be
paid?
Fractional
shares will not be issued to PharmAthene stockholders in the Merger. In lieu
of
fractional shares, the PharmAthene stockholders will receive cash. As a result
of the very limited number of fractional shares which could be issued because
there are only 23 PharmAthene stockholders, the amount of cash needed to cover
fractional shares will be immaterial.
What
will PharmAthene noteholders receive in the Merger?
Pursuant
to a Note Exchange Agreement, the execution of which is a condition precedent
to
consummation of the Merger, current holders of PharmAthene’s $11,800,000 in 8%
convertible notes are required to exchange such notes (all principal and accrued
interest) for the 8% convertible notes of HAQ in the principal amount of
$12,500,000. Pursuant to the Note Exchange Agreement, such holders will also
have the right to designate three nominees to HAQ’s Board
of
Directors, comprised of seven members,
and two
of the three members to each committee of the Board including the corporate
governance and nominating committee and compensation committee.
Do
I have conversion rights in connection with the Merger?
If
you
hold shares of common stock issued in HAQ's IPO, then you have the right to
vote
against the Merger Proposal and demand that HAQ convert your shares of HAQ
common stock into a pro rata portion of the trust account. These rights to
vote
against the Merger and demand conversion of your shares into a pro rata portion
of the trust account are sometimes referred to herein as conversion
rights.
If
I have conversion rights, how do I exercise them?
If
you
wish to exercise your conversion rights, you must vote against the Merger
Proposal and, at the same time, demand that HAQ convert your shares into cash
by
marking the appropriate space on the proxy card. You must affirmatively vote
against the Merger Proposal and demand that HAQ convert your shares into cash
from the trust account no later than the close of the vote on the Merger
Proposal to exercise your conversion rights (by indicating so on the proxy
card
or on the ballot at the Special Meeting). In order to convert your shares you
must hold your shares through the closing date of the Merger and then present
your physical stock certificate to our transfer agent, Continental Stock
Transfer & Trust Company, 17 Battery Place, New York, NY, 10004, Attention
Greg Denman, (212) 845-3287 by 5:00 p.m New York time on the third business
day
subsequent to the closing date of the Merger. If you elect to convert your
shares of common stock, you will still have the right to exercise the warrants
received as part of the units that were issued in our initial public offering
in
accordance with the terms thereof and you will still have the right to attend
the Special Meeting. If, notwithstanding your vote, the Merger is consummated,
then you will be entitled to receive a pro rata share of the trust account
in
which a substantial portion of the net proceeds of HAQ's IPO are held, including
any interest earned thereon through the date of the Special Meeting. Based
on
the amount of cash held in the trust account as of March 31, 2007, without
taking into account any interest accrued after such date, you will be entitled
to convert each share of HAQ common stock that you hold into approximately
$7.60
per share. If you exercise your conversion rights, then you will be exchanging
your shares of HAQ common stock for cash and will no longer own these shares
of
common stock. You will only be entitled to receive cash for these shares if
you
continue to hold these shares through the closing date of the Merger and then
tender your stock certificate to HAQ before 5 p.m. EST on the third business
day
after the consummation of the Merger. Assuming the Merger is approved, HAQ
will
provide public notice of the closing date for the Merger. If you convert your
shares of common stock, you will still have the right to exercise the warrants
received as part of the units purchased in the IPO in accordance with the terms
thereof. If the Merger is not consummated: (i) then your shares will not be
converted into cash at this time, even if you so elected; and (ii) we will
commence the dissolution process and you will be entitled to distribution upon
liquidation. See “Conversion Rights” at page 54 and the section entitled
“Consequences if Merger Proposal is Not Approved” beginning on
page 72.
8
What
happens to the funds deposited in the trust account after completion of the
Merger?
Upon
consummation of the Merger, a portion of the funds remaining in the trust
account after payment of amounts, if any, to stockholders requesting and
exercising their conversion rights, will be used to pay expenses associated
with
the Merger. In addition, approximately $720,000 will be used to pay deferred
underwriters’ compensation from HAQ’s IPO. Substantially all of the funds will
be used to fund working capital of the combined company.
Who
will manage HAQ from and after consummation of the Merger with
PharmAthene?
From
and
after consummation of the Merger, HAQ will be managed by the current management
of PharmAthene including David P. Wright as President and Chief Executive
Officer. It is anticipated that the Board of Directors of the combined company
will consist of the following seven board members: John Pappajohn, HAQ’s current
Chairman, Derace M. Schaffer, M.D., currently a member of HAQ’s Board of
Directors, James Cavanaugh, Ph.D., Steven St. Peter, M.D. Elizabeth Czerepak,
Joel McCleary and David Wright, PharmAthene’s current President and Chief
Executive Officer, each to serve until his or her successor is elected and
qualified or until his or her earlier death, resignation or removal. Ms.
Czerepak and Drs. Cavanaugh and St. Peter, all of whom are currently directors
on PharmAthene’s Board of Directors, will be directors nominated by the holders
of 8% convertible notes to be issued by HAQ in exchange for the
currently-outstanding 8% convertible notes of PharmAthene.
What
happens if the Merger is not consummated?
If
the
Merger is not consummated, HAQ's amended and restated certificate of
incorporation will not be further amended pursuant to the Amendment Proposal
and
we will not adopt the Incentive Plan pursuant to the Incentive Plan Proposal.
Further, HAQ will be liquidated pursuant to its amended and restated certificate
of incorporation. If a liquidation were to occur by approximately August
3, 2007 (the last day on which HAQ would be permitted to consummate the
acquisition of PharmAthene under its amended and restated certificate of
incorporation), HAQ estimates that with the interest that would accrue on
the
amounts that are held in trust through such date, there would be a trust
balance
of approximately $72,280,000 or $7.68 per share. This amount, less any
liabilities not indemnified against by certain members of HAQ's Board and
not
waived by HAQ's creditors, which we estimate will not exceed $280,000, would
be
distributed to the holders of the 9,400,000 shares of common stock purchased
in
HAQ's IPO. We estimate that as of March 31, 2007, we have claims from creditors,
vendors and tax authorities of approximately $630,000 which have not been
waived. HAQ currently has no outstanding liabilities covered by
waivers. HAQ currently estimates that, at August 3, 2007, there would be
approximately $280,000 in Delaware franchise tax included in the $630,000
which
are not waived by such taxing authorities and our Board members have not
agreed
to indemnify HAQ for such tax claims. Our Board members have agreed to indemnify
HAQ for the balance which HAQ owes to certain of its vendors. HAQ has no
other outstanding liabilities which are not indemnified against by the members
of its Board or for which it has not received waivers from creditors. As
of
March 31, 2007, HAQ has approximately $467,000 of cash out of trust available
to
pay for claims and expenses of which only $280,000 of potential tax claims
will
not be covered by the directors’ indemnification. Thus, HAQ estimates that the
total amount available for distribution upon liquidation would be approximately
$72,000,000 or $7.66 per share.
9
Separately,
HAQ estimates that the dissolution process would cost approximately $50,000
to
$75,000 and that HAQ would be indemnified for such costs by HAQ’s
executive officers and directors. Such officers and directors have acknowledged
and agreed that such costs are covered by their existing indemnification
agreement. We do not believe there would be any for claims or liabilities in
excess of the funds out of the trust against which HAQ’s executive officers and
directors would be required to indemnify the trust account in the event of
such
dissolution. In the event that such persons indemnifying HAQ are unable to
satisfy their indemnification obligation or in the
event
that there are subsequent claims such as subsequent non-vendor claims for which
such persons have no indemnification obligation, the amount ultimately
distributed to stockholders may be reduced even further. However, HAQ currently
has no basis to believe there will be any such liabilities or to provide an
estimate of any such liabilities. The only cost of dissolution that HAQ is
aware
of that would not be indemnified against by such officers and directors of
HAQ
is the cost of any associated litigation. See page 32 of the section
entitled “Risk Factors” for a further discussion with respect to amounts payable
from the trust account.
When
do you expect the Merger to be completed?
Assuming
the approval of the Merger Proposal, it is currently anticipated that the Merger
and other proposals will be completed as promptly as practicable following
the
Special Meeting of stockholders to be held on July 26, 2007.
What
do I need to do now?
HAQ
urges
you to read carefully and consider the information contained in this proxy
statement, including the annexes, and to consider how the merger will affect
you
as a stockholder of HAQ. You should then vote as soon as possible in accordance
with the instructions provided in this proxy statement and on the enclosed
proxy
card.
If
you
have any questions or require assistance in voting your proxy, please contact
our proxy solicitors, Morrow & Co., Inc. at 800-607-0088.
Do
I need to send in my stock certificates?
If
the
Merger is approved and consummated, only HAQ stockholders who vote against
adoption of the Merger Proposal and elect to have their shares converted
into a
pro rata share of the funds in the trust account must send their physical
stock
certificate to our stock transfer agent subsequent to the closing of the
Merger.
HAQ stockholders who vote in favor of the adoption of the Merger Proposal,
or
who otherwise do not elect to have their shares converted should not submit
their stock certificates now or after the Merger, because their shares will
not
be converted or exchanged in connection with the Merger. If the Merger is
not
approved and we initiate the dissolution and liquidation processes, we will
at
such time provide instructions to stockholders of the procedure for obtaining
their pro rata portion of the trust fund.
What
should I do if I receive more than one set of voting
materials?
You
may
receive more than one set of voting materials, including multiple copies of
this
proxy statement and multiple proxy cards or voting instruction cards, if your
shares are registered in more than one name or are registered in different
accounts. For example, if you hold your shares in more than one brokerage
account, you will receive a separate voting instruction card for each brokerage
account in which you hold shares. Please complete, sign, date and return each
proxy card and voting instruction card that you receive in order to cast a
vote
with respect to all of your HAQ shares.
Who
is paying for this proxy solicitation?
HAQ
will
pay for the entire cost of soliciting proxies. In addition to these mailed
proxy
materials, our directors and officers may also solicit proxies in person, by
telephone or by other means of communication. These parties will not be paid
any
additional compensation for soliciting proxies. Morrow & Co., Inc., a proxy
solicitation firm that we have engaged to assist us in soliciting proxies,
will
be paid its customary fee of approximately $12,500 plus $5 per solicited
stockholder and out-of-pocket expenses and we expect that the total fees and
expenses payable to Morrow & Co. will not exceed approximately $30,000. We
may also reimburse brokerage firms, banks and other agents for the cost of
forwarding proxy materials to beneficial owners.
10
Who
can help answer my questions?
If
you
have questions about any of the proposals, you may write or call Healthcare
Acquisition Corp. at 2116 Financial Center, 666 Walnut Street, Des Moines,
Iowa
50309, (515) 244-5746, Attention: Matthew Kinley or you may call Morrow &
Co., Inc., our proxy solicitor, at (800) 607-0088.
You
may
also obtain additional information about HAQ from documents filed with the
Securities and Exchange Commission (“SEC”) by following the instructions in the
section entitled “Where You Can Find More Information.”
11
This
summary highlights certain information from this proxy statement including
information with respect to each of the proposals, although the Merger is the
primary reason for the calling of the Special Stockholders and the other
proposals are dependent upon the approval of the Merger Proposal. This summary
does not contain all of the information that is important to you. All of the
proposals are described in detail elsewhere in this proxy statement and this
summary discusses the material items of each of the proposals. You should
carefully read this entire proxy statement and the other documents to which
this
proxy statement refers you. See, “Where You Can Find More Information.” on page
160.
The
Merger Proposal (Page 57)
The
Parties
HAQ
HAQ
is a
blank-check company formed specifically as a vehicle for the acquisition of
or
merger with a business whose fair market value is at least equal to 80% of
the net assets of HAQ at the time of the transaction. The principal executive
offices of HAQ are located at 2116 Financial Center, 666 Walnut Street, Des
Moines, Iowa 50309, and its telephone number is (515) 244-5746.
PAI
Acquisition
PAI
Acquisition, Inc. or Merger Sub, is a wholly owned subsidiary of HAQ, formed
for
the purpose of merging with and into PharmAthene. The principal executive
offices of Merger Sub are located at 2116 Financial Center, 666 Walnut Street,
Des Moines, Iowa 50309, and its telephone number is (515) 244-5746.
PharmAthene
PharmAthene
is a privately owned corporation in the business of discovering and developing
novel human therapeutics and prophylactics for the treatment and prevention
of
morbidity and mortality from exposure to chemical and biological weapons. Based
in Annapolis, Maryland, PharmAthene’s goal is to become the premier company
worldwide specializing in the discovery, development and commercialization
of
therapeutic and prophylactic drugs for defense against bioterrorism and to
eventually leverage its biodefense capabilities for non-biodefense products
in
broader commercial markets. PharmAthene has two products under development,
Valortim™, a human monoclonal antibody for the prevention and treatment of
anthrax infection, and Protexia®, a bioscavenger for the treatment of
organophosphate nerve agent poisoning. Beyond its initial focus in biodefense,
PharmAthene intends to identify and develop dual-use technologies which have
application and indications in broader commercial markets. PharmAthene has
had
no
revenues
from the sale of products since its inception and has incurred significant
operating losses.
PharmAthene
was incorporated on March 13, 2001 under the name PharmAthene, Inc. The
principal executive offices of PharmAthene are located at 175 Admiral Cochrane
Drive, Suite #101, Annapolis, MD 21401, and its telephone number is
(410)
571-8920.
The
Agreement and Plan of Merger (Page 74)
On
January 19, 2007, the parties entered into an Agreement and Plan of Merger
(the
“Merger Agreement”) which provides for a business combination by means of a
merger of Merger Sub with and into PharmAthene in which PharmAthene will be
the
surviving entity and become a wholly-owned subsidiary of HAQ. We will acquire
all of the capital stock of PharmAthene and certain of its securities will
be
terminated. At the closing, and subject to certain adjustments as hereafter
described, the PharmAthene stockholders, optionholders, warrantholders and
noteholders will receive the following in the Merger (the “Merger
Consideration”):
| · |
an
aggregate of 12,500,000 shares of HAQ common stock;
|
| · |
$12,500,000
in 8% convertible notes issued by HAQ; and
|
| · |
up
to $10,000,000 in milestone payments (if certain conditions are met).
|
12
Included
in the 12,500,000 shares of HAQ common stock is the reservation of 577,366
HAQ
shares for issuance in connection with outstanding options and warrants to
acquire shares of common stock and Series C Convertible Preferred Stock of
PharmAthene, which will be assumed by HAQ and converted into options and
warrants of HAQ. Based
upon the closing price of HAQ common stock at the time of the execution of
the
Merger Agreement on January 19, 2007, ($7.46), the total aggregate value
of the
consideration was $115,750.00. The Merger Consideration has an aggregate
value of $113,375,000 (based upon the closing price of HAQ common stock on
June
27, 2007 of $7.27 per share and assuming the maximum milestone payments are
achieved and paid).
Milestone
payments
may be made to the stockholders of PharmAthene as part of the Merger
Consideration equal to 10% of the actual collections on gross sales of its
product, Valortim™, to the U.S. federal government until the earlier of (A)
December 31, 2009, or (B) the point at which total aggregate milestone payments
to the stockholders, optionholders and warrantholders equal $10 million. These
payments will be conditioned upon receipt by PharmAthene of an award,
procurement or other contract (x) on or before December 31, 2007; (y) which
provides for a procurement by the U.S. government of doses or treatments equal
to or greater than 60,000; and (z) with a total contract value of $150 million
or more.
The
12,500,000 shares of HAQ common stock issued as a portion of the Merger
Consideration will only be subject to adjustment to
the
extent that the stockholders of HAQ owning more than 5% of the outstanding
HAQ
common stock exercise their conversion rights. The number of shares of HAQ
common stock comprising the stock consideration shall be adjusted upward
by the
product of (x) the number (as a percentage) that is the difference between
the
percentage of HAQ common stock that is converted and 5% and (y) 2.25 million.
Stockholders holding an aggregate of up to 1,879,060 shares of common stock
could convert such shares and the Merger may still be consummated. If such
number of shares were converted, the shares of HAQ common stock issued as
a
portion of the Merger Consideration would be increased by 337,275 shares
of
common stock. The number of outstanding options and warrants of PharmAthene
will
not effect the total of 12,500,000 shares to be issued as Merger
Consideration.
Of
the
shares of HAQ common stock to be issued to the PharmAthene stockholders as
a
portion of the Merger Consideration, 1,375,000 shares of HAQ common stock will
be placed in an escrow account for a period of one year from the closing date
of
the Merger as the sole and exclusive source to satisfy any indemnification
claims against PharmAthene under the Merger Agreement.
HAQ,
Merger Sub and PharmAthene plan to consummate the Merger as promptly as
practicable after the Special Meeting, provided that:
| · |
HAQ’s
stockholders have approved and adopted the Merger Agreement and the
transactions contemplated thereby;
|
| · |
holders
of no more than 19.99% of the shares of the common stock issued in
HAQ's
IPO vote against the Merger Proposal and demand conversion of their
shares
into cash;
|
| · |
at
the closing, all series of preferred stock of PharmAthene are surrendered
for conversion, all warrants held by the holders of the PharmAthene
preferred stock are cancelled, as well as all related agreements
previously entered into by the holders of the preferred stock and
PharmAthene are terminated;
|
| · |
all
of the noteholders of PharmAthene surrender their notes for exchange
into
the new 8% convertible notes of
HAQ;
|
| · |
all
registration rights, security agreements and any other agreement
related
to the preferred stock and notes of PharmAthene entered into by the
holders of the preferred stock and /or note holders are terminated;
and
|
| · |
the
other conditions specified in the Merger Agreement have been satisfied
or
waived.
|
See
the
description of the Merger Agreement in the section entitled “The Agreement and
Plan of Merger” beginning on page 74. The Merger Agreement is included as “Annex
A” to this proxy statement. We encourage you to read the Merger Agreement in its
entirety.
13
Our
Stock Ownership (Page 55)
On
the
Record Date, our officers and directors owned an aggregate of 2,500,000 shares
of our common stock, or approximately 21.46% of our outstanding shares, of
which
2,250,000 shares were acquired prior to our IPO. They have agreed to vote
2,250,000 of such shares with respect to the Merger Proposal as the holders
of a
majority of our IPO shares that are voted at the Special Meeting and they
have
advised us that they intend to vote the remaining 250,000 shares which were
purchased in the open market by three of our Board members pursuant to
a Rule 10b5-1 plan in favor of the Merger Proposal and all other
proposals.
Date,
Time and Place of Special Meeting of Our Stockholders (Page 51)
The
Special Meeting of our stockholders will be held at 10:00 A.M., local time,
on July 26, 2007 at the offices of McCarter & English, LLP, 245
Park
Avenue, 27th
Floor,
New York, NY, 10167-0001.
Record
Date; Who is entitled to Vote (Page 52)
You
will
be entitled to vote or direct votes to be cast at the Special Meeting if you
owned shares of our common stock at the close of business on June 15, 2007,
which is the record date for the Special Meeting. You will have one vote for
each share of our common stock you owned at the close of business on the record
date. On the record date, there were 11,650,000 shares of our common stock
outstanding, of which 9,400,000 shares were IPO shares. The remaining 2,250,000
shares were issued to our founders prior to our IPO.
Quorum
and Vote Required (Page 53)
A
quorum
of our stockholders is necessary to hold a valid stockholders meeting. A quorum
will be present at the Special Meeting if a majority of the shares of our common
stock outstanding as of the record date are presented in person or by proxy.
Abstentions and broker non-votes will count as present for the purposes of
establishing a quorum.
The
approval of the Merger Proposal will require the approval of the holders of
a
majority of the shares of our common stock issued in our IPO present and that
vote on the Merger Proposal at the Special Meeting with respect to the Merger.
Notwithstanding such approval, the Merger will not be completed if the holders
of 20% or more of our IPO shares (1,880,000 or more shares) vote against the
Merger Proposal and exercise their conversion rights.
As
long
as a quorum is established at the Special Meeting, a failure to vote will have
no impact upon the approval of the Merger Proposal or the Incentive Plan
Proposal but as the Amendment Proposal requires a majority of all outstanding
shares of common stock, a failure to vote will have the effect of a vote against
such proposal. Failure to vote will not have the effect of converting your
shares into a pro rata portion of the trust account.
Voting
your Shares; Proxies (Page 52)
Proxies
may be solicited by mail, telephone or in person. HAQ will pay for the entire
cost of soliciting proxies. In addition to these mailed proxy materials, our
directors and officers may also solicit proxies in person, by telephone or
by
other means of communication. These parties will not be paid any additional
compensation for soliciting proxies. Morrow & Co., Inc., a proxy
solicitation firm that we have engaged to assist us in soliciting proxies,
will
be paid its customary fee of approximately $12,500 plus $5 per solicited
stockholder and out-of-pocket expenses and we expect that the total fees and
expenses payable to Morrow & Co. will not exceed approximately $30,000. We
may also reimburse brokerage firms, banks and other agents for the cost of
forwarding proxy materials to beneficial owners
If
you
grant a proxy, you may still vote your shares in person if you revoke your
proxy
at or before the Special Meeting.
14
Tax
Consequences (Page 71)
There
will be no tax consequences to our stockholders resulting from the Merger,
except to the extent they exercise their conversion rights.
A
stockholder who exercises conversion rights will generally be required to
recognize capital gain or loss upon the conversion, if such shares were held
as
a capital asset on the date of the Merger. This gain or loss will be measured
by
the difference between the amount of cash received and the stockholder’s tax
basis in the converted shares. The gain or loss will be short-term gain or
loss
if the acquisition closes as scheduled, but may be long-term gain or loss if
the
closing is postponed.
Accounting
Treatment (Page 72)
The
Merger will be accounted for as a reverse acquisition and equity
recapitalization, with HAQ treated as the “acquired” company for financial
reporting purposes. For accounting purposes, the transaction is being treated
as
an acquisition of assets and not a business combination because HAQ did not
meet
the definition of a business under EITF 98-3, Determination Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.
Accordingly, the transaction has been treated as a capital transaction whereby
PharmAthene is issuing stock for the net monetary assets of HAQ, accompanied
by
a recapitalization.
Risk
Factors (Page 32)
Before
you grant your proxy or vote or instruct the vote with respect to the Merger,
you should be aware that the occurrence of the events described in the “Risk
Factors” section and elsewhere in this proxy statement could have a material
adverse effect on us and PharmAthene.
Relation
of Proposals
Each
of
the Amendment Proposal and the Incentive Plan Proposal are conditioned upon
the
approval of the Merger Proposal and, in the event the Merger Proposal does
not
receive the necessary vote to approve that proposal, then HAQ will not complete
any of the transactions identified in any of the proposals. If the Amendment
Proposal and/or Incentive Plan Proposal is not approved but the Merger Proposal
is approved, we may still consummate the Merger if the conditions in the
Merger
Agreement requiring the approval of these proposals are waived. Adoption
of the
Adjournment Proposal is not conditioned upon the adoption of any of the other
proposals.
Approval
of PharmAthene's Stockholders
PharmAthene
did not hold a stockholders meeting. The approval of the stockholders and
noteholders of PharmAthene is required to consummate the Merger. More than
80%
of the holders of PharmAthene’s common stock, 100% of its preferred stockholders
and holders of substantially all of the PharmAthene Notes have previously
approved the Merger and the Merger Agreement by written consent. No further
approval is required of PharmAthene securityholders. A form of the Note
Exchange Agreement, to be executed at closing, and a form of the 8% convertible
notes, to be issued at closing, have been agreed upon by the PharmAthene
noteholders and HAQ. Further, the stockholders and noteholders of PharmAthene
have agreed to a lockup of their shares issuable to them in the Merger under
which 50% of the shares will be released after six months and the remaining
shares will be released after 12 months. HAQ has agreed to register the shares
issuable to the PharmaAthene stockholders and noteholders following the closing
pursuant to the terms of a Registration Rights Agreement, the form of which
is
filed as Exhibit 10.1 to the Current Report on Form 8-K, filed with the SEC
on
January 19, 2007.
Conversion
Rights (Page 54)
Pursuant
to HAQ’s existing amended and restated certificate of incorporation, a holder of
shares of HAQ's common stock issued in its IPO may, if the stockholder votes
against the Merger Proposal, demand that HAQ convert such shares into a pro
rata
portion of the trust account. This demand must be made on the proxy card at
the
same time that the stockholder votes against the Merger Proposal. We issued
a
total of 9,400,000 shares in our IPO and, other than the 2,250,000 shares issued
to our management, we have no other shares of common stock issued and
outstanding. If properly demanded, HAQ will convert each share of common stock
as to which such demand has been made into a pro rata portion of the trust
account in which a substantial portion of the net proceeds of HAQ's IPO are
held, plus all interest earned thereon. If you exercise your conversion rights,
then you will be exchanging your shares of HAQ common stock for cash and will
no
longer own these shares. Based on the amount of cash held in the trust account
as of March 31, 2007, without taking into account any interest accrued after
such date, you would be entitled to convert each share of common stock that
you
hold into approximately $7.60 per share. You will only be entitled to receive
cash for these shares if you continue to hold these shares through the closing
date of the Merger and then tender your stock certificate before 5 p.m. EST
on
the third business day after the Merger is consummated to our transfer agent,
Continental Stock Transfer & Trust Company, 17 Battery Place, New York, NY,
10004, Attention Greg Denman, (212) 845-3287. Assuming the Merger is approved,
we expect to close the transaction on the date of the Special Meeting or shortly
thereafter, and will provide public notice of the closing date. The Merger
will
not be consummated if the holders of more than 1,879,060 shares of common stock
issued in HAQ's IPO, an amount equal to less than 20% of such shares,
vote against the Merger Proposal and exercise their conversion rights. If the
Merger is not consummated, then these shares will not be converted into cash
immediately. If you convert your shares of common stock, you will still have
the
right to exercise the warrants received as part of the units purchased in our
IPO in accordance with the terms thereof and you will still have the right
to
attend the Special Meeting. If the Merger is not consummated, then your shares
will not be converted to cash after the Special Meeting, even if you so elected,
and your shares will be converted into cash upon liquidation of the trust.
15
Dissenters’
or Appraisal Rights (Page 54)
No
dissenters’ or appraisal rights are available under the Delaware General
Corporation Law to the stockholders of HAQ in connection with the proposals.
Any
stockholder of HAQ holding shares of common stock issued in HAQ's IPO who votes
against the Merger Proposal may, at the same time, demand that HAQ convert
his
shares into a pro rata portion of the trust account. If the holders of 20%,
or
1,880,000, or more shares of common stock issued in HAQ's IPO vote against
the
Merger Proposal and demand conversion of their shares into a pro rata portion
of
the trust account, HAQ will not be able to consummate the Merger. The only
rights for those stockholders voting against the Merger who wish to receive
cash
for their shares is to simultaneously demand payment for their shares from
the
trust account.
All
of
the holders of PharmAthene’s classes of preferred stock and stockholders
representing 80% of its outstanding common stock have approved the Merger
Proposal by written consent. The holders of PharmAthene common stock who did
not
consent to the Merger were provided with a notice, dated May 10, 2007, regarding
their possible appraisal rights under the Delaware General Corporation Law.
Pursuant to such notice and applicable law, dissenting stockholders were
required to notify PharmAthene within 20 days of the date of the notice of
their
election to exercise their appraisal rights. PharmAthene did not receive any
notices of such election.
Proxies
and Proxy Solicitation Costs
We
are
soliciting proxies on behalf of our Board of Directors. We and our directors,
officers and employees may also solicit proxies in person, by telephone or
by
other electronic means. These parties will not be paid any additional
compensation for soliciting proxies. Morrow & Co., Inc., a proxy
solicitation firm that we have engaged to assist us in soliciting proxies,
will
be paid its customary fee of approximately $12,500 plus $5 per solicited
stockholder and out-of-pocket expenses. Such fees will be paid with non-trust
account funds. We expect that the total fees and related expenses of Morrow
& Co. will not exceed $30,000.
We
will
ask banks, brokers and other institutions, nominees and fiduciaries to forward
proxy materials to their principals and to obtain their authority to execute
proxies and voting instructions. We may also reimburse them for their reasonable
expenses.
16
Stock
Ownership
The
following table sets forth information as of June 27, 2007, based on information
obtained from the persons named below, with respect to the beneficial ownership
of shares of HAQ’s common stock by (i) each person known by us to be the owner
of more than 5% of our outstanding shares of HAQ’s common stock, (ii) each
director and (iii) all officers and directors as a group. Except as indicated
in
the footnotes to the table, 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.
|
Name
and Address of Beneficial
Owner (1)
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class
|
|||||
|
John
Pappajohn (2)(3)
|
1,123,960
|
9.53
|
%
|
||||
|
Derace
L. Schaffer, M.D. (2)(4)
|
1,123,960
|
9.53
|
%
|
||||
|
Matthew
P. Kinley (2)(5)
|
561,980
|
4.79
|
%
|
||||
|
Edward
B. Berger (6)
|
34,500
|
*
|
|||||
|
Wayne
A. Schellhammer
|
22,500
|
*
|
|||||
|
Sapling,
LLC (7)
|
697,715
|
6.0
|
%
|
||||
|
Fir
Tree Recovery Master Fund, LP (7)
|
325,115
|
2.88
|
%
|
||||
|
QVT
Financial LP (8)
|
619,400
|
5.3
|
%
|
||||
|
Andrew
M. Weiss, PhD (9)
|
617,825
|
5.3
|
%
|
||||
|
All
directors and executive officers as a group (5) persons
|
2,866,900
|
24.35
|
%
|
||||
* Represents
beneficial ownership of less than 1%.
(1)
Includes shares of common stock issuable upon exercise of warrants which are
beneficially owned by certain of the persons named in the above table but which
are not exercisable until the later of (i) July 28, 2006 or (ii) the
consummation by us of a business combination (including our acquisition of
PharmAthene). Unless otherwise indicated, the business address of each of the
individuals is 2116 Financial Center, 666 Walnut Street, Des Moines, Iowa
50309.
(2)
On
May 2, 2007, three individuals adopted stock purchase plans intended to comply
with the provisions of SEC Rule 10b5-1.
Shares
purchased under such plans were purchased through an NASD member firm at its
discretion, subject to the terms of the plans. Pursuant to the adopted plans,
the individuals, John Pappajohn, Matthew Kinley and Derace Schaffer authorized
the following open market purchases:
|
Total
Shares
|
Share
Limit Per Day
|
||||||
|
John
Pappajohn
|
100,000
shares
|
10,000
shares
|
|||||
|
Derace
Schaffer
|
100,000
shares
|
10,000
shares
|
|||||
|
Matthew
Kinley
|
50,000
shares
|
5,000
shares
|
The
aggregate number of shares that were purchased did not exceed 250,000 shares.
Further, each individual adopted a daily limit on the number of shares
purchased which in the aggregate was not more than 25,000 shares. The
individuals purchased shares at prices up to $7.60 per share. The plans
expire on August 3, 2007.
(3)
Includes 141,960 warrants and 100,000 shares of common stock purchased on
behalf
of such person pursuant to the guidelines set forth in SEC Rule 10b5-1 under
a
Rule 10b5-1 Plan. See footnotes 1 and 2 above.
(4)
Includes 141,960 warrants and 100,000 shares of common stock purchased on
behalf
of such person pursuant to the guidelines set forth in SEC Rule 10b5-1 under
a
Rule 10b5-1 Plan. See footnotes 1 and 2 above.
(5)
Includes 70,980 warrants and 50,000 shares of common stock purchased on behalf
of such person pursuant to the guidelines set forth in SEC Rule 10b5-1 under
a
Rule 10b5-1 Plan. See footnotes 1 and 2 above.
(6)
Includes 12,000 warrants purchased by Mr. Berger in open market purchases.
See
footnote 1 above.
17
(7)
Based
on information contained in a Statement on Schedule 13G filed by Sapling LLC
in
February 2007. Sapling may direct the vote and disposition of the 697,715 shares
of common stock, and Fir Tree Recovery may direct the vote and disposition
of
325,115 shares of common stock. The address of both Sapling LLC and Fir Tree
Recovery is 535 Fifth Avenue, 31st Floor, New York, New York 10017. Fir Tree,
Inc. is the investment manager for each of Sapling LLC and Fir Tree Recovery
Master Fund, LP. Jeffrey Tannenbaum is the President of Fir Tree,
Inc. and
has
the power to vote or dispose of the securities held by these
entities.
(8)
Based
on information contained in a Statement on Schedule 13G filed by QVT Financial
LP on May 14, 2007. QVT Financial LP (“QVT Financial”) is the investment manager
for QVT Fund LP (the “Fund”), which beneficially owns 541,288 shares of HAQ
common stock. QVT Financial is also the investment manager for a separate
discretionary account managed for Deutsche Bank AG (the “Separate Account”),
which holds 78,112 shares of HAQ common stock. QVT Financial has the power
to
direct the vote and disposition of the HAQ common stock held by each of the
Fund
and the Separate Account. Accordingly, QVT Financial may be deemed to be
the
beneficial owner of an aggregate amount of 619,400 shares of HAQ common stock,
consisting of the shares owned by the Fund and the shares held in the Separate
Account QVT Financial GP LLC, as General Partner of QVT Financial, may be
deemed
to beneficially own the same number of shares of HAQ common stock reported
by
QVT Financial. Daniel Gold and Lars Bader are each managing members of each
of
QVT Financial LP and QVT Financial GP LLC and may therefore be considered
beneficial holders of the securities held by QVT Financial
LP.
(9)
Based
on information contained in a Statement on Schedule 13G filed by Weiss Asset
Management, LLC, Weiss Capital, LLC and Andrew Weiss, PhD on June 4, 2007.
Shares reported for Dr. Weiss include shares beneficially owned by a private
investment partnership of which Weiss Asset Management is the sole general
partner and which may be deemed to be controlled by Dr. Weiss, who is the
Managing Member of Weiss Asset Management, and also includes shares held by
a
private investment corporation which may be deemed to be controlled by Dr.
Weiss, who is the managing member of Weiss Capital, LLC the Investment Manager
of such private investment corporation. Dr. Weiss disclaims beneficial ownership
of the shares reported herein as beneficially owned by him except to the extent
of his pecuniary interest therein.
Other
than the shares purchased by Messrs. Pappajohn and Kinley and Dr. Schaffer
under
10b5-1 plans (an aggregate of 250,000 shares), all of the shares of HAQ common
stock held by our officers and directors were placed in escrow with Continental
Stock Transfer & Trust Company, as escrow agent, until the earliest of (i)
July 28, 2008; or (ii) the consummation of a liquidation, merger, stock exchange
or other similar transaction which results in all of our stockholders having
the
right to exchange their shares of common stock for cash, securities or other
property subsequent to our acquisition of PharmAthene.
During
the escrow period, the holders of these shares are not able to sell or transfer
their securities except to their spouses and children or to trusts established
for their benefit, but will retain all other rights as our stockholder
including, without limitation, the right to vote their shares of common stock
and the right to receive cash dividends, if declared. If dividends are declared
and payable in shares of common stock, such dividends will also be placed
in
escrow. If we are unable to effect a business combination and liquidate,
none of
these stockholders will receive any portion of the liquidation proceeds with
respect to common stock owned by them prior to HAQ’s IPO.
As
described above, certain of our officers and directors determined to purchase
shares of our common stock in open market transactions prior to the Special
Meeting pursuant to Rule 10b5-1 stock purchase plans. Shares purchased under
these plans (250,000 shares) are entitled to participate in the liquidation
of
the trust fund in the event the Merger is not approved. Our officers and
directors have advised us that they will vote the shares so purchased in
favor
of the Merger Proposal, Amendment Proposal, Incentive Plan Proposal and
Adjournment Proposal. As of June 27, 2007, a total of 250,000 shares have
been
purchased under these plans.
Reasons
for the Merger (Page 66)
No
fairness opinion from an independent third party was sought or obtained by
our
Board of Directors in reaching its determination because the Board of Directors
did not believe any such opinion was required to assist them in their decision
making process or added value to the stockholder voting process. In reaching
its
decision with respect to the Merger and the transactions contemplated thereby,
the Board of Directors reviewed various industry and financial data and the
due
diligence and evaluation materials of PharmAthene. During negotiations with
PharmAthene, the Board of Directors of HAQ determined that the value of
PharmAthene was within a range of $101.4 million and $168.8 million. In
addition, in reaching its decision to approve the Merger and the final terms
of
the consideration to be paid, the Board of Directors considered a number
of
factors including, but not limited to, the following:
18
| · |
the
involvement of certain of the stockholders and noteholders of PharmAthene,
whom HAQ believes represent strong long term investors with experience
in
venture transactions and growth companies and their willingness to
continue to be involved, as reflected in the agreement to accept
notes and
common stock as part of the Merger
Consideration;
|
| · |
the
experience of PharmAthene’s management, including David P. Wright,
PharmAthene’s Chief Executive Officer, in building and operating
PharmAthene’s business;
|
| · |
PharmAthene’s
existing products, and the award by U.S. government agencies of contracts
related to such products;
|
| · |
PharmAthene’s
business strategy;
|
| · |
PharmAthene’s
financial results, including potential for revenue growth and operating
margins.
|
| · |
PharmAthene’s
competitive position;
|
| · |
the
industry dynamics, including barriers to
entry;
|
| · |
the
regulatory environment for
PharmAthene;
|
| · |
acquisition
opportunities in the industry;
|
| · |
the
valuation of comparable companies;
|
| · |
the
experience of HAQ’s management, in particular, Mr. Pappajohn and Dr.
Schaffer, in building consolidating and investing in similar businesses
in
the U.S. including relationships HAQ could introduce to PharmAthene
to
potentially enhance its growth; and
|
| · |
the
agreement by the stockholders of PharmAthene to accept merger
consideration that was tied to the future growth of the business
of
PharmAthene, in that the convertible notes were negotiated to be
convertible at a premium to the existing market price of HAQ’s common
stock (the notes are convertible at $10.00 per share and the per
share
market price of HAQ’s Common Stock on January 18, 2007 was $7.45) and the
milestone payments are only payable upon attainment of actual revenue
targets and that the structure also preserved cash for the future
growth
of the company.
|
HAQ's
Board of Directors' Recommendation (Pages 73)
After
careful consideration of the terms and conditions of the Merger Agreement,
HAQ’s
Board of Directors has determined unanimously that the Merger Agreement and
the
transactions contemplated thereby are fair to, and in the best interests of,
HAQ
and its stockholders. Accordingly, HAQ's Board has unanimously approved
and declared advisable the Merger and unanimously recommends that the
stockholders vote or instruct their vote to be cast “FOR” the Merger
Proposal.
HAQ’s
Board of Directors has determined unanimously that the Amendment Proposal is
fair to, and in the best interest of HAQ and its stockholders. Accordingly,
HAQ’s Board of Directors has unanimously approved and declared advisable the
Amendment Proposal and unanimously recommends that you vote or instruct your
vote to be cast “FOR” the approval of the Amendment Proposal.
HAQ’s
Board of Directors has determined unanimously that the adoption of the Incentive
Plan is fair to, and in the best interests of, HAQ and its stockholders.
Accordingly, HAQ’s Board of Directors has unanimously approved and declared
advisable the adoption of the Incentive Plan and unanimously recommends that
you
vote or instruct your vote to be cast “FOR” the approval of the Incentive Plan
Proposal.
19
Interests
of HAQ Directors and Officers in the Merger (Page 65)
When
you
consider the recommendation of HAQ's Board of Directors that you vote in favor
of the Merger Proposal, you should keep in mind that certain of HAQ's Directors
and officers have interests in the Merger that are different from, or in
addition to, your interests as a stockholder. It is anticipated that after
the
consummation of the Merger, John Pappajohn and Derace L. Schaffer, MD, who
currently serve as two of our directors, will remain on the Board. All other
current HAQ Directors will resign. If the Merger is not approved, HAQ will
be
required to liquidate, and the warrants owned by certain of HAQ's directors
and
the shares of common stock issued at a price per share of $0.0111 prior to
HAQ's
IPO to and held by HAQ's executives and directors will be worthless because
HAQ's executives and directors are not entitled to receive any of the net
proceeds of HAQ's IPO that may be distributed upon liquidation of HAQ with
respect to shares or warrants previously purchased by them. Additionally, HAQ's
officers and directors who acquired shares of HAQ common stock prior to HAQ's
IPO at a price per share of $0.0111 will benefit if the Merger is approved
because they will continue to hold their shares.
20
The
table
below sets forth the value of the shares and warrants owned by the officers
and
directors of HAQ upon consummation of the Merger (not including shares
purchased
by such officers and directors in open market transactions, which are entitled
to participate in any liquidation of the Trust) and the unrealized profit
from
such securities based on an assumed market price of the common stock and
the
warrants of HAQ, as of June 27, 2007, of $7.27 and $1.00 respectively.
We have
not included in the table an aggregate of 250,000 shares owned by these
individuals because they were purchased in open market transactions, may
participate in liquidation of the trust and may be sold without any lock-up
period.
|
Common
Shares (a)
|
Warrants
(b)
|
||||||||||||||||||||||||
|
Owned
|
Amount
Paid
|
Current
Value
|
|
Unrealized
Profit
|
|
Owned
|
Amount
Paid
|
Current
Value
|
|
Unrealized
Profit
|
|||||||||||||||
|
John
Pappajohn
|
882,000
|
9,800
|
6,412,140
|
6,402,340
|
141,960
|
154,414
|
141,960
|
N/A
|
|||||||||||||||||
|
Derace
L. Schaffer, M.D.
|
882,000
|
9,800
|
6,412,140
|
6,402,340
|
141,960
|
154,414
|
141,960
|
N/A
|
|||||||||||||||||
|
Matthew
P. Kinley
|
441,000
|
4,900
|
3,206,070
|
3,201,170
|
70,980
|
77,242
|
70,980
|
N/A
|
|||||||||||||||||
|
Edward
B. Berger
|
22,500
|
250
|
163,575
|
163,325
|
12,000
|
12,917
|
12,000
|
N/A
|
|||||||||||||||||
|
Wayne
A. Schellhammer
|
22,500
|
250
|
163,575
|
163,325
|
-
|
||||||||||||||||||||
|
(a)
|
The
purchase price per share for these common shares was $0.0111 per
share.
Pursuant to escrow agreements signed by these stockholders, these
shares
may not be sold or pledged until July 28, 2008. Additionally, these
shares
are currently not registered, although after the release from escrow,
these stockholders may demand that HAQ use its best efforts to
register
the resale of such shares. Does not include an aggregate of 250,000
shares
of HAQ common stock that were purchased in open market transactions
effected in accordance with Rule 10b5-1 Plans and are not subject
to the
aforementioned lock up agreement. These shares were purchased at a
price of not less than $7.54 per share. This
table does not reflect 100,000, 100,000 and 50,000 shares of Common
Stock acquired by Mr. Pappajohn, Dr. Schaffer and Mr. Kinley,
respectively, in open market transactions in May
2007.
|
||||||||||||||||||||||||||||||||||||||||||||
|
|
|
||||||||||||||||||||||||||||||||||||||||||||
|
(b)
|
These
warrants were purchased pursuant to the guidelines set forth in
SEC Rule
10b5-1 in connection with a Rule 10b5-1 Plan.
|
||||||||||||||||||||||||||||||||||||||||||||
Interests
of PharmAthene Directors and Officers in the Merger
You
should understand that some of the current directors and officers of PharmAthene
have interests in the Merger that are different from, or in addition to, your
interests as a stockholder of HAQ. Following the closing of the Merger, a
majority of the members of the Board of Directors of the combined company will
consist of parties initially designated by PharmAthene or its noteholders.
In
particular, David Wright, PharmAthene’s current Chief Executive Officer, is
expected to become HAQ’s Chief Executive Officer and serve on our Board.
Further, David Wright is expected to enter into an employment agreement with
HAQ
in connection with the Merger.
For
so
long as at least 30% of the 8% convertible notes to be issued in the Merger
remain outstanding, the holders of the 8% convertible notes shall have the
right, as a separate class (and notwithstanding the existence of less than
three
such holders at any given time), to (a) elect three members to the Board of
Directors of HAQ and, (b) to the extent they elect to fill such committee
positions, appoint two of the three members of such committees of the Board.
It
is currently contemplated that Elizabeth Czerepak, Steven St. Peter, MD and
James Cavanaugh, Ph.D., who are currently members of the Board of Directors
of
PharmAthene, will be members of the HAQ Board of Directors following the Merger
as representatives of the noteholders.
In
addition, Elizabeth Czerepak, Steven St. Peter, MD and James Cavanaugh, Ph.D.
hold management positions with funds affiliated with Bear Stearns Health
Innoventures Management, LLC, MPM Capital L.P. and HealthCare Ventures VII,
L.P., respectively. Funds affiliated with Bear Stearns Health Innoventures
Management, LLC will beneficially own approximately 5.8% of the outstanding
voting shares of the combined company (and 20.3% of the HAQ 8% convertible
notes), funds affiliated with MPM Capital L.P. will beneficially own
approximately 14.1% of the outstanding voting securities of the combined company
(and 37.6% of the HAQ 8% convertible notes) and HealthCare Ventures VII, L.P.
will beneficially own approximately 13.4% of the outstanding voting securities
of the combined company (and 14.5% of the HAQ 8% convertible notes).
Accordingly, these funds will have the ability to exercise substantial influence
over the election of members of the HAQ Board of Directors and other matters
submitted to the stockholders of the combined company.
21
Interests
of The Maxim Group in the Merger; Fees
The
Maxim
Group served as an underwriter in our IPO and agreed to defer $720,000 of
its
underwriting discounts and commissions until after the consummation of a
business combination. Maxim has also served as our financial advisor in
connection with negotiating the Merger. The Maxim Group did not provide any
fairness opinion or formal analysis of the value of PharmAthene, the Merger
or
the merger consideration to the Board of HAQ. The deferred amount payable
in
connection with the IPO will be paid out of the trust account established
for
the proceeds of the IPO only if we consummate the Merger. Maxim, therefore,
has
an interest in our consummating the Merger that will result in the payment
of
its deferred compensation. Further, Maxim owns an option to purchase 225,000
units (comprised of one share and one warrant) at an exercise price of $10.00
per unit, received as consideration as underwriters in our IPO.
In
addition to receiving its deferred compensation, Maxim will receive fees of
$500,000 only upon completion of the Merger in consideration for its advisory
services to HAQ in connection with the Merger.
Interest
of The Bear Stearns Companies, Inc. in the Merger
Bear,
Stearns & Co. Inc. was retained by PharmAthene to advise PharmAthene in
connection with the negotiations of the terms of the Merger. For its services,
Bear, Stearns & Co. Inc. will receive a fee of $1,750,000 of which
$1,250,000 is contingent upon completion of the Merger. Bear
Stearns, therefore, has an interest in our consummating the Merger that will
result in the payment of such fee.
The
Bear
Stearns Companies, Inc. is the parent company of Bear, Stearns & Co. Inc.
and Bear Stearns Asset Management, Inc., which is the sole manager of Bear
Stearns Health Innoventures Management, LLC. Funds affiliated with Bear Stearns
Health Innoventures Management, LLC will beneficially own approximately 5.8%
of
the outstanding voting shares of the combined company (and 20.3% of the HAQ
8%
convertible notes) following the Merger. In addition, Elizabeth Czerepak is
a
member of Bear Stearns Health Innoventures Management, LLC and is expected
to be a member of the Board of Directors of HAQ following the
Merger.
Conditions
to the Consummation of the Merger
The
obligations of HAQ and PharmAthene to consummate the Merger are subject to
the
satisfaction or waiver of specified conditions before completion of the Merger,
including the following:
The
respective obligations of each of HAQ and PharmAthene to consummate the Merger
are subject to the satisfaction of, or waiver of, the following
conditions:
· the
receipt of HAQ stockholder approval;
· the
receipt of PharmAthene stockholder approval (which has been obtained and is
irrevocable);
· holders
of the outstanding notes of PharmAthene shall have executed the Note Exchange
Agreement;
· the
outstanding classes of preferred stock of PharmAthene, as well as related
warrants and side agreements are terminated in full; and
· the
absence of any order or injunction preventing consummation of the
merger.
Conditions
to HAQ's obligations:
The
obligation of HAQ to consummate the Merger is further subject to the following
conditions, among others:
· the
representations and warranties made by PharmAthene must be true and correct
in
all material respects;
22
· PharmAthene
must have performed in all material respects all obligations required to be
performed by it under the terms of the Merger Agreement;
· there
must not have occurred since the date of the Merger Agreement any material
adverse effect on PharmAthene’s financial condition or business;
and
· PharmAthene
shall have delivered to HAQ executed termination agreements from the holders
of
the PharmAthene preferred stock and noteholders whereby the holders of such
securities terminate all rights under any agreements entered into by PharmAthene
and such preferred stockholders and noteholders.
Conditions
to PharmAthene's obligations:
The
obligation of PharmAthene to consummate the Merger is further subject to the
following conditions, among others:
· the
representations and warranties made by HAQ and Merger Sub must be true and
correct in all respects;
· HAQ
and
Merger Sub must have performed in all material respects all obligations required
to be performed by it under the terms of the Merger Agreement;
· there
must not have occurred since the date of the Merger Agreement any material
adverse effect on the financial condition or business of HAQ or Merger
Sub;
· the
HAQ
certificate of incorporation shall have been amended and restated to provide
for
board designee rights of the 8% convertible noteholders; and
· the
12,500,000 shares of HAQ common stock issuable in the Merger and the shares
into
which the new 8% convertible notes to be issued in the Merger may be converted
shall have been accepted for listing on the American Stock
Exchange.
Termination,
Amendment and Waiver
The
Merger Agreement may be terminated at any time prior to the consummation of
the
Merger, whether before or after receipt of stockholder approval, as
follows:
· by
mutual
written consent of.
· by
either
party if the Merger is not consummated on or before August 3, 2007;
or
· by
either
party if any permanent injunction or other order of a court or other competent
authority preventing the consummation of the Merger shall have become final
and
nonappealable; or
· by
either
party if during any 15-day trading period following the execution of the Merger
Agreement and before its consummation, the average trading price of the
publicly-traded warrants of HAQ is below $0.20 per warrant.
· by
either
party if the other party has breached any of its covenant or representations
and
warranties in any material respect, subject to certain conditions and a right
to
cure, as further described below; or
· by
either
party if any of the conditions to the consummation of the Merger shall have
become incapable of fulfillment; or
· by
PharmAthene if HAQ has not held its Special Meeting of Stockholders to approve
the Merger Proposal within 35 days of the date of approval of the proxy
statement by the SEC; or
23
· by
PharmAthene if HAQ’s Board of Directors has withdrawn or changed its
recommendation to its stockholders regarding the Merger; or
· by
PharmAthene if more than 20% of the holders of the shares issued in HAQ’s IPO
entitled to vote on the Merger elect to convert such shares into cash from
the
Trust Fund.
If
permitted under applicable law, either HAQ or PharmAthene may waive conditions
for their own respective benefit and consummate the Merger, even though one
or
more of these conditions have not been met. We cannot assure you that all of
the
conditions will be satisfied or waived or that the Merger will
occur.
In
certain instances, more fully described below, either HAQ or PharmAthene may
be
liable for a termination fee of $250,000.
Regulatory
Matters
We
believe the Merger and the transactions contemplated by the Merger Agreement
are
not subject to any federal or state regulatory requirement or approval, except
for filings necessary to effectuate the transactions contemplated by the Merger
Proposal and the Amendment Proposal with the Secretary of State of the State
of
Delaware.
The
Amendment Proposal
HAQ
is
seeking stockholder approval to amend HAQ's amended and restated certificate
of
incorporation. Any amendment will not become effective unless and until the
Merger with PharmAthene is consummated. The material terms of such amendment
are
to: (i) change HAQ's name from “Healthcare Acquisition Corp.” to
“PharmAthene, Inc.” (ii) remove certain provisions containing procedural and
approval requirements applicable to HAQ prior to the consummation of the
business combination that will no longer be operative after the consummation
of
the Merger and (iii) grant to holders of certain secured,
convertible promissory notes the right to designate three members to the
Board of Directors of HAQ for so long as at least 30% of the original face
value
of such notes remain outstanding.
The
Incentive Plan Proposal
HAQ
is
seeking stockholder approval for the adoption of the Incentive Plan which will
provide for the granting of options and/or other stock-based or
stock-denominated awards. The material terms of such plan are:
· 3,500,000
shares of HAQ common stock will be reserved for issuance;
· the
Incentive Plan will be administered by the HAQ Board of Directors, or a
committee thereof, and any particular term of a grant or award shall be at
the
Board's discretion; and
· the
Incentive Plan will become effective upon the closing of the Merger with
PharmAthene.
The
Adjournment Proposal
If,
based
on the tabulated vote, there are not sufficient votes at the time of the Special
Meeting approving the Merger Proposal, HAQ's Board of Directors may submit
a
proposal to adjourn the Special Meeting to a later date or dates, if necessary,
to permit further solicitation of proxies. See the section entitled “The
Adjournment Proposal.” beginning on page 100.
24
HAQ
is
providing the following financial information to assist you in the analysis
of
the financial aspects of the Merger. We are providing the financial information
related to PharmAthene since, for accounting purposes, PharmAthene will be
deemed the acquiror. We derived PharmAthene’s historical information from the
unaudited condensed consolidated financial statements of PharmAthene as of
and
for each of the three months ended March 31, 2007 and 2006, respectively and
from the audited consolidated financial statements of PharmAthene as of and
for
the years ended December 31, 2006, December 31, 2005, and December 31, 2004.
The
information is only a summary and should be read in conjunction with the
historical consolidated financial statements and related notes contained
elsewhere herein. The historical results included below and elsewhere in this
proxy statement are not indicative of the future performance of
PharmAthene.
Selected
Historical Financials Statements of PharmAthene
|
Three
Months Ended March 31,
|
|||||||
|
|
2007
|
2006
|
|||||
|
Revenues
|
$
|
2,968,759
|
$
|
186,442
|
|||
|
Research
and Development
|
3,061,059
|
1,750,580
|
|||||
|
General
and Administrative
|
2,510,370
|
1,519,601
|
|||||
|
Operating
Loss
|
(2,749,803
|
)
|
(3,220,075
|
)
|
|||
|
Net
Loss attributable to common stockholders
|
$
|
(4,660,617
|
)
|
$
|
(5,130,584
|
)
|
|
|
Net
Loss per share:
|
|||||||
|
Basic
and Diluted
|
$
|
(0.37
|
)
|
$
|
(0.47
|
)
|
|
|
Weighted
Average Shares
|
|||||||
|
Outstanding
basic and diluted
|
12,483,819
|
10,942,906
|
|||||
|
Total
Assets
|
$
|
23,062,352
|
$
|
12,931,056
|
|||
|
Cash
and cash equivalents
|
11,910,718
|
3,833,759
|
|||||
|
Total
Liabilities
|
27,693,958
|
3,593,221
|
|||||
|
Total
Stockholders deficit
|
(74,432,848
|
)
|
(53,269,673
|
)
|
|||
|
Net
cash used in operating activities
|
$
|
(1,975,466
|
)
|
$
|
(2,871,462
|
)
|
|
|
Fiscal
Year Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Revenues
|
$
|
1,663,306
|
$
|
1,098,400
|
$
|
1,037,979
|
||||
|
Research
and Development
|
7,140,337
|
6,351,157
|
7,843,863
|
|||||||
|
General
and Administrative
|
8,572,963
|
5,009,267
|
3,327,571
|
|||||||
|
Acquired
in process Research and Development
|
—
|
12,812,000
|
—
|
|||||||
|
Operating
Loss
|
(14,533,640
|
)
|
(23,734,591
|
)
|
(10,158,653
|
)
|
||||
|
Net
Loss attributable to common stockholders
|
$
|
(21,723,058
|
)
|
$
|
(29,163,455
|
)
|
$
|
(12,441,644
|
)
|
|
|
Net
Loss per share:
|
||||||||||
|
Basic
and Diluted
|
$
|
(1.90
|
)
|
$
|
(2.70
|
)
|
$
|
(1.16
|
)
|
|
|
Weighted
Average Shares
|
||||||||||
|
Outstanding
basic and diluted
|
11,407,890
|
10,817,949
|
10,740,000
|
|||||||
|
Total
Assets
|
$
|
14,767,504
|
$
|
16,280,234
|
$
|
24,016,883
|
||||
|
Cash
and cash equivalents
|
5,112,212
|
7,938,116
|
21,662,117
|
|||||||
|
Total
Liabilities
|
16,617,596
|
3,514,292
|
1,639,689
|
|||||||
|
Total
Stockholders deficit
|
(69,787,803
|
)
|
(48,582,098
|
)
|
(19,899,650
|
)
|
||||
|
Net
cash used in operating activities
|
$
|
(13,530,005
|
)
|
$
|
(9,990,864
|
)
|
$
|
(12,833,092
|
)
|
|
25
HEALTHCARE
ACQUISITION CORP. SELECTED FINANCIAL DATA
HAQ
is
providing the following selected financial information to assist you in your
analysis of the financial aspects of the merger. The following selected
financial and other operating data should be read in conjunction with
"Healthcare Acquisition Corp.'s Management's Discussion and Analysis of
Financial Condition and Results of Operations" and its financial statements
and
the related notes to those statements included elsewhere in this proxy
statement. We derived HAQ's historical information from the audited and
unaudited financial statements included elsewhere herein. The historical results
included below and elsewhere in this proxy statement are not indicative of
the
future performance of HAQ.
|
BALANCE
SHEETS
|
|||||||
|
December
31, 2006
|
December
31, 2005
|
||||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
675,305
|
$
|
1,398,181
|
|||
|
Cash
held in trust
|
70,887,371
|
68,636,069
|
|||||
|
Prepaid
expense
|
54,115
|
52,500
|
|||||
|
Deferred
legal fees
|
121,953
|
-
|
|||||
|
Total
current assets
|
71,738,744
|
70,086,750
|
|||||
|
Total
assets
|
$
|
71,738,744
|
$
|
70,086,750
|
|||
|
Liabilities
and stockholders' equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
160,514
|
$
|
6,996
|
|||
|
Accrued
expenses
|
90,996
|
98,996
|
|||||
|
State
income tax payable
|
139,034
|
48,000
|
|||||
|
Capital
based taxes payable
|
64,072
|
115,000
|
|||||
|
Deferred
revenue
|
591,579
|
141,543
|
|||||
|
Total
current liabilities
|
1,046,195
|
410,535
|
|||||
|
Common
stock, subject to possible redemption
|
|||||||
|
1,879,060
shares, at conversion value
|
13,578,807
|
13,578,807
|
|||||
|
Stockholders'
equity
|
|||||||
|
Preferred
stock, $.0001 par value, 1,000,000 shares authorized; none
|
|||||||
|
issued
and outstanding
|
-
|
-
|
|||||
|
Common
stock, $.0001 par value, 100,000,000 shares authorized;
|
|||||||
|
11,650,000
shares issued and outstanding (which includes 1,879,060
|
|||||||
|
subject
to possible conversion)
|
1,165
|
1,165
|
|||||
|
Common
stock warrants (9,400,000 outstanding)
|
-
|
-
|
|||||
|
Additional
paid-in capital
|
55,818,948
|
55,818,948
|
|||||
|
Equity
accumulated during the development stage
|
1,293,629
|
277,295
|
|||||
|
Total
stockholders' equity
|
57,113,742
|
56,097,408
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
71,738,744
|
$
|
70,086,750
|
|||
26
|
March
31, 2007
|
December
31, 2006
|
||||||
|
Assets
|
(audited)
|
||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
467,388
|
$
|
675,305
|
|||
|
Cash
held in Trust Fund
|
71,486,888
|
70,887,371
|
|||||
|
Prepaid
expense
|
48,396
|
54,115
|
|||||
|
Deferred
merger fees
|
372,570
|
121,953
|
|||||
|
Total
current assets
|
72,375,242
|
71,738,744
|
|||||
|
Total
assets
|
$
|
72,375,242
|
$
|
71,738,744
|
|||
|
Liabilities
and stockholders' equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
354,654
|
$
|
160,514
|
|||
|
Accrued
expenses
|
83,496
|
90,996
|
|||||
|
State
income tax payable
|
160,000
|
139,034
|
|||||
|
Capital
based taxes payable
|
32,136
|
64,072
|
|||||
|
Deferred
revenue
|
711,422
|
591,579
|
|||||
|
Total
current liabilities
|
1,341,708
|
1,046,195
|
|||||
|
Common
stock, subject to possible redemption
|
|||||||
|
1,879,060
shares, at conversion value
|
13,578,807
|
13,578,807
|
|||||
|
Stockholders'
equity
|
|||||||
|
Preferred
stock, $.0001 par value, 1,000,000 shares
|
|||||||
|
authorized;
none issued and outstanding
|
-
|
-
|
|||||
|
Common
stock, $.0001 par value, 100,000,000 shares
|
|||||||
|
authorized;
11,650,000 shares issued and outstanding
|
|||||||
|
(which
includes 1,879,060 subject to possible conversion)
|
1,165
|
1,165
|
|||||
|
Common
stock warrants (9,400,000 outstanding)
|
-
|
-
|
|||||
|
Paid-in
capital in excess of par
|
55,818,948
|
55,818,948
|
|||||
|
Equity
accumulated during the development stage
|
1,634,614
|
1,293,629
|
|||||
|
Total
stockholders' equity
|
57,454,727
|
57,113,742
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
72,375,242
|
$
|
71,738,744
|
|||
27
|
STATEMENTS
OF OPERATIONS
|
||||||||||
|
For
the Year Ended December 31, 2006
|
For
the Period from April 25, 2005 (inception) to December 31,
2005
|
For
the Period from April 25, 2005 (inception) to December 31,
2006
|
||||||||
|
Revenues
|
||||||||||
|
Interest
income
|
$
|
46,446
|
$
|
19,548
|
$
|
65,994
|
||||
|
Interest
and dividend income from Trust Fund
|
1,801,266
|
566,526
|
2,367,792
|
|||||||
|
Total
revenues
|
1,847,712
|
586,074
|
2,433,786
|
|||||||
|
Costs
and expenses
|
||||||||||
|
Capital
based taxes
|
153,285
|
115,000
|
268,285
|
|||||||
|
Management
fees
|
90,000
|
37,986
|
127,986
|
|||||||
|
Insurance
|
95,815
|
37,500
|
133,315
|
|||||||
|
Legal
fees
|
156,391
|
31,036
|
187,427
|
|||||||
|
Travel
|
100,719
|
27,741
|
128,460
|
|||||||
|
General
and administrative
|
48,168
|
9,016
|
57,184
|
|||||||
|
Formation
costs
|
-
|
2,500
|
2,500
|
|||||||
|
Total
expenses
|
644,378
|
260,779
|
905,157
|
|||||||
|
Income
before taxes
|
1,203,334
|
325,295
|
1,528,629
|
|||||||
|
Provision
for income taxes
|
187,000
|
48,000
|
235,000
|
|||||||
|
Net
income
|
$
|
1,016,334
|
$
|
277,295
|
$
|
1,293,629
|
||||
|
Basic
earnings per share
|
$
|
0.09
|
$
|
0.04
|
||||||
|
Diluted
earnings per share
|
$
|
0.07
|
$
|
0.03
|
||||||
|
Weighted
average basic shares outstanding
|
11,650,000
|
7,869,200
|
||||||||
|
Weighted
average diluted shares outstanding
|
13,634,353
|
8,323,201
|
||||||||
28
|
For
the Three Months Ended March 31, 2007
|
For
the Three Months Ended March 31, 2006
|
For
the Period from April 25, 2005 (inception) to March 31,
2007
|
||||||||
|
Revenues
|
||||||||||
|
Interest
income
|
$
|
6,641
|
$
|
14,310
|
$
|
72,635
|
||||
|
Interest
and dividend income from Trust Fund
|
479,674
|
390,713
|
2,847,466
|
|||||||
|
Total
revenues
|
486,315
|
405,023
|
2,920,101
|
|||||||
|
Costs
and expenses
|
||||||||||
|
Capital
based taxes
|
32,136
|
41,168
|
300,421
|
|||||||
|
Management
fees
|
22,500
|
22,500
|
150,486
|
|||||||
|
Insurance
|
24,070
|
22,500
|
157,385
|
|||||||
|
Professional
fees
|
7,625
|
45,820
|
195,052
|
|||||||
|
Travel
|
17,055
|
19,403
|
145,515
|
|||||||
|
General
and administrative
|
20,978
|
16,182
|
78,162
|
|||||||
|
Formation
costs
|
-
|
-
|
2,500
|
|||||||
|
Total
expenses
|
124,364
|
167,573
|
1,029,521
|
|||||||
|
Income
before taxes
|
361,951
|
237,450
|
1,890,580
|
|||||||
|
Provision
for income taxes
|
20,966
|
33,000
|
255,966
|
|||||||
|
Net
income
|
$
|
340,985
|
$
|
204,450
|
$
|
1,634,614
|
||||
|
Basic
earnings per share
|
$
|
0.03
|
$
|
0.02
|
||||||
|
Diluted
earnings per share
|
$
|
0.02
|
$
|
0.01
|
||||||
|
Weighted
average basic shares outstanding
|
11,650,000
|
11,650,000
|
||||||||
|
Weighted
average diluted shares outstanding
|
13,667,801
|
13,725,325
|
||||||||
29
PRO
FORMA CAPITALIZATION OF COMBINED COMPANY
The
following table sets forth our unaudited total capitalization as of March 31,
2007 on an as adjusted basis to give effect to the consummation of the Merger,
including the pro forma capitalization reflecting maximum and minimum
stockholder approval. The following table does not reflect 3,500,000 shares
of
common stock reserved for the Incentive Plan also proposed for approval in
this
proxy statement.
|
After
Merger
with
|
|||||||||||||
|
PharmAthene,
Inc. Actual
(unaudited)
|
As
Adjusted
(unaudited)
|
Minimum
Stockholder
Approval
|
|
Maximum
Stockholder
Approval
|
|||||||||
|
Minority
Interest - Series C convertible redeemable preferred stock of PHTN
Canada,
par value $0.001 per share; unlimited shares authorized
|
$
|
2,624,605
|
$
|
2,624,605
|
|||||||||
|
Series
A convertible redeemable preferred stock, par value $0.001 per share;
authorized 16,442,000 shares
|
$
|
19,545,314
|
$
|
19,545,314
|
|||||||||
|
Series
B convertible redeemable preferred stock, par value $0.001 per share;
authorized 30,448,147 shares
|
$
|
32,543,119
|
$
|
32,543,119
|
|||||||||
|
Series
C convertible redeemable preferred stock, par value $0.001 per share;
authorized 22,799,574 shares
|
$
|
14,956,947
|
$
|
14,956,947
|
|||||||||
|
Stockholder’s
Equity
|
|||||||||||||
|
Preferred
stock $0.0001 par value; authorized 1,000,000; none issued and outstanding
|
$ | $ | $ | ||||||||||
|
Common
stock - $0.0001 par value; authorized 100,000,000 shares; 11,650,000
shares issued and outstanding (which includes 1,879,060 subject to
possible conversion)
|
$
|
1,165
|
$
|
2,179
|
$
|
2,367
|
|||||||
|
Common
stock, par value $0.0001 per share; authorized 147,089,104 shares,
12,483,472 shares issued and outstanding
|
$
|
12,485
|
$
|
12,485
|
|||||||||
|
Additional
paid-in capital
|
55,818,948
|
72,298,324
|
72,298,324
|
||||||||||
|
Accumulated
other comprehensive loss
|
118,772
|
118,772
|
118,772
|
118,772
|
|||||||||
|
Retained
Earnings (Accumulated Deficit)
|
(74,432,848
|
)
|
(72,798,234
|
)
|
(20,655,080
|
)
|
(6,126,062
|
)
|
|||||
|
Total
stockholders’ equity
|
$
|
(74,301,591
|
)
|
$
|
(16,846,864
|
)
|
51,764,195
|
66,293,401
|
|||||
|
Total
capitalization
|
$
|
(4,631,606
|
)
|
$
|
52,828,121
|
51,764,195
|
66,293,401
|
||||||
30
MARKET
PRICE INFORMATION AND DIVIDEND DATA FOR HAQ SECURITIES
HAQ
consummated its IPO on August 3, 2005. In the IPO, HAQ sold 9,000,000 units,
each consisting of one share of HAQ’s common stock and one warrant to purchase
common stock and on August 16, 2005, HAQ consummated the closing of an
additional 400,000 units that was subject to the underwriters over-allotment
option. The units were quoted on the AMEX from the consummation of the IPO
through October 6, 2005 under the symbol HAQ.U. On October 6, 2005, the common
stock and warrants included in the units began trading separately and the
trading in the units ceased on such date. The shares of HAQ common stock and
warrants are currently quoted on the American Stock Exchange under the symbols
“HAQ” and “HAQ.WS”, respectively. The closing price per share of common stock
and per warrant of HAQ on January 19, 2007, the last trading day before the
announcement of the execution of the Merger Agreement, were $7.46 and $1.60
(the
closing price on January 19, 2007), respectively. Each warrant entitles the
holder to purchase from HAQ one share of common stock at an exercise price
of
$6.00 commencing on the later of the consummation of a business combination
(if
consummated) or July 28, 2006. The HAQ warrants will expire at
5:00 p.m., New York City time, on July 27, 2009, or earlier upon
redemption. Prior to August 1, 2005, there was no established public
trading market for HAQ's securities.
The
following table sets forth, for the calendar quarter indicated, the quarterly
high and low sales prices of HAQ's common stock, warrants and units as reported
on the American Stock Exchange.
| Common Stock | Warrants | Units | |||||||||||||||||
|
Quarter Ended
|
High | Low | High | Low | High | Low | |||||||||||||
|
2007
|
$
|
8.00
|
$
|
7.28
|
$
|
1.60
|
$
|
.85
|
N/A
|
N/A
|
|||||||||
|
March
31, 2007
|
|||||||||||||||||||
|
2006
|
|||||||||||||||||||
|
December
31, 2006
|
$
|
7.40
|
$
|
7.04
|
$
|
1.35
|
$
|
0.78
|
N/A
|
N/A
|
|||||||||
|
September 30,
2006
|
$
|
8.05
|
$
|
7.12
|
$
|
2.00
|
$
|
1.01
|
N/A
|
N/A
|
|||||||||
|
June
30, 2006
|
$
|
8.45
|
$
|
7.50
|
$
|
2.40
|
$
|
1.524
|
N/A
|
N/A
|
|||||||||
|
March 31,
2006
|
$
|
9.08
|
$
|
6.96
|
$
|
2.52
|
$
|
1.40
|
N/A
|
N/A
|
|||||||||
|
2005
|
|||||||||||||||||||
|
December 31,
2005
|
$
|
7.20
|
$
|
6.75
|
$
|
1.75
|
$
|
0.985
|
N/A
|
N/A
|
|||||||||
|
September 30,
2005
|
$
|
N/A
|
N/A
|
N/A
|
N/A
|
$
|
8.25
|
$
|
8.00
|
||||||||||
On
June
27, 2007, the closing prices of our common stock and warrants were $7.27
and
$1.00, respectively. The current exercise price of the warrants is $6.00.
As of
March 31, 2007 each share of our common stock entitled to conversion into
a
portion of the trust fund would be entitled to receive $7.60 from the trust
fund. Holders of our warrants are not entitled to receive any proceeds from
the
trust fund.
Holders
As
of
June 15, 2007, the Record Date of the Special Meeting, there were 0 holders
of
record of units, 6 holders of record of the common stock and 1 holder of record
of the warrants. We estimate that there are 945 beneficial owners of our common
stock and a similar number of beneficial owners of our warrants.
Dividends
HAQ
has
not paid any cash dividends on its common stock and does not intend to pay
dividends prior to consummation of the Merger. It is the present intention
of
the Board of Directors to retain all earnings, if any, for use in the business
operations and, accordingly, the Board does not anticipate declaring dividends
in the foreseeable future.
31
You
should carefully consider the following risk factors, together with all of
the
other information included in this proxy statement, before you decide whether
to
vote or instruct your vote to be cast to adopt the Merger Proposal. As HAQ’s
operations will be those of PharmAthene upon consummation of the Merger, a
number of the following risk factors relate to the business and operations
of
PharmAthene and HAQ, as the successor to such business.
Risks
Particular to the Merger
The
Board of Directors of HAQ did not obtain any fairness opinion or independent
valuation analysis of PharmAthene, or that the merger consideration being paid
for PharmAthene was fair to the stockholders of HAQ and no assurance can be
given that the determination by HAQ’s Board of Directors represents the actual
value of PharmAthene or that you will receive the value of your
investment.
The
Board
of Directors of HAQ has not obtained an independent opinion regarding the
valuation of PharmAthene or that the terms of the Merger, including the
consideration to be paid, are fair to the stockholders of HAQ. Although the
Board of Directors of HAQ undertook analyses of the business and financial
conditions and prospects of PharmAthene in making its determination regarding
the fairness of the terms of the Merger and that the 80% requirement had
been
met, there can be no assurance that an independent analysis would arrive
at the
same conclusion. The Board of Directors and management of HAQ relied upon
their own business experience and the expertise of its individual members
in the
areas of mergers and acquisitions and finance in determining the value range
of
PharmAthene and whether the terms of the Merger are fair to HAQ stockholders.
However, some of their analyses are based on financial projections prepared
by
PharmAthene’s management and if these projections are not met or prove to be
unreasonable, there is a risk that the analyses will be unreasonable as well.
Although we have knowledge of PharmAthene’s business and the industry, it is
possible that the actual value of PharmAthene’s business is lower than HAQ could
realize upon a sale of the combined company or its assets. Although the Board
of
Directors of HAQ believes that it acted in good faith and otherwise in
accordance with Delaware law in reviewing and evaluating the terms of the
proposed Merger and in recommending the proposed Merger to the stockholders,
and
have provided in this Proxy Statement all material information considered
by
it. There can be no assurance that you will receive the value of your
investment upon disposition thereof.
HAQ’s
Board of Directors did not determine a specific value of PharmAthene at
the time
that it entered into the Merger Agreement and a stockholder interpreting
standards set forth in HAQ's IPO prospectus and its existing amended and
restated certificate of incorporation could interpret such standards differently
than HAQ's management interpreted such standards and could make a claim
against
HAQ for taking actions allegedly inconsistent with HAQ’s IPO prospectus, as a
result of which, HAQ may suffer monetary
losses.
HAQ's
IPO
prospectus stated and our existing amended and restated certificate of
incorporation provides that the fair market value of a business to be acquired
by HAQ would be determined by its Board of Directors based upon standards
generally accepted by the financial community such as actual and potential
sales, earnings and cash flow and book value. Our Board of Directors, based
upon
these factors, and its review of the business, financial condition and
operations of PharmAthene, determined that the purchase price that was
negotiated represents the fair value of PharmAthene and, therefore, exceeds
the
80% requirement. A stockholder could, however, make a claim against HAQ
that it
failed to comply with the terms of HAQ’s existing amended and restated
certificate of incorporation when evaluating the proposed merger with
PharmAthene.
HAQ
stockholders will experience immediate dilution as a consequence of the
issuance
of shares of HAQ common stock as consideration in the Merger. Having
a minority
share position may reduce the influence that HAQ’s current stockholders have on
the management of the combined company.
Although
HAQ would vigorously contest any such claim, it
could incur considerable expense in defending such a claim. If HAQ were
not
successful, it would be liable for damages as determined by a court or
may have
to make payments in connection with settling such claim.
Failure
to consummate the Merger could negatively impact the market price of HAQ’s
common stock, resulting, ultimately, in the disbursement of the trust proceeds,
causing investors to experience a loss on their
investment.
If
the
Merger is not completed for any reason, HAQ may be subject to a number of
material risks, including:
|
•
|
the
market price of HAQ’s common stock may decline to the extent that the
current market price of its common stock reflects a market assumption
that
the Merger will be consummated;
and
|
|
•
|
certain
costs related to the Merger, such as legal and accounting fees
which have
not been waived, must be paid even if the Merger is not completed
to the
extent we are not indemnified for such costs by our officers
and
directors, thereby reducing the amount in trust for
distribution.
|
We
have
as of March 31, 2007, claims from creditors, vendors and tax authorities
of
$630,000 which have not been waived. Our officers and directors have
agreed to
indemnify HAQ for all but $280,000 of such claims. As a result, the amount
in
trust available for distribution upon liquidation, could be reduced by
the
amount of $280,000. We estimate that as of March 31, 2007, there would
be
approximately $7.60 per share available from the trust in the event of
liquidation. To the extent that investors paid more than $7.60 per share
and we
are required to liquidate because the Merger is not completed, investors
would
incur a loss in their investment.
HAQ
stockholders will experience immediate dilution as a consequence of the issuance
of shares of HAQ common stock as consideration in the Merger. Having a minority
share position may reduce the influence that HAQ’s current stockholders have on
the management of the combined company.
Following
the consummation of the Merger, the influence of HAQ’s current stockholders, in
their capacity as stockholders of the combined company, will be significantly
reduced. HAQ’s current stockholders will hold, in the aggregate, approximately
48% of the issued and outstanding shares of the combined company (assuming
all
PharmAthene options and warrants assumed by HAQ are exercised and excluding
as
outstanding for purposes of the calculation securities issuable upon the
exercise of HAQ’s outstanding warrants, upon the exercise of the purchase option
issued to underwriters in HAQ’s IPO and upon conversion of the 8% convertible
notes to be issued in the Merger).
32
Moreover,
following the Merger, funds affiliated with MPM Capital, L.P., HealthCare
Ventures VII, L.P. and Bear Stearns Health Innoventures Management LLC will
beneficially own approximately 14.1%, 13.4% and 5.8%, respectively, (33.3%
in
the aggregate) of the outstanding voting shares of the combined company and,
therefore, will have the ability to exercise substantial influence over the
election of Directors and other issues submitted to the stockholders of the
combined company. Funds affiliated with MPM Capital L.P., HealthCare Ventures
VI, L.P. and Bear Stearns Health Innoventures LLC, will beneficially own
approximately 37.6%, 14.5% and 20.3% respectively, (72.4% in the aggregate)
of
the outstanding HAQ 8% convertible notes pursuant to the Merger Agreement.
The
parties have agreed that the noteholders shall have the right to elect three
designees to serve on the Board of Directors of the combined company so long
as
they continue to hold, in the aggregate, at least 30% of the original face
amount of such notes. The concentration of ownership, as well as the Board
designee provision of the Merger Agreement, may have the effect of delaying
or
preventing a change in control of the combined company even if such a change
in
control would be in your interest.
HAQ’s
dividend policy may reduce the value of your
investment.
Following
the Merger, HAQ does not intend that it will in the foreseeable future declare
or pay any cash dividend on its shares and anticipates that earnings, if any,
will be used to finance the development and expansion of its business. Any
payment of future dividends and the amounts thereof will be dependent upon
earnings, financial requirements and other factors deemed relevant by its Board
of Directors, including its contractual obligations, if any.
HAQ
may waive one or more conditions to the Merger without resoliciting stockholder
approval for the Merger.
One
or
more conditions to HAQ’s obligation to complete the Merger may be waived in
whole or in part to the extent legally allowable either unilaterally or by
agreement of PharmAthene and HAQ. Depending upon the condition, the Board of
Directors of HAQ, will evaluate the materiality of any such waiver to determine
whether amendment to this proxy statement and re-solicitation of proxies as
necessary. In the event that the Board of Directors of HAQ determines any such
waivers are not significant enough to require re-solicitation of stockholders,
it would have the discretion to complete the Merger without seeking further
stockholder approval.
HAQ’s
stock price is, and is expected to remain, volatile, which could limit
investors’ ability to sell stock at a profit.
The
volatile price of our stock makes it difficult for investors to predict the
value of their investment, to sell shares at a profit at any given time, or
to
plan purchases and sales in advance. A variety of factors may affect the market
price of our common stock. These include, but are not limited to:
· publicity
regarding actual or potential clinical results relating to products under
development by our competitors or us;
· delay
or
failure in initiating, completing or analyzing pre-clinical or clinical trials
or the unsatisfactory design or results of these trials;
· achievement
or rejection of regulatory approvals by our competitors or us;
· announcements
of technological innovations or new commercial products by our competitors
or
us;
· developments
concerning proprietary rights, including patents;
· developments
concerning our collaborations;
· regulatory
developments in the U.S. and foreign countries;
· economic
or other crises and other external factors;
· period-to-period
fluctuations in our revenues and other results of operations;
· changes
in financial estimates by securities analysts; and
· sales
and
short selling activity of our common stock.
Additionally,
because there is minimal volume of trading in our stock, any information about
PharmAthene in the media may result in significant volatility in our stock
price.
We
will
not be able to control many of these factors, and we believe that
period-to-period comparisons of our financial results will not necessarily
be
indicative of our future performance.
In
addition, the stock market in general, and the market for biopharmaceutical
and
biotechnology companies in particular, has experienced extreme price and volume
fluctuations that may have been unrelated or disproportionate to the operating
performance of individual companies. These broad market and industry factors
may
seriously harm the market price of our common stock, regardless of our operating
performance.
33
Risks
Related to the Business of PharmAthene
It
is expected that PharmAthene will incur net losses and negative cash flow for
the foreseeable future and we cannot guarantee that we will achieve
profitability and our business, results of operations, and financial condition
may be materially adversely affected.
PharmAthene
has incurred significant losses since it commenced operations. For the year
ended December 31, 2006, PharmAthene incurred an operating loss of approximately
$14.5 million. The pro forma combined accumulated deficit of the combined
company is approximately $68.6 million at December 31, 2006. For the three
months ended March 31, 2007, PharmAthene incurred an operating loss of
approximately $2.7 million and the pro forma combined accumulated deficit of
the
combined company is approximately $72.8 million at March 31, 2007. PharmAthene’s
losses to date have resulted principally from research and development costs
related to the development of its product candidates and general and
administrative costs related to its operations.
It
is
expected that the combined company will incur substantial losses for the
foreseeable future as a result of increases in its research and development
costs, including costs associated with conducting preclinical testing, clinical
trials and regulatory compliance activities.
The
combined company’s likelihood for achieving profitability will depend on
numerous factors, including success in:
· developing
and testing new product candidates;
· carrying
out the combined company’s intellectual property strategy;
· establishing
the combined company’s competitive position;
· pursuing
third-party collaborations;
· acquiring
or in-licensing products;
· receiving
regulatory approvals;
· manufacturing
and marketing products; and
· continuing
to receive government funding and identifying new government funding
opportunities.
Many
of
these factors will depend on circumstances beyond the combined company’s
control. We cannot guarantee that we will achieve sufficient revenues for
profitability. Even if we do achieve profitability, we cannot guarantee that
we
can sustain or increase profitability on a quarterly or annual basis in the
future. If revenues grow slower than we anticipate, or if operating expenses
exceed our expectations or cannot be adjusted accordingly, then our business,
results of operations, financial condition and cash flows will be materially
and
adversely affected. Because our strategy might include acquisitions of other
businesses, acquisition expenses and any cash used to make these acquisitions
will reduce our available cash.
PharmAthene
is in various stages of product development and there can be no assurance of
successful commercialization.
PharmAthene
has not commercialized any products or recognized any revenues from product
sales. In general, PharmAthene’s research and development programs are at early
stages. To obtain FDA approval for PharmAthene’s biological warfare defense
products under current FDA regulations, PharmAthene will be required to perform
two animal model studies for efficacy and provide animal and human safety data.
PharmAthene’s other products will be subject to the relevant approval guidelines
under FDA requirements which include a number of phases of testing in humans.
Even if PharmAthene initially receives positive pre-clinical or clinical
results, such results may not be indicative of similar results that could be
anticipated in the later stages of drug development, such as additional
pre-clinical testing or human clinical trials.
34
Other
than the Valortim™ product candidate, the research and development program for
PharmAthene is at an early stage. Other drug candidates developed by the
combined company will require significant additional research and development
efforts, including extensive pre-clinical and clinical testing and regulatory
approval, prior to commercial sale. We cannot be sure that PharmAthene’s
approach to drug discovery will be effective or will result in the development
of any drug. HAQ does not expect that any drugs resulting from the research
and
development efforts of PharmAthene will be commercially available for several
years, if at all. Even if PharmAthene succeeds in developing and commercializing
its product candidates, it may never generate sufficient or sustainable revenues
to enable it to be profitable. Furthermore, even if the product candidates
of
PharmAthene are successful when tested in animals, such success would not be
a
guarantee of the effectiveness and safety of such product candidates in humans.
PharmAthene’s first product, its Dominate Negative Inhibitor (“DNI”), was
demonstrated to be effective in animal testing, but was determined to be unsafe
for humans following clinical trials in human subjects. The DNI program was
subsequently terminated. There can be no assurances that one or more of
PharmAthene’s future product candidates would not similarly fail to meet safety
standards in human testing, even if those product candidates were found to
be
effective in animal studies. There can be no assurances that any such product
candidates will prove to be effective in humans.
Most
of PharmAthene’s immediately foreseeable future revenues are contingent upon
grants and contracts from the U.S. government and collaborative and license
agreements and PharmAthene may not achieve sufficient revenues from these
agreements to attain profitability.
Until
and
unless PharmAthene successfully markets a product, its ability to generate
revenues will largely depend on its ability to enter into additional
collaborative agreements, strategic alliances, research grants, contracts and
license agreements with third parties, including, without limitation, the U.S.
government and branches and agencies thereof, and maintain the agreements it
currently has in place. Substantially all of the revenue of PharmAthene for
the
years ended December 31, 2006, 2005 and 2004, respectively, were derived from
revenues related to grants, contracts and license agreements.
In
addition, PharmAthene’s business plan calls for significant payments from
milestone based collaborative agreements. PharmAthene may not earn significant
milestone payments under its existing collaborative agreements until its
collaborators have advanced products into clinical testing, which may not occur
for many years, if at all.
PharmAthene
has a material agreement with Medarex, Inc., to develop Valortim™, its fully
human monoclonal antibody product designed to protect against and treat
inhalation anthrax. Under the agreement with Medarex, PharmAthene will be
entitled to a variable percentage of profits derived from sales of Valortim™,
depending, in part, on the amount of its investment. In addition,
PharmAthene has entered into licensing and research and development agreements
with a number of other parties and collaborators.
PharmAthene
may need additional capital in the future. If additional capital is not
available or not available on acceptable terms, PharmAthene may be forced to
delay or curtail the development of its product
candidates.
PharmAthene’s
requirements for additional capital may be substantial and will depend on many
other factors, including:
· continued
funding by the Department of Defense and other branches and agencies of the
U.S.
Government;
· payments
received under present or future collaborative partner agreements;
· continued
progress of research and development of PharmAthene’s products;
· PharmAthene’s
ability to license compounds or products from others;
· costs
associated with protecting PharmAthene’s intellectual property
rights;
· development
of marketing and sales capabilities; and
· market
acceptance of PharmAthene’s products.
35
To
the
extent PharmAthene’s capital resources are insufficient to meet future capital
requirements, it will have to raise additional funds to continue the development
of its product candidates. We cannot assure you that funds will be available
on
favorable terms, if at all. To the extent PharmAthene raises additional capital
through the sale of securities, the issuance of those securities could result
in
dilution which may be substantial to the PharmAthene’s stockholders. In
addition, if PharmAthene incurs debt financing, a substantial portion of its
operating cash flow may be dedicated to the payment of principal and interest
on
such indebtedness, thus limiting funds available for PharmAthene’s business
activities. If adequate funds are not available, PharmAthene may be required
to
curtail significantly its development and commercialization
activities.
Biodefense
treatment and drug development is an expensive and uncertain process, and delay
or failure can occur at any stage of the combined company’s development
process.
To
develop and commercialize biodefense treatment and drug candidates, PharmAthene
must provide the FDA and foreign regulatory authorities with clinical data
that
demonstrates adequate safety and immune response. This involves engaging in
clinical trials, which is a lengthy and expensive process, the outcome of which
is uncertain. Because humans are not normally exposed to anthrax, nerve agents,
smallpox or to other lethal biotoxins or chemical agents, statistically
significant effectiveness of PharmAthene’s biodefense product candidates cannot
be demonstrated in humans, but instead must be demonstrated, in part, by
utilizing animal models before they can be approved for commercial sale. Delays
in obtaining results can occur for a variety of reasons such as slower than
anticipated enrollment by volunteers in the trials, adverse events related
to
the products and unsatisfactory results of any trial. Any delay or adverse
clinical event arising during any of its clinical trials could force PharmAthene
to abandon a product altogether or to conduct additional clinical trials in
order to obtain approval from the FDA and other regulatory bodies. PharmAthene’s
development costs will increase substantially if it experiences material delays
in any clinical trials or if it needs to conduct more or larger trials than
planned. Additionally, few facilities in the U.S. have the capability of testing
animals with anthrax or nerve agent exposure. PharmAthene may not be able to
secure clinical contracts to conduct the testing in a predictable timeframe
or
at all. Further, if delays are significant, or if any of PharmAthene’s products
do not prove to be safe or effective or do not receive required regulatory
approvals, and PharmAthene will be unable to recognize revenues from the sale
of
products, the commercial prospects for its product candidates will be adversely
affected.
Even
if PharmAthene completes
the development of its nerve agent countermeasure and anthrax treatment product,
if PharmAthene fails to obtain contracts to supply products to the U.S.
government or the U.S. government does not purchase sufficient quantities of
its
products, PharmAthene may
be unable to generate sufficient revenues to continue
operations.
The
U.S.
government has undertaken commitments to help secure improved countermeasures
against bioterrorism including the stockpiling of treatments and vaccines for
anthrax through a program known as the Strategic National Stockpile. However,
the process of obtaining government contracts is lengthy and uncertain and
PharmAthene will have to compete with other companies for each contract. There
can be no assurances that PharmAthene will be awarded any contracts to supply
the U.S. government with its products as such awards may be made, in whole
or in
part, to PharmAthene’s competitors. If the U.S. government makes significant
future contract awards for the supply of its emergency stockpile to
PharmAthene’s competitors, PharmAthene’s business will be harmed and it is
unlikely that PharmAthene will ultimately be able to commercialize that
particular treatment or product.
Further,
changes in government budgets and agendas may result in a decreased and
de-prioritized emphasis on procuring the biodefense products PharmAthene will
develop. In addition, government contracts typically contain provisions that
permit cancellation in the event that funds become unavailable to the
governmental agency. If the U.S. government makes significant future contract
awards to PharmAthene’s competitors at the exclusion of PharmAthene or otherwise
fails to purchase PharmAthene’s products, it is unlikely that PharmAthene will
ultimately be able to commercialize that particular treatment or product or
that
it will be able to generate sufficient revenues to continue operations.
U.S.
government agencies have special contracting requirements, which give them
the
ability to unilaterally control its contracts with
PharmAthene.
PharmAthene
anticipates that its primary sales will be to the U.S. government. U.S.
government contracts typically contain unfavorable termination provisions and
are subject to audit and modification by the government at its sole discretion,
which will subject PharmAthene to additional risks. These risks include the
ability of the U.S. government to unilaterally:
36
· suspend
or prevent PharmAthene for a set period of time from receiving new contracts
or
extending existing contracts based on violations or suspected violations of
laws
or regulations;
· terminate
PharmAthene’s contracts;
· reduce
the scope and value of PharmAthene’s contracts;
· audit
and
object to PharmAthene’s contract-related costs and fees, including allocated
indirect costs;
· control
and potentially prohibit the export of PharmAthene’s products; and
· change
certain terms and conditions in PharmAthene’s contracts.
The
U.S.
government will be able to terminate any of its contracts with PharmAthene
either for its convenience or if PharmAthene defaults by failing to perform
in
accordance with the contract schedule and terms. Termination for convenience
provisions would generally enable PharmAthene to recover only PharmAthene’s
costs incurred or committed, and settlement expenses and profit on the work
completed prior to termination. Termination for default provisions do not permit
these recoveries and would make PharmAthene liable for excess costs incurred
by
the U.S. government in procuring undelivered items from another
source.
PharmAthene
may fail to fully realize the potential of Valortim™ and of its co-development
arrangement with its partner in the development of Valortim™ which would have an
adverse affect upon its business.
PharmAthene
and its development partner have completed the first Phase I clinical trial
for
Valortim™ without any reported adverse reactions. However, before it may begin
selling any doses of Valortim™, it will need to conduct a more comprehensive
Phase I trial to a significantly larger group of subjects. PharmAthene will
be
required to expend a significant amount to scale up manufacturing capability
through a contract manufacturer in order to conduct the more extensive Phase
I
clinical trial. PharmAthene does not expect to commence this trial until 2008.
If PharmAthene’s contract manufacturer is unable to produce sufficient
quantities at a reasonable cost, then PharmAthene will be unable to commence
the
necessary clinical trials necessary to begin marketing Valortim™. Even after
PharmAthene expends the sufficient funds to complete the development of
Valortim™ and when and if it enters into an agreement to market Valortim™ to the
U.S, government, it will be required to share any and all profits from the
sale
of products with its partner in accordance with a pre-determined formula.
If
PharmAthene cannot enter into new licensing arrangements, its ability to develop
a diverse product portfolio could be limited and its ability to compete would
be
harmed.
A
component of PharmAthene’s business strategy will be in-licensing compounds and
products developed by other pharmaceutical and biotechnology companies or
academic research laboratories that may be marketed and developed or improved
upon using PharmAthene’s novel technologies. Competition for promising compounds
or products can be intense. If PharmAthene is not able to identify new licensing
opportunities or enter into other licensing arrangements on acceptable terms,
it
may be unable to develop a diverse portfolio of products.
PharmAthene
will face competition from several companies with greater financial, personnel
and research and development resources. Its commercial opportunities may be
reduced or eliminated if its competitors are more successful in the development
and marketing of their products.
The
biopharmaceutical industry is characterized by rapid and significant
technological change. PharmAthene’s success will depend on its ability to
develop and apply its technologies in the design and development of its product
candidates and to establish and maintain a market for its product candidates.
There also are many companies, both public and private, including major
pharmaceutical and chemical companies, specialized biotechnology firms,
universities and other research institutions engaged in developing
pharmaceutical and biotechnology products. Many of these companies have
substantially greater financial, technical, research and development, and human
resources than those of PharmAthene. Competitors may develop products or other
technologies that are more effective than any that are being developed by
PharmAthene or may obtain FDA approval for products more rapidly. If PharmAthene
commences commercial sales of products, it still must compete in the
manufacturing and marketing of such products, areas in which it has limited
experience. Many of these companies also have manufacturing facilities and
established marketing capabilities that would enable such companies to market
competing products through existing channels of distribution. PharmAthene’s
commercial opportunities will be reduced or eliminated if its competitors
develop and market products for any of the harmful effects that it targets
that:
37
· are
more
effective;
· have
fewer or less severe adverse side effects;
· are
more
adaptable to various modes of dosing;
· are
easier to administer; or
· are
less
expensive than the products or product candidates PharmAthene will be
developing.
Even
if
PharmAthene is successful in developing effective products, and obtains FDA
and
other regulatory approvals necessary for commercializing them, its products
may
not compete effectively with other successful products. PharmAthene’s
competitors may succeed in developing and marketing products either that are
more effective than those that it may develop, alone or with its collaborators,
making its products obsolete, or that are marketed before any products that
PharmAthene develops are marketed.
Companies
that are developing products that would compete with PharmAthene’s products
include: VaxGen, Inc., which is developing vaccines against anthrax and
smallpox; Avant Immunotherapeutics, Inc., which has vaccine programs for agents
of biological warfare, including plague and anthrax; Human Genome Sciences,
Inc., Elusys Therapeutics, Inc. and AVANIR Pharmaceuticals, Inc., all of which
are developing monoclonal antibodies as anthrax treatments. Other competitors
of
PharmAthene include: Emergent Biosolutions Inc., Merck & Co., Inc., Bio
Sante Pharmaceuticals, Inc., Dynport Vaccine Company, LLC (“DVC”) and Ligocyte
Pharmaceuticals, Inc.
Political
or social factors may delay or impair PharmAthene’s ability to market its
products and its business may be materially adversely
affected.
Products
developed to treat diseases caused by, or to combat the threat of, bioterrorism
will be subject to changing political and social environments. The political
and
social responses to bioterrorism have been unpredictable. Political or social
pressures may delay or cause resistance to bringing PharmAthene’s products to
market or limit pricing of its products, which would harm PharmAthene’s
business.
The
U.S. government’s determination to award any contracts to PharmAthene may be
challenged by an interested party, such as another bidder, at the General
Accounting Office or in federal court. If such a challenge is successful, a
contract may be terminated.
The
laws
and regulations governing the procurement of goods and services by the U.S.
government provide procedures by which other bidders and other interested
parties may challenge the award of a government contract. In the event that
PharmAthene is awarded a government contract, such protests could be filed
even
if there are not any valid legal grounds on which to base the protest. If any
such protests are filed, the government agency may decide to suspend
PharmAthene’s performance under the contract while such protests are being
considered by the General Accounting Office or the applicable federal court,
thus potentially delaying delivery of goods and services and payment. In
addition, PharmAthene could be forced to expend considerable funds to defend
any
potential award. If a protest is successful, the government may be ordered
to
terminate PharmAthene’s contract at its convenience and reselect bids. The
government could even be directed to award a potential contract to one of the
other bidders.
Legal
and Regulatory Risks of Development Stage Biotechnology
Companies
PharmAthene’s
commercial success will be affected significantly by its ability to obtain
protection for its proprietary technology and that of its licensors and
collaborators and not infringe the patents and proprietary rights of third
parties.
The
patent position of biotechnology firms generally is highly uncertain and
involves complex legal and factual questions. To date, no consistent policy
has
emerged regarding the breadth of claims allowed in biotechnology patents.
PharmAthene currently holds two U.S. patents and has five U.S. patent
applications pending. In addition, it has rights under numerous other patents
and patent applications pursuant to exclusive and non-exclusive license
arrangements with licensors and collaborators. However, there can be no
assurance that patent applications owned or licensed by PharmAthene will result
in patents being issued or that the patents, existing or issued in the future,
will afford protection against competitors with similar technology. Any
conflicts resulting from third-party patent applications and patents could
significantly reduce the coverage of the patents owned, optioned by or licensed
to PharmAthene or its collaborators and limit the ability of PharmAthene or
that
of its collaborators to obtain meaningful patent protection.
38
Further,
the commercial success of PharmAthene will depend significantly on its ability
to operate without infringing the patents and proprietary rights of third
parties. PharmAthene is aware of one U.S. patent covering recombinant production
of an antibody, which, it has been argued, covers any reproduction of an
antibody, as well as another U.S. patent application with claims over pegylated
butyrylcholinesterase. Although PharmAthene believes that neither Valortim™,
which is a monoclonal antibody and uses recombinant reproduction of antibodies,
nor Protexia®,
which
uses pegylated butyrylcholinesterase technology, infringes on any valid claims
of such patents, PharmAthene cannot provide any assurances that if a legal
action based on either of these two patents were to be brought against
PharmAthene or its distributors, licensees or collaborators, that PharmAthene
or
its distributors, licensees or collaborators would prevail or that PharmAthene
would have sufficient funds or resources to defend such claims. If patents
are
issued to third parties that contain competitive or conflicting claims,
PharmAthene, its licensors or collaborators may be legally prohibited from
researching, developing or commercializing potential products or be required
to
obtain licenses to these patents or to develop or obtain alternative technology.
PharmAthene, its licensors and/or its collaborators may be legally prohibited
from using patented technology, may not be able to obtain any license to the
patents and technologies of third parties on acceptable terms, if at all, or
may
not be able to obtain or develop alternative technologies.
The
costs
associated with establishing the validity of patents, of defending against
patent infringement claims of others and of asserting infringement claims
against others is expensive and time consuming, even if the outcome is
favorable. An outcome of any patent prosecution or litigation that is
unfavorable to PharmAthene or one of its licensors or collaborators may have
a
material adverse effect on PharmAthene.
Any
inability to protect PharmAthene’s intellectual property could harm its
competitive position and adversely affect its
business.
PharmAthene’s
success will depend, in part, on its ability to obtain patents and maintain
adequate protection of other intellectual property for its technologies and
products in the U.S. and other countries. If PharmAthene does not adequately
protect its intellectual property, competitors may be able to use its
technologies and erode or negate its competitive advantages. Further, the laws
of some foreign countries will not protect PharmAthene’s proprietary rights to
the same extent as the laws of the U.S., and PharmAthene may encounter
significant problems in protecting its proprietary rights in these foreign
countries.
The
patent positions of pharmaceutical and biotechnology companies, including
PharmAthene’s patent positions, involve complex legal and factual questions and,
therefore, validity and enforceability cannot be predicted with certainty.
Patents may be challenged, deemed unenforceable, invalidated or circumvented.
PharmAthene will be able to protect its proprietary rights from unauthorized
use
by third parties only to the extent that it covers its proprietary technologies
with valid and enforceable patents or that it effectively maintains such
proprietary technologies as trade secrets. PharmAthene will apply for patents
covering its technologies and product candidates as it deems appropriate.
PharmAthene may fail to apply for patents on important technologies or products
in a timely fashion, or at all, and in any event, the applications PharmAthene
files may be challenged and may not result in issued patents. Any future patents
PharmAthene obtains may not be sufficiently broad to prevent others from
practicing its technologies or from developing competing products. Furthermore,
others may independently develop similar or alternative technologies or design
around PharmAthene’s patented technologies. In addition, if challenged,
PharmAthene’s patents may be declared invalid. Even if valid, PharmAthene’s
patents may fail to provide it with any competitive advantages.
PharmAthene
will rely upon trade secrets protection for its confidential and proprietary
information. PharmAthene has taken measures to protect their proprietary
information; however, these measures may not provide adequate protection to
PharmAthene. The companies have sought to protect their proprietary information
by entering into confidentiality agreements with employees, collaborators and
consultants. Nevertheless, employees, collaborators or consultants may still
disclose the companies’ proprietary information, and PharmAthene may not be able
to meaningfully protect its trade secrets. In addition, others may independently
develop substantially equivalent proprietary information or techniques or
otherwise gain access to PharmAthene’s trade secrets.
39
PharmAthene’s
use of hazardous materials and chemicals require it to comply with regulatory
requirements which may result in significant costs and expose it to potential
liabilities.
PharmAthene’s
research and development involves the controlled use of hazardous materials
and
chemicals. PharmAthene will be subject to federal, state, local and foreign
laws
governing the use, manufacture, storage, handling and disposal of such
materials. PharmAthene will not be able to eliminate the risk of accidental
contamination or injury from these materials. In the event of such an accident,
PharmAthene could be held liable for significant damages or fines, and these
damages could exceed its resources and any applicable insurance coverage. In
addition, PharmAthene may be required to incur significant costs to comply
with
regulatory requirements in the future.
PharmAthene
may become subject to product liability claims, which could reduce demand for
its product candidates or result in damages that exceed its insurance
coverage.
PharmAthene
will face an inherent risk of exposure to product liability suits in connection
with its products being tested in human clinical trials or sold commercially.
PharmAthene may become subject to a product liability suit if any product it
develops causes injury, or if treated individuals subsequently become infected
or otherwise suffer adverse effects from its products. Regardless of merit
or
eventual outcome, product liability claims may result in decreased demand for
a
product, injury to PharmAthene’s reputation, withdrawal of clinical trial
volunteers and loss of revenues.
If
a
product liability claim is brought against PharmAthene, the cost of defending
the claim could be significant and any adverse determination may result in
liabilities in excess of its insurance coverage. Additionally, PharmAthene
will
be applying for indemnification under the Support Anti-terrorism by Fostering
Effective Technologies Act of 2002 which preempts and modifies tort laws so
as
to limit the claims and damages potentially faced by companies who provide
certain “qualified” anti-terrorism products. However, PharmAthene cannot be
certain that it will be able to obtain or maintain adequate insurance coverage
on acceptable terms, if at all.
Legislation
limiting or restricting liability for medical products used to fight
bioterrorism is new, and PharmAthene cannot be certain that any such protection
will apply to its products and, therefore, PharmAthene could become subject
to
product liability suits and other third party claims if such protections do
not
apply.
The
Public Readiness and Emergency Preparedness Act (“Public Readiness Act”) was
signed into law in December 2005 and creates general immunity for manufacturers
of countermeasures, including security countermeasures (as defined in Section
319F-2(c)(1)(B)), when the Secretary of Defense issues a declaration for their
manufacture, administration or use. The declaration is meant to provide general
immunity from all claims under state or federal law for loss arising out of
the
administration or use of a covered countermeasure. Manufacturers are excluded
from this protection in cases of willful misconduct.
Upon
a
declaration by the Secretary of Health and Human Services, a compensation fund
is created to provide “timely, uniform, and adequate compensation to eligible
individuals for covered injuries directly caused by the administration or use
of
a covered countermeasure.” The “covered injuries” to which the program applies
are defined as serious physical injuries or death. Individuals are permitted
to
bring a willful misconduct action against a manufacturer only after they have
exhausted their remedies under the compensation program. A willful misconduct
action could be brought against us if an individual(s) has exhausted their
remedies under the compensation program which thereby could expose us to
liability. PharmAthene may become subject to standard product liability suits
and other third party claims if products it develops which fall outside of
the
Public Readiness Act cause injury or if treated individuals subsequently become
infected or otherwise suffer adverse effects from such products.
PharmAthene
may be subject to claims that it or its employees wrongfully used or disclosed
alleged trade secrets of the employees’ former employers. Such litigation could
result in substantial costs and be a distraction to PharmAthene’s
management.
As
is
commonplace in the biotechnology industry, PharmAthene employs individuals
who
were previously employed at other biotechnology or pharmaceutical companies,
including their competitors or potential competitors. Although no claims against
PharmAthene are currently pending, PharmAthene may be subject to claims that
these employees or it have inadvertently or otherwise used or disclosed trade
secrets or other proprietary information of their former employers. Litigation
may be necessary to defend against these claims. Even if PharmAthene is
successful in defending against these claims, litigation could result in
substantial costs and be a distraction to management.
40
If
PharmAthene experiences delays in obtaining regulatory approvals, or is unable
to obtain or maintain regulatory approvals, it may be unable to commercialize
any products.
PharmAthene
will need to conduct a substantial amount of additional research and development
before any U.S. or foreign regulatory authority will approve any of its
products. In addition, PharmAthene’s product candidates will be subject to
extensive and rigorous domestic government regulation. Results of PharmAthene’s
research and development activities may indicate that its potential products
are
unsafe or ineffective. In this case, regulatory authorities will not approve
them. Even if approved, PharmAthene’s products may not be commercially
successful. If PharmAthene fails to develop and commercialize its products,
it
may be forced to curtail or cease operations.
In
addition, the commencement and rate of completion of clinical trials for
PharmAthene’s products may be delayed by many factors, including:
· lack
of
efficacy during the clinical trials in animals;
· unsatisfactory
results of any clinical trial;
· unforeseen
safety issues;
· slower
than expected rate of patient recruitment; or
· government
or regulatory delays.
· Delays
in
obtaining regulatory approvals may:
· adversely
affect the commercialization of any products that PharmAthene or its
collaborative partners develop;
· impose
costly procedures on PharmAthene or its collaborative partners;
· diminish
any competitive advantages that PharmAthene or its collaborative partners may
attain; and
· adversely
affect PharmAthene’s receipt of revenues or royalties.
The
results from preclinical testing and early clinical trials are often not
predictive of results obtained in later clinical trials. Although a new product
may show promising results in initial clinical trials, it may subsequently
prove
unfeasible or impossible to generate sufficient safety and efficacy data to
obtain necessary regulatory approvals. Data obtained from preclinical and
clinical studies are susceptible to varying interpretations, which may delay,
limit or prevent regulatory approval. In addition, PharmAthene may encounter
regulatory delays or rejections as a result of many factors, including results
that do not support its claims, perceived defects in the design of clinical
trials and changes in regulatory policy during the period of product
development. PharmAthene’s business, financial condition, prospects and results
of operations may be materially adversely affected by any delays in, or
termination of, its clinical trials or a determination by the FDA that the
results of PharmAthene’s trials are inadequate to justify regulatory
approval.
Any
required approvals, once obtained, may be withdrawn. Further, if the companies
fail to comply with applicable FDA and other regulatory requirements at any
stage during the regulatory process, it may encounter difficulties including:
· delays
in
clinical trials or commercialization;
· product
recalls or seizures;
· suspension
of production and/or distribution;
· withdrawals
of previously approved marketing applications; and
· fines,
civil penalties and criminal prosecutions.
41
PharmAthene’s
collaborative partners may not be able to conduct clinical testing or obtain
necessary approvals from the FDA or other regulatory authorities for any product
candidates. If PharmAthene fails to obtain required governmental approvals,
it
or its collaborative partners will experience delays in, or be precluded from,
marketing products developed through it or, as applicable, their
research.
PharmAthene
and its contract manufacturers will also be required to comply with the
applicable FDA good manufacturing practice regulations. Good manufacturing
practice regulations include requirements relating to quality control and
quality assurance as well as the corresponding maintenance of records and
documentation. Manufacturing facilities are subject to inspection by the FDA.
These facilities must be approved before PharmAthene will be able to use them
in
commercial manufacturing of their products. PharmAthene and its contract
manufacturers may not be able to comply with the applicable good manufacturing
practice requirements and other FDA regulatory requirements. If PharmAthene
and
its contract manufacturers fail to comply, they could be subject to fines or
other sanctions, or be precluded from marketing their products.
PharmAthene
may be required to perform additional clinical trials or change the labeling
of
its products if it or others identify side effects after its products are on
the
market, which could harm sales of the affected
products.
If
PharmAthene or others identify side effects after any of its products are on
the
market, or if manufacturing problems occur:
· regulatory
approval may be withdrawn;
· reformulation
of the affected products, additional clinical trials, or changes in labeling
of
PharmAthene’s products may be required;
· changes
to or re-approvals of PharmAthene’s manufacturing facilities may be
required;
· sales
of
the affected products may drop significantly;
· PharmAthene’s
reputation in the marketplace may suffer; and
· lawsuits,
including class action suits, may be brought against PharmAthene.
Any
of
the above occurrences could harm or prevent sales of the affected products
or
could increase the costs and expenses of commercializing and marketing these
products.
Risks
Relating to HAQ’s Business and Status as a Special Purpose Acquisition
Company
Our
outstanding warrants may have an adverse effect on the market price of common
stock and make it more difficult to effect the
Merger.
In
connection with the IPO, we issued warrants to purchase 9,400,000 shares of
common stock. The sale, or even the possibility of sale, of the shares
underlying the warrants could have an adverse effect on the market price for
our
securities or on our ability to obtain future public financing. If and to the
extent these warrants are exercised, you may experience dilution to your
holdings.
If
our existing stockholders exercise their registration rights, it may have an
adverse effect on the market price of our common
stock.
Our
initial stockholders are entitled to require us to register the resale of their
shares of common stock at any time after the date on which their shares are
released from escrow, which, except in limited circumstances, will not be before
July 29, 2008. If our existing stockholders exercise their registration rights
with respect to all of their shares of common stock, then there will be an
additional 2,250,000 shares of common stock eligible for trading in the public
market. The presence of this additional number of shares of common stock
eligible for trading in the public market may have an adverse effect on the
market price of our common stock.
42
The
American Stock Exchange may delist our securities from trading which could
limit
investors' ability to make transactions in our securities and subject us to
additional trading restrictions.
Our
common stock and warrants are listed on the AMEX, a national securities
exchange. We cannot assure you that our securities will continue to be listed
on
the AMEX in the future prior to a business combination. If the AMEX delists
our
securities from trading on its exchange and we are not able to list our
securities on another exchange or to have them quoted on Nasdaq, our securities
could be quoted on the OTC Bulletin Board, or “pink sheets”. As a result, we
could face significant material adverse consequences including:
· a
limited
availability of market quotations for our securities;
· a
determination that our common stock is a “penny stock” which will require
brokers trading in our common stock to adhere to more stringent rules and
possibly resulting in a reduced level of trading activity in the secondary
trading market for our securities;
· a
limited
amount of news and analyst coverage for our company; and
· a
decreased ability to issue additional securities or obtain additional financing
in the future.
The
National Securities Markets Improvement Act of 1996, which is a federal statute,
prevents or preempts the states from regulating the sale of certain securities,
which are referred to as "covered securities". Since we are listed on the AMEX,
our securities are covered securities. Although the states are preempted from
regulating the sale of our securities, the federal statute does allow the states
to investigate companies if there is a suspicion of fraud, and if there is
a
finding of fraudulent activity, then the states can regulate or bar the sale
of
covered securities in a particular case. While we are not aware of a state
having used these powers to prohibit or restrict the sale of securities issued
by blank check companies generally, certain state securities regulators view
blank check companies unfavorably and might use these powers, or threaten to
use
these powers, to hinder the sale of securities of blank check companies in
their
states.
43
If
HAQ is deemed to be an investment company, HAQ may be required to institute
burdensome compliance requirements and its activities may be restricted, which
may make it difficult for it to complete a business
combination.
In
order
not to be regulated as an investment company under the Investment Company Act
of
1940, as amended, or the Investment Company Act, unless HAQ can qualify for
an
exclusion, HAQ must ensure that it is engaged primarily in a business other
than
investing, reinvesting or trading of securities and that its activities do
not
include investing, reinvesting, owning, holding or trading “investment
securities.” HAQ's business is to identify and consummate a business combination
and thereafter to operate the acquired business or businesses. HAQ invests
the
funds in the trust account only in treasury bills issued by the U.S. having
a
maturity of 180 days or less or money market funds meeting the criteria under
Rule 2a-7 under the Investment Company Act until it uses them to complete a
business combination. By limiting the investment of the funds to these
instruments, HAQ believes that it will not be considered an investment company
under the Investment Company Act. The trust account and the purchase of
government securities for the trust account is intended as a holding place
for
funds pending the earlier to occur of either: (i) the consummation of our
primary business objective, which is a business combination, or (ii) absent
a
business combination, our dissolution, liquidation and distribution of our
assets, including the proceeds held in the trust account, as part of our plan
of
dissolution and liquidation. If we fail to invest the proceeds as described
above or if we cease to be primarily engaged in our business as set forth above
(for instance, if our stockholders do not approve a plan of dissolution and
liquidation and the funds remain in the trust account for an indeterminable
amount of time), we may be considered to be an investment company and thus
be
required to comply with the Investment Company Act.
If
HAQ is
deemed to be an investment company under the Investment Company Act, its
activities may be restricted, including:
· restrictions
on the nature of its investments; and
· restrictions
on the issuance of securities.
each
of
which may make it difficult for it to consummate a business combination. HAQ
would also become subject to burdensome regulatory requirements, including
reporting, record keeping, voting, proxy and disclosure requirements and the
costs of meeting these requirements would reduce the funds it has available
outside the trust account to consummate a business combination.
If
20% or more of the holders of HAQ’s common stock issued in HAQ’s IPO decide to
vote against the Merger Proposal and convert their shares to cash, HAQ will
be
forced to abandon the Merger with PharmAthene and will seek to liquidate, in
which event stockholders may receive less than $7.60 per share and the warrants
may expire worthless.
Under
the
terms of HAQ’s certificate of incorporation, if 20% or more of shares issued in
HAQ’s IPO decide to vote against the proposed merger and opt to convert their
shares to cash, HAQ will be required to liquidate. In any liquidation, the
net
proceeds of HAQ’s IPO held in the trust account, plus any interest earned
thereon, will be distributed on a pro rata basis to the holders of HAQ’s common
stock issued in the IPO. If HAQ liquidates its assets, the per-share liquidation
will be the approximately $69 million deposited in the trust account at the
time
of the IPO, plus interest accrued thereon until the date of any liquidation;
as
of March 31, 2007, there was approximately $7.60 per share available in the
trust account for distribution to stockholders. Furthermore, there will be
no
distribution with respect to HAQ’s outstanding warrants and, accordingly, the
warrants will expire worthless.
If
third parties bring claims against HAQ, the proceeds held in trust could be
reduced and the per-share liquidation price received by stockholders will be
less than $7.60 per share.
Our
placing of funds in trust may not protect those funds from third party claims
against HAQ. Pursuant to Delaware General Corporation Law Sections 280 and
281,
upon a dissolution we will be required to pay or make reasonable provision
to
pay all claims and obligations of the corporation, including all contingent,
conditional or unmatured claims. Although we will seek to have all vendors,
prospective target businesses or other entities we engage execute agreements
with us waiving any right, title, interest or claim of any kind in or to any
monies held in the trust account for the benefit of our public stockholders,
there is no guarantee that they will execute such agreements. Nor is there
any
guarantee that such entities will agree to waive any claims they may have in
the
future as a result of, or arising out of, any negotiations, contracts or
agreements with us and will not seek recourse against the trust account for
any
reason. Accordingly, the proceeds held in trust could be subject to claims
which
could take priority over the claims of our public stockholders and the IPO
per-share liquidation price could be less than $7.60 per share held in the
trust
account as of March 31, 2007, plus interest, due to claims of such creditors.
If
we are unable to complete a business combination and are forced to liquidate,
our chairman and executive officers will be personally liable under certain
circumstances (for example, if a vendor does not waive any rights or claims
to
the trust account) to ensure that the proceeds in the trust fund are not reduced
by the claims of various vendors or other entities that are owed money by us
for
services rendered or products sold to us, to the extent necessary to ensure
that
such claims do not reduce the amount in the trust fund. However, we cannot
assure you that our executive officers will be able to satisfy those
obligations.
44
In
addition, although our directors and officers have agreed to indemnify HAQ
for
claims by any vendor that is owed money by HAQ for services rendered or products
sold to HAQ, to the extent that such claims reduce the amounts in the trust
fund
to be distributed to the public stockholders upon dissolution and liquidation,
this indemnification is limited to claims by vendors that do not execute
a valid
and enforceable waiver of all rights, title, interest, and claim of any kind
in
or to the monies held in the trust account. Our independent auditors, LWBJ,
LLP
have not executed such a waiver as of June 26, 2007, no fees were owned to
our
auditors. The indemnification provided by certain of our Directors and officers
would not cover claims by target businesses or other entities and vendors
that
execute such waivers nor claims related to torts, such as if someone were
to be
injured on our premises, securities litigation or franchise and income tax
liabilities. We are not aware of any other claims of the type described above
nor any basis for any such claim and, as of March 31, 2007, there is
approximately $467,000 of cash outside of the trust account. There are only
potential liabilities in an amount of $280,000 (which represent potential
franchise tax claims from the state of our incorporation) which are not covered
by our insider agreements to indemnify. We
estimate that as of March 31, 2007, we have claims from creditors,
vendors and tax authorities of approximately $630,000 which have not been
waived. HAQ currently has no outstanding liabilities covered by waivers.
HAQ
currently estimates that, at August 3, 2007, there would be approximately
$280,000 in Delaware franchise tax which are not waived by such taxing
authorities and our Board members have not agreed to indemnify HAQ for such
tax
claims. Our Board members have agreed to indemnify HAQ for the balance
that HAQ owes to certain of its vendors. HAQ has no other outstanding
liabilities which are not indemnified against by the members of its Board
or for
which it has not received waivers from creditors. Based
on
representations made to us by certain of our directors and officers, we
currently believe that they are of substantial means and capable of funding
a
shortfall in our trust account to satisfy their foreseeable indemnification
obligations, however, the indemnification may be limited as we have not asked
them to reserve for such an eventuality. The indemnification obligations
may be
substantially higher than certain of our directors and officers currently
foresee or expect and/or their financial resources may deteriorate in the
future
which could also act as a limitation on this indemnification. Hence, we cannot
assure you that certain of our directors and officers will be able to satisfy
those obligations or that the proceeds in the trust account will not be reduced
by such claims. Furthermore, creditors may seek to interfere with the
distribution of the trust account pursuant to federal or state creditor and
bankruptcy laws, which could delay the actual distribution of such funds
or
reduce the amount ultimately available for distribution to our public
stockholders. If we are forced to file a bankruptcy case or an involuntary
bankruptcy case is filed against us which is not dismissed, the funds held
in
our trust account will be subject to applicable bankruptcy law and may be
included in our bankruptcy estate and subject to claims of third parties
with
priority over the claims of our stockholders. To the extent bankruptcy claims
deplete the trust account, we cannot assure you that we will be able to return
to our stockholders the liquidation amounts due to them. Accordingly, the
actual
per share amount distributed from the trust account to our public stockholders
could be significantly less than approximately $7.60 per share as of March
31,
2007 (and estimated to equal 7.66 per share as of August 3, 2007 because
of
additional interest), without taking into account interest earned on the
trust
account, due to claims of creditors. Any claims by creditors could cause
additional delays in the distribution of trust funds to the public stockholders
beyond the time periods required to comply with Delaware General Corporation
Law
procedures and federal securities laws and regulations. As discussed herein,
if
the Merger Proposal is not approved and the Merger is not consummated, HAQ
will be forced to dissolve and liquidate. In such event, it is more likely
than
not that the amount distributed to our stockholders will be less than
approximately $7.60 per share.
Our
stockholders may be held liable for claims against HAQ by third parties to
the
extent of distributions received by them.
We
have
agreed with the trustee to promptly adopt a plan of dissolution and liquidation
and initiate procedures for our dissolution and liquidation if we do not
complete a business combination within 24 months after the consummation of
our
IPO. Under the Delaware General Corporation Law, stockholders may be held liable
for claims by third parties against a corporation to the extent of distributions
received by them in a dissolution. If we complied with certain
procedures
set
forth in Section 280 of the Delaware General Corporation Law intended to ensure
that we make reasonable provision for all claims against us, including a 60-day
notice period during which any third-party claims can be brought against us,
a
90-day period during which we may reject any claims brought, and an additional
150-day waiting period before any liquidating distributions are made to
stockholders, any liability of a stockholder with respect to a liquidating
distribution would be limited to the lesser of such stockholder's pro rata
share
of the claim or the amount distributed to the stockholder, and any liability
of
the stockholder would be barred after the third anniversary of the dissolution.
However, it is our intention to make liquidating distributions to our
stockholders as soon as reasonably possible after dissolution and, therefore,
we
do not intend to comply with those procedures. As such, our stockholders could
potentially be liable for any claims to the extent of distributions received
by
them in a dissolution and any such liability of our stockholders will likely
extend beyond the third anniversary of such dissolution. Accordingly, we cannot
assure you that third parties will not seek to recover from our public
stockholders amounts owed to them by us.
Under
Delaware law, our dissolution requires the approval of the holders of a majority
of our outstanding stock, without which we will not be able to dissolve and
liquidate and distribute our assets to our public stockholders. Therefore,
there
may be a considerable delay before any distribution of our
assets.
We
have
agreed with the trustee to initiate procedures for our dissolution and
liquidation if we do not effect the Merger by August 3, 2007 and we intend
to
commence such procedures within five business days of such date. However,
pursuant to Delaware law, our dissolution requires the affirmative vote of
stockholders owning a majority of our then outstanding common stock. Soliciting
the vote of our stockholders will require the preparation of preliminary and
definitive proxy statements, which will need to be filed with the Securities
and
Exchange Commission and could be subject to their review. This process could
take a substantial amount of time ranging from 40 days to several
months.
45
As
a
result, the distribution of our assets to the public stockholders could be
subject to a considerable delay. Furthermore, we may need to postpone the
stockholders meeting, resolicit our stockholders or amend our plan of
dissolution and liquidation to obtain the required stockholder approval, all
of
which would further delay the distribution of our assets and result in increased
costs. If we are not able to obtain approval from a majority of our
stockholders, we will not be able to dissolve and liquidate and we will not
be
able to distribute funds from our trust account to holders of our common stock
sold in our IPO and these funds will not be available for any other corporate
purpose. In the event we seek stockholder approval for a plan of dissolution
and
liquidation and do not obtain such approval, we will nonetheless continue to
pursue stockholder approval for our dissolution. However, we cannot predict
whether our stockholders will approve our dissolution in a timely manner or
will
ever approve our dissolution. As a result, we cannot provide our stockholders
with assurances of a specific timeframe for the dissolution and distribution.
If
our stockholders do not approve a plan of dissolution and liquidation and the
funds remain in the trust account for an indeterminate amount of time, we may
be
considered to be an investment company.
The
financial interests of our officers and directors, which may be different than
the best interests of our stockholders, may have influenced their motivation
in
causing us to enter into and, may influence in the future, their motivation
to
close the Merger Agreement.
Our
officers and directors will not receive reimbursement for any out-of-pocket
expenses incurred by them to the extent that such expenses exceed the amount
of
available proceeds not in the trust account unless the Merger is completed.
If
we do not complete the Merger or other business combination and are forced
to
liquidate, the trust account proceeds may be subject to claims that could take
priority over the claims of our public stockholders. Certain of our officers
and
directors have entered into separate indemnity agreements under which they
will
be personally liable under certain circumstances to ensure that the proceeds
of
the trust account are not reduced by the claims of various vendors that are
owed
money by us for services rendered or contracted for, or claims of other parties
with which we have contracted. The shares of common stock and warrants owned
by
our officers and directors and their affiliates will be worthless if we do
not
consummate a business combination. These financial interests of our officers
and
directors may have influenced their motivation in causing us to enter into
and,
ultimately, may influence their motivation to close the Merger Agreement.
If
third parties bring claims against us or if PharmAthene has breached any of
its
representations, warranties or covenants set forth in the Merger Agreement,
we
may not be adequately indemnified for any losses arising
therefrom.
Although
the Merger Agreement provides that the PharmAthene stockholders will indemnify
us for losses arising from a breach of the representations, warranties and
covenants by PharmAthene set forth in the Merger Agreement, such indemnification
is limited both in the aggregate and the deductible and is subject to other
limitations. In addition, the survival period for any claims under the Merger
Agreement is limited to claims arising within the twelve months immediately
following the effective time of the Merger. Accordingly, we will be prevented
from seeking indemnification for any claims above the aggregate threshold or
arising after the applicable survival period.
If
the Merger’s benefits do not meet the expectations of financial or industry
analysts, the market price of HAQ’s common stock may
decline.
The
market price of HAQ’s common stock may decline as a result of the Merger
if:
46
· HAQ
does
not achieve the perceived benefits of the Merger as rapidly as, or to the extent
anticipated by, financial or industry analysts; or
· the
effect of the Merger on HAQ’s financial results is not consistent with the
expectations of financial or industry analysts.
Accordingly,
investors may experience a loss as a result of a decreasing stock price and
HAQ
may not be able to raise future capital, if necessary, in the equity
markets.
If
we do not consummate a business combination and dissolve, payments from the
trust account to our public stockholders may be
delayed.
We
currently believe that any plan of dissolution and liquidation subsequent to
the
expiration of the 24 month deadline would proceed in approximately the following
manner:
· our
Board
of Directors will,
consistent with Delaware law and its obligations described in our amended and
restated certificate of incorporation to dissolve, prior to the passing of
such
deadline, convene and adopt a specific plan of dissolution and liquidation,
which it will then vote to recommend to our stockholders; at such time it will
also cause to be prepared a preliminary proxy statement setting out such plan
of
dissolution and liquidation as well as the board’s recommendation of such
plan;
· soon
after such deadline, we would file our preliminary proxy statement with the
Securities and Exchange Commission;
· if
the
Securities and Exchange Commission does not review the preliminary proxy
statement, then, approximately 10 days following the passing of such deadline,
we will mail the proxy statements to our stockholders, and approximately 30
days
following the passing of such deadline we will convene a meeting of our
stockholders, at which they will either approve or reject our plan of
dissolution and liquidation; and
· if
the
Securities and Exchange Commission does review the preliminary proxy statement,
we currently estimate that we will receive their comments approximately 45
days
following the passing of such deadline. We will mail the proxy statements to
our
stockholders following the conclusion of the comment and review process (the
length of which we cannot predict with any certainty, and which may be
substantial) and we will convene a meeting of our stockholders at which they
will either approve or reject our plan of dissolution and
liquidation.
In
the
event we seek stockholder approval for a plan of dissolution and liquidation
and
do not obtain such approval, we will nonetheless continue to pursue stockholder
approval for our dissolution. Pursuant to the terms of our amended and restated
certificate of incorporation, our powers following the expiration of the
permitted time periods for consummating a business combination will
automatically thereafter be limited to acts and activities relating to
dissolving and winding up our affairs, including liquidation. The funds held
in
our trust account may not be distributed except upon our dissolution and, unless
and until such approval is obtained from our stockholders, the funds held in
our
trust account will not be released. Consequently, holders of a majority of
our
outstanding stock must approve our dissolution in order to receive the funds
held in our trust account and the funds will not be available for any other
corporate purpose.
The
procedures required for us to liquidate under the Delaware law, or a vote to
reject any plan of dissolution and liquidation by our stockholders, may result
in substantial delays in the liquidation of our trust account to our public
stockholders as part of our plan of dissolution and liquidation.
We
will dissolve and liquidate if we do not consummate the
Merger.
If
we do
not complete the Merger on or before August 3, 2007, we will dissolve and
liquidate pursuant to the provisions of our certificate of incorporation and
Delaware law. We view this obligation to dissolve and liquidate as an obligation
to our public stockholders and neither we nor our Board
of
Directors will
take
any action to amend or waive any provision of our amended
and restated certificate
of incorporation to allow us to survive for a longer period of time if it does
not appear we will be able to consummate the Merger. We will be required to
obtain stockholder approval of a plan of dissolution under Delaware law. Upon
approval of our plan of dissolution, we will distribute, assuming satisfaction
of our creditors, to all of our public stockholders, in proportion to their
respective equity interest, an aggregate sum equal to the amount in the trust
account (net of taxes payable). Our initial stockholders have waived their
rights to participate in any liquidation distribution with respect to their
initial shares and have agreed to vote in favor of any plan of dissolution
and
distribution which we will present to our stockholders for vote. There will
be
no distribution from the trust account with respect to our warrants which will
expire worthless. We will pay the costs of our dissolution and liquidation
of
the trust account from our remaining assets outside of the trust fund, and
we
estimate such costs to be between $50,000 and $75,000.
47
Because
we entered into a definitive agreement to complete a business combination prior
to the expiration of 18 months after the consummation of our IPO, we have an
additional six months in which to complete the Merger with PharmAthene. If
we
are unable to consummate the Merger before August 3, 2007, our purpose and
powers will be limited to dissolving, liquidating and winding up. Upon notice
from us, the trustee of the trust account will liquidate the investments
constituting the trust account and will turn over the proceeds to our transfer
agent for distribution to our public stockholders as part of our
stockholder-approved plan of dissolution and liquidation. Concurrently, we
shall
pay, or reserve for payment, from funds held outside of the trust account,
if
available, our liabilities and obligations, although we cannot assure you that
there will be sufficient funds for such purpose. The amounts held in the trust
account may be subject to claims by third parties, such as vendors, prospective
target business or other entities, if we do not obtain waivers in advance from
such third parties prior to such parties providing us with services or entering
into arrangements with them.
Our
public stockholders will be entitled to receive funds from the trust account
only in the event of our dissolution and liquidation or if they seek to convert
their respective shares into cash upon a business combination which the
stockholder voted against and which is completed by us. In no other
circumstances will a stockholder have any right or interest of any kind to
or in
the trust account.
48
FORWARD-LOOKING
STATEMENTS
We
believe that some of the information in this proxy statement constitutes
forward-looking statements. You can identify these statements by forward-looking
words such as “may,” “expect,” “anticipate,” “contemplate,” “believe,”
“estimate,” “intends,” and “continue” or similar words. You should read
statements that contain these words carefully because they:
| · |
discuss
future expectations;
|
| · |
contain
projections of future results of operations or financial condition;
and
|
| · |
state
other “forward-looking”'
information.
|
HAQ
believes it is important to communicate its expectations to its stockholders.
However, there may be events in the future that HAQ or PharmAthene is not able
to accurately predict or over which HAQ or PharmAthene have no control. The
risk
factors and cautionary language discussed in this proxy statement provide
examples of risks, uncertainties and events that may cause actual results to
differ materially from the expectations described by HAQ or PharmAthene in
their
forward-looking statements, including among other things:
| · |
changing
interpretations of generally accepted accounting
principles;
|
| · |
outcomes
of government reviews, inquiries, investigations and related
litigation;
|
| · |
potential
products that appear promising to PharmAthene or its collaborators
cannot
be shown to be efficacious or safe in subsequent pre-clinical or
clinical
trials;
|
| · |
PharmAthene
or its collaborators will not obtain appropriate or necessary governmental
approvals to market these or other potential
products;
|
| · |
PharmAthene
may not be able to obtain anticipated funding for its development
projects
or other needed funding;
|
| · |
PharmAthene
may not be able to secure funding from anticipated government contracts
and grants;
|
| · |
PharmAthene
may not be able to secure or enforce adequate legal protection, including
patent protection, for its
products;
|
| · |
continued
compliance with government
regulations;
|
| · |
legislation
or regulatory environments, requirements or changes adversely affecting
the businesses in which PharmAthene is
engaged;
|
| · |
statements
about industry trends;
|
| · |
general
economic conditions; and
|
| · |
geopolitical
events and regulatory changes.
|
You
are
cautioned not to place undue reliance on these forward-looking statements,
which
speak only as of the date of this proxy statement.
All
forward-looking statements included herein attributable to HAQ, PharmAthene
or
any person acting on either party's behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to in this section.
Except to the extent required by applicable laws and regulations, HAQ and
PharmAthene undertake no obligation to update these forward-looking statements
to reflect events or circumstances after the date of this proxy statement or
to
reflect the occurrence of unanticipated events.
49
Before
you grant your proxy or instruct how your vote should be cast or vote on the
approval of the Merger you should be aware that the occurrence of the events
described in the “Risk Factors” section and elsewhere in this proxy statement
could have a material adverse effect on HAQ or PharmAthene upon completion
of
the Merger.
50
The
HAQ Special Meeting
HAQ
is
furnishing this proxy statement to you as part of the solicitation of proxies
by
the HAQ Board of Directors for use at the Special Meeting in connection with
the
proposed merger, the proposed Certificate of Incorporation Amendment, the
proposed Incentive Plan and the proposed Adjournment. This proxy statement
provides you with the information you need to be able to vote or instruct your
vote to be cast at the Special Meeting.
Date,
Time and Place
The
Special Meeting will be held at 10:00 a.m., Eastern Time, on July 26, 2007,
at
the offices of McCarter & English, LLP, 245
Park
Avenue, 27th
Floor,
New York, NY, 10167-0001,
to vote
on each of the Merger, the Certificate of Incorporation Amendment, the Incentive
Plan and the Adjournment Proposals.
Purpose
of the Special Meeting
At
the
Special Meeting, the holders of HAQ common stock are being asked to consider
and
vote upon the following:
| · |
the
Merger Proposal-
the
proposed merger with PharmAthene, Inc. (the “Merger”), a Delaware
corporation, pursuant to the Agreement and Plan of Merger, dated
as of
January 19, 2007, by and among HAQ, Merger Sub and PharmAthene, and
the
transactions contemplated thereby, whereby PharmAthene will become
a
wholly-owned subsidiary of HAQ (“Proposal 1” or the “Merger
Proposal”) and the stockholders, optionholders, warrantholders and
noteholders of PharmAthene shall receive
consideration having an aggregate value of $116,625,000 comprised of
the following consideration (having an aggregate value of
$116,625,000 assuming the maximum milestone payments are
achieved and paid and assuming a price of $7.53 per share based on
the
closing price of HAQ common stock on June 2, 2007):
|
| § an aggregate of 12,500,000 shares of HAQ common stock; |
| § $12,500,000 in 8% convertible notes issued by HAQ; and |
| § up to $10,000,000 in milestone payments (if certain conditions are met); |
| · |
the
Amendment Proposal - a proposal to amend HAQ's amended and restated
certificate of incorporation effective concurrently with the Merger,
to: (i) change HAQ's name from “Healthcare Acquisition Corp.” to
“PharmAthene, Inc.”, (ii) remove certain provisions containing procedural
and approval requirements applicable to HAQ prior to the consummation
of
the business combination that will no longer be operative after the
consummation of the Merger and (iii) grant to holders of
convertible promissory notes the right to designate three members to
the Board of Directors of HAQ for so long as at least 30% of the
original
face value of such notes remain outstanding (“Proposal 2” or the
“Amendment Proposal”);
|
| · |
the
Incentive Plan Proposal -
a
proposal to approve and adopt
the 2007 Long-Term Incentive Plan (the “Incentive Plan”') pursuant to
which HAQ will reserve 3,500,000 shares of common stock for issuance
pursuant to the Incentive Plan (“Proposal 3” or the “Incentive Plan
Proposal”);
|
| · |
the
Adjournment Proposal - to
consider and vote upon a proposal to adjourn the Special Meeting
to a
later date or dates, if necessary, to permit further solicitation
and vote
of proxies in the event that, based upon the tabulated vote at the
time of
the Special Meeting, HAQ would not have been authorized to consummate
the
Merger - we refer to this proposal as the adjournment proposal. (“Proposal
4” or the “Adjournment Proposal”);
and
|
| · |
such
other business as may properly come before the Special Meeting or
any
adjournment or postponement
thereof.
|
The
HAQ
Board of Directors:
| · |
has
unanimously determined that the Merger Proposal, the Amendment Proposal
and the Incentive Plan Proposal are fair to, and in the best interests
of,
HAQ and its stockholders;
|
51
| · |
has
determined that the consideration to be paid by HAQ in connection
with the
Merger is fair to our current stockholders from a financial point
of view
and the fair market value of PharmAthene is equal to or greater than
80%
of the fair market value of the net assets of
HAQ;
|
| · |
has
unanimously approved and declared it advisable to approve the Merger,
the
Certificate of Incorporation Amendment, the Incentive Plan and the
Adjournment Proposals; and
|
| · |
unanimously
recommends that the holders of HAQ common stock vote “FOR” the Merger
Proposal, “FOR” the Amendment Proposal, “FOR” the Incentive Plan Proposal
and “FOR” the Adjournment Proposal.
|
No
fairness opinion or valuation analysis from an independent advisor was sought
or
obtained by our Board of Directors in reaching its determination to approve
the
Merger, nor did the Board determine a specific value for
PharmAthene.
Record
Date; Who is Entitled to Vote
The
Record Date for the Special Meeting is June 15, 2007. Record holders of HAQ
common stock at the close of business on the Record Date are entitled to vote
or
have their votes cast at the Special Meeting. On the Record Date, there were
11,650,000 outstanding shares of HAQ common stock.
Each
share of HAQ common stock is entitled to one vote at the Special
Meeting.
Our
officers and directors agreed with the underwriter in our initial public
offering that any shares of HAQ common stock held by our officers and directors
which were obtained prior to our initial public offering will be voted in
accordance with the majority of the votes cast at the Special Meeting with
respect to the Merger Proposal. The holders of common stock acquired in HAQ's
IPO or afterwards are free to vote their shares, as they see fit. We have a
total of 11,650,000 shares outstanding, of which 2,250,000 were issued prior
to
the IPO. All of these shares are held by our officers and
directors. Additionally, three of our Board members have purchased an
additional 250,000 shares of HAQ common stock and have advised us that they
intend to vote such shares in favor of the Merger. If our officers and
directors determine to purchase additional shares of our common stock prior
to
the Special Meeting, they have advised us that they intend to vote these shares
in favor of the Merger Proposal.
HAQ's
issued and outstanding warrants do not have voting rights and record holders
of
HAQ warrants will not be entitled to vote at the Special Meeting.
Voting
Your Shares
Each
share of HAQ common stock that you own in your name entitles you to one vote.
Your proxy card shows the number of shares of HAQ common stock that you
own.
There
are
two ways to vote your shares of HAQ common stock:
· You
can
vote by signing and returning the enclosed proxy card. If you vote by proxy
card, your “proxy,” whose name is listed on the proxy card, will vote your
shares as you instruct on the proxy card. If you sign and return the proxy
card,
but do not give instructions on how to vote your shares, your shares will be
voted, as recommended by the HAQ Board, “FOR” the approval of the Merger
Proposal, “FOR” the approval of the Amendment Proposal, “FOR” the approval of
the Incentive Plan Proposal and “FOR” the approval of the Adjournment
Proposal.
· You
can
attend the Special Meeting and vote in person. HAQ will give you a ballot when
you arrive. However, if your shares are held in the name of your broker, bank
or
another nominee, you must get a proxy from the broker, bank or other nominee.
That is the only way HAQ can be sure that the broker, bank or nominee has not
already voted your shares.
No
Additional Matters May Be Presented at the Special
Meeting
The
Special Meeting has been called only to consider the approval of the Merger
Proposal, the Amendment Proposal, the Incentive Plan Proposal and the
Adjournment Proposal. Under HAQ's bylaws, other than procedural matters incident
to the conduct of the meeting, no other matters may be considered at the Special
Meeting if they are not included in the notice of the meeting.
52
Revoking
Your Proxy
If
you
give a proxy, you may revoke it at any time before it is exercised by doing
any
one of the following:
· You
may
send another proxy card with a later date;
· You
may
notify Matthew Kinley, addressed to HAQ, in writing before the Special Meeting
that you have revoked your proxy; and
· You
may
attend the Special Meeting, revoke your proxy, and vote in person.
Quorum;
Vote Required
The
approval and adoption of the Merger Agreement and the transactions contemplated
thereby will require the affirmative vote of a majority of the shares of HAQ's
common stock issued in HAQ’s IPO that vote on this proposal at the Special
Meeting. A total of 9,400,000 shares were issued in our IPO. In addition,
notwithstanding the approval of a majority, if the holders of 1,880,000 or
more
shares of common stock issued in HAQ's IPO, an amount equal to 20% or more
of
the total number of shares issued in the IPO, vote against the Merger and demand
conversion of their shares into a pro rata portion of the trust account, then
HAQ will not be able to consummate the Merger. Each HAQ stockholder that holds
shares of common stock issued in HAQ's IPO or purchased following such offering
in the open market has the right, assuming such stockholder votes against the
Merger Proposal and, at the same time, demands that HAQ convert such
stockholder's shares into cash equal to a pro rata portion of the trust account
in which a substantial portion of the net proceeds of HAQ's IPO is deposited.
These shares will be converted into cash only if the Merger is consummated
and
the stockholder requesting conversion holds such shares until the date the
Merger is consummated.
The
approval and adoption of the Amendment Proposal will require the affirmative
vote of a majority of the issued and outstanding shares of HAQ common stock
as
of the Record Date. The approval and adoption of the Incentive Plan Proposal
will require the affirmative vote of a majority of the shares of HAQ’s common
stock that are present in person or by proxy and entitled to vote at the Special
Meeting. Adoption of the Adjournment Proposal requires the affirmative vote
of a
majority of the shares of HAQ's common stock present in person or by proxy
and
entitled to vote at the Special Meeting. Adoption of the Adjournment Proposal
is
not conditioned upon the adoption of any of the other proposals.
Each
of
the Amendment Proposal and the Incentive Plan Proposal are conditioned upon
the
approval of the Merger Proposal and, in the event the Merger Proposal does
not
receive the necessary vote to approve that proposal, then HAQ will not complete
any of the transactions identified in any of the proposals. If the Incentive
Plan Proposal and/or the Amendment Proposal are not approved but the Merger
Proposal is approved, we may still consummate the Merger. If the conditions
in
the Merger Agreement requiring approval of these proposals are waived by
PharmAthene.
As
long
as a quorum is established at the Special Meeting, a failure to vote will have
no impact upon the approval of the Merger Proposal or the Incentive Plan
Proposal but as the Amendment Proposal requires a majority of all outstanding
shares of common stock and the Adjournment Proposal requires the affirmative
vote of a majority of the shares of HAQ's common stock present in person or
by
proxy and entitled to vote at the Special Meeting, a failure to vote will have
the effect of a vote against each of the Amendment Proposal and the Adjournment
Proposal. Failure to vote will not have the effect of converting your shares
into a pro rata portion of the trust account.
Abstentions
and Broker Non-Votes
If
your
broker holds your shares in its name and you do not give the broker voting
instructions, under the rules of the NASD, your broker may not vote your
shares on the proposals to approve the Merger with PharmAthene pursuant to
the
Merger Agreement and to approve the adoption of the Incentive Plan. If you
do
not give your broker voting instructions and the broker does not vote your
shares, this is referred to as a “broker non-vote.” Abstentions and broker
non-votes are counted for purposes of determining the presence of a
quorum.
Assuming
the presence of a quorum of more than 50% of the shares of our common stock
issued in our IPO, broker non-votes, abstentions or the failure to vote on
the
Merger Proposal will have no effect on the outcome of the vote.
If
you
abstain from voting, it will (i) not be a vote against the Merger Proposal
and will not have the effect of converting your shares into a pro rata portion
of the trust account; (ii) not count as a vote against the Incentive Plan
Proposal; and (iii) be treated as a vote against the approval of the
Amendment Proposal and the Adjournment Proposal.
53
If
you
hold your shares in street name you can obtain physical delivery of your shares
into your name, and then vote the shares yourself. In order to obtain shares
directly into your name, you must contact your brokerage firm representative.
Brokerage firms may assess a fee for your conversion; the amount of such fee
varies from firm to firm.
Conversion
Rights
Any
stockholder of HAQ holding shares of common stock issued in HAQ's IPO who votes
against the Merger Proposal may, at the same time, demand that HAQ convert
his
shares into a pro rata portion of the trust account. You must mark the
appropriate box on the proxy card in order to demand the conversion of your
shares. You must affirmatively vote against the Merger Proposal and demand
that
HAQ convert your shares into cash no later than the close of the vote on the
Merger Proposal to exercise your conversion rights (either by indicating such
on
the proxy card or providing such information at the Special Meeting). You must
hold your shares through the closing date of the Merger and then you must also
present your physical stock certificate to our transfer agent, Continental
Stock
Transfer & Trust Company, 17 Battery Place, New York, NY, 10004, Attention:
Greg Denman (212) 845-3274 by the third business day after consummation of
the
Merger, assuming it is approved by our stockholders. If the Merger Proposal
is
approved, we expect to close the transaction on the date of the Special Meeting
or soon thereafter and we will provide public notice of such closing date.
If
you convert your shares of common stock, you will still have the right to
exercise the warrants received as part of the units in accordance with the
terms
thereof and you will still have the right to attend the Special Meeting. If
so
demanded, HAQ will convert these shares into a pro rata portion of the net
proceeds from the IPO that were deposited into the trust account, plus interest
earned thereon after such date, if the Merger is consummated. If the holders
of
20%, or 1,880,000, or more shares of common stock issued in HAQ's IPO vote
against the Merger Proposal and demand conversion of their shares into a pro
rata portion of the trust account, HAQ will not be able to consummate the
Merger. Based on the amount of cash held in the trust account as of March 31,
2007, without taking into account any interest accrued after such date, you
will
be entitled to convert each share of common stock that you hold into
approximately $7.60 per share. HAQ will be liquidated if the Merger is not
consummated by August 3, 2007. In any liquidation, the net proceeds of HAQ's
IPO
held in the trust account, plus any interest earned thereon, will be distributed
on a pro rata basis to the holders of HAQ's common stock other than the
founders, who will not share in any such liquidation proceeds.
If
you
exercise your conversion rights, then you will be exchanging your shares
of HAQ
common stock for cash and will no longer own these shares. You will only
be
entitled to receive cash for these shares if you continue to hold these shares
through the closing date of the Merger and then tender your stock certificate
to
our transfer agent as set forth above. The closing price of HAQ's common
stock
on June 27, 2007, the most recent trading day practicable before the printing
of
this proxy statement, was $7.27 and the amount of cash held in the trust
account
is approximately $71.5 million as of March 31, 2007, plus interest accrued
thereon after such date. If a HAQ stockholder would have elected to exercise
his
conversion rights on such date, then he would have been entitled to receive
$7.60 per share, plus interest accrued thereon subsequent to such date. Prior
to
exercising conversion rights, HAQ stockholders should verify the market price
of
HAQ's common stock as they may receive higher proceeds from the sale of their
common stock in the public market than from exercising their conversion rights.
Dissenters’
or Appraisal Rights
No
dissenters’ or appraisal rights are available under the Delaware General
Corporation Law to the stockholders of HAQ in connection with the proposals.
The
only rights for those HAQ stockholders voting against the Merger who wish to
receive cash for their shares is to simultaneously demand payment for their
shares from the trust account. All of the holders of PharmAthene’s classes of
preferred stock and stockholders representing 80% of its outstanding common
stock have approved the Merger Proposal by written consent. The holders of
PharmAthene common stock who did not consent to the Merger were provided with
a
notice, dated May 10, 2007, regarding their possible appraisal rights under
the
Delaware General Corporation Law. Pursuant to such notice and applicable law,
dissenting stockholders were required to notify PharmAthene within 20 days
of
the date of the notice of their election to exercise their appraisal rights.
PharmAthene did not receive any notices of such election.
HAQ
is
soliciting proxies on behalf of the HAQ Board of Directors. This solicitation
is
being made by mail but also may be made by telephone or in person. HAQ and
its
respective directors and officers may also solicit proxies in person, by
telephone or by other electronic means, and in the event of such solicitations,
the information provided will be consistent with this proxy statement and
enclosed proxy card. These persons will not be paid for doing this. HAQ will
ask
banks, brokers and other institutions, nominees and fiduciaries to forward
its
proxy statement materials to their principals and to obtain their authority
to
execute proxies and voting instructions. HAQ will reimburse them for their
reasonable expenses.
54
Morrow
& Co., Inc., a proxy solicitation firm that we have engaged to assist us in
soliciting proxies, will be paid its customary fee of approximately $12,500
plus
$5 per solicited stockholder and out-of-pocket expenses. Such fee will be paid
with non-trust account funds. We expect the fees and associated expenses payable
to Morrow & Co., Inc. will not exceed approximately $30,000.
Stock
Ownership
Of
the
11,650,000 outstanding shares of HAQ common stock, HAQ's initial stockholders,
including all of its officers and directors and their affiliates, who purchased
shares of common stock prior to HAQ's IPO and who own an aggregate of
approximately 21.46% of the outstanding shares of HAQ common stock (2,250,000
of
which were issued prior to the IPO), agreed to vote such shares acquired prior
to the IPO in accordance with the vote of the majority in interest of all other
HAQ stockholders on the Merger Proposal and have advised us that they intend
to
vote the remaining 250,000 shares in favor of the Merger Proposal.
Based
solely upon information contained in public filings and the records of our
transfer agent, as of the Record Date, the following stockholders beneficially
own greater than five percent of HAQ's issued and outstanding common stock,
as
such amounts and percentages are reflected in the public filing of such
stockholder:
The
following table sets forth information as of June 27, 2007, based on information
obtained from the persons named below, with respect to the beneficial ownership
of shares of our common stock by (i) each person known by us to be the owner
of
more than 5% of our outstanding shares of common stock, (ii) each director
and
(iii) all officers and directors as a group. Except as indicated in the
footnotes to the table, 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.
|
Name
and Address of Beneficial
Owner (1)
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class
|
|||||
|
John
Pappajohn (2)(3)
|
1,123,960
|
9.53
|
%
|
||||
|
Derace
L. Schaffer, M.D. (2)(4)
|
1,123,960
|
9.53
|
%
|
||||
|
Matthew
P. Kinley (2)(5)
|
561,980
|
4.79
|
%
|
||||
|
Edward
B. Berger (6)
|
34,500
|
*
|
|||||
|
Wayne
A. Schellhammer
|
22,500
|
*
|
|||||
|
Sapling,
LLC (7)
|
697,715
|
6.0
|
%
|
||||
|
Fir
Tree Recovery Master Fund, LP (7)
|
325,115
|
2.88
|
%
|
||||
|
QVT
Financial LP (8)
|
619,400
|
5.3
|
%
|
||||
|
Andrew
M. Weiss, PhD (9)
|
617,825
|
5.3
|
%
|
||||
|
All
directors and executive officers as a group (5) persons
|
2,866,900
|
24.35
|
%
|
||||
* Represents
beneficial ownership of less than 1%.
(1)
Includes shares of common stock issuable upon exercise of warrants which are
beneficially owned by certain of the persons named in the above table but which
are not exercisable until the later of (i) July 28, 2006 or (ii) the
consummation by us of a business combination (including our acquisition of
PharmAthene). Unless otherwise indicated, the business address of each of the
individuals is 2116 Financial Center, 666 Walnut Street, Des Moines, Iowa
50309.
(2)
On
May 2, 2007, three individuals adopted stock purchase plans intended to comply
with the provisions of SEC Rule 10b5-1. Shares purchased under such plans were
purchased through an NASD member firm at its discretion, subject to the terms
of
the plans. Pursuant to the adopted plans, the individuals, John Pappajohn,
Matthew Kinley and Derace Schaffer authorized the following open market
purchases:
55
|
Total
Shares
|
Share
Limit Per Day
|
||||||
|
John
Pappajohn
|
100,000
shares
|
10,000
shares
|
|||||
|
Derace
Schaffer
|
100,000
shares
|
10,000
shares
|
|||||
|
Matthew
Kinley
|
50,000
shares
|
5,000
shares
|
The
aggregate number of shares that were purchased did not exceed 250,000 shares.
Further, each adopted a daily limit on the number of shares purchased which
in the aggregate was not more than 25,000 shares. The individuals purchased
shares at prices up to $7.60 per share. The plans expire on August 3,
2007.
(3)
Includes 141,960 warrants and 100,000 shares of common stock purchased on behalf
of such person pursuant to the guidelines set forth in SEC Rule 10b5-1 under
a
Rule 10b5-1 Plan. See footnotes 1 and 2 above.
(4)
Includes 141,960 warrants and 100,000 shares of common stock purchased on behalf
of such person pursuant to the guidelines set forth in SEC Rule 10b5-1 under
a
Rule 10b5-1 Plan. See footnotes 1 and 2 above.
(5)
Includes 70,980 warrants and 50,000 shares of common stock purchased on behalf
of such person pursuant to the guidelines set forth in SEC Rule 10b5-1 under
a
Rule 10b5-1 Plan. See footnotes 1 and 2 above.
(6)
Includes 12,000 warrants purchased by Mr. Berger in open market purchases.
See
footnote 1 above.
(7)
Based
on information contained in a Statement on Schedule 13G filed by Sapling LLC
in
February 2007. Sapling may direct the vote and disposition of the 679,715 shares
of common stock, and Fir Tree Recovery may direct the vote and disposition of
325,115 shares of common stock. The address of both Sapling LLC and Fir Tree
Recovery is 535 Fifth Avenue, 31st Floor New York, New York 10017.
Fir
Tree, Inc. is the investment manager for each of Sapling LLC and Fir Tree
Recovery Master Fund, LP. Jeffrey Tannenbaum is the President of Fir Tree,
Inc. and
has
the power to vote or dispose of the securities held by these
entities.
(8)
Based
on information contained in a Statement on Schedule 13G filed by QVT Financial
LP on May 14, 2007. QVT Financial LP (“QVT Financial”) is the investment manager
for QVT Fund LP (the “Fund”), which beneficially owns 541,288 shares of HAQ
common stock. QVT Financial is also the investment manager for a separate
discretionary account managed for Deutsche Bank AG (the “Separate Account”),
which holds 78,112 shares of HAQ common stock. QVT Financial has the power
to
direct the vote and disposition of the HAQ common stock held by each of the
Fund
and the Separate Account. Accordingly, QVT Financial may be deemed to be
the
beneficial owner of an aggregate amount of 619,400 shares of HAQ common stock,
consisting of the shares owned by the Fund and the shares held in the Separate
Account QVT Financial GP LLC, as General Partner of QVT Financial, may be
deemed
to beneficially own the same number of shares of HAQ common stock reported
by
QVT Financial. Daniel Gold and Lars Bader are each managing members of each
of
QVT Financial LP and QVT Financial GP LLC and may therefore be considered
beneficial holders of the securities held by QVT Financial
LP.
(9)
Based
on information contained in a Statement on Schedule 13G filed by Weiss Asset
Management, LLC, Weiss Capital, LLC and Andrew Weiss, PhD on June 4, 2007.
Shares reported for Dr. Weiss include shares beneficially owned by a
private investment partnership of which Weiss Asset Management is the sole
general partner and which may be deemed to be controlled by Dr. Weiss, who
is
the Managing Member of Weiss Asset Management, and also includes shares held
by
a private investment corporation which may be deemed to be controlled by Mr.
Weiss, who is the managing member of Weiss Capital, LLC the Investment Manager
of such private investment corporation. Dr. Weiss disclaims beneficial ownership
of the shares reported herein as beneficially owned by him except to the extent
of his pecuniary interest therein.
Other
than the shares purchased by Messrs. Pappajohn and Kinley and Dr. Schaffer
under
10b5-1 plans (an aggregate of 250,000 shares), all of the shares of HAQ
common
stock held by our officers and directors were placed in escrow with Continental
Stock Transfer & Trust Company, as escrow agent, until the earliest of (i)
July 28, 2008; or (ii) the consummation of a liquidation, merger, stock
exchange
or other similar transaction which results in all of our stockholders having
the
right to exchange their shares of common stock for cash, securities or
other
property subsequent to our acquisition of PharmAthene.
During
the escrow period, the holders of these shares are not able to sell or transfer
their securities except to their spouses and children or trusts established
for
their benefit, but will retain all other rights as our stockholders, including,
without limitation, the right to vote their shares of common stock and the
right
to receive cash dividends, if declared. If dividends are declared and payable
in
shares of common stock, such dividends will also be placed in escrow. If
we are
unable to effect a business combination and liquidate, none of these
stockholders will receive any portion of the liquidation proceeds with respect
to common stock owned by them prior to HAQ’s IPO.
As
described above, certain of our officers and directors determined to purchase
shares of our common stock in open market transactions prior to the Special
Meeting pursuant to Rule 10b5-1 stock puchase plans. Shares purchased under
these plans (250,000 shares) are entitled to participate in the liquidation
of
the trust fund in the event the Merger is not approved. Our officers and
directors have advised us that they will vote the shares so purchased in
favor
of the Merger Proposal, Amendment Proposal, Incentive Plan Proposal and
Adjournment Proposal. As of June 5, 2007, a total of 250,000 shares have
been
purchased under these plans.
56
PROPOSAL
1
THE
MERGER PROPOSAL
The
discussion in this proxy statement of the Merger Proposal and the principal
terms of the Agreement and Plan of Merger, dated January 19, 2007, by and among
HAQ, Merger Sub and PharmAthene (the “Merger Agreement”) is subject to, and is
qualified in its entirety by reference to, the Merger Agreement, which is
attached as “Annex A'' to this proxy statement and is incorporated in this proxy
statement by reference.
General
Description of the Merger
Pursuant
to the Merger Agreement, Merger Sub, a wholly-owned subsidiary of HAQ will
merge
with and into PharmAthene and PharmAthene will be the surviving entity and
become a wholly-owned subsidiary of HAQ. At the closing, and subject to certain
adjustments as hereinafter described, the PharmAthene stockholders,
optionholders and warrantholders and noteholders will receive the following
in
the Merger:
| § |
an
aggregate of 12,500,000 shares of HAQ common stock, subject to adjustments
as described below;
|
| § |
$12,500,000
in 8% convertible notes issued by HAQ;
and
|
| § |
up
to $10,000,000 in milestone payments (if certain conditions are
met);
|
in
exchange for all of the issued and outstanding capital stock and convertible
notes of PharmAthene (other than the securities being cancelled). The
merger consideration has an aggregate value of $116,625,000 (based upon the
closing price of HAQ’s common stock on June 2, 2007 of $ 7.53 per share and
assuming the maximum milestone payments are achieved and paid).
HAQ
is
also assuming certain outstanding vested and unvested options and warrants
of
PharmAthene, which shall be exchanged for options and warrants of HAQ on
economically equivalent terms. The 12,500,000 shares of HAQ common stock issued
as merger consideration will not increase due to the vesting, issuance of any
options or warrants of PharmAthene or the assumption of the PharmAthene options
and warrants and the actual number of shares of HAQ common stock ultimately
issued may be less to the extent options and warrants are not exercised. The
number of shares which are to be issued may be subject to increase in the event
that the stockholders of HAQ owning more than 5% of the outstanding HAQ common
stock exercise their conversion rights, the number of shares of HAQ common
stock
comprising the stock consideration shall be adjusted upward by the product
of
(x) the number (as a percentage) that is the difference between the percentage
of HAQ common stock that is converted and 5% and (y) 2.25 million. Stockholders
holding an aggregate of up to 1,879,060 shares of common stock could convert
such shares and the Merger may still be consummated. If such number of shares
were
converted, the shares of HAQ common stock issued as a portion of the merger
consideration would be increased by 337,275 shares of common stock.
Background
of the Merger
The
terms
of the Merger Agreement are the result of arm's-length negotiations between
representatives of HAQ and PharmAthene. The following is a discussion of the
background of these negotiations, the Merger and related
transactions.
HAQ
was
incorporated in Delaware on April 25, 2005, as a blank check company formed
to
serve as a vehicle for the acquisition, through a merger, capital stock
exchange, asset acquisition or other similar business combination with a then
unidentified operating business.
The
registration statement for HAQ's IPO was declared effective on July 28, 2005.
On
August 3, 2005, HAQ consummated its IPO of 9,000,000 units, and on August 16,
2005, HAQ consummated the closing of an additional 400,000 units that were
subject to the underwriters' over-allotment option. Each unit consists of one
share of common stock and one redeemable common stock purchase warrant. Each
warrant expires on July 27, 2009, or earlier upon redemption, and entitles
the
holder to purchase one share of HAQ common stock at an exercise price of $6.00
per share. The common stock and warrants started trading separately as of
October 6, 2005.
The
net
proceeds from the sale of the HAQ units were approximately $69,450,000. Of
this
amount, $67,928,000 was deposited in trust and, in accordance with HAQ's amended
and restated certificate of incorporation, will be released (with interest)
either upon the consummation of a business combination (i.e., the Merger) or
upon the liquidation of HAQ. The remaining $1,522,000 has been held outside
of
the trust for use to provide for business, legal and accounting due diligence
on
prospective businesses.
57
Pursuant
to HAQ’s amended and restated articles of incorporation, HAQ had to locate a
target and consummate a business combination on or before February 3, 2007
or
dissolve and liquidate, however, if a letter of intent, an agreement in
principal or a definitive agreement to complete a business combination were
to
be entered into prior to February 3, 2007, we would have an additional six
months, until August 3, 2007, in which to complete the business combination
contemplated by the letter of intent, agreement in principle or definitive
agreement. Because HAQ entered into the letter of intent with PharmAthene on
December 12, 2006, which was 53 days prior to the initial deadline of February
3, 2007, we have an additional six months to consummate the transaction; we
must
consummate the Merger on or before August 3, 2007 or we must dissolve and
liquidate.
During
the period beginning August 3, 2005 through January 19, 2007, HAQ was involved
in investigating and evaluating prospective businesses regarding potential
business combinations. This activity occurred constantly from August 3, 2005
onward until we entered into the Merger Agreement.
In August
2005, Mr. Matthew Kinley, the President of HAQ, created a list of potential
clients for management of HAQ to contact in order to commence the search for
targets for a business combination. This list of contacts was primarily
individuals HAQ management had contact or prior business dealings with, and
included, but was not limited to, the following:
· Healthcare
investment bankers;
· Commercial
bankers;
· Business
brokers and other “finders”;
· Venture
capital fund managers;
· Private
equity fund managers’
· CEOs
and
other executives active in the healthcare industry
· Attorneys;
· Accountants;
· Healthcare
consultants; and
· Physicians
and other healthcare professionals.
HAQ
management then communicated to these contacts HAQ’s desire to find an
attractive healthcare business opportunity for merger or acquisition. These
contacts were made by a combination of Mr. Pappajohn, Dr. Schaffer and Mr.
Kinley. In addition, Mr. Kinley made a list of healthcare sectors and companies
within such sectors for review and possible contact by HAQ management. On many
occasions Mr. Pappajohn, Dr. Schaffer and Mr. Kinley met in person or by
teleconference to discuss possible focus sectors of healthcare and specific
companies to target. The result of these meetings was a prioritized a list
of
potential candidates for a business combination. In addition, from August
2005 through January 2007 HAQ management was contacted by various parties
regarding possible targets for a business combination. All of these
opportunities were either discussed or the relevant information was shared
by
email, primarily among Messrs. Pappajohn and Kinley and Dr.
Schaffer.
Using
this list of contacts and targets as a guide, HAQ management attempted to
initiate conversations (i) directly with third-party companies they believed
could make attractive combination partners, (ii) with professional service
providers (attorneys, accountants, consultants and bankers), (iii) with their
own network of business associates and friends, and (iv) with third-party
intermediaries, including investment bankers and private equity fund managers.
HAQ also responded to inquiries or solicitations from (i) companies looking
for
capital or investment alternatives, and (ii) investment bankers or other similar
professionals who represented companies engaged in sale or fund-raising
processes. From time to time the list of potential candidates was updated and
supplemented based on additional information derived from these discussions
with
third parties.
In
considering potential targets for business combination, HAQ’s management
considered, among other factors, the following:
| · |
financial
condition and results of
operations;
|
| · |
growth
potential;
|
58
| · |
experience
and skill of management and availability of additional personnel;
|
| · |
capital
requirements;
|
| · |
competitive
position;
|
| · |
barriers
to entry into other industries;
|
| · |
stage
of development of the products, processes or
services;
|
| · |
degree
of current or potential market acceptance of the products,
processes or services;
|
| · |
proprietary
features and degree of intellectual property or other
protection of the products, processes or
services;
|
| · |
regulatory
environment of the industry; and
|
| · |
costs
associated with effecting the business
combination.
|
These
criteria were not exhaustive. The evaluation relating to the merits of a
particular business combination were based, to the extent relevant, on the
above
factors as well as other considerations deemed relevant by HAQ’s management in
effecting a business combination consistent with HAQ’s business objective. In
evaluating a prospective target business, HAQ’s management conducted an
extensive due diligence review which encompassed, among other things, meetings
with management, where applicable, and inspection of facilities, as well as
review of financial and other information which were available.
As
a
result of these efforts, HAQ initiated contact, either directly or through
a
third party intermediary, with approximately 48 potential targets. In addition,
HAQ received business plans, financial summaries or presentation books of at
least 43 potential target companies. HAQ
signed non-disclosure agreements relating to approximately 20 of these potential
business combination opportunities. HAQ also had extensive discussions with
several target companies with which a non-disclosure agreement was not signed.
HAQ was still in discussion with a potential target company other than
PharmAthene as late as January 2007,
within
two weeks of when the Merger Agreement was executed. With respect to each of
these business combination opportunities, discussions among HAQ’s management and
the targets included financial disclosures, reviews of potential transaction
structures, preliminary estimates of transaction values and discussions of
management objectives, business plans and projections. Each of the potential
target companies with which HAQ engaged in detailed discussions was either
part
of the initial list created by the HAQ team or was identified
through contact
described above. Of
these
contacts, HAQ held detailed discussions with approximately 10 potential target
companies, including PharmAthene. Discussions
including introductory meetings attended by some combination of Mr. Kinley,
Dr.
Schaffer and/or Mr. Pappajohn occurred with potential targets on a regular
basis
during the period from October 2005 through November 2006.
One
of
the discussions with a potential target company, resulted in a signed letter
of
intent. HAQ was
introduced to a target business in September 2005, received an executive summary
in October 2005 and met with management of the target in 2005. After management
meetings, including personal interviews of management and other employees,
extensive due diligence and review of the target business, HAQ issued a draft
letter of intent in January 2006. Subsequent negotiations occurred and a revised
letter of intent was executed by both parties in March 2006. After further
due
diligence, valuation negotiations and preliminary negotiations of a draft
definitive agreement, the letter of intent, as amended, expired in November
2006. HAQ did not move forward with that transaction for a variety of reasons,
including too great a divergence regarding valuation and final terms of the
transaction. The target was a healthcare services business providing service
to
managed care companies and other healthcare companies.
No
discussions with potential target companies, other than PharmAthene, resulted
in
the
execution of
a
definitive agreement regarding a potential business combination.
Based
on
their experience in investigating investment opportunities, the HAQ management
assessed the competition for quality companies that could be a potential target
for a business combination and determined that a company that HAQ’s management
identified as a suitable potential business combination partner would typically
have several alternatives to any potential business combination with HAQ,
including remaining independent or selling itself to another third party, as
well as obtaining capital either privately or publicly. Additionally, in many
cases, HAQ management had to spend time educating a prospective business
combination partner about “blank check” companies and explaining, from HAQ
management’s perspective, the benefits of a combination with HAQ over other
alternatives that it may have been considering. The reasons varied for why
HAQ
did not reach agreement with potential business combination partners other
than
PharmAthene. For example, after extensive discussions with one potential target,
the HAQ management team did not feel sufficiently comfortable with the target
company’s forecasted financial performance and the likelihood that management
could meet such forecasted performance results to proceed without adjustment
of
the discussion terms. Upon HAQ’s requirement for a greater portion of the
purchase price to be contingent on performance, negotiations faltered. In
another case, HAQ determined that the potential target business was too highly
valued and a competitive
bidding
situation had reduced the possibility of an attractive deal for the HAQ
stockholders.
59
On
June
8, 2006, PharmAthene entered into a definitive Agreement and Plan of Merger
(the
“SIGA Merger Agreement”) with SIGA Technologies, Inc. (“SIGA”), a Delaware
corporation engaged in the development and commercialization of novel
anti-infectives, antibiotics and vaccines for serious infectious diseases
including products for use in defense against biological warfare agents such
as
smallpox and arena
viruses,
and
SIGA Acquisition Corp., a Delaware corporation with no business operations
organized solely as an acquisition vehicle to effect the merger. Pursuant
to the
terms of the SIGA Merger Agreement, it was estimated that stockholders of
PharmAthene would receive up to 91.3 million shares of SIGA common stock
(including shares issuable upon the exercise of outstanding options). On
October
4, 2006, PharmAthene received from SIGA a notice of termination of the SIGA
Merger Agreement which SIGA was entitled to issue pursuant to the terms of
the
agreement which allowed either party to terminate the SIGA Merger Agreement
if
the closing of the merger had not occurred by September 30, 2006. No stated
reason for the termination was contained in SIGA’s notice of termination. The
value of the shares of SIGA common stock which were issuable as merger
consideration, based upon the trading price of SIGA common stock on the date
of
the execution of the SIGA Merger Agreement, was $1.30 and the total
consideration was $118.7 million.
On
October 5, 2006, Mr. Kinley was contacted by counsel to PharmAthene. The
management of HAQ had previously been involved with companies that were
represented by counsel to PharmAthene. During the call, PharmAthene’s counsel
inquired if HAQ had committed to a business combination. Mr. Kinley responded
that HAQ was engaged in discussions with another healthcare company, but it
had
not yet signed a definitive merger agreement. PharmAthene’s counsel inquired
whether HAQ would consider discussing a possible business combination with
PharmAthene. There are no direct business relationships between any of the
officers, directors or principal stockholders of HAQ and any of the officers,
directors or principal stockholders of PharmAthene and no pre-existing
businesses relationships between any of our initial stockholders and any
affiliates of PharmAthene. However, counsel to PharmAthene also serves as
counsel to a company on which Mr. Pappajohn, Dr. Schaffer and Mr. Berger serve
as members of the Board of Directors and of which Wayne Schellhammer, a member
of the HAQ Board of Directors, is the President and Chief Executive Officer.
There were no discussions between counsel to PharmAthene and any of Messrs.
Pappajohn or Schellhammer or Dr. Schaffer or prior to October 5, 2006 concerning
a possible transaction between of PharmAthene and HAQ.
On
October 6, 2006, at the suggestion of counsel, James Cavanaugh, PhD., a member
of the Board of Directors of PharmAthene, spoke by telephone with Messrs.
Pappajohn and Kinley to discuss the status of HAQ and the feasibility of a
possible merger between HAQ and PharmAthene.
Commencing
October 6, 2006 and on various occasions thereafter until the meeting of the
Board of Directors of HAQ
on
January 16, 2007, Mr. Pappajohn, Dr. Schaffer and Mr. Kinley held update
discussions with, and forwarded information to, Messrs. Berger and Schellhammer
to
keep
them
apprised
of the progress of the negotiations, due diligence and other matters related
to
the Merger with PharmAthene.
From
October 6, 2006 through January 19, 2007, the Investment Committee of
PharmAthene, comprised of Steven St. Peter, M.D., Elizabeth Czerepak and Dr.
Cavanaugh met via telephone on each Friday to review, among other things, the
status of the discussions of the proposed transaction with HAQ.
On
October 7, 2006, HAQ commenced its due diligence examination of
PharmAthene including reviewing all of PharmAthene’s significant agreements,
conducting interviews with management and department heads of PharmAthene and
visiting each of the PharmAthene facilities.
Also on
such
date, Mr. Kinley and Dr. Schaffer reviewed executive summary information
provided by representatives of PharmAthene and the information previously filed
with the SEC in connection with the proposed transaction between SIGA and
PharmAthene.
On
October 10, 2006, Mr. Kinley and Dr. Schaffer met with Mr. Schellhammer to
provide him with updated information with respect to the negotiations and
discussions relating to the proposed transaction.
60
On
October 11, 2006, at the request of Mr. Pappajohn and Dr. Cavanaugh, Dr.
Schaffer, the Chief Executive Officer and Vice Chairman of HAQ, and Mr. Kinley
met with David P. Wright and Eric Richman, the President and Senior Vice
President, respectively, of PharmAthene, at the offices of PharmAthene’s counsel
in New York City to discuss the possibility of a merger.
During
this meeting, Messrs. Wright and Richman described PharmAthene’s programs, its
material agreements, the status of its product development efforts and described
its contracts with the United States government. Mr. Kinley and Dr. Schaffer
asked questions of the PharmAthene representatives.
On
October 12, 2006, PharmAthene provided to Mr. Kinley and Dr. Schaffer copies
of
research papers, technical presentations, additional financial information,
including projections and cash flow analyses, estimates with respect to the
size
of the market for PharmAthene’s potential products and estimated development
costs and expenses. The projections provided by PharmAthene were internally
prepared and did not include detailed assumptions, notes or other similar
disclosures that would have been included in more formally prepared investor
analysis or financial statements. Management of HAQ considered these
projections as significant in their overall analysis of the business,
operations and prospects of PharmAthene and used these projections in
constructing analyses which ultimately led to the determination to recommend
the
transaction to HAQ's stockholders, but did not assign specific weight to
the projections relative to the other factors that were
considered.
On
October 19, 2006, Mr. Pappajohn joined Mr. Kinley and Dr. Schaffer to meet
with
Messrs. Wright and Richman at the offices of counsel
to PharmAthene in New York City. During the meeting, PharmAthene again presented
to the representatives of HAQ information with respect to its product
candidates, results of studies, financial information and management background
and responded to questions from the representatives of HAQ.
Following
the meeting, all five of the participants met with representatives of The Maxim
Group, HAQ’s financial advisor, to seek financial counsel as to the advisability
of proceeding with a merger transaction with PharmAthene.
Representatives of PharmAthene provided a presentation to the representatives
of
The Maxim Group. The presentation included a description of PharmAthene’s
business plan, its technology, products and financial information. Immediately
following the presentation by the representatives of PharmAthene, Dr. Schaffer,
Mr. Pappajohn and Mr. Kinley met privately with the representatives of The
Maxim
Group to discuss the PharmAthene business plan, issues relating to the
difficulties in valuation of biotech companies, the market prices for comparable
companies and the likelihood of approval of the transaction by the stockholders
of HAQ.
On
October 20 and 21, 2006, Messrs.
Pappajohn and Kinley spoke on the telephone on separate occasions with Messrs.
Berger and Schellhammer to provide due diligence information and a status report
with respect to the discussions between HAQ and PharmAthene.
From
October 20, 2006 through October 25, 2006, representatives of HAQ continued
to
have discussions with representatives of PharmAthene, primarily Messrs. Wright
and Richman to request additional due diligence information relating to the
PharmAthene products, its financial position and the market for its products.
In
addition, representatives of HAQ conversed on the telephone with representatives
of The Maxim Group to review the proposed structure for a transaction and the
valuation for the business of PharmAthene. These discussions included an
evaluation by The Maxim Group of the likelihood of approval of the transaction
by the HAQ stockholders.
On
October 24, 2006, Mr. Kinley spoke on the telephone with Messrs. Berger,
Schellhammer and Pappajohn and Dr. Schaffer to review the terms of the draft
letter of intent, the valuation range for PharmAthene that HAQ’s management had
been considering and how it resulted in the proposed merger consideration for
PharmAthene and to respond to questions from them regarding the business plan
and other relevant information with respect to the business of PharmAthene.
Mr.
Kinley also explained the valuation range being applied by HAQ’s management to
PharmAthene at that time and how that range tied to the proposed merger
consideration. In addition, Mr. Kinley reviewed with each of the members of
the
Board of Directors the terms of the proposed letter of intent. Each member
of
the Board expressed approval regarding the submission of the proposed letter
of
intent.
The
Board
of Directors had commenced its negotiations of the merger consideration
believing that the value of PharmAthene was in the range of approximately
$101.4
million to $168.8 million as discussed in the paragraph below and under the
section entitled “HAQ’s Reasons for the Merger and Recommendation of the HAQ
Board” at pages 66 to 71. This range was arrived at by analyzing the available
information including the information contained in the business combination
proxy statement of SIGA for its proposed merger with PharmAthene as well
as
materials obtained directly from PharmAthene in the early phases of discussions
between the parties. The final merger consideration is within this
range.
In
addition to the factors described on pages 58 to 59, two analyses were prepared
by HAQ management relating to valuation and the amount of merger consideration
included in initial letter of intent. One analysis was a peer group
company analysis comparing the post merger company with five publicly
traded biotechnology companies which management deemed sufficiently
comparable to PharmAthene. The peer group company analysis criteria included
market capitalization, enterprise value and revenue multiples. The second
analysis was a revenue multiples valuation. The final version of the analyses
reviewed prior to the signing of the Merger Agreement did not vary materially
from the initial analyses reviewed prior to the signing of the letter of
intent.
HAQ did not obtain any written analyses or valuation opinions from any third
party during the negotiation process or prior to the approval of the Merger
Agreement. The Maxim Group, which was acting as an advisor to HAQ, provided
some
of the underlying information related to the companies used in the comparable
companies’ analysis.
61
On
October 25, 2006, HAQ delivered to PharmAthene its draft letter of intent.
The
letter provided for the issuance to stockholders of PharmAthene of 12 million
shares of HAQ common stock.
On
November 3, 2006, PharmAthene retained Bear, Stearns & Co. Inc. to assist
and advise PharmAthene in connection with the proposed Merger.
On
November 4 and 6, 2006, PharmAthene delivered comments to HAQ including
suggested revisions to its draft letter of intent. Representatives of
PharmAthene, including Mr. Richman and representatives from Bear Stearns,
engaged in conversations with representatives of HAQ, including Mr. Kinley
and
Dr. Schaffer with regard to PharmAthene’s comments to HAQ’s proposed letter of
intent.
On
November 7, 2006, Messrs. Kinley and Pappajohn met in person with Mr. Berger
in
New York City to provide him with updated information with respect to the
negotiations between HAQ and PharmAthene. Mr. Berger asked specific questions
regarding due diligence and the business plan and Mr. Kinley provided responses
to the inquires made by Mr. Berger. Also on November 7, 2006, Messrs. Pappajohn
and Kinley and Dr. Schaffer met with Messrs. Wright and Richman at the offices
of Bear Stearns in New York City. During the meeting, the parties discussed
specific issues relating to the valuation range, the merger consideration to
be
paid by HAQ to PharmAthene and other issues relating to the capitalization
of
PharmAthene, including its stock option plan and its preferred stock structure.
During the meeting, PharmAthene presented its position that the value of
the proposed merger consideration in the then current draft letter of
intent did not sufficiently reflect the value of Pharmathene. Protracted
discussions ensued regarding the valuation of Pharmathene, of the proposed
merger consideration and, generally of securities issued by companies such
as
HAQ.
On
the
evening of November 7, 2006, Dr. Schaffer met with Messrs. Wright and Richman
for dinner to further discuss issues relating to the management of PharmAthene,
the technology and general due diligence items.
On
November 9, 2006, Dr. Steven St. Peter of MPM Capital, a member of the Board
of
Directors of PharmAthene and a representative of MPM as an investor in
PharmAthene, met with Mr. Pappajohn to discuss the transaction. Mr. Pappajohn
and Dr. St. Peter discussed the composition of the Board of Directors and
management of the company following the consummation of the Merger as well
as
the general background of the parties involved with each of the
companies.
On
November 10, 2006, several conversations occurred on the telephone between
representatives of HAQ and PharmAthene, including representatives of Bear
Stearns and counsel to PharmAthene, with respect to the terms of the draft
letter of intent, the economic features relating to the securities of HAQ and
the parties discussed various options in the structuring of the transaction
including with respect to the outstanding bridge debt of
PharmAthene.
Following
conversations with representatives of PharmAthene, Mr. Kinley had further
discussions with representatives of The Maxim Group as well as with Messrs.
Pappajohn and Berger and Dr. Schaffer with respect to merger consideration
and
PharmAthene’s value. Management of HAQ did not request or receive any formal
valuation analysis or reports from The Maxim Group related to the value of
PharmAthene. Representatives of The Maxim Group were utilized by HAQ management
to consult with regarding certain terms of the negotiations related to the
merger consideration and the components parts of the consideration. Further,
since The Maxim Group had acted as the underwriter in HAQ’s IPO, and was
involved in several other “SPAC” merger transactions, HAQ management consulted
The Maxim Group with a view towards assessing whether the investment community
would be receptive to the terms of the proposed Merger with PharmAthene.
62
On
November 13, 2006, Mr. Kinley and counsel for PharmAthene had a telephone
conversation regarding the terms of the draft letter of intent.
Later
that day, HAQ received a revised letter of intent, prepared by representatives
of Bear Stearns in conjunction with counsel to PharmAthene, which incorporated
certain suggested revisions from PharmAthene management and its advisors. The
revised letter provided for merger consideration to PharmAthene stockholders
consisting of (i) 12.7 million shares of HAQ common stock and (ii) $5 million
cash.
On
November 14, 2006, Mr. Kinley had a telephone conversation with Mr. Richman,
representatives of Bear Stearns and counsel to PharmAthene regarding the
proposed revisions to the draft letter of intent. During the conversation they
discussed the proposed composition of the Board of Directors following the
Merger, the assumption by HAQ of the outstanding stock options of PharmAthene,
whether any portion of the merger consideration would be escrowed, the treatment
of advisory fees, the ability of PharmAthene to raise capital prior to the
closing, the approval by PharmAthene of its stockholders to the transaction
and
any dissenters’ rights and whether or not a break-up fee would be included in
the letter of intent. Later on November 14, 2006, Mr. Kinley engaged in a
discussion with representatives of The Maxim Group regarding the proposed
revisions to the letter of intent.
On
November 15, 2006, Mr. Kinley delivered a revised draft letter of intent to
representatives of PharmAthene, including representatives of Bear Stearns and
counsel to PharmAthene. The revised letter of intent included warrants to
purchase 3.5 million shares of HAQ common stock at an exercise price of $10
per
share to be issued to PharmAthene stockholders, in addition to the previously
offered merger consideration. Representatives of PharmAthene, including Messrs.
Wright and Richman and counsel to PharmAthene, met with representatives of
Bear
Stearns at their offices later that day to discuss the terms of the
letter of intent.
On
November 16, 2006, the Board of Directors of PharmAthene met at the offices
of
Bear Stearns in New York City. At the meeting, the terms of the proposed Merger
as embodied in the then current draft letter of intent with HAQ were described
to the Board by counsel. The PharmAthene Board reviewed alternative transactions
that could result in the investment of additional capital into PharmAthene.
The
PharmAthene Board also discussed the effect of the transaction on each class
of
equity of PharmAthene. Representatives of Bear Stearns presented to the Board
their analysis of the transaction from a financial perspective and relative
to
other options that could be explored by PharmAthene. Although the Board
determined that it was favorably disposed to proceed with the transaction,
it
determined not to act with respect to the draft letter of intent pending
additional analysis by certain Board members and discussions with certain
significant stockholders of PharmAthene as to whether they would support the
proposed Merger.
Also
on
November 16, 2006, Mr. Pappajohn met with Elizabeth Czerepak, a member of
PharmAthene’s Board of Directors to discuss the proposed Merger.
On
November 20, 2006, representatives of PharmAthene delivered a further revised
draft of the letter of intent including comments and revisions suggested by
PharmAthene. From November 20, 2006 through December 12, 2006, representatives
of HAQ and PharmAthene continued to negotiate the terms of the letter of intent.
During these negotiations, the various components of the merger consideration,
including the number of shares of HAQ common stock, amount of cash, number
of
warrants and the principal amount of any replacement notes to be issued to
PharmAthene’s bridge lenders were discussed in the context of the initial
proposals, until the final structure was agreed upon. The
members of the Board of Directors of PharmAthene had expressed concern that
the
value of the consideration offered by HAQ was not adequate. In addition, there
was concern that if PharmAthene were to win a substantial contract in the near
term that PharmAthene stockholders would have received substantially less
consideration than would be appropriate. Accordingly, the parties agreed to
provide for milestone payments if a significant contract was entered into within
a limited time period.
On
November 21, 2006, Mr. Kinley discussed with counsel to PharmAthene responses
to
the comments delivered by PharmAthene and asked questions with respect to the
proposed changes. Also, on November 21, 2006, Mr. Kinley reviewed with
representatives of The Maxim Group the newly proposed merger consideration
under
the letter of intent.
On
November 29, 2006, HAQ requested additional due diligence materials of
PharmAthene.
On
December 5, 2006, Mr. Kinley engaged in a telephone conference with counsel
to
PharmAthene to discuss specific due diligence matters raised by the due
diligence materials furnished by PharmAthene and reviewed. Also, on December
5,
2006, Mr. Kinley engaged in a telephone conference with representatives of
The
Maxim Group to review final merger consideration and terms of the proposed
transaction.
On
December 11, 2006, a meeting was held at PharmAthene’s offices in Annapolis,
Maryland, at which Messrs. Wright and Richman were present as well as John
Troyer, Jody Hatch, Jeffrey Jones, Francesca Cook, Wayne Morges, Ph.D., Valerie
Riddle, M.D., Richard Schoenfeld and Solomon Langermann, members of
PharmAthene’s management, were present and Mr. Kinley and Dr. Schaffer and
Robert Kaufman were present from HAQ; representatives of Bear Stearns wre also
present. PharmAthene’s management reviewed for the representatives present the
status of product development efforts including scientific and clinical updates.
PharmAthene’s management also provided information on the production of
Protexia® and Valortim™ and business development possibilities. The parties also
discussed the financial condition of PharmAthene, regulatory and governmental
affairs, the then current status of PharmAthene’s Protexia® and Valortim™
products and future business development initiatives.
63
Mr.
Kaufman had been retained as a consultant to HAQ to assist in the due diligence
evaluation of PharmAthene. Mr. Kaufman is currently Chief Operating Officer
of
Outcome Science, Inc. of Boston, Massachusetts. Mr. Kaufman received $15,000
for
his consulting services. Mr. Kaufman reviewed research, scientific, legal and
financial documents as part of the due diligence. He also attended due diligence
meetings at PharmAthene’s offices in Maryland and Montreal.
A
telephonic meeting of the Board of Directors of HAQ took place on December
12,
2006. At that meeting, Mr. Kinley reported to the Board the analyses
undertaken in evaluating PharmAthene and how the results of such analyses
supported the merger consideration contained in the final version of the letter
of intent and HAQ’s obligation to engage in a business combination with a
company having a fair market value equal to at least 80% of HAQ net assets.
Mr.
Kinley pointed out to the Board that these analyses were based on projections
furnished by PharmAthene as well as other materials supplied and that no third
party valuation with respect to PharmAthene had been sought. Following a
discussion of the presentation and of the terms of the letter of intent, the
HAQ
Board determined that the merger consideration was fair, approved the terms
of
the letter of intent and authorized HAQ’s management to proceed to negotiation
of a definitive merger agreement.
On
December 12, 2006, the Board of Directors of PharmAthene again held a telephonic
meeting at which the revised terms of the letter of intent were discussed and
a
vote was taken to approve the letter of intent. The letter of intent was
approved by the Board of Directors of PharmAthene and then both PharmAthene
and
HAQ executed the letter of intent. The terms of the merger consideration
reflected in the definitive Merger Agreement did not change from those contained
in the executed letter of intent.
From
December 12, 2006 through January 12, 2007, PharmAthene and HAQ negotiated
the
terms of a definitive agreement and plan of merger and the related documents
such as the 8% notes. During such time, representatives of HAQ continued their
due diligence efforts including visits to the facilities of PharmAthene in
Annapolis, Maryland and in Canada.
On
December 14, 2006, Mr. Kinley called BDR Research Group, an independent company
with expertise in technical review and analysis of pharmaceutical products,
to
retain them to assist with due diligence. BDR Research received $18,000 for
its
services. BDR reviewed the underlying technology of PharmAthene’s Valortim™ and
Protexia® products, their development status and the overall market for such
products. BDR also included a review of competitive products.
On
December 14 and 15, 2006, Mr. Kinley spoke to Messrs. Berger and Schellhammer
to
review due diligence, additional due diligence to be completed, including the
engagement of BDR Research Group and the upcoming visit to Canada by
representatives of HAQ. Mr., Kinley also reviewed financial information with
respect to PharmAthene. Dr. Schaffer also reported to Messrs. Berger and
Schellhammer on his due diligence investigation.
On
December 19 and 20, 2006, Dr. Schaffer and Mr. Kaufman met with David Wright
and
visited the offices of PharmAthene’s Canadian subsidiary with Mr. Wright and
Richard Schoenfeld, Vice President of PharmAthene.
On
December 21, 2006, Messrs. Pappajohn and Kinley met with representatives of
The
Maxim Group to discuss and negotiate an advisory agreement. Representatives
of
The Maxim Group proposed being retained by HAQ to assist in due diligence,
to
review and provide assistance in the negotiation of the terms of the Merger
Agreement and to provide advice and services related to road show activities
and
investor meetings following the execution of the Merger Agreement. Also on
December 21, 2006, Mr. Kinley met with BDR Research Group to discuss its
retention as an expert in the review of PharmAthene’s technology.
On
January 2 and 3, 2007, Mr. Kinley and Dr. Schaffer met with Chris Camut, the
newly appointed Chief Financial Officer of PharmAthene, and Messrs. Wright
and
Richman to review open issues relating to the negotiation of the Merger
Agreement, to discuss the announcement of the proposed merger and the proposed
presentation to investors.
On
January 3, 2007, Mr. Kinley and Dr. Schaffer participated in a telephonic due
diligence conference call with counsel to HAQ to review the results of the
legal
due diligence review by such counsel. Following the call, Mr. Kinley and Dr.
Schaffer spoke on the telephone with Messrs. Berger and Schellhammer regarding
the results of the due diligence.
64
On
January 8, 2007, Mr. Kinley, Dr. Schaffer and Mr. Kaufman participated in a
telephone conference call with Messrs. Richman and Jones and intellectual
property counsel to PharmAthene.
On
January 10, 2007, Mr. Kinley, Dr. Schaffer and Mr. Kaufman participated in
a
telephone conference call with representatives of BDR Research Group during
which BDR Research Group reported on their due diligence review of the
PharmAthene technology and product candidates.
On
January 11 and 12, 2007, Messrs. Kinley and Pappajohn and Dr. Schaffer met
with
Messrs. Wright, Camut and Richman and counsel to PharmAthene to negotiate the
final terms of the definitive Merger Agreement. In addition, during these
meetings, the representatives of PharmAthene and HAQ met with representatives
of
The Maxim Group to review the presentation to be made following the announcement
of the transaction. Also at such time, the representatives of HAQ received
a
written report from BDR Research Group. The written report summarized BDR’s
analysis of PharmAthene which was based upon reviewing the scientific and
clinical merits of Valortim™ and Protexia®. The report addressed, among other
things, the efficacy and safety of Valortim™ and Protexia® as well as
potentially competitive products to each of these currently under
development.
On
January 12, 2007, copies of the draft Merger Agreement and related documents
were distributed to the Board of Directors of PharmAthene for review and
consideration.
On
January 14, 2007, copies of the draft Merger Agreement and related documents
were distributed to the Board of Directors of HAQ for review and
consideration.
On
January 16, 2007, the Board of Directors of PharmAthene, during a telephonic
meeting of the Board, approved the Merger Agreement and authorized the
presentation of the proposal to merge with HAQ to the stockholders of
PharmAthene with the Board’s recommendation that the stockholders approve and
adopt the Merger Agreement and the transactions contemplated
thereby.
Also
on
January 16, 2007, the Board of Directors of HAQ, during a telephonic meeting
of
the Board, approved the Merger Agreement and authorized the presentation of
the
proposal to merge with PharmAthene to the stockholders of HAQ with its
recommendation that the stockholders approve and adopt the Merger Agreement
and
the transactions contemplated thereby. During the meeting, Mr. Kinley presented
to the Board the updated information with respect to the capitalization of
the
combined companies and the terms of the Merger Agreement and information with
respect to the proposed retention of The Maxim Group. Mr. Kinley again reported
to the Board the analyses undertaken in evaluating PharmAthene and how the
results of such analyses supported the merger consideration and HAQ’s obligation
to engage in a business combination with a company having a fair market value
equal to at least 80% of HAQ net assets. Mr. Kinley reminded the Board that
these analyses were based on projections furnished by PharmAthene as well as
other materials supplied and that no third party valuation with respect to
PharmAthene had been sought. The Board considered the current market price
of
HAQ’s common stock ($7.46 per share as of January 12, 2007) and the components
and terms of the other merger consideration. Management of HAQ had updated
the
comparative capitalization chart reflective of the final terms of the Merger,
which chart reflected, among other things, the conversion price of the 8% notes
of $10.00 per share. The Board also considered and determined that the amount
of
Merger consideration was within the range of values that management had
initially applied to PharmAthene at the commencement of the negotiations.
On
January 19, 2007, the Merger Agreement was executed by David Wright on behalf
of
PharmAthene and John Pappajohn on behalf of HAQ. On January 19, 2007, the
requisite majority of all classes of equity of PharmAthene released their
irrevocable written consent approving and adopting the Merger Agreement and
the
Merger.
Interests
of HAQ Directors and Officers in the Merger
In
considering the recommendation of the Board of Directors of HAQ to vote for
the
proposals to approve and adopt the Merger Agreement and the Merger, you should
be aware that certain members of the HAQ Board have agreements or arrangements
that provide them with interests in the Merger that differ from, or are in
addition to, those of HAQ stockholders generally. In particular:
·
if
the
Merger is not approved, HAQ will be required to adopt a plan to liquidate
and
dissolve, and the shares of common stock purchased before the IPO and warrants
held by HAQ's executive officers and directors will be worthless because
HAQ's
executive officers and directors are not entitled to receive any of the net
proceeds of HAQ's IPO that may be distributed upon liquidation of HAQ (except
for shares they purchased in the open market). HAQ's executive officers and
directors own a total 2,250,000 shares of HAQ common stock that were purchased
before the IPO that have a market value of $16,357,500 based on HAQ's share
price of $7.27 as of June 27, 2007. HAQ's executive officers and directors
also
own a total of 366,900 warrants to purchase shares of HAQ common stock that
have
a market value of $366,900 based on HAQ's warrant price of $1.00 as of June
27, 2007. Such warrants were purchased on the open market pursuant to the
terms
of a Rule 10b5-1 plan. However, as HAQ's executive officers, Directors and
special advisors are contractually prohibited from selling the shares of
common
stock issued to them prior to the IPO prior to July 27, 2008, during which
time
the value of the shares may increase or decrease, it is impossible to determine
what the financial impact if the Merger is not approved would be on HAQ's
executive officers and directors. In addition, certain of HAQ’s officers and
directors purchased an aggregate of 250,000 shares of common stock in the
open
market pursuant to a Rule 10b5-1 plan. They are not, however, contractually
prohibited from selling such shares and may participate in the liquidation
of
the trust;
65
·
it
is
currently anticipated that John Pappajohn and Derace M. Schaffer, M.D., both
of
whom are current Directors of HAQ, will continue as Directors of the combined
company.
HAQ’s
Reasons for the Merger and Recommendation of the HAQ Board
Based
upon its evaluation, our Board of Directors has unanimously approved the Merger
with PharmAthene and determined that it is in the best interests of HAQ and
our
stockholders and that the merger consideration payable is fair. No fairness
opinion from a third party was sought or obtained by our Board of Directors
in
reaching its determination.
In
the
prospectus relating to our IPO, we stated our intention to focus our pursuit
of
a business combination on targets in the healthcare industry and in areas where
our management has significant expertise. We believe that the Merger meets
these
investment objectives.
As
discussed below and under the prior section of this proxy statement entitled
“Background of the Merger” commencing at page 57, HAQ’s Board of Directors
considered a wide variety of other factors in connection with its evaluation
of
the Merger. In light of the complexity of those factors, our Board of Directors,
as a whole, did not consider it practicable to, nor did it attempt to, quantify
or otherwise assign relative weights to the specific factors it considered
in
reaching its decision. Individual members of our Board of Directors may have
given different weight to different factors.
Our
Board
of Directors considered the nature of PharmAthene’s business and assets, its
current capitalization and operating losses, the extent of the liabilities
to be
assumed and the factors below, in addition to the various risks discussed in
the
section entitled “Risk Factors” beginning on page 32, in reaching its
determination that the Merger is in the best interests of HAQ’s stockholders and
to approve the Merger and enter into the Merger Agreement.
In
considering the Merger, our Board of Directors gave consideration to the
following positive factors:
• Financial
Analyses. Management of HAQ undertook financial analyses of PharmAthene in
order
to determine that the value of the consideration to be issued by HAQ in
connection with the Merger is fair and reasonable. Management considered very
carefully traditional standards generally accepted by the financial community
in
evaluating a business entity including potential sales, potential earnings,
cash
flow, book value of assets and value of intangible assets. However, in
evaluating PharmAthene, HAQ management recognized that PharmAthene is involved
in a relatively new sector, a unique industry (the biodefense industry) which
may not be as easily subject to traditional valuation criteria. Accordingly,
HAQ
management applied what it perceived to be generally accepted standards for
evaluating companies in the biotechnology industry which, in addition to factors
such as potential sales, potential earnings and cash flow, included
consideration of the particular market for potential products, the likelihood
of
development and commercialization of the products and, on a qualitative basis,
the unique supplemental value that might be derived from PharmAthene’s
intellectual property, specifically its intellectual property rights and
know-how in its recombinant version of human butyrylcholinesterase (used to
develop Protexia®) although
no
separate valuation analysis was conducted with respect to intellectual property.
Specifically,
management of HAQ prepared and utilized as part of its analyses, a “peer group
analysis”:
Peer
Group Analysis. As part of the financial analysis, HAQ management prepared
a
summary of valuations of at least five biotechnology companies deemed to
be
comparable to PharmAthene in part because all are involved in the development
of
products for biodefense. HAQ management believed these companies were the
most likely set of comparable companies to be used to value PharmAthene
in the
public markets after completion of the Merger. HAQ Management assembled
this list based on its research of the industry and with input from its
advisor,
The Maxim Group. Five of these comparable enterprises were publicly traded
and
one was a subsidiary of a public company. In reviewing publicly available
information on the peer group companies, management looked at the market
capitalization of the entities, the enterprise value and estimated revenue
multiples.
Although
two of the five peer companies had current product revenues, HAQ management
chose to compare projected revenues so that all companies could be compared
on
the same basis, projected future revenues. HAQ management believed that
the revenue projections provided by PharmAthene were prepared using similar
criteria and methods as considered by research analysts in reviewing
and
providing revenue estimates for the peer group companies. Each was engaged
in
the development of at least one biodefense product. Two of the companies
have
product sales for one of their products and the others all have products
in
varying stages of development. HAQ management reviewed the stage of
development of each and reviewed whether or not such companies had received
government funding, the experience of its management and other factors
deemed
relevant to such analysis such as whether or not the companies had product
sales
and the stage of development of potential products. Important characteristics
for the peer group that were considered included company size, products
and
potential products, stage of product development, customer segmentation,
cash
flow and number of employees. Although PharmAthene is in a unique, relatively
new bio-security sub-sector of biotechnology, HAQ Management selected
a group of
companies that it believed to have characteristics described above that
were
most similar to PharmAthene. HAQ management then evaluated the relative
valuation of each, in light of these factors as compared to PharmAthene.
In
light of the complexity of the many elements affecting the factors
considered by our Board, our Board of Directors, as a whole, did not
consider it
practicable, nor did it attempt, to quantify or otherwise assign relative
weights to the specific factors it considered in reaching its decision.
Selecting the peer group was an important step in the valuation process
for HAQ.
The publicly traded companies selected were BioCryst (“BCRX”), AVI Biopharma
(“AVII”), SIGA Technologies (“SIGA”), Cangene (Toronto Stock Exchange “CNJ.to”)
and Emergent Bio Solutions (“EBSI”). The following illustrates the analysis
presented to the Board of HAQ in October 2006 at the time of the issuance
of the
letter of intent:
66
|
Healthcare
Acquisition Corp
|
||||||||||||||||||||||
|
Peer
Group Company Analysis and Revenue Multiple
Analysis
|
||||||||||||||||||||||
|
10/20/2006
|
|
10/20/2006
|
Shares
|
|||||||||||||||||||||||||||||||||
|
Ticker
|
Share
|
Outstanding
|
Market
|
Enterprise
|
Revenue,
in millions (2)
|
TEV
(3) / Revenue Multiple
|
||||||||||||||||||||||||||||
|
Company
|
Symbol
|
Price
|
(in
millions) (1)
|
Capitalization
|
Debt
|
Cash
|
Value
|
2008
|
2009
|
2008
|
2009
|
|||||||||||||||||||||||
|
BioCryst
(1)
|
BCRX
|
$
|
11.93
|
29.2
|
$
|
348.5
|
-
|
$
|
54.7
|
$
|
293.8
|
$
|
35.0
|
$
|
50.0
|
8.4
|
5.9
|
|||||||||||||||||
|
AVI
Biopharma (1)
|
AVII
|
$
|
4.37
|
53.0
|
231.4
|
-
|
44.5
|
186.9
|
20.0
|
20.0
|
9.3
|
9.3
|
||||||||||||||||||||||
|
SIGA
(1)
|
SIGA
|
$
|
3.92
|
29.0
|
113.7
|
$
|
3.1
|
3.0
|
113.8
|
7.0
|
15.0
|
16.3
|
7.6
|
|||||||||||||||||||||
|
CanGene
(Toronto) (4)
|
CNJ.to
|
$
|
8.19
|
65.8
|
538.7
|
32.5
|
7.7
|
563.5
|
115.0
|
150.0
|
4.9
|
3.8
|
||||||||||||||||||||||
|
Emergent
Bio Solutions (5)
|
EBS
|
$
|
33.25
|
7.8
|
258.8
|
34.5
|
20.0
|
273.3
|
180.0
|
225.0
|
1.5
|
1.2
|
||||||||||||||||||||||
|
|
High
|
$
|
563.5
|
16.3
|
9.3
|
|||||||||||||||||||||||||||||
|
|
|
Average
|
|
$
|
286.3
|
8.1
|
5.6
|
|||||||||||||||||||||||||||
|
|
Median
|
|
$
|
273.3
|
8.4
|
5.9
|
||||||||||||||||||||||||||||
|
|
Low
|
$
|
113.8
|
1.5
|
1.2
|
|||||||||||||||||||||||||||||
|
Notes:
|
||||||||||||||||||||||
|
(1)
Information derived from company 10Q's and publicly filed
documents at
June 30, 2006.
|
||||||||||||||||||||||
|
(2)
Revenue projections derived from equity research analyst
reports.
|
||||||||||||||||||||||
|
(3)
TEV = Total Enterprise Value and is defined as market capitalization
plus
cash, minus debt.
|
||||||||||||||||||||||
|
(4)
Cangene information derived from Annual Report dated July
31,
2006.
|
||||||||||||||||||||||
|
(5)
Derived from registration statement filed by Emergent Biosolutions.
Assumes a pre-money value of approximately $258.8 million.
Analysis
assumes an initial public offering discount of 25%. Information
derived
from public documents and Maxim Equity Research. (Does not
reflect a stock
split completed by Emergent Bio prior to its
offering.)
|
||||||||||||||||||||||
The
following table includes, for each of the above companies, information
known to
PharmAthene with respect to product development
activities.
|
Product
Development
|
|||
|
Company
|
Number
of Products
|
Development
Stage
|
Market
|
|
AVI
Biopharma
|
One
|
Phase
II
|
Commercial
|
|
One
|
Phase
I/II
|
Commercial
|
|
|
One
|
Preclinical
|
Biodefense/Commercial
|
|
|
One
|
Preclinical
|
Biodefense
|
|
|
|
|||
|
Biocryst
|
One
|
Phase
II/III
|
Commercial
|
|
One
|
Phase
II
|
Biodefense/Commercial
|
|
|
One
|
Phase
I
|
Commercial
|
|
|
Cangene
|
Three
|
Marketed
|
Commercial
|
|
One
|
Marketed
|
Biodefense
|
|
|
Two
|
Phase
I
|
Biodefense
|
|
|
Emergent
Biosolutions
|
One
|
Marketed
|
Biodefense
|
|
One
|
Phase
I
|
Biodefense
|
|
|
Two
|
Preclinical
|
Biodefense
|
|
|
Two
|
Phase
II
|
Commercial
|
|
|
One
|
Phase
I
|
Commercial
|
|
|
Siga
|
One
|
Phase
I
|
Biodefense
|
|
One
|
Preclinical
|
Biodefense
|
|
|
PharmAthene
|
One
(Protexia®)
|
Preclinical
|
Biodefense
|
|
One
(Valortim™)
|
Phase
I
|
Biodefense
|
|
Management
next determined that a widely recognized and generally accepted valuation
multiple for biotechnology-related companies is a revenue multiple (being
the
ratio of total enterprise value to projected revenue). Enterprise values
were
calculated for each of the peer group companies based on publicly filed
documents and projected revenues for each of the peer group companies as
derived
from generally available equity analyst research reports. Based on the total
enterprise value to 2008 and 2009 projected revenues, the average multiple
for
the peer group was determined to be 8.1 times and 5.6 times, respectively.
During
the early stages of the due diligence process, PharmAthene provided HAQ
with
revenue projections for 2008 and 2009 of $67.5 million and $168.8 million,
respectively. The next step for HAQ was to determine the factor of revenues
to
apply to the forecast to determine an enterprise value for PharmaAthene,
based
on, among other things, the risk level associated with PharmaAthene and
its
revenue projections to reflect the inherent uncertainty of revenue projections
and the biotechnology industry. Without reference to a formula, management
applied a range to discount the projected revenue. At a 50% discount,
PharmAthene projected revenues would be $33.8 million and $84.4 million
for 2008
and 2009, respectively. Management then applied a range of multiples
to the
discounted revenue projections supplied by Pharmathene management. Using
reduced projected revenue (discounted 50%) of $33.8 million and $84.4
million
for 2008 and 2009, respectively, times multiples of 3.0 times and 2.0
times for
the 2008 and 2009, respectively, (which equate to approximately 37% of
the
average revenue multiple derived from the peer group analysis of 8.1
times and
5.6 times for 2008 and 2009, respectively) management calculated a valuation
range of approximately $101.4 million and $168.8 million, respectively,
for
PharmAthene as a stand-alone company. Management of HAQ selected the
37% factor
to apply another conservative measure as compared to the peer group. It
should
be understood that the PharmAthene revenue projections, although believed
at the
time to be valid, are subject to uncertainties that may, in the future,
result
in actual results that differ from those
projected.
67
PharmAthene’s
projections were prepared internally by PharmAthene’s management, and reflect
their good faith estimate of the probable results for the periods indicated.
They were prepared under the supervision of PharmAthene’s former and current
Chief Financial Officers both of whom are experienced in the analysis of
a
company’s financial circumstances and in the preparation of financial
projections. The projections are based upon assumptions that are believed
by
PharmAthene to be valid at the time made. Nevertheless, the attainability
of the
projected results will depend upon third parties and events that are not
within
PharmAthene’s control, as indicated below including
the issuances of Requests for Proposals by agencies of the United States
government and the award of contracts to PharmAthene. Accordingly,
investors should understand that the actual results may vary materially
from
those suggested.
Although
PharmAthene has estimated that it will have revenues of $67.5 million and
$168.8
million in 2008 and 2009, respectively, it will not have a commercially
available product at those times. In order to market commercially its products,
PharmAthene must receive final approval from the FDA. PharmAthene currently
estimates that it will not have an FDA approved product until at least
2012.
Nevertheless, PharmAthene derived its projections for 2008 and 2009 in
the
following manner. The United States Strategic National Stockpile (“SNS”) is able
to purchase products from companies prior to the receipt of FDA approval
for
Emergency Use Authorization (“EUA”). PharmAthene is aware that, under certain
conditions, the SNS currently buys a significant amount of product from
companies that do not have an FDA-approved product. PharmAthene analyzed
the
United States Government’s demand for its products based upon published reports.
It also analyzed available information regarding its competitors’ projects and
determined the level of orders that could be received from the United States
Government. PharmAthene estimated what portion of such orders it could
receive
and of such orders what portion PharmAthene could deliver in each of 2008
and
2009 and the price per treatment delivered. PharmAthene also considered
delivery
of a limited number of orders internationally. Much like the Valortim™ analysis,
PharmAthene performed a similar evaluation and analysis of the market for
Protexia®. To this end, PharmAthene projected the delivery, beginning in 2009,
of Protexia® domestically to SNS and internationally. Accordingly, projected
sales in 2009 includes sales of Valortim™ and Protexia®.
PharmAthene’s
forecasts and assumptions included in this proxy statement do not constitute
representations as to future operations and no assurance can be given regarding
the attainability of these forecasts, the reliability of the assumptions
upon
which they are based, or the achievability of any investor returns of or
on
capital invested based on these forecasts. Although PharmAthene believes
the
assumptions upon which the projections are based to be reasonable, such
assumptions may be incomplete or inaccurate and unanticipated events and
circumstances are likely to occur. For these reasons, actual results achieved
during the periods covered may vary from the forecasts and such variations
may
be material and adverse. If these assumptions are incorrect, the projections
likewise would be incorrect. If
the
United States government determines not to request proposals for the sale
of
these products, does not award contracts to PharmAtene or if PharmAtene
is not
able to complete the development of these products within the time frame
suggested if at all, it will likely not be able to achieve these projected
results.
HAQ’s management
also applied a valuation methodology called a multiple analysis. This
analysis
was completed on October 20, 2006 by HAQ. This method first involved
examining
and comparing certain financial ratios of the peer group described
above, in
order to further test the validity of the valuation range of PharmAthene
described in the table above. The multiple analysis looks at the enterprise
value for HAQ on a post merger basis assuming various HAQ stock prices.
Although
a post-merger calculation would not necessarily be determinative of
value for
PharmAthene, it could be used by the Board of Directors to test the
peer group
analysis presented by HAQ’s management. HAQ’s analysis included estimated
stock prices for HAQ’s common stock with a range of between $7.50 to $10.00,
which the Board believed was relevant because of the market prices for
its common stock and the potential conversion price of the notes (which
price was going to be negotiated and eventually was settled at
$10.00.)
68
•
Valuations Ascribed by Recognized Venture Capital Investors and a Potential
Acquirer. HAQ’s Board and management acknowledged that PharmAthene raised equity
from a very sophisticated group of investors, including MPM Capital, HealthCare
Ventures and Bear Stearns Health Innoventures, which had determined a valuation
for PharmAthene in connection with their investment. HAQ’s Board and management
believes that a valuation by sophisticated investors, particularly if applicable
to an actual investment, is a valid indication of value by the financial
community. In March 2005, at the time of the acquisition by PharmAthene
of the
assets attributable to the Protexia® program, PharmAthene raised $10.9 million
from its investors in connection with the sale of Series C Convertible
Preferred Stock. Giving effect to the purchase price per share of this
Series C Convertible Preferred Stock, the market capitalization of
PharmAthene immediately following the acquisition of the Protexia® program was
deemed by PharmAthene to be approximately $91 million. The calculation of
this valuation is based upon the assumption that all outstanding PharmAthene
securities, including then outstanding shares of PharmAthene common stock,
are
priced at the same price per share as the Series C Convertible Preferred
Stock
notwithstanding the different financial and governance terms of these
securities. In this regard, the Series C Convertible Preferred Stock had
certain
advantageous economic terms that were superior to the economic terms of
the
common stock but that, unlike common stock, the Series C Convertible
Preferred Stock was non-voting. However, even though the per share price
of the
Series C Preferred Stock is not directly comparable to the value of the
common
stock, HAQ’s Board and management believe that it provides some indication of
the enterprise value of PharmAthene.
Through
the due diligence process, HAQ’s Board and management identified, with
PharmAthene executives, advances in PharmAthene’s business since the investment
made by investors made in March 2005 which would support a greater valuation.
These advances include: (i) the successful completion of a Phase I clinical
trials for Valortim™, (ii) the award of a contract from the Department of
Defense for Protexia® for approximately $35 million, which if all options
and extension are exercised, could amount up to $213 million, and (iii) the
successful completion of efficiency studies in animal models for Valortim™.
HAQ’s Board and management believes that the achievement of these milestones
could only serve to increase any historical valuations placed on PharmAthene
and
that historical investments of the venture capital investors in PharmAthene
were
a valid factor to consider in determining the value of PharmAthene. Further,
the
willingness of these venture capital investors to continue to be stockholders
in
the post merger company suggests confidence in PharmAthene’s business and
prospect.
HAQ’s
Board recognized that in certain instances, because of certain of the financial
preferences inherent in preferred stock, and because of the participation
rights
that venture investors may enjoy, such as a right to designate members
of the
Board of Directors of a company (inherent in preferred stock issued prior
to the
Series C Convertible Preferred Stock, and which rights are possessed by
certain
holder of Series C Convertible Preferred Stock), valuations in connection
with
such investments may not always reflect a definitive index of value.
Nevertheless, the Board considered the valuation in its analysis, tempering
such
consideration with the understanding of the rights of the preferred
stockholders. As with the other factors considered and discussed in this
proxy
statement, the historical level and types of investment were just one of
the
factors considered by HAQ’s Board in determining to approve the Merger Agreement
and recommend the Merger.
HAQ’s
Board and management also reviewed the valuation ascribed by SIGA to the
business of PharmAthene in connection with the proposed merger with SIGA
which
had been terminated. The valuation, as indicated by the market value of
the SIGA
common stock that would have been issued to PharmAthene stockholders on
the date
of the execution of the SIGA Merger Agreement was $118.7
million.
In
each
instance, HAQ’s Board and management determined that the merger consideration
contemplated in the Merger was within the range of values previously ascribed
to
PharmAthene.
•
Quality
of and Strategy for Revenue Growth for PharmAthene’s Two Leading
Products. HAQ’s management reviewed the business strategies employed by
PharmAthene and focused primarily on the two potential products under
development by PharmAthene, specifically Valortim™ and Protexia®. Together with
its consultant BDR Research, HAQ Management identified the potential market
for
each of Valortim™ and Protexia® and
discussed the PharmAthene management its marketing plans for the products.
Also
HAQ’s management with BDR Research, reviewed the market conditions for the two
products and PharmAthene’s position in, and strategy to penetrate the market
with its two products. In evaluating the market, management
identified the designation by the U.S. government of anthrax as a significant
threat to national security for which the government has mandated the
procurement, on an expedited basis, of antidotes for the strategic national
stockpile. HAQ management then considered the cost basis for the development
and
production of biodefense products. First, HAQ management noted the reduced
regulatory approval process required for biodefense products, resulting in
reduced costs for product development. Second, HAQ management noted the unique
ability PharmAthene has demonstrated to secure funding from the U.S. government
to fund research and development. Finally, HAQ management noted the advanced
stage of development achieved by PharmAthene of each of Valortim™ and Protexia®
and the limited amount of additional cost necessary for the completion and
sale
of these products.
•
Industry Recognition of PharmAthene and its Management Team. PharmAthene has
a
strong presence and commitment to the development of products for use in the
defense against agents of biological warfare which can be seen in its
significant involvement in the industry including that its Chief Executive
Officer, David P. Wright, is co-chair of the Alliance for Biosecurity, that
its
management is called on to testify before the U.S. Senate and House of
Representatives on biodefense matters and that it is involved in assisting
the
Biodefense Advanced Research and Development Authority in drafting legislation.
We expect the strong development and commercialization capabilities of
PharmAthene together with its research capabilities will create an expanded
biodefense platform with the possibility for multiple procurement stage products
and near term revenue opportunities.
•
Industry Presence. The biodefense industry has been identified by the U.S.
government as a priority evidenced by the enactment of Project Bioshield
with
funding targets of $5.6 billion over 10 years. PharmAthene has possible defense
products in two of the U.S. government’s identified top five priority categories
for biodefense (i.e. anthrax and nerve agent (the remaining three being
smallpox, botulinum toxin and radiation)). The biodefense industry is a
significant market in the U.S. and abroad due to the threat of biological
warfare and PharmAthene has been awarded a contract with the Department of
Defense for its product Protexia® for approximately $35 million which, if all
options and extensions thereof are exercised, could amount to up to $213
million
in revenues.
69
• Management
Strength. PharmAthene has an experienced management team including David P.
Wright, PharmAthene’s Chief Executive Officer, who has participated in the
development and marketing of many successful drug launches including, among
others, the launch of Zantac® by GlaxoSmithKline, Inc. and the launch of
Cytogam®, Synagis®.and Respigam® by MedImmune, Inc.
• Government
Contract Awards. PharmAthene has demonstrated an ability to succeed in its
industry, having been awarded U.S. government, funded contracts including,
a $35
million contract with the Department of Defense for Protexia® (with options for
up to $213 million in total contract value) and a $1.8 million contract with
the
Department of Defense for Valortim™. The Board identified these government
awards as validation of PharmAthene’s position in the industry.
• HAQ
Management Experience. The experience of HAQ’s management, in particular, Mr.
Pappajohn and Dr. Schaffer, in building, consolidating and investing in similar
businesses in the U.S. including relationships HAQ could introduce to
PharmAthene could potentially enhance its growth.
• Continuing
Involvement of PharmAthene Security Holders. The involvement of certain of
the
stockholders and noteholders of PharmAthene, including MPM Capital, Healthcare
Ventures and Bear Stearns Health Innoventures and the representatives of these
funds, whom HAQ believes represent strong long term investors with experience
in
venture transactions and growth companies could be beneficial to the combined
company. It is currently intended that Dr. Steven St. Peter of MPM Capital,
Dr.
James Cavanaugh of Healthcare Ventures and Ms. Elizabeth Czerepak of Bear
Stearns Health Innoventures will serve on the Board of Directors of HAQ
following the Merger. HAQ’s management believes that with their vast knowledge
and experience in the biotechnology and pharmaceutical industries, these
individuals will provide valuable guidance and insight to the management of
HAQ
following the Merger.
The
Board
considered the following to be potential negative factors related to the
Merger,
including the risk factors appearing at pages 32 to 48 related to the
business of PharmAthene:
• The
inherent risk associated with development of therapeutic products, including
negative data from animal trials or human safety trials. Because humans
are not
normally exposed to anthrax, nerve agents, smallpox or to other lethal
biotoxins
or chemical agents, statistically significant effectiveness of PharmAthene’s
biodefense product candidates cannot be demonstrated in humans, but instead
must
be demonstrated, in part, by utilizing animal models before they can be
approved
for commercial sale. Delays in obtaining results can occur for a variety
of
reasons such as slower than anticipated enrollment by volunteers in the
trials,
adverse events related to the products and unsatisfactory results of any
trial.
Any delay or adverse clinical event arising during any of its clinical
trials
could force PharmAthene to abandon a product altogether or to conduct additional
clinical trials in order to obtain approval from the FDA and other regulatory
bodies. PharmAthene’s development costs will increase substantially if it
experiences material delays in any clinical trials or if it needs to conduct
more or larger trials than planned.
• The
lack of current marketable products and receipt of product revenues.
PharmAthene’s revenues since inception have been from development funding and
not from the sale of marketable products.
• The
losses and negative cash used in operations required significant resources
to
further develop PharmAthene’s products. Other than the Valortim™ product
candidate, the research and development program for PharmAthene is at an
early
stage. Other drug candidates developed by the combined company will require
significant additional research and development efforts, including extensive
pre-clinical and clinical testing and regulatory approval, prior to commercial
sale. We cannot be sure that PharmAthene’s approach to drug discovery will be
effective or will result in the development of any drug. HAQ does not expect
that any drugs resulting from the research and development efforts of
PharmAthene will be commercially available for several years, if at
all.
• PharmAthene
will not have significant cash available on its balance sheet at closing
and
therefore we will be utilizing the funds from our ipo, presently held in
the
trust account, to fund our working capital needs.
• There
are many well-funded competitors that may be preferential to customers
and
funding partners or be able to develop more clinically efficacious products.
Many of these companies have substantially greater financial, technical,
research and development, and human resources than those of PharmAthene.
Competitors may develop products or other technologies that are more effective
than any that are being developed by PharmAthene or may obtain FDA approval
for
products more rapidly. PharmAthene’s competitors may succeed in developing and
marketing products either that are more effective than those that it may
develop, alone or with its collaborators, making its products obsolete,
or that
are marketed before any products that PharmAthene develops are
marketed.
• Political
factors may impact the buying pattern, program funding, and purchase
decisions
of the U.S. government and other potential customers. For example, the
U.S.
government may purchase less product than anticipated for the strategic
national
stockpile.
• The
risks associated with PharmAthene’s litigation with SIGA, including the
opportunity cost and the management distraction with the litigation.
Litigation
can be expensive and time consuming for the Company and individual members
of
management.
• The
significant amount of capital needed to be competitive in the development
of
therapeutic products and the possible dilution to HAQ stockholders if
additional
capital is needed. PharmAthene will need to conduct a substantial amount
of
additional research and development before any U.S. or foreign regulatory
authority will approve any of its products, which will result in costs
and
expenses.
PharmAthene’s
development costs will increase substantially if it experiences material
delays
in any clinical trials or if it needs to conduct more or larger trials
than
planned. PharmAthene
and its development partner have completed the first Phase I clinical
trial for
Valortim™ without any reported adverse reactions. However, before it may begin
selling any doses of Valortim™, it will need to conduct a more comprehensive
Phase I trial to a significantly larger group of subjects. PharmAthene
will be
required to expend a significant amount to scale up manufacturing capability
through a contract manufacturer in order to conduct the more extensive
Phase I
clinical trial. PharmAthene does not expect to commence this trial until
2008.
• The
risk of maintaining senior management that has developed the current
strategy
and relationships. PharmAthene is dependent upon its current management
team and
it may not be able to retain all of its members during the process of
developing
the products and the technology.
• The
issuance of $12.5 million of convertible notes and the assumption of
PharmAthene
liabilities which potentially weakens the financial position of HAQ.
The post
transaction company will have approximately $12.5 million in total debt
outstanding following completion of the transaction. PharmAthene has
approximately $10 million outstanding under its outstanding credit
facility.
70
The
foregoing discussion of the information and factors considered by the HAQ Board
of Directors is not meant to be exhaustive but includes the material information
and factors considered.
Satisfaction
of 80% requirement
We
represented in the prospectus relating to our IPO that the business acquired
by
us in our initial business combination would have a fair market value equal
to
at least 80% of our net assets at the time of the transaction, including the
funds held in the trust account. Based on the financial analyses undertaken
or
reviewed by our Board of Directors generally in evaluating and approving the
acquisition, and the factors enumerated above, our Board of Directors determined
that the proposed Merger with PharmAthene meets this requirement.
This
determination was based on an analysis of PharmAthene’s current and projected
revenues and EBITDA, as compared to other publicly-traded businesses of a
similar nature and the acquisition multiples for other similar transactions
in
the biodefense industry that have recently been publicly announced or completed.
The Board of Directors also considered, on a limited basis, the terms of the
proposed transaction between PharmAthene and SIGA Technologies, Inc. which
was
terminated in October 2006, in assessing a value range for PharmAthene. In
all
analyses undertaken, the range of the fair market values exceeded $57 million,
which is 80% of our net assets value of approximately $71.4 million as of March
31, 2007.
The
terms
of the Merger were determined based upon arms’-length negotiations between HAQ
and PharmAthene, the respective managements of which had no prior dealings.
Under the circumstances, our Board of Directors believes that the total
consideration payable in the Merger appropriately reflects the fair market
value
of PharmAthene. In light of the financial background and experience of several
members of our management and Board of Directors, our Board also believes it
is
qualified to determine whether the Merger meets this requirement. Our Board
of
Directors did not seek or obtain an opinion of an outside fairness or valuation
advisor as to whether the 80% test has been met.
Experience
of Management and Board in Performing Financial Analyses
The
Board
of Directors of HAQ has substantial experience in evaluating and valuing
companies in a broad array of healthcare and life science fields. John
Pappajohn, the Chairman of the Board of Directors of HAQ, has performed merchant
banking and venture investing activities in the healthcare and biotechnology
industry for over thirty-five years. He has held positions on over forty boards
of directors of public companies and has participated in the negotiation and
valuation of over one hundred transactions relating to the purchase or sale
of
businesses. Mr. Pappajohn has been honored for his entrepreneurial skills.
Matthew Kinley, the President and Treasurer of HAQ, has been a senior vice
president of Equity Dynamics Inc. for over twelve years. He has assisted Mr.
Pappajohn in investment activities and the negotiation of merger and acquisition
transactions with over twenty technology companies. In addition, Mr. Kinley
is a
certified public accountant, a member of the executive advisory board to the
College of Business Administration at the University of Northern Iowa and has
a
very strong financial accounting background. Edward Berger, a member of the
Board of Directors of HAQ, has a long history of management in the healthcare
and life sciences industry. He has experience in management and has participated
in the negotiation and evaluation of over 20 merger and acquisition
transactions. He is the chairman of the MBA advisory counsel of the Eller
Graduate School of Management at the University of Arizona and he has had
leadership positions in private and public companies. Derace Schaffer, M.D.,
Chief Executive Officer of HAQ, has significant surgical and medical experience,
having held positions at Massachusetts General Hospital, University of Rochester
Medical Center, as a member of the faculty of Weill Medical College of Cornell
University and he has published widely on a number of medical issues. In
addition, Dr. Schaffer has over the last fifteen years served on the board
of
directors of over twenty companies and participated in the evaluation and
negotiation of over forty merger and acquisition transactions for public and
private companies.
United
States Federal Income Tax Consequences of the Merger
As
the
stockholders of HAQ are not receiving any consideration or exchanging any of
their outstanding securities in connection with the Merger with PharmAthene
and
are simply being asked to vote on the matters, it is not expected that the
stockholders will have any tax related issues as a result of voting on these
matters. However, if you vote against the Merger Proposal and elect a cash
conversion of your shares of HAQ into your pro-rata portion of the trust fund
and as a result receive cash in exchange for your HAQ shares, there may be
certain tax consequences, such as realizing a loss on your investment in HAQ's
shares.
WE URGE YOU TO CONSULT YOUR OWN TAX ADVISORS REGARDING YOUR PARTICULAR TAX
CONSEQUENCES.
71
Accounting
Treatment of the Merger
The
Merger will be accounted for as a reverse acquisition and equity
recapitalization, with HAQ treated as the “acquired” company for financial
reporting purposes. For accounting purposes, the transaction is being treated
as
an acquisition of assets and not a business combination because HAQ did not
meet
the definition of a business under EITF 98-3, Determination Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.
Accordingly, the transaction has been treated as a capital transaction whereby
PharmAthene is issuing stock for the net monetary assets of HAQ, accompanied
by
a recapitalization.
Regulatory
Matters
The
Merger and the transactions contemplated by the Merger Agreement are not subject
to any federal or state regulatory requirement or approval, and except for
filings necessary to effectuate the transactions contemplated by the Merger
Proposal and the Certificate of Incorporation Amendment Proposal with the
Secretary of State of the State of Delaware.
Consequences
if Merger Proposal is Not Approved
If
the
Merger Proposal is not approved by the stockholders, HAQ will not merge with
PharmAthene. In addition, HAQ would not effect the Certificate of Incorporation
Amendment or adopt the Incentive Plan. In such an event HAQ will not have the
time, resources or capital available to find a suitable business combination
partner and HAQ will be dissolved pursuant to the trust agreement, in accordance
with HAQ's amended and restated certificate of incorporation and following
stockholder approval as required by Delaware law.
We
expect
that we would initiate proceedings to liquidate and dissolve within 5 days
following stockholder disapproval of the Merger Proposal. We would be required,
under Delaware law, to obtain stockholder approval of a plan of dissolution.
We
cannot distribute any proceeds in the trust account without stockholder approval
of the plan of dissolution and liquidation. Although there can be no assurance
of the plan of dissolution and liquidation, we would continue to seek
stockholder approval of a plan of dissolution.
If
a
liquidation were to occur by approximately August 3, 2007, HAQ estimates that
with the interest that would accrue on the amounts that are held in trust
through such date, the trust balance would be approximately $72,280,000 or
$7.68
per share. We
estimate that as of March 31, 2007, we have claims from creditors, vendors
and
tax authorities of approximately $630,000 which have not been waived. HAQ
currently has no outstanding liabilities covered by waivers. HAQ
currently estimates that, at August 3, 2007, there would be approximately
$280,000 in Delaware franchise tax which are not waived and our Board members
have not agreed to indemnify HAQ for such claims. Our Board members have agreed
to indemnify HAQ for the balance that HAQ owes to certain of its vendors.
Accordingly,
the balance of the trust, less any liabilities not indemnified
by members of HAQ's Board and not waived by HAQ's creditors, would be
distributed to the holders of the 9,400,000 shares of common stock purchased
in
HAQ's IPO. HAQ currently estimates that, as of August 3, 2007, there would
be
approximately $280,000 in Delaware franchise tax and state income tax claims
which are not indemnified and not waived by such taxing authorities. Thus,
HAQ
estimates that the total amount available for distribution upon liquidation
would be approximately $72,000,000 or $7.66 per share.
Separately,
HAQ estimates that the dissolution process would cost approximately $50,000
to
$75,000 and that HAQ would be indemnified for such costs by certain of the
HAQ
executive officers and directors. Such officers and directors have acknowledged
and agreed that such costs are covered by their existing indemnification
agreement. We do not believe there would be any claims or liabilities against
which certain of HAQ’s executive officers and directors have agreed to indemnify
the trust account in the event of such dissolution. In the event that such
persons indemnifying HAQ are unable to satisfy their indemnification obligation
or in the event that there are subsequent claims such as subsequent non-vendor
claims for which such persons have no indemnification obligation, the amount
ultimately distributed to stockholders may be reduced even further. However,
HAQ
currently has no basis to believe there will be any such liabilities or to
provide an estimate of any such liabilities. The only cost of dissolution that
HAQ is aware of that would not be indemnified against by such officers and
directors of HAQ is the cost of any associated litigation.
72
Required
Vote
Approval
of the Merger Proposal will require: (1) that a majority of the shares of our
common stock issued in our IPO present in person or by proxy at the special
meeting vote in favor of the proposal; and (2) that holders of less than
20% of the shares issued in our initial public offering vote against the
Merger and demand to convert their shares into cash. Assuming the presence
of a
quorum of more than 50% of the shares of our common stock issued in IPO, the
failure to vote, broker non-votes or abstentions will have no effect on the
outcome of the vote.
Recommendation
After
careful consideration, HAQ's Board of Directors has determined unanimously
that
the Merger Proposal and the terms of the Merger are fair to, and in the best
interests of, HAQ and its stockholders. HAQ's Board of Directors has approved
and declared advisable the Merger Proposal and unanimously recommends that
you
vote or give instructions to vote “FOR” the Merger Proposal.
The
foregoing discussion of the information and factors considered by the HAQ Board
of Directors is not meant to be exhaustive, but includes the material
information and factors considered by the HAQ Board of Directors.
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR'' THE
MERGER PROPOSAL.
73
The
following summary describes the material provisions of the Agreement and Plan
of
Merger. The provisions of the Merger Agreement are complicated and not easily
summarized. This summary may not contain all of the information about the Merger
Agreement that is important to you. The Merger Agreement is attached to this
proxy statement as Annex A and is incorporated by reference into this proxy
statement, and we encourage you to read it carefully in its entirety for a
more
complete understanding of the Agreement and Plan of Merger.
General
The
Agreement and Plan of Merger, sometimes referred to herein as the Merger
Agreement, provides that upon the consummation of the Merger, PAI Acquisition
Corp., a newly formed, wholly-owned subsidiary of HAQ, sometimes referred
to
herein as “Merger Sub”, will be merged into PharmAthene. PharmAthene will
survive the Merger as a wholly-owned subsidiary of HAQ, and stockholders
of
PharmAthene will exchange their PharmAthene equity interests for 12,500,000
shares of HAQ common stock thereby becoming equityholders of HAQ and,
potentially, milestone payments not to exceed $10,000,000 in the aggregate,
while noteholders of PharmAthene will exchange currently-outstanding 8%
convertible notes of PharmAthene for new 8% convertible notes of HAQ in the
amount of $12,500,000 with a maturity date two years from the date of issuance.
The total Merger Consideration has a potential aggregate value of $113,375,000
(based upon HAQ’s common stock price of $7.27 per share on June 27, 2007 and
assuming all of the milestone payments are made).
The
closing of the transactions contemplated by the Merger Agreement will occur
promptly after the last of the conditions to the Merger has been satisfied
or
waived, or at such other time as HAQ and PharmAthene agree. Contemporaneously
with or as soon as practicable after that time, HAQ and PharmAthene will file
a
Certificate of Merger with the Secretary of State of the State of Delaware.
The
Merger will become effective upon the filing of the Certificate of Merger or
at
such other time as HAQ and PharmAthene may agree. HAQ and PharmAthene currently
expect that the completion of the Merger will take place in the second calendar
quarter of 2007. However, because the Merger is subject to stockholder approval
and other customary conditions, HAQ and PharmAthene cannot predict exactly
when
or if the Merger will occur.
Stock
Consideration
The
shares of HAQ common stock to be allocated to the holders of PharmAthene capital
stock in the Merger will be distributed to the holders of PharmAthene capital
stock as follows:
· the
holders of PharmAthene common stock will receive, on a pro rata basis
(determined based on the number of shares of PharmAthene common stock held
by
such holder) divided among the holders thereof, 4.9708% of the total number
of
shares of HAQ common stock allocated in the Merger to the holders of PharmAthene
capital stock;
· the
holders of PharmAthene Series A Convertible Preferred Stock will receive, on
a
pro rata basis (determined based on the number of shares of PharmAthene Series
A
Convertible Preferred Stock held by such holder) divided among the holders
thereof, 14.9657% of the total number of shares of HAQ common stock allocated
in
the Merger to the holders of PharmAthene capital stock;
· the
holders of PharmAthene Series B Convertible Preferred Stock will receive, on
a
pro rata basis (determined based on the number of shares of PharmAthene Series
B
Convertible Preferred Stock held by such holder) divided among the holders
thereof, 43.9882% of the total number of shares of HAQ common stock allocated
in
the Merger to the holders of PharmAthene capital stock;
· the
holders of PharmAthene Series C Convertible Preferred Stock will receive, on
a
pro rata basis (determined based on the number of shares of PharmAthene Series
C
Convertible Preferred Stock held by such holder and the number of shares of
PharmAthene Series C Convertible Preferred Stock issuable upon the exercise
of
warrants issued in connection with PharmAthene’s existing loan facility which
are being assumed by HAQ) divided among the holders thereof, 32.2427% of the
total number of shares of HAQ common stock allocated in the Merger to the
holders of PharmAthene capital stock;
74
· an
aggregate of 3.8325% of the total number of shares of HAQ common stock allocated
in the Merger to the holders of PharmAthene capital stock shall be reserved
by
HAQ for issuance and delivery upon the exercise of options and warrants to
purchase shares of common stock which are assumed by HAQ in the Merger;
and
· the
22,108,669 shares of PharmAthene common stock and shares represented by
outstanding options and common stock warrants will convert into approximately
1,100,422 shares of HAQ common stock, or a 20.08 to 1 exchange ratio; the
16,442,400 issued and outstanding shares of PharmAthene Series A Convertible
Preferred Stock will convert into approximately 1,870,700 shares of HAQ common
stock, or a 8.79 to 1 exchange ratio; the 30,448,147 issued and outstanding
shares of PharmAthene Series B Convertible Preferred Stock will convert into
approximately 5,498,500 shares of HAQ common stock, or a 5.54 to 1 exchange
ratio; the 17,976,586 shares of PharmAthene Series C Convertible Preferred
Stock
(representing 17,538,133 issued and outstanding shares of Series C Convertible
Preferred Stock and 438,353 shres of Series C Convertible Preferred Stock
underlying warrants) will convert into approximately 4,030,300 shares of HAQ
common stock, or a 4.46 to 1 exchange ratio.
At
the
effective time of the Merger, all options to purchase shares of PharmAthene
stock then outstanding under the PharmAthene, Inc. 2002 Long-Term Incentive
Plan
(as amended, the “PharmAthene Plan”) or issued under any other agreement,
whether vested or unvested, shall be assumed by HAQ. The per-share exercise
price for the shares of HAQ common stock issuable upon exercise of such assumed
outstanding PharmAthene option will be equal to the quotient determined by
dividing the exercise price per share of PharmAthene common stock at which
such
outstanding PharmAthene option was exercisable immediately prior to the closing
of the Merger by the share exchange ratio, and rounding the resulting exercise
price up to the nearest whole cent. The average exercise price of the 9,625,197
existing stock options and common stock warrants pre Merger is $0.20.
Using the exchange ratio of 0.0498, this results in 479,065 stock options and
common stock warrants subsequent to the Merger with an average exercise price
of
$4.02. Outstanding common stock warrants of 10,856,917 million to purchase
PharmAthene common stock at an exercise price of $0.01 will be eliminated post
Merger. Outstanding preferred stock warrants of 5,261,442 million to purchase
PharmAthene preferred stock at an exercise price of $0.91 will also be
eliminated post Merger. There will be no additional options or warrants granted
in connection with, or as a result of the proposed Merger.
Other
than warrants to purchase 263,296 shares of common stock of PharmAthene and
438,457 shares of Series C Convertible Preferred Stock issued in connection
with
PharmAthene’s existing loan facility, all warrants to purchase shares of
PharmAthene capital stock will be cancelled immediately prior to the closing
of
the Merger.
As
of
March 31, 2007, there were 11,650,000 shares of HAQ common stock outstanding.
The fully diluted number of shares of common stock, assuming the exercise of
all
outstanding warrants to purchase HAQ common stock, was 21,050,000 as of March
31, 2007 (but excluding the warrants underlying the unit purchase option).
Assuming no change in HAQ capitalization between the date of the Merger
Agreement and the closing of the Merger, 12,500,000 shares of HAQ common stock
would be allocated to the PharmAthene equityholders in the manner described
above.
The
foregoing allocation may be revised to reflect the exercise or termination
of
warrants or options to purchase PharmAthene common stock which occurs after
the
date of the Merger Agreement and prior to the closing of the Merger.
Additionally, the 12,500,000 shares of HAQ common stock issued as merger
consideration will be subject to adjustment to the extent that the stockholders
of HAQ owning more than 5% of the outstanding HAQ Common Stock exercise their
conversion rights, the number of shares of HAQ common stock comprising the
stock
consideration shall be adjusted upward by the product of (x) the number (as
a
percentage) that is the difference between the percentage of HAQ common stock
that is converted and 5% and (y) 2.25 million.
The
actual number of shares of HAQ common stock to be paid to the holders of each
class and series of PharmAthene stock will change only if the 5% contingency
described above occurs between the date of the Merger Agreement and the closing
of the Merger. In addition, the number of outstanding shares of PharmAthene’s
common stock, Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock or Series C Convertible Preferred Stock could change upon the
occurrence of certain events including, but not limited to, (i) the exercise
of
warrants to purchase shares of either common stock or Series C Convertible
Preferred Stock, (ii) the exercise of options to purchase common stock, or
(iii)
the conversion of shares of Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock or Series C Convertible Preferred Stock into
PharmAthene common stock.
75
At
the
closing, all series of preferred stock of PharmAthene are surrendered for
conversion, all warrants held by the holders of the PharmAthene preferred stock
will be terminated, and all related agreements previously entered into by the
holders of the preferred stock and PharmAthene will be terminated.
All
of
the noteholders of PharmAthene will surrender their notes for exchange into
the
new 8% notes of HAQ.
All
registration rights, security agreements and any other agreement related to
the
preferred stock and notes of PharmAthene entered into by the holders of the
preferred stock and /or noteholders will be terminated.
No
fractional shares of HAQ common stock will be issued in the Merger. All
fractional shares of HAQ common stock to be distributed to an individual
stockholder of PharmAthene will be aggregated before determining whether
a
fractional share remains. Any remaining fractional shares that would otherwise
be issuable in the Merger will be paid in cash. Due to the limited member
of
PharmAthene security holders who may receive fractional shares, the amount
of
cash required for fractional share payments will be immaterial.
8%
Convertible Notes to be Issued and Note Exchange Agreement
Pursuant
to the terms of the Merger Agreement, we have agreed to issue new 8% convertible
notes to the holders of PharmAthene’s outstanding 8% convertible notes. The new
notes will be in the aggregate principal amount of $12,500,000 and will replace
the existing PharmAthene notes in the principal amount of $11,800,000. The
new
notes will be obligations of HAQ, not PharmAthene, and have a maturity date
two
years from the date of issuance.
The
new
notes will be issued, pursuant to the terms of a Note Exchange Agreement and
the
PharmAthene notes will be cancelled, as well as all existing agreements related
to such notes. Unless waived by HAQ, it is a condition to closing that all
of
the existing PharmAthene notes be cancelled at closing.
The
new
8% convertible notes will accrue, with simple interest at 8% per annum (based
upon a 360 day year), except, after an event of default, the interest rate
will
increase to 12% per annum. Such interest shall only be payable upon repayment
of
the notes. Prior to the payment of interest upon repayment, interest shall
accrue at the applicable interest rate and be payable by way of inclusion of
the
interest in the “conversion amount” as defined in the notes. The maturity date
for payment of all principal and interest on the new notes is two years from
the
date of closing.
The
principal amount of the notes and any accrued interest are convertible into
shares of HAQ’s common stock at the option of the holders at any time based upon
an initial conversion rate of $10.00 per share. The noteholder is required
to
provide us with a written notice of the amount of his/her/its note to be
converted. If we fail to deliver a share certificate to the holder requesting
conversion within seven business days of the request to convert, we may incur
a
penalty equal to 1.5% per day of the product of the number of shares being
requesting and the closing sale price of our common stock on the day of the
request for conversion.
The
conversion rate is not subject to adjustment except for certain corporate events
such as stock splits, dividends and the like. There are no “price protection”
adjustments which otherwise would require an adjustment in the conversion ratio
as a result of the sale or issuance by us of shares of our common stock.
Upon
a
“change of control” as defined in the notes, noteholders may require HAQ that
redeem all (but not less than all) of their notes for a price equal to the
principal amount then outstanding, together with accrued and unpaid interest
with respect to such principal and any accrued and unpaid late charges with
respect to such principal and interest, provided, however, that at least
two-thirds of the aggregate principal amount of the notes then outstanding
submit optional change of control redemption notices.
A
“change
of control” generally means (1) HAQ shall (a) a consolidate or merge with or
into another person or subsidiary of another person in which the beneficial
owners of HAQ then outstanding voting securities immediately prior to such
transaction beneficially own securities representing 50% or more of the
aggregate voting power of then outstanding voting securities of the resulting
or
acquiring corporation (or any parent thereof), or their equivalent if other
than
a corporation, or (b) sell, assign, transfer, convey or otherwise dispose of
all
or substantially all of the properties or assets of the HAQ to another person,
or (c) be the subject of a purchase, tender or exchange offer that is accepted
by the holders of more than the 50% of the outstanding shares of common stock
(not including any shares of common stock held by the person or persons making
or party to, or associated or affiliated with the persons making or party to,
such purchase, tender or exchange offer), or (d) consummate a stock purchase
agreement or other business combination (including, without limitation, a
reorganization, recapitalization, spin-off or scheme of arrangement) with
another person whereby such other person or parent of such other person acquires
more than the 50% of the outstanding shares of common stock (not including
any
shares of common stock held by the other person or other persons making or
party
to, or associated or affiliated with the other persons making or party to,
such
stock purchase agreement or other business combination), (2) any time the HAQ’s
continuing directors do not constitute a majority of the HAQ’s Board of
Directors (or, if applicable, a successor entity), or (3) a termination of
trading.
76
Upon
a
“significant transaction” as defined in the notes, noteholders may require HAQ
to redeem all (but not less than all) of their notes for a price equal to the
principal amount then outstanding, together with accrued and unpaid interest
with respect to such principal and any accrued and unpaid late charges with
respect to such principal and interest. A “significant transaction” generally
means any “fundamental transaction” as defined in the note or other corporate
transaction, or series of transactions, (including but not limited to, any
acquisition, disposition, merger, license or collaboration, joint venture,
financing or securities offering) that would result in either (x) the issuance
of common stock and/or convertible securities that would exceed 40% of the
Common Stock outstanding prior to the transaction or (y) the payment or receipt
of cash or other consideration of in excess of $25 million, unless such
transaction has been approved by the two-thirds of the aggregate principal
amount of the notes then outstanding.
Commencing
upon the 12 month anniversary of issuance, we can prepay the notes, in full
or
in part, on not less than 30 days’ but not more than 60 days’ prior notice after
the one year anniversary of the Merger, during which time the note holders
can
convert their notes into our common stock at the then current conversion price.
If we seek to prepay the notes, we are required to pay the principal amount
and
all accrued interest. If we send out a notice to the holders stating that we
are
redeeming the notes, and then fail to pay the redemption price within five
business days of the date set for redemption, the holders can request that
we
re-issue the notes surrendered for redemption or conversion and we will be
required to reduce the conversion price of the note to equal to the lowest
closing bid price of our common stock during the redemption period.
Under
the
terms of these agreements, the noteholders have a right to designate three
persons on our Board of Directors for so long as at least 30% of the original
principal amount of the notes remains outstanding. This is one of the reasons
we
are requesting, as part of Proposal 2, to amend our certificate of
incorporation. See Proposal 2 beginning on page 90 for a further discussion
of
this right.
Each
of
the noteholders will be entitled to the rights under the Registration Rights
Agreement, as discussed below. In addition to the rights granted under the
Registration Rights Agreement, we have agreed that the noteholders will be
entitled to certain “penalty” provisions for the failure by us to satisfy the
obligations under the Registration Rights Agreement. If we fail to file a
registration statement within sixty days after closing of the Merger or fail
to
obtain an order of effectiveness within one hundred eighty days of closing,
there will be imposed a penalty of 1% of the aggregate amount of the notes
($125,000) for each such failure. Further, we will incur a further penalty
of 1%
of the principal amount of the notes for every thirty days that such failure
continues or for any period in excess of two days after effectiveness that
the
holders cannot avail themselves of the use of the registration statement.
We
have
agreed to reserve for issuance a number of shares equal to 120% of the total
number of shares issuable upon conversion at the then current conversion rate.
If we fail to maintain the required reserve amount, we are obligated to obtain
stockholder approval to increase our authorized shares within seventy-five
days.
We
agreed
with the noteholders that we would file a listing application with AMEX for
the
listing of the shares of our common stock issuable upon conversion of the notes.
Upon
an
event of default the principal and accrued interest becomes due and payable.
As
defined under the notes, an event of default includes the following
events:
77
· HAQ’s
failure to pay to the holder any amount of principal when and as
due;
· HAQ’s
failure to pay to the holder any amount of interest, late charges or other
amounts when and as due under the Note if such failure continues for a period
of
at least thirty business days;
· any
acceleration prior to maturity of any indebtedness of the definition thereof
of
HAQ or any of our subsidiaries which individually or in the aggregate is equal
to or greater than $250,000 principal amount of indebtedness;
· HAQ
or
any of our material subsidiaries, (A) commences a voluntary case, (B) consents
to the entry of an order for relief against it in an involuntary case, (C)
consents to the appointment of a receiver, trustee, assignee, liquidator or
similar official, (D) makes a general assignment for the benefit of its
creditors or (E) admits in writing that it is generally unable to pay its debts
as they become due;
· a
court
of competent jurisdiction enters an order or decree under any bankruptcy law
that is not vacated, set aside or reversed within sixty (60) days that (A)
is
for relief against HAQ or any of our material subsidiaries in an involuntary
case, (B) appoints a custodian or any of its material subsidiaries or (C) orders
the liquidation of HAQ or any of our material subsidiaries;
· a
final
judgment or judgments for the payment of money aggregating in excess of
$5,000,000 are rendered against HAQ or any of our Subsidiaries and which
judgments are not, within sixty days after the entry thereof, bonded, discharged
or stayed pending appeal, or are not discharged within sixty days after the
expiration of such stay; provided, however, that any judgment which is covered
by insurance or an indemnity from a credit worthy party shall not be included
in
calculating the $5,000,000 amount set forth above so long as HAQ provides the
holder a written statement from such insurer or indemnity provider (which
written statement shall be reasonably satisfactory to the holder) to the effect
that such judgment is covered by insurance or an indemnity and HAQ will receive
the proceeds of such insurance or indemnity within sixty days of the issuance
of
such judgment;
· HAQ
breaches any covenant or agreement or materially breaches any representation
or
warranty in any of the Notes, the Note Exchange Agreement or Registration Rights
Agreement and such breach continues for a period of at least thirty days after
written notice thereof from one or more Holders to HAQ; or
if
at any
time while at least thirty percent (30%) of the original aggregate principal
amount of the notes outstanding (x) the Board of Directors fails to include
three Directors designated by the noteholders or (y) without the consent of
the
persons then serving as noteholder directors, the Board of Directors exceeds
seven directors, or the compensation committee or nominating committee (or
other
committees serving similar functions) exceeds three members, or (z) the
noteholder directors are not afforded the right to appoint two members of each
of the compensation committee and nominating committee (or committees serving
similar functions). See Proposal 2 beginning on page 90 for a more detailed
description.
Milestone
Payments
Pursuant
to the terms of the Merger Agreement, HAQ has agreed that the PharmAthene
stockholders (including the holders of common stock, options and warrants)
would
be entitled to additional consideration equal to 10% of the actual collections
on gross sales of Valortim™ to the United States federal government (or a
department thereof) until the earlier of (A) December 31, 2009, or (B) total
aggregate milestone payments to such holders equal $10 million. The Milestone
Payments are conditioned upon receipt by PharmAthene of an award, procurement
or
other contract (x) on or before December 31, 2007; (y) which provides for a
procurement by the U.S. government (or a department thereof) of doses or
treatments equal to or greater than 60,000; and (z) with a total contract value
of $150 million or more. If these conditions are not satisfied, no Milestone
Payments will be paid or due. Any Milestone Payments owed will be determined,
in
arrears, by HAQ within forty-five days of the end of each fiscal quarter based
on actual collections from the U.S. government (or a department thereof) of
gross sales, and will be paid within three business days of such determination.
78
Effect
of Merger on PharmAthene Options and Warrants
At
the
effective time of the Merger, all options to purchase shares of PharmAthene
stock then outstanding under the PharmAthene, Inc. 2002 Long-Term Incentive
Plan
(as amended, the “PharmAthene Plan”) or issued under any other agreement,
whether vested or unvested, shall be assumed by HAQ. Each such outstanding
PharmAthene option so assumed by HAQ shall continue to have, and be subject
to,
the same terms and conditions set forth in the PharmAthene Plan, option
agreements thereunder and other relevant documentation in existence immediately
prior to the Merger, except that each such outstanding PharmAthene option will
be converted into an option to purchase that number of shares of HAQ common
stock calculated by multiplying the number of PharmAthene shares underlying
such
outstanding PharmAthene option by the share exchange ratio and rounding to
the
nearest whole share of HAQ common stock. The per-share exercise price for the
shares of HAQ common stock issuable upon exercise of such assumed outstanding
PharmAthene option will be equal to the quotient determined by dividing the
exercise price per share of PharmAthene common stock at which such outstanding
PharmAthene option was exercisable immediately prior to the closing of the
Merger by the share exchange ratio, and rounding the resulting exercise price
up
to the nearest whole cent. PharmAthene has, as of the date hereof, options
and
warrants to acquire 9,625,197 shares of its common stock. The share exchange
ratio for common stock, the common stock options and common stock warrants
is
.0498. As a consequence, HAQ shall grant 479,065 options and common stock
warrants with an average exercise price of $4.02 per share in exchange for
all
of the PharmAthene options and common stock warrants assumed by
HAQ.
Except
for 263,296 common stock warrants and 438,457 Series C Convertible Preferred
Stock warrants, all other warrants will be terminated. The common stock warrants
will be converted into warrants to acquire HAQ common stock and adjusted to
reflect the 0498 ratio and the Series C Convertible Preferred Stock warrants
will be converted into warrants to acquire HAQ common stock and adjusted to
reflect the .2242 ratio.
HAQ
has
agreed to establish a new incentive plan containing terms no less favorable
to
holders of outstanding
PharmAthene options
and HAQ
shall reserve for issuance under such plan a sufficient number of shares of
HAQ
common stock for delivery upon exercise of outstanding
PharmAthene options
assumed
by HAQ under the Merger Agreement, as well as an additional 3,000,000 shares
of
HAQ common stock. See Proposal 3 beginning on page 93 for description of the
Incentive Plan.
Unless
provided for in the option grant or PharmAthene Plan, the vesting of each
outstanding
PharmAthene option
will not
automatically accelerate pursuant to its terms as a result of, or in connection
with, the transactions contemplated hereby.
Representations
and Warranties of the Parties
The
Merger Agreement contains customary representations and warranties made by
each
of HAQ and Merger Sub on the one hand, and PharmAthene on the other, regarding
various aspects of their respective businesses, financial condition and
structure, as well as other facts pertinent to the Merger. These representations
and warranties are subject to materiality, knowledge and other similar
qualifications in many. The representations and warranties of each of the
parties have been made solely for the benefit of the other party and those
representations and warranties should not be relied on by any other person,
except as specifically permitted in the documents relating to the Merger. In
addition, those representations and warranties may be intended not as statements
of actual fact, but rather as a way of allocating risk between the parties,
may
have been modified by the disclosure schedules attached to the Merger Agreement,
are subject to the materiality standard described in the Merger Agreement,
which
may differ from what may be viewed as material by you, and were made only as
of
the date of the Merger Agreement or another date as specified in the Merger
Agreement.
The
representations and warranties made by HAQ and PharmAthene to each other in
the
Merger Agreement include representations and warranties relating to the
following matters (in some cases, made by one party only, and also made in
certain instances with respect to their respective subsidiaries), among
others:
· corporate
organization, existence, good standing and power and authority;
79
· corporate
authorization to enter into and carry out the obligations contained in the
Merger Agreement and the valid and binding nature of such
obligations;
· absence
of any conflict or violation of the corporate charter and bylaws, any applicable
legal requirements, or any agreements with third parties, as a result of
entering into and carrying out the obligations contained in the Merger
Agreement;
· capital
structure and the absence of restrictions or encumbrances with respect to
capital stock;
· corporate
organization, qualifications to do business and corporate standing of
subsidiaries;
· ownership
of, and absence of restrictions or encumbrances with respect to, the capital
stock of subsidiaries;
· litigation;
· financial
statements;
· internal
accounting controls and disclosure controls and procedures;
· absence
of undisclosed liabilities;
· absence
of certain changes since December 31, 2005;
· intellectual
property;
· taxes
and
tax returns;
· title
to
assets and properties;
· leases
of
intangible or personal property;
· owned
and
leased real property;
· material
contracts and the absence of breaches of material contracts;
· compensation
of employees; absence of collective bargaining arrangements and labor liability
as a result of the Merger;
· benefit
plans;
· labor
relations;
· transactions
with affiliates;
· insurance;
· permits,
licenses, franchise and approvals;
· compliance
with applicable laws;
· environmental
matters;
· governmental
regulatory matters, including FDA rules and regulations;
80
· entitlements
to any broker’s, finder’s, or other similar fees, commissions or expenses in
connection with the transactions contemplated by the Merger
Agreement;
· absence
of certain business practices;
· restrictions
on business activities;
· inapplicability
of state takeover statutes;
· maintenance
of books and records; and
· disclosure.
Covenants
and Agreements
Operating
Covenants
Under
the
Merger Agreement PharmAthene has agreed, until the closing of the Merger, except
with the prior written consent of HAQ or as scheduled in the Merger Agreement,
to not:
· amend
its
certificate of incorporation or bylaws or equivalent organizational
documents;
· except
for the issuance of stock options under the PharmAthene Plan to employees and
consultants of PharmAthene, issue, deliver, sell, pledge, dispose of or
encumber, or authorize or commit to the issuance, sale, pledge, disposition
or
encumbrance of, any shares of capital stock of any class, or any options,
warrants, convertible securities or other rights of any kind to acquire any
shares of capital stock, or any other ownership interest (including, but not
limited to, stock appreciation rights or phantom stock), of
PharmAthene;
· declare,
set aside, make or pay any dividend or other distribution, payable in cash,
stock, property or otherwise, with respect to any of its capital
stock;
· acquire
(by merger, consolidation or acquisition of stock or assets) any corporation,
partnership or other business organization or division or line of
business;
· modify
its current investment policies or investment practices in any material respect
except to accommodate changes in applicable law;
· except
as
permitted, transfer, sell, lease, mortgage, or otherwise dispose of or subject
to any Lien any of its assets, including capital stock; and (ii) equipment
and property no longer used in the operation of PharmAthene’s business) other
than in the ordinary course of business consistent with past
practice;
· except
as
may be required as a result of a change in law or in generally accepted
accounting or actuarial principles, make any change to the accounting practices
or principles or reserving or underwriting practices or principles used by
it;
· settle
or
compromise any pending or threatened suit, action or claim (other than the
payment of health benefit claims on behalf of customers of PharmAthene)
involving a payment by PharmAthene in excess of $100,000;
· adopt
a
plan of complete or partial liquidation, dissolution, restructuring,
recapitalization or other reorganization of PharmAthene;
· fail
to
use commercially reasonable efforts to maintain in full force and effect the
existing insurance policies covering PharmAthene or its properties, assets
and
businesses or comparable replacement policies;
81
· authorize
or make capital expenditures in excess of $250,000;
· make
any
material tax election or settle or compromise any material federal, state,
local
or foreign tax liability, change any annual tax accounting period, change any
material method of tax accounting, enter into any closing agreement relating
to
any tax, or surrender any right to claim a tax refund or (ii) consent,
without providing advance notice to HAQ, to any extension or waiver of the
limitations period applicable to any Tax claim or assessment;
· reclassify,
combine, split, subdivide or redeem, purchase or otherwise acquire, directly
or
indirectly, any of its capital stock, stock options or debt
securities;
· repay
or
retire any indebtedness for borrowed money or repurchase or redeem any debt
securities;
· incur
any
indebtedness for borrowed money (including pursuant to any commercial paper
program or credit facility of PharmAthene) or issue any debt securities;
· assume,
guarantee or endorse, or otherwise as an accommodation become responsible for,
the obligations of any person, or make any loans, advances or capital
contributions to, or investments in, any other person, other than providers
of
PharmAthene in the ordinary course of business consistent with past
practice;
· enter
into or renew, extend, materially amend or otherwise materially modify
(i) any material contract of PharmAthene, or (ii) any other contract
or agreement (with “other contract or agreement” being defined for the purposes
of this subsection as a contract or agreement which involves PharmAthene
incurring a liability in excess of $250,000 and which is not terminable by
PharmAthene without penalty upon one year or less notice);
· increase
the compensation or fringe benefits of any of its directors, officers or
employees, except for increases in salary or wages of officers and employees
of
PharmAthene in the ordinary course of business in accordance with past practice,
or grant any severance or termination pay not currently required to be paid
under existing severance plans or enter into, or amend, any employment,
consulting or severance agreement or arrangement with any present or former
director, officer or other employee of PharmAthene, or establish, adopt, enter
into or amend or terminate any collective bargaining, bonus, profit sharing,
thrift, compensation, stock option, restricted stock, pension, retirement,
deferred compensation, employment, termination, welfare, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of any
directors, officers or employees, except for any plan amendments to comply
with
Section 409A of the Internal Revenue Internal Revenue Code (provided that
any such amendments shall not materially increase the cost of such plan to
PharmAthene);
· grant
any
license with respect to intellectual property other than non-exclusive licenses
granted in the ordinary course of business;
· take
any
action or omit to take any action that would reasonably be expected to cause
any
intellectual property used or held for use in its business to become
invalidated, abandoned or dedicated to the public domain;
· take
or
fail to take any action that would prevent the Merger from qualifying as
reorganization within the meaning of Section 368(a) of the Internal Revenue
Internal Revenue Code;
· effectuate
a “plant closing” or “mass layoff” as those terms are defined in the Worker
Adjustment and Retraining Notification Act, affecting in whole or in part any
site of employment, facility, operating unit or employee of
PharmAthene;
· pay,
discharge or satisfy any claims, liabilities or obligations (absolute accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business and consistent
with past practice, of liabilities reflected or reserved against in the
financial statements of PharmAthene or incurred in the ordinary course of
business and consistent with past practice;
82
· enter
into any transaction with, or enter into any agreement, arrangement, or
understanding with any of PharmAthene’s affiliates that would be required to be
disclosed pursuant to Item 404 of SEC Regulation S-K; or
· take,
or
offer or propose to take, or agree to take in writing or otherwise, any of
the
actions described above or any action which would result in any of the
conditions to the Merger not being satisfied or would materially delay the
closing of the Merger.
Also
under the Merger Agreement, HAQ has agreed, until the closing of the Merger
that, except with the prior written consent of PharmAthene, to not:
· amend
the
HAQ charter or bylaws or equivalent organizational documents;
· issue,
deliver, sell, pledge, dispose of or encumber, or authorize or commit to the
issuance, sale, pledge, disposition or encumbrance of, any shares of capital
stock of any class, or any options, warrants, convertible securities or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest (including, but not limited to, stock appreciation rights
or
phantom stock), of HAQ;
· declare,
set aside, make or pay any dividend or other distribution, payable in cash,
stock, property or otherwise, with respect to any of its capital
stock;
· acquire
(by merger, consolidation or acquisition of stock or assets) any corporation,
partnership or other business organization or division or line of
business;
· modify
its current investment policies or investment practices in any material respect
except to accommodate changes in applicable law;
· transfer,
sell, lease, mortgage, or otherwise dispose of or subject to any Lien any of
its
assets, including capital stock other than in the ordinary course of business
consistent with past practice;
· except
as
may be required as a result of a change in law or in generally accepted
accounting or actuarial principles, make any change to the accounting practices
or principles or reserving or underwriting practices or principles used by
it;
· settle
or
compromise any pending or threatened suit, action or claim involving a payment
by HAQ in excess of $100,000;
· adopt
a
plan of complete or partial liquidation, dissolution, restructuring,
recapitalization or other reorganization of HAQ;
· fail
to
use commercially reasonable efforts to maintain in full force and effect the
existing insurance policies covering HAQ or its properties, assets and
businesses or comparable replacement policies;
· authorize
or make capital expenditures;
· make
any
material tax election or settle or compromise any material federal, state,
local
or foreign tax liability, change any annual tax accounting period, change any
material method of tax accounting, enter into any closing agreement relating
to
any tax, or surrender any right to claim a tax refund
· consent,
without providing advance notice to PharmAthene, to any extension or waiver
of
the limitations period applicable to any tax claim or assessment;
83
· reclassify,
combine, split, subdivide or redeem, purchase or otherwise acquire, directly
or
indirectly, any of its capital stock, stock options or debt
securities;
· repay
or
retire any indebtedness for borrowed money or repurchase or redeem any debt
securities;
· incur
any
indebtedness for borrowed money or issue any debt securities;
· assume,
guarantee or endorse, or otherwise as an accommodation become responsible for,
the obligations of any person, or make any loans, advances or capital
contributions to, or investments in, any other person, other than providers
of
HAQ in the ordinary course of business consistent with past
practice;
· enter
into or renew, extend, materially amend or otherwise materially modify
(i) any HAQ material contract, or (ii) any other contract or agreement
incurring a liability in excess of $250,000 and which is not terminable by
HAQ
without penalty upon one year or less notice;
· increase
the compensation or fringe benefits of any of its directors, officers or
employees, except for increases in salary or wages of officers and employees
of
HAQ in the ordinary course of business in accordance with past practice, or
grant any severance or termination pay not currently required to be paid under
existing severance plans or enter into, or amend, any employment, consulting
or
severance agreement or arrangement with any present or former director, officer
or other employee of HAQ, or establish, adopt, enter into or amend or terminate
any collective bargaining, bonus, profit sharing, thrift, compensation, stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, welfare, severance or other plan, agreement, trust,
fund, policy or arrangement for the benefit of any directors, officers or
employees, except for any plan amendments to comply with Section 409A of
the Internal Revenue Code (provided that any such amendments shall not
materially increase the cost of such plan to HAQ);
· take
or
fail to take any action that would prevent the Merger from qualifying as
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code;
· pay,
discharge or satisfy any claims, liabilities or obligations (absolute accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business and consistent
with past practice, of liabilities reflected or reserved against in the
financial statements of HAQ or incurred in the ordinary course of business
and
consistent with past practice;
· enter
into any transaction with, or enter into any agreement, arrangement, or
understanding with any of HAQ’s affiliates that would be required to be
disclosed pursuant to Item 404 of SEC Regulation S-K.
Board
of Directors
HAQ
has
agreed to take all necessary action prior to the effective time so that,
effective
at the closing, the Board of Directors of HAQ shall be reconstituted and
pursuant to the HAQ charter and bylaws, be fixed at a total of seven persons,
and be comprised as follows: (i) PharmAthene shall designate four persons (one
of whom shall be the current Chief Executive Officer of PharmAthene); (ii)
HAQ
shall designate two persons; and (iii) PharmAthene and HAQ shall designate
one
person mutually acceptable to both of them. This is one of the reasons we are
submitting Proposal 2 to our stockholders for a vote. See Proposal 2 beginning
on page 90.
No
Solicitation
Under
the
Merger Agreement, PharmAthene and HAQ have agreed that from the date of the
Merger Agreement until the closing or termination of the Merger Agreement,
neither they nor any of their respective officers and directors shall, and
that
they shall use their respective commercially reasonable efforts to cause their
respective employees, agents and representatives (including any investment
banker, attorney or accountant retained by it) not to, directly or indirectly,
(i) initiate, solicit, encourage or knowingly facilitate any inquiries or the
making of any proposal or offer with respect to, or a transaction to effect,
a
merger, reorganization, share exchange, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
it
or any purchase, transfer or sale of the assets of it, or any purchase or sale
of, or tender or exchange offer for, its voting securities that (any such
proposal, offer or transaction (other than a proposal or offer made by the
other
party to the Merger Agreement or an affiliate thereof) being hereinafter
referred to as an “Acquisition Proposal”), (ii) have any discussions with or
provide any confidential information or data to any person relating to an
Acquisition Proposal, or engage in any negotiations concerning an Acquisition
Proposal, or knowingly facilitate any effort or attempt to make or implement
an
Acquisition Proposal, (iii) approve or recommend, or propose publicly to approve
or recommend, any Acquisition Proposal or (iv) approve or recommend, or propose
to approve or recommend, or execute or enter into, any letter of intent,
agreement in principle, merger agreement, asset purchase or share exchange
agreement, option agreement or other similar agreement related to any
Acquisition Proposal or propose or agree to do any of the foregoing.
84
Access
to Information
Each
of
PharmAthene and HAQ has agreed to give the other, its counsel, accountants
and
other representatives, reasonable access during normal business hours during
the
period prior to the closing, to the properties, books, records and personnel
of
the other to obtain all information concerning the business, including the
status of product development efforts, properties, results of operations and
personnel of the other, as such party may reasonably request.
Public
Announcements
PharmAthene
and HAQ have agreed to a joint communications plan and each party agreed to
(a) ensure that all press releases and other public statements and
communications (including any communications that would require a filing under
Rule 425, Rule 165 and Rule 166 of the Securities Act or
Rule 14a-12 of the Exchange Act) with respect to the Merger Agreement and
the transactions contemplated thereby shall be consistent with such joint
communications plan and (b) unless otherwise required by applicable law or
by obligations pursuant to any listing agreement with or rules of any securities
exchange, PharmAthene will consult with HAQ for a reasonable time before issuing
any press release or otherwise making any public statement or communication
(including any communication that would require a filing under Rule 425,
Rule 165 and Rule 166 of the Securities Act or Rule 14a-12 of the
Exchange Act). HAQ and PharmAthene have also agreed to consult with each other
prior to the release of any press release of PharmAthene or any such public
statement or communication by PharmAthene, with respect to the Merger Agreement
or the transactions contemplated hereby. In addition to the foregoing, except
to
the extent required by applicable law, HAQ and PharmAthene agreed not to issue
any press release or otherwise make any public statement or disclosure
concerning the other party or the other party’s business, financial condition or
results of operations without the consent of the other party.
Other
Agreements
Additionally,
HAQ and PharmAthene have agreed to use commercially reasonable efforts to obtain
necessary consents and approvals in connection with the Merger Agreement, and
to
list the HAQ common stock issued as merger consideration (including shares
issuable upon conversion of the 8% convertible notes) for trading on the AMEX.
The parties believe there are no unordinary consents to be
obtained.
Operations
After the Merger
Following
the Merger, PharmAthene will continue its operations as a wholly owned
subsidiary of HAQ. The stockholders of PharmAthene will become stockholders
of
HAQ, and their rights as stockholders will be governed by the HAQ amended and
restated certificate of incorporation, the HAQ bylaws, and the laws of the
State
of Delaware.
Conditions
to the Completion of the Merger
The
obligations of HAQ and PharmAthene to complete the Merger are subject to the
satisfaction or waiver of specified conditions before completion of the Merger,
including the following:
Conditions
to HAQ's and PharmAthene's obligations to consummate the
Merger:
The
respective obligations of each of HAQ and PharmAthene to consummate the Merger
are subject to the satisfaction of, or waiver of, the following
conditions:
85
· the
receipt of HAQ stockholder approval;
· the
receipt of PharmAthene stockholder approval (which has been obtained and is
irrevocable);
· holders
of the outstanding notes of PharmAthene shall have executed the Note Exchange
Agreement;
· the
outstanding classes of preferred stock of PharmAthene, as well as related
warrants and side agreements are terminated in full; and
· the
absence of any order or injunction preventing consummation of the
Merger.
Conditions
to HAQ's obligations:
The
obligation of HAQ to consummate the Merger is further subject to the following
conditions, among others:
· the
representations and warranties made by PharmAthene must be true and correct
in
all material respects;
· PharmAthene
must have performed in all material respects all obligations required to be
performed by it under the terms of the Merger Agreement;
· there
must not have occurred since the date of the Merger Agreement any material
adverse effect on PharmAthene’s financial condition or business;
and
· PharmAthene
shall have delivered to HAQ executed termination agreements from the holders
of
the PharmAthene preferred stock and noteholders whereby the holders of such
securities terminate all rights under any agreements entered into by PharmAthene
and such preferred stockholders and noteholders.
Conditions
to PharmAthene's obligations:
The
obligation of PharmAthene to consummate the Merger is further subject to the
following conditions, among others:
· the
representations and warranties made by HAQ and Merger Sub must be true and
correct in all respects;
· HAQ
and
Merger Sub must have performed in all material respects all obligations required
to be performed by it under the terms of the Merger Agreement;
· there
must not have occurred since the date of the Merger Agreement any material
adverse effect on the financial condition or business of HAQ or Merger
Sub;
· the
HAQ
certificate of incorporation shall have been amended and restated to provide
for
board designee rights of the 8% convertible noteholders; and
· the
12,500,000 shares of HAQ common stock issuable in the Merger and the shares
into
which the new 8% convertible notes to be issued in the Merger may be converted
shall have been accepted for listing on the American Stock
Exchange.
Materiality
and Material Adverse Effect
Certain
of the representations and warranties are qualified by materiality or material
adverse effect. For the purposes of the Merger Agreement, a material adverse
effect on an entity means any change, effect, event, occurrence or state of
facts which is, or is reasonably expected to be, materially adverse to the
business, financial condition, results of operations or prospects of such party
and its subsidiaries, taken as a whole, other than any change, effect, event
or
occurrence relating to (i) the economy or securities markets of the U.S. or
any
other region in general or (ii) the Merger Agreement or the transactions
contemplated thereby or the announcement thereof or otherwise as contemplated
by
the Merger Agreement or disclosed thereunder.
86
Termination
The
Merger Agreement may be terminated at any time prior to the completion of the
Merger, whether before or after receipt of stockholder approval, by mutual
written consent of HAQ, Merger Sub and PharmAthene.
Either
HAQ or PharmAthene may terminate the Merger Agreement if:
|
· the
Merger is not consummated on or before August 3, 2007;
or
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||
|
|
|
|
|
· any
permanent injunction or other order of a court or other competent
authority preventing the consummation of the Merger shall have become
final and nonappealable; or
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||
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· if
during any 15-day trading period following the execution of the Merger
Agreement and before its consummation, the average trading price
of the
publicly-traded warrants of HAQ is below $0.20 per
warrant.
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||
PharmAthene
may terminate the Merger Agreement if:
· prior
to
the closing date there shall have been a material breach of any representation,
warranty, covenant or agreement on the part of HAQ or Merger Sub, subject to
certain conditions and a right to cure (within proscribed notice periods);
or
· any
of
the conditions to the consummation of the Merger shall have become incapable
of
fulfillment; or
· HAQ
has
not held its Special Meeting of Stockholders to approve the Merger within
thirty-five (35) days of approval of the proxy statement by the SEC;
or
·
HAQ’s
Board of Directors has withdrawn or changed its recommendation to it
stockholders regarding the Merger; or
· more
than
20% of the holders of the shares issued in HAQ’s IPO entitled to vote on the
Merger elect to convert such shares into cash from the trust fund.
HAQ
may
terminate the Merger Agreement if:
· prior
to
the closing date there shall have been a material breach of any representation,
warranty, covenant or agreement on the part of PharmAthene, subject to certain
conditions and a right to cure, as further described below; or
· any
of
the conditions to the consummation of the Merger shall have become incapable
of
fulfillment; or
· necessary
consents, individually or in the aggregate contain any burdensome terms or
conditions which have a material adverse effect on PharmAthene or
HAQ.
If
permitted under applicable law, either HAQ or PharmAthene may waive conditions
for their own respective benefit and consummate the Merger, even though one
or
more of these conditions have not been met. We cannot assure you that all of
the
conditions will be satisfied or waived or that the Merger will
occur.
If
certain deadlines set forth in the Merger Agreement are not met, and if
prior
to
the closing date there shall have been a material breach of any representation,
warranty, covenant or agreement on the part of either party contained in the
Merger Agreement or any representation or warranty of either party contained
in
the Merger Agreement shall have become untrue after the date of the Merger
Agreement, which breach or untrue representation or warranty cannot be cured
as
described in the Merger Agreement,
then
the non-terminating party may be liable to the other for a termination fee
of
$250,000 which in the case of PharmAthene, is limited to all cash held outside
of HAQ’s trust fund.
87
Indemnification
of Claims and Escrow of Shares
Under
the
terms of the Merger Agreement, the stockholders, optionholders and
warrantholders of PharmAthene agreed to indemnify HAQ for the breach of any
representations or warranties or covenants by PharmAthene and agreed that
1,375,000 shares from the merger consideration will be placed into escrow which
shares will be used to satisfy any claims. The indemnification is subject to
a
limitation that we incur damages of at least $500,000 prior to making any claim.
Further, the indemnification obligation is limited solely and exclusively to
the
shares held in escrow.
The
shares will be held in escrow until satisfaction of any claims. Any claims
by us
against the shares must be made within 12 months of closing of the Merger.
For
purposes of determining the number of shares required to settle any claim for
which we are entitled to indemnification, the parties have agreed to assign
a
value equal to the average reported last sales price for the ten trading days
ending on the last day prior to the date that the claim for indemnification
is
publicly disclosed (or if there is no public disclosure, the date on which
the
indemnification notice is received) and the ten trading days after such date.
HAQ and the PharmAthene stockholders, optionholders and warrantholders, in
each
case, have agreed to appoint a representative who will have the power and
authority to negotiate and settle claims. Additionally, the representatives
of
the two parties can mutually agree to a different value of the escrowed shares
in order to settle third parties claims, or use the shares to actually settle
any claim. Mr. John Pappajohn has been appointed to serve as HAQ’s
representative and MPM BioVentures III-QP, L.P. has been appointed to serve
as
the representative of the PharmAthene stockholders, optionholders and
warrantholders.
Representative
PharmAthene
designated its representative with authority to make all decisions and
determinations and to take all actions required or permitted under the Merger
Agreement and the Escrow Agreement on behalf of the PharmAthene stockholders,
optionholders and warrantholders. Any such action, decision or determination
so
made or taken shall be deemed the action, decision or determination of the
PharmAthene stockholders, optionholders and warrantholders, and any notice,
document, certificate or information required to be given to any PharmAthene
stockholders, optionholders and warrantholders shall be deemed so given if
given
to the representative. As such representative is also a stockholder of
PharmAthene, it is possible that potential conflicts of interest may arise
with
respect to their obligations as representatives and their interests as
stockholders of PharmAthene. The parties agreed that 1,375,000 shares of
HAQ Common Stock issued as merger consideration will be placed into an escrow
account, from which the representative will have the right to withdraw
shares necessary to in the performance of its duties. Any remaining shares
held
in such account will be released to the PharmAthene stockholders on the first
anniversary of the closing of the Merger or such time that there are no
unresolved claims for indemnification.
Assignment
The
Merger Agreement and the rights and obligations of the parties thereunder may
not be assigned, transferred or encumbered without the prior written consent
of
the other parties.
Further
Assurances
Each
of
HAQ and PharmAthene agree that it will execute and deliver, or cause to be
executed and delivered, on or after the date of the Merger Agreement, all such
other documents and instruments and will take all reasonable actions as may
be
necessary to transfer and convey the securities of PharmAthene to
HAQ.
88
OTHER
AGREEMENTS RELATED TO THE MERGER
Registration
Rights Agreement
In
connection with the Merger, we have agreed to grant to the recipients of the
shares of our common stock and the noteholders receiving the new 8% convertible
notes, certain registration rights to allow them to resell their shares in
accordance with the federal securities laws. At the closing of the Merger,
assuming it is approved by our stockholders, we will enter into a registration
rights agreement with each of the recipients of our common stock and the notes.
Under
the
terms of the registration rights agreement, we will agree to file a registration
statement with the Securities and Exchange Commission under the Securities
Act
of 1933, as amended to allow for the resale by the holders of the shares and
the
note conversion shares, which filing will be made within 60 days after the
closing of the Merger. We will further agree to use our best efforts to have
the
registration statement declared effective as soon after filing as
possible.
We
will
also agree that the holders of a majority of the shares and note conversion
shares will have the right to demand that we file a registration statement
on
their behalf at any time commencing 180 days after the closing of the Merger.
Further, if two thirds of the holders so request, we will enter into an
underwriting agreement with an underwriter so that the shares can be offered
on
an underwritten basis. Lastly, if during the five years following the closing
we
file a registration statement to provide for the resale of shares, we will
agree
to notify the holders of the shares and the note conversion shares and if so
requested by a holder, we will include his/her or its shares in the registration
statement being filed.
Lock-Up
Agreements
As
a
condition to the closing of the Merger, substantially all of the holders of
capital stock and all of the noteholders of PharmAthene are required to enter
into lock-up agreements covering the shares of HAQ common stock that they are
to
receive in the Merger or that they may acquire in the future subject to certain
limitations. These agreements provide that, subject to certain exceptions,
the
parties thereto may not offer, pledge, sell, or otherwise dispose of or transfer
any shares of HAQ common stock, or any options or warrants to purchase any
shares of HAQ common stock, or any securities convertible into or exchangeable
or exercisable for HAQ common stock following the closing of the Merger. In
addition, the parties may not enter into any swap or any other agreement or
any
transaction that transfers the economic consequence of ownership of such HAQ
common stock during such period. Fifty percent of the shares of HAQ common
stock
subject to the lock-up agreements shall be released from the lock-up six months
following the Merger, and all shares of HAQ common stock subject to the lock-up
shall be released from the lock-up agreement twelve months following the
closing.
Employment
Agreements
A
condition to HAQ’s obligation to consummate the Merger is that David Wright, the
current Chief Executive Officer of PharmAthene, enter into a mutually acceptable
employment agreement with HAQ. The parties agreed upon the terms of such
agreement which will be effective upon the closing date of the merger. See
discussion at page 148.
89
THE
AMENDMENT PROPOSAL
Pursuant
to the Merger Agreement, HAQ has agreed to amend its amended and restated
certificate of incorporation to change its corporate name from Healthcare
Acquisition Corp. to PharmAthene, Inc. upon consummation of the
Merger.
General
HAQ
also
proposes to amend its amended and restated certificate of incorporation to
(i)
remove the staggered Board provision (ii) remove those provisions of HAQ’S
amended and restated certificate of incorporation that will no longer be
operative upon consummation of the Merger (which constitutes a business
combination for purposes of HAQ’s amended and restated certificate of
incorporation), but which were applicable at the time of HAQ’s formation as a
blank-check company and (iii) grant the right to the 8% convertible note holders
to appoint three members to the Board of Directors. In order to accomplish
this,
the text of Article Sixth will be replaced in its entirety.
Article
Sixth of HAQ’s amended and restated certificate of incorporation currently reads
as follows:
The
following provisions (A) through (E) shall apply during the period commencing
upon the filing of this Certificate of Incorporation and terminating upon the
consummation of any "Business Combination", and may not be amended prior to
the
consummation of any Business Combination. A "Business Combination" shall mean
the acquisition by the Corporation, whether by merger, capital stock exchange,
asset or stock acquisition or other similar type of transaction, of assets
or an
operating business in the healthcare industry ("Target Business").
A.
Prior
to the consummation of any Business Combination, the Corporation shall submit
such Business Combination to its stockholders for approval regardless of whether
the Business Combination is of a type which normally would require such
stockholder approval under the GCL. In the event that a majority of the IPO
Shares (defined below) cast at the meeting to approve the Business Combination
are voted for the approval of such Business Combination, the Corporation shall
be authorized to consummate the Business Combination; provided that the
Corporation shall not consummate any Business Combination if 20% or more in
interest of the holders of IPO Shares exercise their conversion rights described
in paragraph B below.
B.
In the
event that a Business Combination is approved in accordance with the above
paragraph A and is consummated by the Corporation, any stockholder of the
Corporation holding shares of Common Stock ("IPO Shares") issued in the
Corporation's initial public offering ("IPO") of securities who voted against
the Business Combination may, contemporaneous with such vote, demand that the
Corporation convert his IPO Shares into cash. If so demanded, the Corporation
shall convert such shares at a per share conversion price equal to the quotient
determined by dividing (i) the amount in the Trust Fund (as defined below),
inclusive of any interest thereon, calculated as of two business days prior
to
the proposed consummation of the Business Combination, by (ii) the total number
of IPO Shares. "Trust Fund" shall mean the trust account established by the
Corporation at the consummation of its IPO and into which a certain amount
of
the net proceeds of the IPO are deposited.
C.
In the
event that the Corporation does not consummate a Business Combination by the
later of (i) 18 months after the consummation of the IPO or (ii) 24 months
after
the consummation of the IPO in the event that either a letter of intent, an
agreement in principle or a definitive agreement to complete a Business
Combination was executed but was not consummated within such 18 month period
(such later date being referred to as the "Termination Date"), the officers
of
the Corporation shall take all such action necessary to dissolve and liquidate
the Corporation as soon as reasonably practicable. In the event that the
Corporation is so dissolved and liquidated, only the holders of IPO Shares
(at
such time) shall be entitled to receive liquidating distributions and the
Corporation shall pay no liquidating distributions with respect to any other
shares of capital stock of the Corporation.
D.
A
holder of IPO Shares shall be entitled to receive distributions from the Trust
Fund only in the event of a liquidation of the Corporation or in the event
he
demands conversion of his shares in accordance with paragraph B, above. In
no
other circumstances shall a holder of IPO Shares have any right or interest
of
any kind in or to the Trust Fund.
90
E.
The
Board of Directors shall be divided into two classes: Class A and Class B.
The
number of directors in each class shall be as nearly equal as possible. Prior
to
the IPO, there shall be elected two Class A directors for a term expiring at
the
Corporation's first Annual Meeting of Stockholders and three Class B directors
for a term expiring at the Corporation's second Annual Meeting of Stockholders.
Commencing at the first Annual Meeting of Stockholders, and at each annual
meeting thereafter, directors elected to succeed those directors whose terms
expire shall be elected for a term of office to expire at the second succeeding
annual meeting of stockholders after their election. Except as the GCL may
otherwise require, in the interim between annual meetings of stockholders or
special meetings of stockholders called for the election of directors and/or
the
removal of one or more directors and the filling of any vacancy in that
connection, newly created directorships and any vacancies in the Board of
Directors, including unfilled vacancies resulting from the removal of directors
for cause, may be filled by the vote of a majority of the remaining directors
then in office, although less than a quorum (as defined in the Corporation's
Bylaws), or by the sole remaining director. All directors shall hold office
until the expiration of their respective terms of office and until their
successors shall have been elected and qualified. A director elected to fill
a
vacancy resulting from the death, resignation or removal of a director shall
serve for the remainder of the full term of the director whose death,
resignation or removal shall have created such vacancy and until his successor
shall have been elected and qualified.
If
this
proposal is approved by the stockholders, Article Sixth will read in its
entirety as follows:
For
so
long as at least 30% of the aggregate principal amount of the 8% convertible
notes of the Corporation (the “Notes”) issued on July __, 2007 in the original
aggregate amount of $12,500,000 remains outstanding (and notwithstanding the
existence of less than three (3) noteholders at any given time), the following
provisions shall apply:
A.
The
Corporation shall maintain a Board of Directors consisting of no more than
seven
(7) individuals and each committee of the Board of Directors shall have no
more
than three (3) members;
B.
three
(3) members of the Corporation’s Board of Directors (the “Noteholder Directors’
shall be elected by the holders of Notes representing a two-thirds of the then
outstanding principal amount of all Notes, voting as a separate
class;
C.
subject to applicable law, two (2) Noteholder Directors (in each case chosen
by
majority vote of all of the Noteholder Directors) shall have the right, but
not
the obligation, to serve as members of each committee of the Board of
Directors;
D.
the
Board of Directors of the Corporation shall nominate as Noteholders Directors
only the persons designated as directors pursuant to the Note Exchange
Agreement, dated ____, 2007, by and among HAQ and the holders of the Notes
and
recommend that the holders of the Notes vote to elect such nominees as directors
of the Corporation and shall fill any vacancies that may arise upon the
resignation of any of the Noteholder Directors with a new Noteholder Director
designated in accordance with the foregoing. A Noteholder Director elected
to
fill a vacancy resulting from the death, resignation or removal of a Noteholder
Director shall serve for the remainder of the full term of the Noteholder
Director whose death, resignation or removal shall have created such vacancy
and
until his successor shall have been elected and qualified; and
E.
the
provisions contained in this Article SIXTH shall terminate immediately and
without further action when less than 30% of the aggregate principal amount
of
the Notes remains outstanding.
If
the
Merger Proposal is not approved, this proposal will not be presented at the
meeting. In addition, if the Merger is not subsequently consummated, HAQ’s Board
of Directors will not effect this amendment to HAQ’s amended and restated
certificate of incorporation.
Stockholders
will not be required to exchange outstanding stock certificates for new stock
certificates if the amendment is adopted.
91
In
the
judgment of HAQ’s Board of Directors, if the Merger is consummated, the
amendment to HAQ’s second amended and restated certificate of incorporation to:
(i) change HAQ’s corporate name, (ii) eliminate the staggered Board and remove
those provisions of HAQ’s second amended and restated certificate of
incorporation that will no longer be operative upon consummation of the Merger
and (iii) to grant the right to the 8% noteholders to appoint three members
to
the Board of Directors, is desirable, among other things, to reflect the fact
that HAQ would then be an operating business. A copy of the amended and restated
certificate of incorporation as it would be filed if the Merger Proposal and
the
proposal to amend HAQ’s amended and restated certificate of incorporation are
approved is attached to this proxy statement as Annex B.
Required
Vote
The
approval of the Amendment Proposal requires the affirmative vote of holders
of
at least a majority of the outstanding shares of our common stock. Abstentions
and broker non-votes, as well as failing to vote by not returning your proxy
card, because they are not affirmative votes, will have the same effect as
a
vote against this proposal.
Recommendation
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR'' THE
APPROVAL OF THE AMENDMENT PROPOSAL.
92
PROPOSAL
3
THE
INCENTIVE PLAN PROPOSAL
HAQ’s
2007 Long-Term Incentive Plan has been approved by HAQ’s Board of Directors
subject to approval and consummation of the Merger and further subject to the
approval of our stockholders. The approval of the Merger Proposal and the
consummation of the Merger are conditions to the effectiveness of the Amendment
Proposal and the Incentive Plan Proposal, assuming such proposals are approved
by the stockholders. If the Merger Proposal is not approved and/or the Merger
is
not consummated, the Incentive Plan will not be adopted.
The
purposes of our Incentive Plan are to create incentives designed to motivate
our
employees to significantly contribute toward our growth and profitability,
to
provide our executives, directors and other employees, and persons who, by
their
position, ability and diligence, are able to make important contributions to
our
growth and profitability, with an incentive to assist us in achieving our
long-term corporate objectives, to attract and retain executives and other
employees of outstanding competence, and to provide such persons with an
opportunity to acquire an equity interest in us.
We
may
grant incentive and non-qualified stock options, stock appreciation rights,
performance units, restricted stock awards and performance bonuses, or
collectively, awards, to our officers and key employees, and those of our
subsidiaries. In addition, the Incentive Plan authorizes the grant of
non-qualified stock options and restricted stock awards to our directors and
to
any independent contractors and consultants who by their position, ability
and
diligence are able to make important contributions to our future growth and
profitability. Generally, all classes of our employees are eligible to
participate in our Incentive Plan. No options, restricted stock or other awards
under the Incentive Plan have been made or committed to be made as of the date
of this proxy statement.
The
following is a summary of the material provisions of our Incentive Plan and
is
qualified in its entirety by reference to the complete text of our Incentive
Plan, a copy of which is attached to this proxy statement as Annex
C.
Stock
Subject to the 2007 Incentive Plan
We
have
reserved a maximum of 3,500,000 shares of our authorized common stock for
issuance upon the exercise of awards to be granted pursuant to our Incentive
Plan. Each share issued under an option or under a restricted stock award will
be counted against this limit. Shares to be delivered at the time a stock option
is exercised or at the time a restricted stock award is made may be available
from authorized but unissued shares or from stock previously issued but which
we
have reacquired and hold in our treasury.
In
the
event of any change in our outstanding common stock by reason of any
reorganization, recapitalization, stock split, stock dividend, combination of
shares, asset acquisition, consolidation, issuance of rights or other similar
transactions, the number of shares of our common stock which may be issued
upon
exercise of outstanding options, and the exercise price of options previously
granted under our Incentive Plan, will be proportionally adjusted to prevent
any
enlargement or dilution of the rights of holders of previously granted options
as may be appropriate to reflect any such transaction or event.
Administration
Our
Board
will establish a compensation committee that, among other duties, will
administer the Incentive Plan. The compensation committee will be composed
of
three members of the Board, a majority of whom will be “non-employee directors”
within the meaning of Rule 16b-3(b)(3) of the Securities Exchange Act of 1934,
as amended. Under the terms of the Note Exchange Agreement and the Merger
Agreement, HAQ has agreed that two of the three members of the Committee will
be
representatives of the holders of the 8% convertible notes. Members of our
compensation committee will serve at the pleasure of our Board. In connection
with the administration of our Incentive Plan, the compensation committee,
with
respect to awards to be made to any person who is not one of our directors,
will:
·
determine
which employees and other persons will be granted awards under our Incentive
Plan;
·
grant
the
awards to those selected to participate;
93
·
determine
the exercise price for options; and
·
prescribe
any limitations, restrictions and conditions upon any awards, including the
vesting conditions of awards.
With
respect to stock options or restricted stock awards to be made to any of our
directors, the Compensation Committee will make recommendations to our Board
of
Directors as to:
·
which
of
such persons should be granted stock options, restricted stock awards,
performance units or stock appreciation rights;
·
the
terms
of proposed grants of awards to those selected by our Board of Directors to
participate;
·
the
exercise price for options; and
·
any
limitations, restrictions and conditions upon any awards.
Any
grant
of awards to any of directors under our Incentive Plan must be approved by
our
Board of Directors.
In
addition, the compensation committee will:
·
interpret
our Incentive Plan; and
·
make
all
other determinations and take all other action that may be necessary or
advisable to implement and administer our Incentive Plan.
Types
of Awards
Our
Incentive Plan permits the Compensation Committee to grant the following types
of awards.
Stock
Options.
Stock
options are contractual rights entitling an optionee who has been granted a
stock option to purchase a stated number of shares of our common stock at an
exercise price per share determined at the date of the grant. Options are
evidenced by stock option agreements with the respective optionees. The exercise
price for each stock option granted under our Incentive Plan will be determined
by our Board of Directors or a committee of the Board at the time of the grant,
but will not be less than fair market value on the date of the grant. Our Board
of Directors or a committee of the Board will also determine the duration of
each option; however, no option may be exercisable more than ten years after
the
date the option is granted. Within the foregoing limitations, the Board of
Directors or committee of the Board may, in its discretion, impose limitations
on exercise of all or some options granted under our Incentive Plan, such as
specifying minimum periods of time after grant during which options may not
be
exercised. Options granted under our Incentive Plan will vest at rates specified
in the option agreement at the time of grant; however, all options granted
under
our Incentive Plan will vest upon the occurrence of a change of control, as
defined in the Incentive Plan. Our Incentive Plan also contains provisions
for
our Board of Directors or a committee of the Board to provide in the
participants’ option award agreements for accelerating the right of an
individual employee to exercise his or her stock option or restricted stock
award in the event of retirement or other termination of employment. No cash
consideration is payable to us in exchange for the grant of
options.
Our
Incentive Plan provides that the stock options may either be Incentive Stock
Options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, or Non-Qualified Options, which are stock options other than
Incentive Stock Options within the meaning of Sections 422 of the Code.
Incentive Stock Options may be granted only to our employees or employees of
our
subsidiaries, and must be granted at a per share option price not less than
the
fair market value of our common stock on the date the Incentive Stock Option
is
granted. In the case of an Incentive Stock Option granted to a stockholder
who
owns shares of our outstanding stock of all classes representing more that
10%
of the total combined voting power of all of our outstanding stock of all
classes entitled to vote in the election of directors, the per share option
price must be not less than 110% of the fair market value of one share of our
common stock on the date the Incentive Stock Option is granted and the term
of
such option may not exceed five years. As required by the Code, the aggregate
fair market value, determined at the time an Incentive Stock Option is granted,
of our common stock with respect to which Incentive Stock Options may be
exercised by an optionee for the first time during any calendar year under
all
of our incentive stock option plans may not exceed $100,000.
94
The
exercise price for Non-Qualified Options may not be less than the fair market
value of our common stock on the date the Non-Qualified Option is granted.
Non-Qualified Options are not subject to any of the restrictions described
above
with respect to Incentive Stock Options. The exercise price of stock options
may
be paid in cash, in whole shares of our common stock, in a combination of cash
and our common stock, or in such other form of consideration as our Board of
Directors or the committee of the Board may determine, equal in value to the
exercise price. However, only shares of our common stock which the option holder
has held for at least six months on the date of the exercise may be surrendered
in payment of the exercise price for the options. In no event may a stock option
be exercised after the expiration of its stated term.
Stock
Appreciation Rights.
A stock
appreciation right permits the grantee to receive an amount (in cash, common
stock, or a combination thereof) equal to the number of stock appreciation
rights exercised by the grantee multiplied by the excess of the fair market
value of our common stock on the exercise date over the stock appreciation
rights’ exercise price. Stock appreciation rights may or may not be granted in
connection with the grant of an option. The exercise price of stock appreciation
rights granted under the Incentive Plan will be determined by the Board of
Directors or a committee of the Board; provided, however, that such exercise
price cannot be less than the fair market value of a share of common stock
on a
date the stock appreciation right is granted (subject to adjustments). A stock
appreciation right may be exercised in whole or in such installments and at
such
times as determined by the Board of Directors or a committee of the
Board.
Restricted
Stock.
Restricted shares of our common stock may be granted under our Incentive Plan
subject to such terms and conditions, including forfeiture and vesting
provisions, and restrictions against sale, transfer or other disposition as
the
Board of Directors or a committee of the Board may determine to be appropriate
at the time of making the award. In addition, the Board of Directors or a
committee of the Board may direct that share certificates representing
restricted stock be inscribed with a legend as to the restrictions on sale,
transfer or other disposition, and may direct that the certificates, along
with
a stock power signed in blank by the grantee, be delivered to and held by us
until such restrictions lapse. The Board of Directors or a committee of the
Board, in its discretion, may provide in the award agreement for a modification
or acceleration of shares of restricted stock in the event of permanent
disability, retirement or other termination of employment or business
relationship with the grantee.
Performance
Units.
The
Incentive Plan permits grants of performance units, which are rights to receive
cash payments equal to the difference (if any) between the fair market value
of
our common stock on the date of grant and its fair market value on the date
of
exercise of the award, except to the extent otherwise provided by the Board
of
Directors or a committee of the Board or required by law. Such awards are
subject to the fulfillment of conditions that may be established by the Board
of
Directors or a committee of the Board including, without limitation, the
achievement of performance targets based upon the factors described above
relating to restricted stock awards.
Performance
Bonus.
The
Incentive Plan permits grants of performance bonuses, which may be paid in
cash,
common stock or combination thereof as determined by the Board of Directors
or a
committee of the Board. The maximum value of performance bonus awards granted
under the Incentive Plan shall be established by the compensation committee
at
the time of the grant. An employee’s receipt of such amount will be contingent
upon achievement of performance targets during the performance period
established by the compensation committee. The performance targets will be
determined by the Board of Directors or a committee of the Board based upon
the
factors described above relating to restricted stock awards. Following the
end
of the performance period, the Board of Directors or a committee of the Board
will determine the achievement of the performance targets for such performance
period. Payment may be made within 60 days of such determination. Any payment
made in shares of common stock will be based upon the fair market value of
the
common stock on the payment date.
Transferability
With
the
exception of Non-Qualified Stock Options, awards are not transferable other
than
by will or by the laws of descent and distribution. Non-Qualified Stock Options
are transferable on a limited basis. Restricted stock awards are not
transferable during the restriction period.
95
Change
of Control Event
The
Incentive Plan provides for the acceleration of any unvested portion of any
outstanding awards under the Incentive Plan upon a change of control event
unless the terms of a particular award state otherwise.
Termination
of Employment/Relationship
Awards
granted under our Incentive Plan that have not vested will generally terminate
immediately upon the grantee’s termination of employment or business
relationship with us or any of our subsidiaries for any reason other than
retirement with our consent, disability or death. The Board of Directors or
a
committee of the Board may determine at the time of the grant that an award
agreement should contain provisions permitting the grantee to exercise the
stock
options for any stated period after such termination, or for any period the
Board of Directors or a committee of the Board determines to be advisable after
the grantee’s employment or business relationship with us terminates by reason
of retirement, disability, death or termination without cause. Incentive Stock
Options will, however, terminate no more than three months after termination
of
the optionee’s employment, twelve months after termination of the optionee’s
employment due to disability and three years after termination of the optionee’s
employment due to death. The Board of Directors or a committee of the Board
may
permit a deceased optionee’s stock options to be exercised by the optionee’s
executor or heirs during a period acceptable to the Board of Directors or a
committee of the Board following the date of the optionee’s death but such
exercise must occur prior to the expiration date of the stock
option.
Dilution;
Substitution
As
described above, our Incentive Plan will provide protection against substantial
dilution or enlargement of the rights granted to holders of awards in the event
of stock splits, recapitalizations, asset acquisitions, consolidations,
reorganizations or similar transactions. New award rights may, but need not,
be
substituted for the awards granted under our Incentive Plan, or our obligations
with respect to awards outstanding under our Incentive Plan may, but need not,
be assumed by another corporation in connection with any asset acquisition,
consolidation, acquisition, separation, reorganization, sale or distribution
of
assets, liquidation or like occurrence in which we are involved. In the event
that our Incentive Plan is assumed, the stock issuable with respect to awards
previously granted under our Incentive Plan shall thereafter include the stock
of the corporation granting such new option rights or assuming our obligations
under the Incentive Plan.
Amendment
of the Incentive Plan
Our
Board
may amend our Incentive Plan at any time. However, without stockholder approval,
our Incentive Plan may not be amended in a manner that would:
·
increase
the number of shares that may be issued under our Incentive Plan;
·
materially
modify the requirements for eligibility for participation in our Incentive
Plan;
·
materially
increase the benefits to participants provided by our Incentive Plan;
or
·
otherwise
disqualify our Incentive Plan for coverage under Rule 16b-3 promulgated under
the Securities Exchange Act of 1934, as amended.
Awards
previously granted under our Incentive Plan may not be impaired or affected
by
any amendment of our Incentive Plan, without the consent of the affected
grantees.
Accounting
Treatment
Under
generally accepted accounting principles with respect to the financial
accounting treatment of stock options used to compensate employees, upon the
grant of stock options under our Incentive Plan, the fair value of the options
will be measured on the date of grant and this amount will be recognized as
a
compensation expense ratably over the vesting period. Stock appreciation rights
granted under the Incentive Plan must be settled in common stock. Therefore,
stock appreciation rights granted under the Incentive Plan will receive the
same
accounting treatment as options. The cash we receive upon the exercise of stock
options will be reflected as an increase in our capital. No additional
compensation expense will be recognized at the time stock options are exercised,
although the issuance of shares of common stock upon exercise may reduce basic
earnings per share, as more shares of our common stock would then be
outstanding.
96
When
we
make a grant of restricted stock, the fair value of the restricted stock award
at the date of grant will be determined and this amount will be recognized
over
the vesting period of the award. The fair value of a restricted stock award
is
equal to the fair market value of our common stock on the date of
grant.
Due
to
consideration of the accounting treatment of stock options and restricted stock
awards by various regulatory bodies, it is possible that the present accounting
treatment may change.
Tax
Treatment
The
following is a brief description of the federal income tax consequences, under
existing law, with respect to awards that may be granted under our Incentive
Plan.
Incentive
Stock Options.
An
optionee will not realize any taxable income upon the grant or the exercise
of
an Incentive Stock Option. However, the amount by which the fair market value
of
the shares covered by the Incentive Stock Option (on the date of exercise)
exceeds the option price paid will be an item of tax preference to which the
alternative minimum tax may apply, depending on each optionee’s individual
circumstances. If the optionee does not dispose of the shares of our common
stock acquired by exercising an Incentive Stock Option within two years from
the
date of the grant of the Incentive Stock Option or within one year after the
shares are transferred to the optionee, when the optionee later sells or
otherwise disposes of the stock, any amount realized by the optionee in excess
of the option price will be taxed as a long-term capital gain and any loss
will
be recognized as a long-term capital loss. We generally will not be entitled
to
an income tax deduction with respect to the grant or exercise of an Incentive
Stock Option.
If
any
shares of our common stock acquired upon exercise of an Incentive Stock Option
are resold or disposed of before the expiration of the prescribed holding
periods, the optionee would realize ordinary income, instead of capital gain.
The amount of the ordinary income realized would be equal to the lesser of
(i)
the excess of the fair market value of the stock on the exercise date over
the
option price; or (ii) in the case of a taxable sale or exchange, the amount
of
the gain realized. Any additional gain would be either long-term or short-term
capital gain, depending on whether the applicable capital gain holding period
has been satisfied. In the event of a premature disposition of shares of stock
acquired by exercising an Incentive Stock Option, we would be entitled to a
deduction equal to the amount of ordinary income realized by the
optionee.
Non-Qualified
Options.
An
optionee will not realize any taxable income upon the grant of a Non-Qualified
Option. At the time the optionee exercises the Non-Qualified Option, the amount
by which the fair market value at the time of exercise of the shares covered
by
the Non-Qualified Option exceeds the option price paid upon exercise will
constitute ordinary income to the optionee in the year of such exercise. We
will
be entitled to a corresponding income tax deduction in the year of exercise
equal to the ordinary income recognized by the optionee. If the optionee
thereafter sells such shares, the difference between any amount realized on
the
sale and the fair market value of the shares at the time of exercise will be
taxed to the optionee as capital gain or loss, short- or long-term depending
on
the length of time the stock was held by the optionee before sale.
Stock
Appreciation Rights.
A
participant realizes no taxable income and we are not entitled to a deduction
when a stock appreciation right is granted. Upon exercising a stock appreciation
right, a participant will realize ordinary income in an amount equal to the
fair
market value of the shares received minus any amount paid for the shares, and
we
will be entitled to a corresponding deduction. A participant’s tax basis in the
shares of common stock received upon exercise of a stock appreciation right
will
be equal to the fair market value of such shares on the exercise date, and
the
participant’s holding period for such shares will begin at that time. Upon sale
of the shares of common stock received upon exercise of a stock appreciation
right, the participant will realize short-term or long-term capital gain or
loss, depending upon whether the shares have been held for more than one year.
The amount of such gain or loss will be equal to the difference between the
amount realized in connection with the sale of the shares, and the participant’s
tax basis in such shares.
Restricted
Stock Award.
A
recipient of restricted stock generally will not recognize any taxable income
until the shares of restricted stock become freely transferable or are no longer
subject to a substantial risk of forfeiture. At that time, the excess of the
fair market value of the restricted stock over the amount, if any, paid for
the
restricted stock is taxable to the recipient as ordinary income. If a recipient
of restricted stock subsequently sells the shares, he or she generally will
realize capital gain or loss in the year of such sale in an amount equal to
the
difference between the net proceeds from the sale and the price paid for the
stock, if any, plus the amount previously included in income as ordinary income
with respect to such restricted shares.
97
A
recipient has the opportunity, within certain limits, to fix the amount and
timing of the taxable income attributable to a grant of restricted stock.
Section 83(b) of the Code permits a recipient of restricted stock, which is
not
yet required to be included in taxable income, to elect, within 30 days of
the
award of restricted stock, to include in income immediately the difference
between the fair market value of the shares of restricted stock at the date
of
the award and the amount paid for the restricted stock, if any. The election
permits the recipient of restricted stock to fix the amount of income that
must
be recognized by virtue of the restricted stock grant. We will be entitled
to a
deduction in the year the recipient is required (or elects) to recognize income
by virtue of receipt of restricted stock, equal to the amount of taxable income
recognized by the recipient.
Performance
Units and Performance Bonuses.
A
participant realizes no taxable income and we are not entitled to a deduction
when performance units or performance bonuses are awarded. When the performance
units or performance bonuses vest and become payable upon the achievement of
the
performance objectives, the participant will realize ordinary income equal
to
the amount of cash received or the fair market value of the shares received
minus any amount paid for the shares, and we will be entitled to a corresponding
deduction. A participant’s tax basis in shares of common stock received upon
payment will be equal to the fair market value of such shares when the
participant receives them. Upon sale of the shares, the participant will realize
short-term or long-term capital gain or loss, depending upon whether the shares
have been held for more than one year at the time of sale. Such gain or loss
will be equal to the difference between the amount realized upon the sale of
the
shares and the tax basis of the shares in the participant’s hands.
Section
162(m) of the Code.
Section
162(m) of the Code precludes a public corporation from taking a deduction for
annual compensation in excess of $1.0 million paid to its chief executive
officer or any of its four other highest-paid officers. However, compensation
that qualifies under Section 162(m) of the Code as “performance-based” is
specifically exempt from the deduction limit. Based on Section 162(m) of the
Code and the regulations thereunder, our ability to deduct compensation income
generated in connection with the exercise of stock options or stock appreciation
rights granted under the Incentive Plan should not be limited by Section 162(m)
of the Code. Further, we believe that compensation income generated in
connection with performance awards granted under the Incentive Plan should
not
be limited by Section 162(m) of the Code. The Incentive Plan has been designed
to provide flexibility with respect to whether restricted stock awards or
performance bonuses will qualify as performance-based compensation under Section
162(m) of the Code and, therefore, be exempt from the deduction limit. If the
vesting restrictions relating to any such award are based solely upon the
satisfaction of one of the performance goals set forth in the Incentive Plan,
then we believe that the compensation expense relating to such an award will
be
deductible by us if the awards become vested. However, compensation expense
deductions relating to such awards will be subject to the Section 162(m)
deduction limitation if such awards become vested based upon any other criteria
set forth in such award (such as the occurrence of a change in control or
vesting based upon continued employment with us).
Certain
Awards Deferring or Accelerating the Receipt of Compensation.
Section
409A of the Internal Revenue Code, enacted as part of the American Jobs Creation
Act of 2004, imposes certain new requirements applicable to “nonqualified
deferred compensation plans.” If a nonqualified deferred compensation plan
subject to Section 409A fails to meet, or is not operated in accordance with,
these new requirements, then all compensation deferred under the plan may become
immediately taxable. Stock appreciation rights and deferred stock awards which
may be granted under the plan may constitute deferred compensation subject
to
the Section 409A requirements. It is our intention that any award agreement
governing awards subject to Section 409A will comply with these new
rules.
Required
Vote
Approval
of our Incentive Plan will require the affirmative vote of the holders of a
majority of the shares of HAQ common stock represented in person or by proxy
and
entitled to vote at the Special Meeting. Assuming the presence of a quorum
of
more than 50% of the shares of our common stock, the failure to vote will have
no effect on the outcome of the vote.
98
Recommendation
THE
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS VOTE “FOR” THE
INCENTIVE PLAN PROPOSAL.
99
PROPOSAL
4
THE
ADJOURNMENT PROPOSAL
The
Adjournment Proposal allows HAQ’s Board of Directors to submit a proposal to
adjourn the Special Meeting to a later date or dates, if necessary, to permit
further solicitation of proxies in the event, based on the tabulated votes,
there are not sufficient votes at the time of the Special Meeting to approve
the
consummation of the Merger.
Consequences
if the Adjournment Proposal is not Approved
If
the
Adjournment Proposal is presented to the Special Meeting and is not approved
by
the stockholders, HAQ’s Board of Directors may not be able to adjourn the
Special Meeting to a later date in the event, based on the tabulated votes,
there are not sufficient votes at the time of the Special Meeting to approve
the
consummation of the Merger. In such event, HAQ will be required to
liquidate.
Required
Vote
Adoption
of the Adjournment Proposal requires the affirmative vote of a majority of
the
shares of HAQ's common stock present in person or by proxy and entitled to
vote
at the Special Meeting. Adoption of the Adjournment Proposal is not conditioned
upon the adoption of any of the other proposals.
OUR
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT OUR STOCKHOLDERS VOTE ``FOR''
THE
APPROVAL OF THE ADJOURNMENT PROPOSAL.
100
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS
OF OPERATIONS OF PHARMATHENE
The
following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements for PharmAthene beginning on page FS-14 of
this proxy statement. These Condensed Consolidated Financial Statements present
the results of operations of PharmAthene for three months ended March 31, 2007
and 2006 as well as the financial positions at March 31, 2007. In addition
to
historical information, the following discussion may contain forward looking
information that involves risks and uncertainties. All amounts presented, except
share data, are rounded to the nearest thousand dollars.
Overview
PharmAthene
is a biodefense company engaged in the business of discovery and development
of
novel human therapeutics and prophylactics for the treatment and prevention
of
morbidity and mortality from exposure to biological and chemical weapons.
Additionally, PharmAthene collaborates with other pharmaceutical companies
to
support clinical development of product candidates. PharmAthene has two products
currently under development. Valortim™, a fully human monoclonal antibody (an
identical population of highly specific antibodies produced from a single clone)
for the prevention and treatment of anthrax infection and Protexia®, mimics a
natural bioscavenger for the treatment or prevention of nerve agent poisoning
by
organophosphate compounds which include nerve gases and pesticides.
PharmAthene’s
lead product candidate, Valortim™, is a fully human monoclonal antibody designed
to protect against and treat inhalation anthrax infection, the most lethal
form
of illness in humans caused by the Bacillus
anthracis
bacterium. PharmAthene is co-developing Valortim™ with Medarex, Inc., a
biopharmaceutical company that specializes in developing fully human
antibody-based therapeutic products and will share with Medarex any profits
derived from sales of Valortim™. Preclinical trials on animal models have
demonstrated that Valortim™ is highly efficacious as both a prophylaxis and a
therapeutic for inhalation anthrax infection. PharmAthene and Medarex have
completed dosing of healthy volunteers in a Phase I open-label, dose-escalation
clinical trial to evaluate the safety, tolerability, immunogenicity (the ability
of an antigen to elicit an immune response), and pharmacokinetics (the study
of
absorption, metabolism and action of drugs) of a single dose of Valortim™
administered intravenously or intramuscularly. No drug-related serious adverse
events have been reported. Final results from the Phase I trial were presented
at the Infectious Disease Society of America meeting in October 2006. Valortim™
has been granted Fast Track Status by the U.S. Food and Drug Administration
(the
“FDA”), which may permit PharmAthene to submit portions of a Biologics License
Application (“BLA”) or efficacy supplement before the complete BLA is submitted.
This may expedite the review process but requires that the FDA have sufficient
resources to allow early review of the portions submitted. In addition,
Valortim™ has been granted orphan drug status for the treatment of inhalational
anthrax.
Protexia®,
PharmAthene’s second product candidate, is a recombinant form (that is, produced
using genetic engineering technology) of human butyrylcholinesterase, a
naturally occurring enzyme (“BChE”), for use in the prophylaxis
and treatment of organophosphate chemical nerve agent poisoning.
Preclinical trials on animal models have demonstrated that Protexia® is highly
efficacious both prophylactically and therapeutically for chemical nerve agent
poisoning. PharmAthene plans to continue preclinical animal studies of Protexia®
throughout 2006 and 2007 and file an Investigational New Drug application
(“IND”) with the FDA in 2008. The procurement process for the scale-up
development and sale of Protexia® is already underway with the U.S. Department
of Defense (the “DoD”), the department tasked with purchasing biodefense
countermeasures for military use. The DoD requested competitive bids in a
Request for Proposal (an “RFP”) for a recombinant form of BChE drug for the
prophylaxis treatment of chemical nerve agent poisoning, which PharmAthene
submitted in November 2005. In September 2006, PharmAthene was awarded a
contract by the DoD for the advanced development of Protexia® and
procurement of an initial 90,000 doses for approximately $35 million. If all
options and extensions of this contract are exercised, the contract could amount
to up to $213 million in revenues.
In
compiling its business plan and cost and revenue projections for the
future,
PharmAtene has considered various factors, relating to potential sales
of
Valortim and Protexia. In order to market commercially its products,
PharmAthene
must receive final approval from the FDA. PharmAthene currently estimates
that
it will not have an FDA approved product until at least 2012. Nevertheless,
PharmAthene believes that it may commence sales of Valortim and Protexia in
2008 and 2009. The United States Strategic National Stockpile (“SNS”) is able to
purchase products from companies prior to the receipt of FDA approval
for
Emergency Use Authorization (“EUA”). PharmAthene is aware that, under certain
conditions, the SNS currently buys a significant amount of product from
companies that do not have an FDA-approved product. PharmAthene analyzed
the
United States Government’s demand for its products based upon published reports.
It also analyzed available information regarding its competitors’ projects and
determined the level of orders that could be received from the United
States
Government. PharmAthene estimated what portion of such orders it could
receive
and of such orders what portion PharmAthene could deliver in each of
2008 and
2009 and the price per treatment delivered. PharmAthene also considered
delivery
of a limited number of orders internationally. Much like the Valortim™ analysis,
PharmAthene performed a similar evaluation and analysis of the market
for
Protexia®. To this end, PharmAthene projected the delivery, beginning in 2009,
of Protexia® domestically to SNS and internationally. Accordingly, PharmAthene
believes it can meet projections for sales in 2009 of Valortim™ and
Protexia ®.
PharmAthene
has financed its operations since inception in March 2001 primarily through
the
issuance of equity securities, convertible notes, and proceeds from loans or
other borrowings. Any, or all, of these financing vehicles or others may be
utilized to fund its future capital requirements.
101
Nexia
Asset Acquisition
In
March
2005, PharmAthene acquired substantially all of the assets and liabilities
of
Nexia Biotechnologies Inc. (‘‘Nexia’’) that related to its Protexia® compound
for a purchase price of $19.1 million (the “Nexia Acquisition”). PharmAthene
delivered to Nexia $11.8 million in cash, 7,465,501 shares of Series C Preferred
Stock and 2,239,650 warrants to acquire Series C Preferred Stock and 1,343,790
warrants to purchase common stock. In order to finance the cash portion of
the
Nexia Acquisition, PharmAthene sold Series C Convertible Redeemable Preferred
Stock (the “Series C Preferred Stock”), issued warrants to acquire Series C
Preferred Stock and issued warrants to acquire common stock. The purchased
assets and liabilities are held by PharmAthene Canada, Inc., PharmAthene’s only
subsidiary (‘‘PharmAthene Canada’’), a variable interest entity established in
connection with the acquisition to allow for the investment by certain Canadian
stockholders and consolidated in PharmAthene’s financial statements as of the
date of its inception. As a result of the Nexia Acquisition, PharmAthene was
able to secure the aforementioned $213 million DoD contract for the development
and procurement of Protexia®.
In
conjunction with the issuance of the Series C Preferred Stock, PharmAthene
sold
2,951,654 shares of Class C Shares of PharmAthene Canada (the ‘‘Class C
Shares’’) to one investor for net proceeds of $2,364,000. The Class C Shares
are, pursuant to the terms of a Put and Support Agreement, exchangeable for
an
equal number of shares of Series C Preferred Stock. The Class C Shares bear
a
cumulative dividend rate of 8% per annum.
The
investor in the Class C Shares also received warrants to purchase 466,498 Class
B Common Shares of PharmAthene Canada at an exercise price of $0.01 per share,
subject to reduction if certain milestones are met by PharmAthene. The investor
in the Class C Shares also received warrants to purchase 777,496 Class C Shares
at an exercise price of $0.91 per share.
Recent
Events
On
January 19, 2007 PharmAthene entered into the Merger Agreement with HAQ and
its
wholly-owned subsidiary, PAI Acquisition Corp., pursuant to which PharmAthene
will become a wholly-owned subsidiary of HAQ and the stockholders,
optionsholders, warrantholders and noteholders of PharmAthene will receive
the
following consideration (i) an aggregate of 12.5 million shares of HAQ common
stock; (ii) $12.5 million in 8% convertible notes issued by HAQ and (iii) up
to
$10 million in milestone payments if certain conditions are met. It is
anticipated that stockholders of PharmAthene will initially own up to
approximately 52% of the issued and outstanding shares of common stock of the
combined company after the Merger, which is expected to remain listed on the
American Stock Exchange.
The
new
8% convertible notes to be issued by HAQ are to be issued in exchange for
PharmAthene’s $11.8 million outstanding secured convertible notes and will
mature in 24 months. These convertible notes will be convertible at the option
of the holders into common stock at $10.00 per share and may be redeemed by
PharmAthene without penalty after 12 months. In the event that PharmAthene
enters into a contract prior to December 31, 2007 for the sale of Valortim™ to
the U.S. government for more than $150 million in anticipated revenue,
PharmAthene’s current stockholders will be eligible for additional cash
payments, not to exceed $10 million, equal to 10% of the actual collections
from
the sale of Valortim™. Subject to certain approvals required of the HAQ and
PharmAthene stockholders under applicable state law and the rules and
regulations of the American Stock Exchange, as well as other regulatory
approvals and other customary closing conditions, PharmAthene expects the Merger
to close in the second or third quarter of 2007.
On
March
30, 2007, PharmAthene entered into a $10 million credit facility with Silicon
Valley Bank and Oxford Finance Corporation. Under the credit facility,
PharmAthene borrowed $10 million which loan bears interest at the rate of 11.5%
per annum. Pursuant to the terms of the loan and security agreement evidencing
the credit facility, PharmAthene will make monthly payments of interest only
through September 30, 2007 and, thereafter, will make monthly payments of
principal and interest over the remaining 30 months of the loan. The loan is
secured by a security interest on all of PharmAthene’s and PharmAthene Canada’s
assets other than certain intellectual property. In addition, in the event
that
the proposed Merger is not consummated by August 3, 2007, PharmAthene has agreed
to provide the lenders with a mortgage on its Canadian real estate. PharmAthene
may not repay the loan for the first six months but, thereafter, may prepay
provided it pays certain prepayment fees. In connection with the credit
facility, PharmAthene issued to Silicon Valley Bank and Oxford Financial
Corporation warrants to purchase an aggregate of 438,453 shares of PharmAthene
Series C Preferred Stock through March 30, 2017 at an exercise price of $0.91.
As a consequence of the issuance of the warrants, the Merger Allocation
Agreement was amended and restated in order to recalculate the Merger
Consideration payable to the holders of the various classes of capital stock
of
PharmAthene taking into account the newly issued warrants.
102
Results
of Operations
Revenue
PharmAthene
recognized revenues of $3.0 million and $186,400 for the three month periods
ending March 31, 2007 and 2006, respectively. These revenues consist primarily
of contract and grant funding from the U.S. Government for the development
of
pharmaceutical products for Protexia®, one of the Company’s two drugs. Other
non-grant related revenue of $7,000 and $7,741 was recognized in the first
quarters of fiscal years 2007 and 2006, respectively.
Contract
and Grant revenue
During
the three month periods ending March 31, 2007 and 2006, contract and grant
revenues recognized related to U.S. government awarded contracts and grants
as
follows:
|
|
·
|
With
the March 2005 Nexia Acquisition, PharmAthene was assigned the rights
to
receive the fixed price grant with the U.S. Army Medical Research
and
Material Command Center to fund preclinical studies for the Protexia®
compound. This grant was awarded for approximately $2.7 million for
the
period from April 2003 through September 2006.
|
|
|
|
|
|
|
·
|
In
September 2006, the DoD U.S. Army Space and Missile Command awarded
PharmAthene a multi-year contract for advanced development of
PharmAthene’s broad spectrum chemical nerve agent prophylaxis and therapy,
Protexia®. The contract for advanced development and procurement of an
initial 90,000 doses of Protexia® is for approximately $35 million. If all
options and extensions of this contract are exercised, the contract
could
amount to up to $213 million in revenues.
|
|
·
|
In
October 2006, the National Institutes of Health (NIH) Countermeasures
Against Chemical Threats, (Counter ACT) Research Network awarded
a $1.7
million grant to support continued development of PharmAthene’s broad
spectrum chemical nerve agent therapy, Protexia®. Counter ACT’s program
goal is to develop novel therapeutic agents for use in a mass civilian
terrorist attack.
|
During
the first quarter of fiscal year 2007, PharmAthene recognized $2.9 million
in
revenue related to advanced development work funded through the DoD U.S. Army
Space and Missile Command contract awarded in September 2006. Additionally,
approximately $86,900 of revenue was recognized for the three months ending
March 31, 2007 related to the development grant work under the NIH Counter
ACT
program.
During
the first quarter of fiscal year 2006, PharmAthene recognized $178,700 in grant
revenue related to the firm fixed price grant with the U.S. Army Medical
Research and Material Command Center to fund preclinical studies for the
Protexia® compound. Work under this grant was completed in March 2006, with no
additional grant funding for the remainder of the year.
Other
revenue
In
connection with the Nexia Acquisition, PharmAthene acquired property and
equipment, including farm facilities. Other income primarily results from the
leasing of farm facilities that PharmAthene is currently not
utilizing.
Research
and Development Expenses
PharmAthene’s
research and development expenses were $3.1 million and $1.8 million for the
three months ending March 31, 2007 and 2006, respectively. These expenses
resulted from research and development activities related to programs for
ValortimTM,
for
protection against and treatment of inhalation anthrax, and for Protexia®, for
treatment of nerve agent poisoning. PharmAthene incurred both direct and
indirect expenses. Direct expenses included salaries and other costs of
personnel, raw materials and supplies. PharmAthene may also incur third-party
costs related to these projects, such as contract research, consulting and
clinical development costs for individual projects.
103
Research
and development expenses for the first quarter of fiscal years 2007 and 2006,
respectively, was attributable to research programs as
follows:
|
Three
months ended March, 31
|
|||||||
|
|
2007
|
2006
|
|||||
|
Valortim™
|
$
|
477,040
|
$
|
521,680
|
|||
|
Protexia®
|
2,141,869
|
1,228,900
|
|||||
|
Internal
research and development
|
442,150
|
--
|
|||||
|
Total
R&D expenses
|
$
|
3,061,059
|
$
|
1,750,580
|
|||
Research
and development expense increased $1.3 million quarter over quarter primarily
as
a result of increased process development and manufacturing activities related
to Protexia® and Valortim™ of $1.7 million. This increase is partially offset by
reduced clinical fees of $383,700 related to the clinical trial program for
Valortim™ which was initiated in fiscal year 2005 in collaboration with Medarex.
Protexia®
is PharmAthene’s drug candidate for countermeasure against nerve agent
bioterrorist attacks, acquired in March 2005. In the first quarter of 2007,
PharmAthene spent approximately $375,800 on internal human resources and $1.8
million mainly on process development and manufacturing activities. For the
three months ended March 31, 2006, PharmAthene spent approximately $704,100
on
internal human resources and $524,800 mainly on pre-clinical testing and
manufacturing. From inception of the Protexia® development program to date,
PharmAthene has expended a total of approximately $12 million related to the
Protexia® program.
Valortim™
is
PharmAthene’s drug candidate for use as a countermeasure against anthrax
associated bioterrorist attacks. For the three months ended March 31, 2007,
PharmAthene spent approximately $454,000 on process and clinical development
with the remaining expenditure related to internal resources. For the first
quarter of 2006, PharmAthene spent $448,900 on clinical development with the
remaining expense related to internal resources. From inception of the
Valortim™
development program to date, PharmAthene has expended a total of approximately
$4 million related to the Valortim™ development program.
Internal
research and development costs include activities related to the development
of
future programs.
General
and Administrative Expenses
General
and administrative functions for PharmAthene include the areas of executive
management, finance and administration, government affairs and regulations,
corporate development, human resources, legal, and compliance. For each
function, PharmAthene may incur direct expenses such as salaries, supplies
and
third-party consulting and other external costs. Indirect costs such as
facilities, utilities and other administrative overhead are also included in
general and administrative expenses.
Expenses
associated with general and administrative functions for PharmAthene were $2.5
million and $1.5 million for the three months ended March 31, 2007 and 2006,
respectively. General and administrative expenses increased $1.0 million from
the first quarter of fiscal year 2006 to the first quarter of 2007 primarily
due
to increased employee costs of $335,900, $480,100 in additional consulting
and
legal costs associated with transactional, proposal and compliance related
activities, and increased building operation costs of $100,400 associated with
the increased headcount, primarily in the United States.
Depreciation
and Intangible Amortization
Depreciation
and intangible amortization expense was $147,100 and $136,300 for the three
months ended March 31, 2007 and 2006 respectively. Depreciation expense for
the
first quarter of fiscal years 2007 and 2006 of $112,000 and $104,300,
respectively, resulted primarily from building, leasehold improvements and
lab
equipment acquired through the Nexia Acquisition in the first quarter of 2005.
Amortization expense recorded the three months ended March 31, 2007 and 2006
of
$35,100 and $32,000 respectively, related to patents acquired in the Nexia
Acquisition.
104
Other
Income and Expenses
Other
income and expenses consists primarily of income on PharmAthene’s investments,
interest expense on PharmAthene’s debt and other financial obligations and the
change in market value of its derivative financial instruments. For the first
quarter of fiscal years 2007 and 2006, PharmAthene’s interest income was $55,600
and $72,300, respectively. The decrease in interest income first quarter to
first quarter resulted from lower average investment balance throughout the
first quarter of 2007 with the funding of operations.
PharmAthene
incurred interest expense of $241,800 and $100 for the three months ended March
31, 2007 and 2006, respectively. During the second and third quarters of fiscal
year 2006, PharmAthene entered into $11.8 million 8% convertible notes.
PharmAthene has recognized $241,800 in interest expense related to these notes
in the first quarter of fiscal year 2007.
For
the
first quarters of fiscal year 2007 and 2006, PharmAthene incurred income of
$7,600 and expense of $353,800, respectively, related to the change in market
value of its derivative instruments, which consist of 5,699,895 warrants to
purchase Series C Preferred Stock at an exercise price of $0.91 per share.
The
fair values of these warrants are estimated on a quarterly basis using the
Black-Scholes valuation model.
Liquidity
and Capital Resources
Overview
PharmAthene's
primary cash requirements are to fund its research and development programs
and
to fund general corporate overhead. Its cash requirements could change
materially as a result of changes in its business and strategy. These changes
could arise from PharmAthene's management team's evaluation of its business
strategy, the progress of its research and development activities and clinical
programs, licensing activities, acquisitions, divestitures or other corporate
developments.
PharmAthene
has financed its operations since inception in March 2001 primarily through
the
issuance of equity securities in addition to convertible notes, and proceeds
from loans or other borrowings. Any combination of, or all of, these financing
vehicles or others may be utilized to fund its future capital requirements.
In
evaluating alternative sources of financing, PharmAthene considers, among other
things, the dilutive impact, if any, on its stockholders, the ability to
leverage stockholder returns through debt financing, the particular terms and
conditions of each alternative financing arrangement and its ability to service
its obligations under such financing arrangements.
PharmAthene's
Consolidated Financial Statements have been prepared on a basis which assumes
that it will continue as a going concern and which contemplates the realization
of assets and the satisfaction of liabilities and commitments in the normal
course of business. PharmAthene has incurred cumulative net losses and expects
to incur additional losses to perform further research and development
activities. PharmAthene does not have commercial products and has limited
capital resources. Its plans with regard to these matters include continued
development of its products as well as seeking additional research support
funds
and financial arrangements. Although PharmAthene continues to pursue these
plans, there is no assurance that it will be successful in obtaining sufficient
financing on commercially reasonable terms or that it will be able to secure
financing through government contracts and grants.
PharmAthene
has developed a plan to reduce its operating expenses in the event that
sufficient funds are not available, or if it is not able to obtain anticipated
government contracts and grants. If PharmAthene is unable to raise adequate
capital or achieve profitability, future operations will need to be scaled
back
or discontinued. Continuance of PharmAthene as a going concern is dependent
upon, among other things, the success of PharmAthene’s research and development
programs and its ability to obtain adequate financing. PharmAthene’s
Consolidated Financial Statements do not include any adjustments relating to
recoverability of the carrying amount of recorded assets and liabilities that
might result from the outcome of these uncertainties.
Sources
and Uses of Cash
Cash
and
cash equivalents for PharmAthene were $11.9 million and $5.1 million at March
31, 2007 and December 31, 2006, respectively. The $6.8 million increase in
cash
and cash equivalents from December 31, 2006 was primarily attributable to the
March 2007 $10 million debt financing partially offset by the funding of
operations for the quarter.
105
Operating
Activities
Net
cash
used in operating activities was $2.0 million and $2.9 million for the three
months ending March 31, 2007 and 2006, respectively. The 2007 cash used in
operations results primarily from a net loss after the effect of non-cash
adjustments of $2.7 million and an increase in accounts receivable of $589,000
partially offset by decrease in prepaid and other assets of $262,900 and an
increase in accrued expenses and accounts payable of $1.1 million. Accounts
receivable increased due to contract award receivables due from the DoD related
to the advanced development of Protexia®. Prepaid and other current assets
decreased primarily as a result of the use of funds for development activity
related to the PharmAthene collaboration with Medarex on the
ValortimTM
program.
Prepaid expenses fluctuate from period to period depending on the timing and
level of preparation and initiation of research and development activity and
clinical trials. Accounts payable and accrued expenses increased due to
increased development activities and compliance related activities.
Cash
used
in operations during 2006 results primarily from a net loss after the effect
of
non-cash adjustments of $2.9 million. Non-cash adjustments for the three
months
ending March 31, 2006 included a $353,800 charge related to the change in
market
value of derivative financial instruments.
Investing
Activities
Net
cash
used in investing activities was $247,300 for the first quarter of fiscal year
2007 compared to $1.2 million for the first quarter of fiscal year 2006. All
investing activities for the first quarter of 2007, and $189,100 of investing
activities for the period ended March 31, 2006, related to the purchase of
property and equipment. PharmAthene finances capital expenditures primarily
through direct purchases utilizing PharmAthene’s existing cash.
In
March
2006 in connection with the SIGA Merger Agreement, PharmAthene entered into
a
Bridge Note Purchase Agreement with SIGA providing SIGA with interim financing,
subject to the execution of a definitive merger agreement through a bridge
loan.
In March 2006, PharmAthene funded $1.0 million of this interim
financing.
Financing
Activities
Net
cash
provided by financing activities was $9.2 million for the three months ending
March 31, 2007. The 2007 cash provided in financing results from a $10 million
credit facility partially offset by $985,900 in financing costs related to
merger and financing activities. On March 30, 2007, PharmAthene entered into
a
$10.0 million credit facility with Silicon Valley Bank and Oxford Finance
Corporation. Under the credit facility, PharmAthene borrowed $10 million which
loan bears interest at the rate of 11.5% per annum. Pursuant to the terms of
the
loan and security agreement evidencing the credit facility, PharmAthene will
make monthly payments of interest only through September 30, 2007 and,
thereafter, will make monthly payments of principal and interest over the
remaining 30 months of the loan. The loan is secured by a security interest
on
all of PharmAthene’s and PharmAthene Canada’s assets other than certain
intellectual property. In addition, in the event that the proposed Merger is
not
consummated by August 3, 2007, PharmAthene has agreed to provide the lenders
with a mortgage on its Canadian real estate. PharmAthene may not repay the
loan
for the first six months but, thereafter, may prepay provided it pays certain
prepayment fees. In connection with the credit facility, PharmAthene issued
to
Silicon Valley Bank and Oxford Financial Corporation warrants to purchase an
aggregate of 438,453 shares of PharmAthene Series C Preferred Stock through
March 30, 2017 at an exercise price of $0.91. As a consequence of the issuance
of the warrants, the Merger Allocation Agreement was amended and restated in
order to recalculate the Merger Consideration payable to the holders of the
various classes of capital stock of PharmAthene taking into account the newly
issued warrants.
From
April 2006 through July 2006, PharmAthene and PharmAthene Canada, Inc. a
subsidiary of PharmAthene, collectively borrowed an aggregate of $11.8 million
and issued 8% convertible notes (the “2006 Bridge Notes’’). The 2006 Bridge
Notes are convertible upon the occurrence of various events, including (i)
the
closing of the merger with SIGA and a financing resulting in gross proceeds
exceeding $25.0 million (the ‘‘SIGA Financing’’), and (ii) upon any financing
resulting in gross proceeds in excess of $10.0 million, other than as described
in (i) above (an ‘‘Other Financing’’). In the case of the SIGA Financing, the
2006 Bridge Notes were to be convertible, at a 10% discount, into the same
SIGA
securities sold in such financing. ; the SIGA merger agreement was subsequently
terminated. In the case of an Other Financing, the 2006 Bridge Notes are
convertible, at a 25% discount, into common stock of PharmAthene as well as
shares of the same securities sold in such financing.
106
In
connection with the SIGA Merger Agreement, PharmAthene entered into a Bridge
Note Purchase Agreement with SIGA providing SIGA with interim financing, subject
to the execution of a definitive merger agreement through a bridge loan of
$3,000,000. PharmAthene fully funded this financing in 2006. On October 4,
2006,
SIGA terminated the SIGA Agreement and repaid the $3.0 million Bridge Notes
including interest.
In
March
2005, PharmAthene sold 14,946,479 shares of its Series C Preferred Stock at
a
price of approximately $0.91 per share for net proceeds of $13,305,000. The
Series C Preferred Stock bears a cumulative dividend rate of 8.0% per annum.
Each share of the Series C Preferred Stock is convertible into shares of common
stock at the then-applicable conversion rate at any time and at the option
of
the holder. The Series C Preferred Stock will automatically convert to common
stock at the then-applicable conversion rate in the event of an IPO of
PharmAthene’s common stock resulting in aggregate proceeds to PharmAthene of $50
million and a share price of at least $2.74. Commencing in October 2009, the
holders of the Series C Preferred Stock may require PharmAthene to redeem the
Series C Preferred Stock then outstanding for an amount equal to the original
purchase price plus any unpaid dividends. Proceeds from the equity issuance
were
used to partially finance the Nexia Acquisition and to fund further research
and
development programs related to ValortimTM
and
Protexia®, working capital and general corporate purposes.
The
investors in the Series C Preferred Stock also received warrants to purchase
2,690,420 shares of common stock at an exercise price of $0.01 per share,
subject to reduction if certain business milestones are met by PharmAthene,
which expire in October 2014. Additionally, the investors in the Series C
Preferred Stock also received warrants to acquire 4,483,946 shares of Series
C
Preferred Stock at an exercise price of approximately $0.91, which expire in
March 2008.
In
conjunction with the issuance of the Series C Preferred Stock, PharmAthene
sold
2,951,654 shares of Class C Shares of PharmAthene Canada, Inc. (the ‘‘Class C
Shares’’) in March 2005 for net proceeds of $2,364,000. The Class C Shares are,
pursuant to the terms of a Put and Support Agreement, exchangeable for an equal
number of shares of Series C Preferred Stock. The Class C Shares bear a
cumulative dividend rate of 8% per annum.
The
investors in the Class C Shares also received warrants to purchase 466,498
Class
B Common Shares of PharmAthene Canada at an exercise price of $0.01 per share,
subject to reduction if certain milestones are met by PharmAthene. The investors
in the Class C Shares also received warrants to purchase 777,496 Class C Shares
at an exercise price of $.91 per share.
In
October 2004, PharmAthene sold 30,448,147 shares of Series B Convertible
Redeemable Preferred Stock (the “Series B Preferred Stock”) at a price of
approximately $0.91 per share for net proceeds of $27,570,000. The Series B
Preferred Stock bears a cumulative dividend rate of 8.0% per annum. The Series
B
Preferred Stock will automatically convert to common stock at the
then-applicable conversion rate in the event of an initial public offering
of
PharmAthene's common stock resulting in aggregate proceeds to PharmAthene of
$50
million and a share price of at least $2.74. Commencing in October 2009, the
holders of the Series B Preferred Stock may require PharmAthene to redeem the
Series B Preferred Stock then outstanding for an amount equal to the original
purchase price plus any unpaid dividends. Proceeds from the equity issuance
were
used for further research and development of the DNI program and its clinical
trial, for the initiation of corporate activities with both Medarex and with
the
acquisition of the Protexia® assets, as well as working capital and general
corporate purposes. The DNI program was subsequently terminated in the fourth
quarter of 2004.
The
investors in the Series B Preferred Stock also received warrants to purchase
15,400,000 shares of PharmAthene common stock at an exercise price of $0.01
per
share, subject to reduction if certain business milestones, which expire in
October 2014, are met by PharmAthene. In December 2004, PharmAthene met the
milestone related to 1,540,000 shares of common stock underlying the warrants
to
purchase common stock thereby reducing the number of outstanding warrants to
13,860,000. Following the Nexia Acquisition in March 2005, an additional
milestone related to 6,160,001 shares of common stock underlying the warrants
was achieved and total warrants outstanding were further reduced to
7,699,999.
107
In
June
2004, PharmAthene entered into an agreement to borrow up to $3.0 million in
the
form of 8% convertible notes (the “2004 Bridge Notes”). The 2004 Bridge Notes
were repayable upon the earlier of (i) the closing of a financing with gross
proceeds exceeding $10.0 million or (ii) the sale of PharmAthene or (iii)
December 31, 2004. The 2004 Bridge Notes bore an interest rate of 8% per annum
and were convertible at the investors' option during a future financing or
on
December 31, 2004 into Series A Convertible Redeemable Preferred Stock (the
“Series A Preferred Stock”). In June 2004, PharmAthene borrowed $1.5 million
under the Bridge Notes. Upon the issuance of Series B Preferred Stock in October
2004, the 2004 Bridge Notes were converted into Series B Preferred Stock at
approximately $0.91 per share. As a result of this financing and in accordance
with the terms of the Series A Preferred Stock, the conversion price of the
Series A Preferred Stock was adjusted with an additional 2,672,770 shares of
Series A Preferred Stock issued to the investors.
In
September 2003, PharmAthene sold 13,769,230 shares of Series A Preferred Stock
at a price of approximately $1.09 per share for net proceeds of $14,894,000.
The
Series A Preferred Stock bears a cumulative dividend rate of 8.0% per annum.
Each share of the Series A Preferred Stock is convertible into shares of common
stock at the then-applicable conversion rate at any time and at the option
of
the holder. The Series A Preferred Stock will automatically convert to common
stock at the then-applicable conversion rate in the event of an initial public
offering of PharmAthene’s common stock resulting in aggregate proceeds to
PharmAthene of $50 million and a share price of at least $2.74. Commencing
in
October 2009, the holders of the Series A Preferred Stock may require
PharmAthene to redeem the Series A Preferred Stock then outstanding for an
amount equal to the original purchase price plus any unpaid dividends. Proceeds
from the equity issuance were used for research and development of the DNI
program, working capital and general corporate purposes.
From
inception until August 2003, PharmAthene has issued approximately $492,000
in
notes payable to directors and scientific advisory board members. These notes
accrued interest at rates ranging from 4.74% to 8.0%. Subsequent to the issuance
of the Series A Preferred Stock in September 2003, PharmAthene repaid the
outstanding balance and interest under such notes for approximately
$521,000.
Future
Cash Needs
PharmAthene
has financed its operations since inception in March 2001 primarily through
the
issuance of equity securities, convertible notes, and proceeds from loans or
other borrowings. Any, or all, of these financing vehicles or others may be
utilized to fund PharmAthene’s future capital requirements.
PharmAthene's
future capital requirements and liquidity will depend on many factors including,
but not limited to, the progress of its research and development programs;
the
progress of pre-clinical and clinical testing; the time and cost involved
in
obtaining regulatory approval; the cost of filing, prosecuting, defending
and
enforcing any patent claims and other intellectual property rights; the changes
in its existing research relationships, competing technological and marketing
developments; its ability to establish collaborative arrangements and to
enter
into licensing agreements and contractual arrangements with others; and any
future change in its business strategy.
PharmAthene
expects to fund its development activities for Protexia® primarily using the
funds available from its contract with the DoD. Under the agreement, the
DoD has
agreed to fund up to $35 million of development costs as incurred over
a three
year period. PharmAthene believes this funding will be sufficient to complete
the development of Protexia®. In connection with its collaboration with Medarex
for the development of Valortim™, PharmAthene has expended $2 million of its own
funds and Medarex has received $7.2 million in grants from the United States
Government. PharmAthene believes that the remaining costs for this development
program, be financed through additional grants anticipated to be received
from
the United States Government and from PharmAthene’s available cash which, if the
Merger is not consummated, would be drawn from PharmAthene’s credit facility
and/or additional issuances of securities. If the merger is consummated,
the
post merger companies will have up to $68 million less any conversion from
the
trust and any expenses.
PharmAthene
has incurred cumulative net losses and expects to incur additional losses to
perform further research and development activities. It does not have commercial
products and has limited capital resources. PharmAthene's plans with regard
to
these matters include continued development of its product candidates as well
as
seeking additional research support funds and financial arrangements through
a
combination of collaborative agreements, strategic alliances, research grants,
equity and debt financing. Although PharmAthene continues to pursue these plans,
there is no assurance that it will be successful in obtaining sufficient
financing on commercially reasonable terms or that PharmAthene will be able
to
secure financing from anticipated government contracts and grants. PharmAthene
has developed a plan to reduce its operating expenses in the event that
sufficient funds are not available, or if it is not able to obtain anticipated
government contracts and grants. If PharmAthene is unable to raise adequate
capital or achieve profitability, future operations will need to be scaled
back
or discontinued.
Off-Balance
Sheet Arrangements
The
only
off-balance sheet arrangements which PharmAthene has entered into are its
facility and equipment operating lease agreements. PharmAthene’s obligations
under these agreements are presented in this section under ‘‘Contractual
Obligations.’’
108
Critical
Accounting Policies
Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires PharmAthene to make estimates and assumptions
that affect the reported amounts of assets and liabilities, 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.
PharmAthene bases its estimates and assumptions on historical experience and
various other factors that are believed to be reasonable under the
circumstances. Actual results could differ from our estimates and assumptions.
PharmAthene believes the following critical accounting policies, among others,
affect our more significant estimates and assumptions and require the use of
complex judgment in their application.
Revenue
Recognition
PharmAthene
recognizes revenue when all terms and conditions of the agreements have been
met
including persuasive evidence of an arrangement, services have been rendered,
price is fixed or determinable, and collectibility is reasonably assured. For
reimbursable cost research grants, PharmAthene recognizes revenue as costs
are
incurred and appropriate regulatory approvals have been obtained or approval
criteria are met for invoicing the related government agency. This approval
criteria may be met or obtained on certain factors, such as the achievement
of
milestone objectives or the completion of certain tasks according to agreed
upon
activity terms.
All
of
the grant revenue PharmAthene recognized historically was received under a
cost
reimbursement grant from the U.S. government to fund the development of
pharmaceutical products for biodefense applications. Uncertainties exist as
to
the approval of receipts pursuant to such cost reimbursement grants including
the execution risks associated with the successful completion of related tasks
and the funding risks caused by the modifications of contracts at any time
by
the granting agency to accommodate goals or budgetary funding changes. In
addition, reimbursed costs are subject to review and adjustment by the granting
agency. As PharmAthene develops experience with contracting authorities and
as
its incurred cost submissions are reviewed and approved by the responsible
government authorities, estimates of the assumptions related to these
uncertainties may change.
Research
and Development Expenses
Research
and development costs are charged to expense as incurred.
Intangible
Assets
When
PharmAthene acquires development products, we allocate the purchase price,
including expenses and assumed liabilities, to tangible and intangible assets.
The portion allocated to intangible assets may be allocated to trademarks,
patents and other intangibles using the assistance of valuation experts.
PharmAthene estimates the useful lives of the assets by considering the
remaining life of the patents, estimated future introductions of competing
products, and other related factors.
Because
of the nature of pharmaceutical research, and particularly because of the
difficulties associated with efficacy studies in humans related to the
bioterrorist products with which PharmAthene works and the government's related
funding provisions, factors that drive the estimate of the life of the asset
are
often more uncertain than other non-bioterrorist pharmaceutical research. On
an
annual basis, PharmAthene assesses recoverability of intangibles from future
operations, using undiscounted future cash flows derived from the intangible
assets.
Any
impairment would be recognized in operating results to the extent the carrying
value exceeds the fair value, which is determined based on the net present
value
of estimated future cash flows; in certain situations, where the carrying value
is dependent upon the outcome of a single study and that study is unsuccessful,
that impairment may be significant in amount and immediate in
timing.
Consolidation
of PharmAthene Canada, Inc.
109
The
FASB
has issued ASB Interpretation No. 46R, Consolidation of Variable Interest
Entities, (“FIN 46R”), which expands consolidated financial statements to
include variable interest entities. Variable interest entities are to be
consolidated by the company which is considered to be the primary beneficiary
of
the entity, even if such company does not have majority control. Under FIN
46R,
PharmAthene has been deemed the primary beneficiary of PharmAthene Canada,
Inc.,
a variable interest entity. Accordingly, the financial results of PharmAthene
Canada, Inc. have been consolidated with the PharmAthene financial statements
as
of its date of inception.
Contractual
Obligations
The
following are contractual commitments at March 31, 2007 associated with leases,
research and development arrangements, collaborative development obligations
and
long term debt:
|
Contractual
Obligations(1)
|
Total
|
Less
than
1
Year
|
1-3
Years
|
3-5
Years
|
More
than
5
years
|
|||||||||||
|
Operating
facility leases
|
$
|
4,340,700
|
$
|
498,159
|
$
|
1,169,052
|
$
|
1,277,494
|
$
|
1,395,995
|
||||||
|
Tenant
improvements
|
474,406
|
474,406
|
—
|
—
|
—
|
|||||||||||
|
Medarex
Inc. collaboration agreement (2)
|
230,927
|
230,927
|
—
|
—
|
—
|
|||||||||||
|
Research
and development agreements
|
7,164,157
|
4,277,251
|
2,886,906
|
|||||||||||||
|
Notes
payable, including interest
|
24,700,340
|
15,801,427
|
8,898,913
|
—
|
—
|
|||||||||||
|
Total
contractual obligations
|
$
|
36,910,530
|
$
|
21,282,170
|
$
|
12,954,871
|
$
|
1,277,494
|
$
|
1,395,995
|
||||||
|
(1)
|
This
table does not include any royalty payments of future sales of products
subject to license agreements PharmAthene have entered into in relation
to
its in-licensed technology, as the timing and likelihood of such
payments
are not known. Additionally, the table does not include obligations
to
taxing authorities due to the uncertainty surrounding the ultimate
settlement of amounts and timing of these
obligations.
|
|
(2)
|
In
November 2004, PharmAthene entered into a collaboration agreement
with
Medarex, Inc. under which the companies plan to develop and commercialize
MDX-1303, a fully monoclonal antibody, for use against human anthrax
infection. In December 2004, PharmAthene paid a $2.0 million deposit
to
Medarex to be used for potential future development activities on
MDX-1303. At March 31, 2007, approximately $0.2 million of this deposit
remains with current estimates forecasting depletion of this deposit
by
the second quarter of fiscal year 2007. The contractual obligations
table
includes PharmAthene's estimated obligation for funding development
activities under this collaboration agreement subsequent to depleting
the
original deposit.
|
Quantitative
and Qualitative Disclosures About Market Risk
None.
110
INFORMATION
ABOUT PHARMATHENE
Overview
PharmAthene
is in the business of discovering and developing novel human therapeutics and
prophylactics for the treatment and prevention of morbidity and mortality from
exposure to biological and chemical weapons. PharmAthene has two products
currently in development, Valortim™, a human monoclonal antibody (an identical
population of highly specific antibodies produced from a single clone) for
the
prevention and treatment of anthrax infection, and Protexia®, a bioscavenger for
the treatment or prevention of nerve agent poisons by organophosphate compounds
which include nerve gases and pesticides.
The
U.S.
government has identified certain indications as priorities for biodefense
funding, including anthrax, nerve agent exposure, smallpox, botulinum toxin
and
radiation. PharmAthene is pursuing the development of products in the areas
of
anthrax and nerve agent exposure. Currently, the FDA has an expedited and
simplified mechanism for regulatory approval of biodefense drugs. Phase I human
clinical trials are required to show reasonable safety, but efficacy only needs
to be demonstrated in two animal species. In addition, the U.S. government
has
enacted laws and established processes to permit the sale of bioterrorism drugs
to government organizations prior to obtaining regulatory approval.
PharmAthene’s
lead product candidate, Valortim™, is a fully human monoclonal antibody designed
to protect against and treat inhalation anthrax infection, the most lethal
form
of illness in humans caused by the Bacillus
anthracis
bacterium. PharmAthene is co-developing Valortim™ with Medarex, Inc., a
biopharmaceutical company that specializes in developing fully human
antibody-based therapeutic products and will share with Medarex any profits
derived from sales of Valortim™. Preclinical trials on animal models have
demonstrated that Valortim™ is highly efficacious as both a prophylaxis and a
therapeutic for inhalation anthrax infection in some animal models. PharmAthene
and Medarex have completed dosing of healthy volunteers in a Phase I open-label,
dose-escalation clinical trial to evaluate the safety, tolerability,
immunogenicity (the ability of an antigen to elicit an immune response), and
pharmacokinetics (the study of absorption, metabolism and action of drugs)
of a
single dose of Valortim™ administered intravenously or intramuscularly. No
drug-related serious adverse events have been reported. Final results from
the
Phase I trial were presented at the Infectious Disease Society of America
meeting in October 2006. Valortim™ has been granted Fast Track Status by the
FDA, which may permit PharmAthene to submit portions of a Biologics License
Application (“BLA”) or efficacy supplement before the complete BLA is submitted.
This may expedite the review process but requires that the FDA have sufficient
resources to allow early review of the portions submitted. In addition,
Valortim™ has been granted orphan drug status for the treatment of inhalational
anthrax.
Protexia®,
PharmAthene’s second product candidate, is a recombinant form (produced using
genetic engineering technology) of human butyrylcholinesterase, a naturally
occurring enzyme (“BChE”) for use in the prophylaxis and treatment of
organophosphate chemical nerve agent poisoning. Preclinical trials on animal
models have demonstrated that Protexia®is
highly
efficacious as both a prophylaxis and a therapeutic for chemical nerve agent
poisoning. PharmAthene plans to continue preclinical animal studies of
Protexia®
throughout 2007 and file an Investigational New Drug application (“IND”) with
the FDA in 2008. The procurement process for the scale-up development and sale
of Protexia®
is
already underway with the U.S. Department of Defense (“DoD”), the department
tasked with purchasing biodefense countermeasures for military use. The DoD
requested competitive bids in a Request for Proposal (an “RFP”) for a
recombinant form of BChE drug for the prophylaxis treatment of chemical nerve
agent poisoning, which PharmAthene submitted in November 2005. In
September 2006, PharmAthene was awarded a contract by the DoD for advanced
development and
procurement of an initial 90,000 doses of Protexia® for approximately $35
million. If all options and extensions of this contract are exercised, the
contract could amount to up to $213 million in revenues.
Strategy
PharmAthene’s
goal is to become the premier company worldwide specializing in the discovery,
development, and commercialization of therapeutic and prophylactic drugs for
defense against bio-terrorism and to eventually leverage its biodefense
capabilities for non-biodefense products in broader commercial markets.
PharmAthene’s strategy to achieve this objective includes the following
elements:
111
§ In-license
or acquire development-stage product candidates that address other large
biodefense markets.
PharmAthene endeavors to continue to build a portfolio of development-stage
products in the area of biodefense. PharmAthene intends to continue to identify
development-stage product candidates, including therapeutics, diagnostics and
vaccines, that address the bioterrorism threats given the highest priority
by
the U.S. government, such as smallpox and botulinum toxin.
§ Maximize
the value of its product candidates, Valortim™ and Protexia®, by accessing the
resources of PharmAthene’s partners.
PharmAthene intends to maximize the value of its product candidates by
leveraging the substantial clinical, financial, regulatory, and commercial
strengths of its partners. PharmAthene believes that Medarex provides
manufacturing and monoclonal antibody development expertise and other resources
needed to help successfully develop Valortim™. In addition, PharmAthene actively
co-developed Protexia®
with the
U.S. Army under a cooperative research and development agreement. PharmAthene
believes the U.S. Army is the leading institution in the area of chemical nerve
agent testing and analysis, including modified, more toxic forms of
organophosphate nerve agents which have not yet been, but may eventually be,
used as weapons.
§ Establish
additional collaborations with pharmaceutical and biotechnology
companies.
PharmAthene will seek to enter into additional partnerships to support the
development of existing and future pipeline products, or to more favorably
position its products for government procurement.
§ Market
and apply PharmAthene’s capabilities in the procurement of government contracts
to sell other companies’ products.
PharmAthene personnel has significant experience in dealing with all aspects
of
government contract bidding, procurement and maintenance including, the
applicable accounting procedures and real-time evaluation processes. PharmAthene
believes that companies that are not focused on biodefense but that do have
products that could be sold to the government could benefit from PharmAthene’s
capabilities. PharmAthene has been approached, and anticipates that it will
continue to be approached, by companies willing to enter into sales, marketing
and distribution agreements for access to PharmAthene’s government contracting
expertise. While PharmAthene has not entered into any such arrangements to
date,
PharmAthene expects that this is a further area for expansion of its business
in
the future though PharmAthene cannot assure that such arrangements will be
entered into or, if entered into, will be profitable for PharmAthene or will
positively affect its future operations or revenues.
§ Expand
into commercial markets by leveraging PharmAthene’s biodefense
capabilities.
To
diversify its risk of dependence on government funding of biodefense products,
PharmAthene intends to apply its drug development expertise and capabilities
for
the development of non-biodefense products for broader commercial markets.
For
example, PharmAthene believes that Protexia®,
its
recombinant human BChE product, in addition to having utility as a
broad-spectrum countermeasure against nerve agent chemical weapons, may be
used
to treat cocaine and heroin addiction. Documented test results have shown that
BChE is a major cocaine-metabolizing enzyme in humans and other primates which
suggests that treatment with BChE may have benefits in enhancing cocaine
metabolism and in having a protective action against cocaine and, as such,
may
help reduce risks of complications due to cocaine and heroin abuse as well
as
help prevent and treat addiction.
Biodefense
Industry
Market
Overview
In
recent
years, the U.S. government has significantly increased spending for development
of measures to counteract biowarfare agents and has established numerous
programs with some budgets extending out for nearly a decade. U.S. government
spending on military and civilian biodefense currently averages nearly $7
billion annually, representing the vast majority of spending on biodefense
countermeasures worldwide. The biodefense market can be divided into three
segments: U.S. civilian, U.S. military, and non-U.S. markets.
|
§
|
U.S.
Civilian
|
The
U.S.
civilian market includes funds allocated to protecting the U.S. population
from
biowarfare agents. The market is largely funded by Project BioShield. The
Project BioShield Act of 2004, the U.S. government’s largest biodefense
initiative, was signed into law for the procurement of biodefense
countermeasures for the Strategic National Stockpile. Project Bioshield provided
for $5.6 billion in biodefense spending for the period from July 2004 through
2013. Procurement awards totaled $1.8 billion through 2006 and $400 million
is
expected to be awarded through 2008. The remaining $2.2 billion is scheduled
to
become available in 2009.
112
According
to the DoD, U.S. civilian biodefense spending outside of Project BioShield
has
been approximately $5 billion per year since 2003. The Department of Health
and
Human Services and the Department of Homeland Security account for 88% of
civilian biodefense dollars.
|
§
|
Military
|
The
DoD
is responsible for the development and procurement of countermeasures for the
military segment which focuses on providing biowarfare protection for military
personnel and civilians who are on active duty. The Chemical and Biological
Program was funded with $1.2 billion in 2005, while $1.5 billion was requested
for 2006, according to the DoD. Of such amounts, funds dedicated to the
development and procurement of medical technologies, therapeutics, and vaccines
are approximately $300 million for 2005, while nearly $400 million has been
requested for 2006. Total funding for the Chemical and Biological Program
between 2006 and 2011 is projected by the U.S. government to be $9.9
billion.
|
§
|
Non-U.S.
Markets
|
Non-U.S.
markets address protection against biowarfare agents for both civilians and
military in foreign countries. PharmAthene believes the recognition by foreign
governments of a need for biodefense programs has been increasing recently.
Foreign biodefense programs would help support a larger market and also further
diversify PharmAthene’s potential sources of funding.
Project
BioShield
Project
BioShield is focused on products with low technology risk that will be available
for purchase in the near term. The U.S. government has identified the following
indications as a priority: anthrax; smallpox; botulinum toxin; radiation; and
nerve agent exposure. To identify the best products for these indications,
HHS
has issued Requests for Information (“RFI”) followed by RFP. The RFP details
requirements including treatment types, number of doses and delivery timeframe.
To qualify for Project BioShield funding, a company is required to demonstrate
product efficacy in an animal model, initial product safety in Phase I clinical
trials and sufficient manufacturing capabilities. To date, 10 awards have been
made under Project BioShield, including those for anthrax vaccines and
therapeutics, radiation, and botulinum. While the largest contract ($877
million) for anthrax vaccine was terminated, HHS has indicated those funds
will
be allocated to a new solicitation and award for anthrax vaccines.
Development
Cycle
The
U.S.
government has acted to facilitate expeditious development of biodefense
countermeasures by shortening the development and approval process relative
to
traditional pharmaceutical products. Development of biodefense products may
be
less expensive and less risky compared to traditional therapeutics and vaccines
because human efficacy trials are not required.
Immediate
Biodefense Focus: Anthrax and Nerve Agent Exposure
Under
Project BioShield, the government has identified certain indications as
priorities for biodefense funding including anthrax, smallpox, botulinum toxin,
radiation, and nerve agent exposure. PharmAthene is pursuing the development
of
products in the areas of anthrax and nerve agent exposure.
Anthrax
113
The
three
general modes of infection by Bacillus
anthracis
(“B.
anthracis”),
the
bacterium which causes anthrax, are by inhalation, ingestion, and skin contact.
Inhalation is the form of infection most likely to be lethal. Inhalational
anthrax occurs when the anthrax bacterium becomes airborne and enters a person’s
body through the lungs. Persons suffering from inhalation anthrax will
experience a series of symptoms consisting of fever, muscle aches, fatigue,
and
cough, which lasts an average of four days. Following this period, there is
rapid onset of severe respiratory distress, low blood oxygen and low blood
pressure, which generally culminates in death. Inhalation anthrax has a 95%
to
100% mortality rate if left untreated, and at least a 50% mortality rate in
patients treated aggressively with antibiotics. Persons infected by B.
anthracis that
is
ingested will suffer from gastrointestinal anthrax; those whose skin comes
into
contact with the anthrax bacteria will suffer from cutaneous anthrax.
Gastrointestinal anthrax often presents those exposed with serious
gastrointestinal difficulty, vomiting of blood, severe diarrhea, acute
inflammation of the intestinal tract, and loss of appetite. Gastrointestinal
anthrax has a 25% to 65% mortality rate if left untreated. Cutaneous anthrax
generally causes skin infections within a week or two after exposure. Cutaneous
anthrax is the least fatal. Without treatment, approximately 20% of all skin
infection cases are fatal. Treated cutaneous anthrax is rarely
fatal.
B.
anthracis
is a
spore forming bacterium that has potential use as a weapon of bioterror,
especially when delivered in an aerosolized form. Following germination of
the
spores, the bacteria replicates and produces three toxins. The first of these
toxins, Anthrax Protective Antigen initiates the onset of illness by attaching
to the outside of the healthy cells of the infected person, and then facilitates
the entry of the two additional destructive toxins, referred to as Lethal Factor
and Edema Factor, into those cells.
The
DoD
estimates that up to ten countries may possess anthrax weapons and an
undetermined number of individuals and terrorist groups could have access to
anthrax. Anthrax is an effective bioterrorism agent because the spore-forming
bacteria are very stable, can be milled to a very fine powder, and may be
dispersed widely with readily available instruments and machinery. The World
Health Organization estimates that 50 kilograms of B.
anthracis
released
upwind of a city of 500,000 people could result in up to 95,000 fatalities,
with
an additional 125,000 persons being incapacitated.
PharmAthene
believes that currently available treatment for inhalation anthrax is limited
and suboptimal. Following exposure, but prior to the onset of symptoms,
antibiotics like ciprofloxacin, doxycycline, or penicillin can be used as
post-exposure prophylaxis with the goal of preventing progression of the
disease. In order to be fully effective when used in this way, the recommended
antibiotic treatment must be continued for sixty days. PharmAthene believes
that
both compliance and side effects are problematic for anyone asked to take
antibiotics for such an extended period of time. A product like Valortim™, with
a prolonged half-life, might allow for less frequent dosing to achieve adequate
post-exposure prophylaxis.
Once
symptoms have developed following exposure, interventions are aimed at improving
mortality. PharmAthene believes the addition of an anti-toxin like Valortim™ has
the potential to significantly improve upon the current therapeutic regimen,
and
it would have the added benefit of acting against the toxins released from
antibiotic-resistant strains.
Chemical
Weapons and Nerve Agents
Chemical
weapons use the toxic properties, as opposed to the explosive properties, of
chemical substances to produce physiological effects on an enemy. Classic
chemical weapons, such as chlorine and phosgene, were employed during World
War
I and consisted primarily of commercial chemicals used as choking and blood
agents, which caused respiratory damage and asphyxiation. Nerve agents, one
of
the most lethal forms of chemical weapons, were developed in the 1930s in the
years leading up to World War II.
Nerve
agents function by binding to acetylcholinesterase, an enzyme that normally
causes the neurotransmitter acetylcholine to relax. By blocking the activity
of
acetylcholinesterase, nerve agents cause nerve impulses to be continually
transmitted, causing muscle contractions that do not stop. This effect is
referred to as a “cholinergic crisis” and consists of a loss of muscle control,
respiratory failure, paralysis and convulsions. Nerve agent exposure that does
not cause death after a short period can lead to permanent brain damage. Nerve
agents are a class of organophosphates, a term which refers to organic chemicals
that contain the element phosphorous.
114
Nerve
agents, which are all liquids at room temperature, are generally lethal far
more
quickly and in far lower quantities than are classic chemical weapons, and
are
effective both when inhaled and when absorbed through the skin. Nerve gases
can
be classified as either G-agents (such as sarin, soman, tabun) or V-agents
(such
as VX), both of which are volatile and toxic. Chemical agents can be delivered
through explosive devices, spray tanks or most any other liquid or gas
dispersion devices and machinery.
The
current standard of care for post-exposure treatment involves repeated doses
of
a cocktail of drugs, including atropine, oxime reactivators, and
anti-convulsants. PharmAthene believes available treatment options are
inadequate and there is a need for more efficacious countermeasures, especially
as evidence mounts that modified, more toxic forms of organophospates, VX and
G
agents may be used in future attacks.
There
is
currently only one FDA approved product, Pyridostigmine bromide (“PB”), which is
used as a “pre-treatment adjunct” against nerve agent poisoning, and it is only
usable to counteract poisoning by one nerve agent, soman. It confers no
protection on its own but enhances the protection conferred by post-exposure
treatment. The current standard of care for post-exposure treatment involves
repeated doses of a cocktail of drugs including atropine, oxime reactivators
(“2-PAM”) and anti-convulsants. However, this standard of care acts primarily on
the symptoms of nerve agents, not their underlying cause. PharmAthene believes
available pre-and post-treatment options are inadequate and that there is a
need
for more efficacious countermeasures.
PharmAthene’s
Solutions
Based
on
its preclinical and clinical trials to date, PharmAthene believes its two
product candidates will offer tangible benefits over existing treatments for
inhalation anthrax and chemical nerve agent poisoning.
PharmAthene’s
Product Pipeline
Valortim™:
Anthrax Monoclonal Antibody
Valortim™
is a fully human antibody designed to protect against or treat inhalation
anthrax, the most lethal form of illness in humans caused by B.
anthracis.
Valortim™ functions by targeting Anthrax Protective Antigen, a protein component
of the lethal toxins produced by the bacterium. Anthrax Protective Antigen
(“Anthrax PA”) initiates the onset of the illness by attaching to and
facilitating the entry of the destructive toxins Lethal Factor (“LF”) and Edema
Factor (“EF”) into healthy cells in the infected person. Valortim™ is designed
to bind to Anthrax PA and protect the cells from damage by the anthrax toxins.
In preclinical studies, Valortim™ both protected against infection, and when
administered some time after exposure, facilitated recovery and survival in
animals exposed to lethal inhalation doses of anthrax spores.
115
Anthrax
spore challenge studies in animals have demonstrated protection by Valortim™
both when given early following challenge (post-exposure prophylaxis) as well
as
when given up to 48 hours after challenge (therapeutic intervention). Valortim™
binds to a novel site of Anthrax PA, permitting protection after toxins have
already attached to the cell. PharmAthene believes Valortim’s potency and unique
mechanism of action differentiate it from competing products, and provides
superior activity in the toxin neutralization assay. PharmAthene believes that,
in the initial Phase I clinical trials in healthy human volunteers, Valortim™
was well-tolerated with no drug-related serious adverse events
reported.
Development
Timeline
Currently,
PharmAthene and Medarex have completed dosing in a Phase I open-label,
dose-escalation clinical trial to evaluate the safety, tolerability,
immunogenicity, and pharmacokinetics of a single dose of Valortim™ administered
intravenously or intramuscularly in healthy volunteers. Final results from
the
Phase I study were presented at the Infectious Disease Society of America
meeting in October 2006.
Recently,
Valortim™ received Fast Track designation from the FDA, which generally
indicates that the FDA will facilitate the development and expedite the
regulatory review of the product. However, PharmAthene can provide no assurance
that the review will be successful. Valortim™ has also been granted Orphan Drug
status, a designation for drugs developed for diseases which affect less than
200,000 persons in the United States and provides for reduced fees to the FDA,
market exclusivity for seven years and other FDA-related privileges.
Clinical
and Preclinical Studies
Valortim™
is being developed for two indications: (i) as a post-exposure prophylaxis;
and
(ii) as a post-exposure therapy.
Clinical
Phase I Studies
Valortim™
has been tested in a Phase I, single-dose, dose-escalation trial in healthy
human volunteers. PharmAthene found that subjects tolerated Valortim™ without
drug-related serious adverse events. Minor adverse events reported included
pain
at the intramuscular injection site, headache, muscle aches, and occasionally
bruising at the site of the intravenous catheter inserted for drug dosing and
blood draws. Pharmacokinetic data indicate that Valortim™ has good
bioavailability following intramuscular injection; additionally, both
intravenous and intramuscular injection result in a half-life of 26 to 30 days.
Preclinical
Studies: Post-exposure Prophylaxis Indication
PharmAthene
has conducted two studies in animals to evaluate the use of Valortim™ as a
post-exposure prophylaxis, or, in other words, to protect exposed patients
from
developing the symptoms and from dying of inhalational anthrax. Eighty-five
percent of rabbits treated intravenously with doses of Valortim™ survived
following inhalational exposure to anthrax spores. One hundred percent of
cynomolgus monkeys treated intramuscularly with doses of Valortim™ were
protected from death following exposure to inhalational anthrax spores.
Treatment of both of these animal models was initiated within one hour following
exposure to the anthrax spores.
PharmAthene
has also conducted a study in animals to evaluate the use of Valortim™ as a
post-exposure therapeutic. This indication for Valortim™ would be intended to
treat those patients who have already developed symptoms of inhalational
anthrax. In this study, 89% of the animals treated with Valortim™ intravenously
twenty-four hours following inhalational exposure to anthrax spores survived.
A
second group of animals were not treated with Valortim™ until forty-eight hours
following exposure; 42% of the animals treated at this timepoint survived.
Lower
doses have not yet been tested in this model. Additional work has begun to
test
Valortim™ in a second animal model for its effectiveness when given at extended
timepoints following inhalational anthrax spore exposure.
Protexia®:
Recombinant Human Butyrylcholinesterase
116
Protexia®
is a
recombinant version of human butyrylcholinesterase (“rBChE”), a naturally
occurring protein found in minute quantities in blood. In its natural form,
butyrylcholinesterase, or “BChE” functions as a natural bioscavenger, like a
sponge, to absorb and degrade organophospate poisons (e.g. nerve agents) before
they cause neurological damage. Protexia®
is being
developed as a pre-exposure and post-exposure therapy for military and civilian
targets of a nerve agent attack.
PharmAthene,
in collaboration with the Institute for Chemical Defense (“ICD”), a U.S.
military organization where the testing of Protexia®
against
traditional and non-traditional agents is performed, has screened for
neutralizing activity by rBChE against a number of these classified agents.
rBChE continues to be assayed against such non-traditional agents as they become
available. In addition, newer more potent forms of rBChE will be screened as
second-generation rBChE molecules (having higher affinity binding
characteristics and enhanced catalytic activity) become available. Because
ICD
is a U.S. military organization, which treats the results of its studies as
classified national security information, the results of these tests are not
available to PharmAthene or to the public.
Preliminary
data has been generated through a collaboration with the University of Maryland
suggesting that there may be more than one activity associated with Valortim™ to
explain its mechanism of action. These data demonstrate that Valortim™ has the
ability to enhance macrophage killing of B.
anthracis
spores
within macrophages; this is in addition to its previously described toxin
neutralizing activity. Further work is ongoing to fully elucidate these and
other possible effects and functional properties of Valortim™.
Development
Timeline
Protexia®’s
capability as a medical countermeasure has been demonstrated in
vivo
by its
ability to protect animals from multiple lethal doses of nerve agent chemical
weapons. Protexia®
has also
been demonstrated to bind a broad spectrum of agents, including sarin, soman,
tabun and VX. Protexia®
has
several likely advantages, including providing protection both pre-exposure
and
post-exposure, detoxification of organophosphate nerve agents with full spectrum
protection and an acceptable safety profile.
Protexia®
Proof
of Concept Studies
Protexia®
is being
developed for two indications: (i) as a pre-exposure prophylaxis; and (ii)
as a
post-exposure therapy.
Pre-exposure
Prophylaxis Indication:
Pre-treatment
with Protexia®
not only
provided 100% survival against multiple lethal doses of the nerve agents VX
and
soman in animal models but surviving animals also displayed no nerve agent
side
effects. In these experiments, one group of animals was pre-treated with
Protexia®
or a
negative control. Eighteen hours later, they were exposed to multiple lethal
doses of nerve agent (VX or soman). Another group of animals was exposed to
approximately 75% less nerve agent and then treated immediately with the current
standard therapy, a three-drug cocktail of atropine, 2-PAM and diazepam. Animals
were videotaped post-exposure and evaluated for toxic signs by observers blinded
to the treatment groups. In addition, a functional observation battery
neurological function tests (ability to balance and memory tests) were formed
six hours after exposure.
Results:
None of
the control animals exposed to nerve agents alone survived while 100% of animals
pretreated with Protexia®
survived
with no visible nerve agent side effects and no loss of balance or memory
relative to negative control animals. In contrast, the animals exposed to much
lower levels of nerve agents and subsequently treated with the current standard
therapy did not respond as well. Survival in these animals was mixed with 100%
survival in animals exposed to VX but only 50% survival in animals exposed
to
soman, although all survivors had significant side effects including a
pronounced loss of balance and loss of memory.
Post-exposure
Therapeutic Indication:
117
Based
on
the demonstration of protection when Protexia®
was
administered before nerve agent exposure, a series of experiments were conducted
to determine whether Protexia®
was
effective as a therapy when administered after exposure to nerve
agent.
The
therapeutic efficacy of Protexia®
was
first evaluated in a domestic pig model with rapid (intravenous) exposure to
nerve agent (VX) followed by treatment with Protexia®
15
minutes later. All of the control animals receiving nerve agent alone died
with
an average time to death of 1.5 hours while 50% of animals receiving
Protexia®
survived
with a prolonged time to death (average of 5.4 hours) in the animals that
died.
A
second
study was then conducted to evaluate the therapeutic efficacy of Protexia®
in a
different animal model and to increase the time before treatment with
Protexia®
to one
hour. In this study, 90% of the animals exposed to VX on the skin and then
treated with Protexia®
survived
as compared to no survivors among the group that was not treated.
U.S.
Government Regulatory Pathway
General
Regulation
by governmental authorities in the United States and other countries will be
a
significant factor in the production and marketing of any biopharmaceutical
products that PharmAthene may develop. The nature and the extent to which such
regulations may apply to PharmAthene will vary depending on the nature of any
such products. Virtually all of PharmAthene’s potential biopharmaceutical
products will require regulatory approval by governmental agencies prior to
commercialization. In particular, human therapeutic products are subject to
rigorous pre-clinical and clinical testing and other approval procedures by
the
FDA and similar health authorities in foreign countries. Various federal
statutes and regulations also govern or influence the manufacturing, safety,
labeling, storage, record keeping and marketing of such products. The process
of
obtaining these approvals and the subsequent compliance with appropriate federal
and foreign statutes and regulations requires the expenditure of substantial
resources.
Government
Funding
The
U.S.
Government awarded Medarex, PharmAthene’s partner in the development of
Valortim™, two separate grants of up to $7.2 million over the next three years
for the further development of Valortim™, though PharmAthene does not receive
any of these funds. In addition, the DoD Appropriations bills for fiscal
year
2006 and 2007 included $2.05 million and $1.0 million respectively to support
PharmAthene’s ongoing development of Valortim™. Prior to PharmAthene’s
acquisition of the recombinant butyrylcholinesterase program, Nexia, the
predecessor of PharmAthene Canada, was awarded a $2.6 million contract by
the
DoD to support the expression of rBChE in the milk of transgenic goats and
to
provide proof of concept data that the product can be produced in kilogram
quantities. Additionally, PharmAthene was awarded a multi-year contract by
the
DoD U.S. Army Space and Missile Command for the advanced development of
Protexia®.
The
contract for advanced development and procurement of an initial 90,000 doses
of
Protexia® is for approximately $35 million. If all options and extensions of
this contract are exercised, the contract could amount to up to $213 million
in
revenues.
Collaborations
PharmAthene
entered into a collaboration and development agreement with Medarex in November
2004 to co-develop Valortim™ for the treatment of anthrax infection. Under the
terms of the agreement, Medarex and PharmAthene have agreed jointly to continue
to investigate the potential for Valortim™ to be used as a therapeutic for
individuals with active disease as well as for prophylactic treatment of
individuals exposed to anthrax. Medarex received an initial payment from
PharmAthene of $2 million used to fund development activities already
underway for Valortim™. PharmAthene will be solely responsible for funding all
future research and development activities that are not supported by government
funds. The companies will share profits according to a predetermined allocation
percentage. The percentage of profits that PharmAthene will be entitled to
receive will depend in part upon the amount of funding that it provides in
connection with the collaboration. Additionally, PharmAthene will be responsible
for marketing, sales and distribution of the product.
118
Additional
animal model development and testing of Valortim™ for therapeutic efficacy will
be carried out under a recently established Collaborative Research and
Development Agreement with the U.S. Army Medical Research Institute of
Infectious Diseases.
PharmAthene
has actively co-developed Protexia®
with the
U.S. Army Medical Research Institute of Chemical Defense under a cooperative
research and development agreement.
Non-Biodefense
Products in Development
In
addition to its utility as a broad-spectrum countermeasure against nerve agent
chemical weapons, PharmAthene is evaluating the use of BChE as a potential
clinical candidate for the treatment of cocaine and heroin addiction and the
treatment of initial toxicity from overdose of cocaine and heroin. This is
due
to the unique structure of the enzyme that allows for selective binding to
a
variety of substrates and inhibitors. Increasing endogenous levels of BChE
can
reduce risks of complications due to cocaine and heroin abuse.
Intellectual
Property
PharmAthene’s
success depends in part on its ability to obtain patents, to protect trade
secrets, and to operate without infringing upon the proprietary rights of
others. PharmAthene seeks to protect its proprietary position by, among other
methods, filing U.S. and foreign patent applications related to the proprietary
technology, inventions and improvements that are important to its business.
PharmAthene currently holds two U.S. issued patents relating to its Protexia®
product
and six corresponding foreign patents. These patents provide PharmAthene with
claim coverage for direct gene transfer into the ruminant mammary gland and
the
method for development of transgenic goats. The issued patents have expiration
dates in 2015. In accordance with ongoing research and development efforts,
PharmAthene has five pending U.S. patent applications and three corresponding
foreign applications covering relevant and newly-developed portions of our
transgenic technology.
The
following identifies each of PharmAthene’s issued patents and pending
applications:
|
Patent/Patent
Application
|
Patent
Number/Application Number
|
County
of Issue/Filing
|
|
Issue
Date/File Date
|
Expiration
Date
|
||||||||
|
Direct
Gene Transfer Into the Ruminant Mammary Gland
|
5,780,009
|
U.S.
|
Issued
July 14, 1998
|
July
14, 2015
|
|||||||||
|
Method
for Development of Transgenic Goats
|
5,907,080
|
U.S.
|
Issued
May 25, 1999
|
November
30, 2015
|
|||||||||
|
Method
for Development of Transgenic Goats
|
0871357
|
Netherlands,
Great Britain, France, Germany, Spain
|
May
2, 2003
|
November
27, 2016
|
|||||||||
|
Production
of Butyrylcholinesterase in Transgenic Animals
|
10/326,892
|
U.S.
|
Filed
December 20, 2002
|
December
20, 2022
|
|||||||||
|
Production
of Butyrylcholinesterase in Transgenic Animals
|
051024531
|
Hong
Kong
|
March
22, 2005
|
March
22, 2025
|
|||||||||
|
Production
of Butyrylcholinesterase in Transgenic Animals
|
027883958
|
Spain
|
December
19, 2002
|
December
19, 2022
|
|||||||||
|
Pulmonary
Delivery of Enzymatic Medical Countermeasures
|
11/195,041
|
U.S.
|
Filed
August 2, 2005
|
August
2, 2025
|
|||||||||
|
Long
Half-Life Recombinant Butyrylcholinesterase
|
60/835,827
|
U.S.
|
Filed
August 4, 2006
|
August
4, 2007
|
|
||||||||
|
Embryonic
Stem Cell Lines and Transgenic Animals Derived From Them
|
60/841,126
|
U.S.
|
Filed
August 30, 2006
|
August
30, 2007
|
|
||||||||
|
Production
of HAS-Linked Butyrylcholiesterase
|
11/401,390
|
U.S.
|
Filed
April 10, 2006
|
December
20, 2022
|
|||||||||
119
In
addition, PharmAthene is a party to various exclusive and non-exclusive licenses
to specific patents and technologies relating to transgenic production of
proteins in the milk of non-human animals which are held by other parties.
Some
of these licenses, which generally extend for the life of any applicable patent,
require PharmAthene to pay royalties on sales of products which may be derived
from or produced using the licensed technology. PharmAthene derives its rights
to the patents, patent applications and know how relating to
ValortimTM through its collaboration arrangement with Medarex, Inc.,
which owns such rights.
PharmAthene
relies upon certain proprietary trade secrets, know-how and continuing
technological advances to develop a competitive position. In efforts to maintain
confidentiality and ownership of trade secrets, proprietary information and
developments, all of PharmAthene’s employees are required to execute agreements
regarding confidentiality and assigning to PharmAthene all rights to any
inventions and processes they develop while they are employed by
PharmAthene.
PharmAthene
intends to use license agreements to access external products and technologies,
as well as to convey its own intellectual property to others. PharmAthene will
be able to protect its proprietary rights from unauthorized use by third parties
only to the extent that its proprietary rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets.
Research
and Development Costs
During
2006, 2005 and 2004, we incurred $7.1 million, $6.4 million and $7.8 million,
respectively, of development expenses related to our research and development
programs.
Manufacturing
PharmAthene
has limited manufacturing capabilities and believes that acceptable alternatives
are available through Contract Manufacturing Organizations, “CMOs.” These CMOs
have experience in operating under the current Good Manufacturing Practices
established by the FDA.
For
Protexia®,
PharmAthene owns and operates a transgenic goat farm for the production of
BChE
in Quebec, Canada. PharmAthene is currently producing this protein in the milk
of transgenic goats at commercially feasible concentrations. This farm will
be
used for the commercial production of the crude material. The large-scale
recovery and purification process is currently under development at
PharmAthene’s research center in Montreal and at a CMO. For commercial
manufacturing, the initial production will be performed at PharmAthene’s farm
and the final purification of the bulk drug substance will be performed at
a
CMO. Final formulation and delivery are still being developed.
For
Valortim™, the cell culture process was developed by PharmAthene’s partner for
Valortim™, Medarex, and results in a commercially feasible and high purity
product that would be manufactured commercially by a CMO. PharmAthene has
determined that the capital investment and high operating costs of a
manufacturing operation are not justified at this time and several acceptable
CMOs are available to produce this product.
Competition
Anthrax
Therapeutics:
Monoclonal
antibodies (“MAbs”) directed against anthrax PA are being developed for
post-exposure prophylaxis and as symptomatic therapy for anthrax infection.
There are currently a limited number of companies of which PharmAthene is aware
with anti-anthrax MAbs in development. These include: Human Genome Sciences,
Inc., Elusys Therapeutics, Inc., Avanir Pharmaceuticals Inc. and IQ Corporation
BV.
120
There
are
a number of orally available small molecule drugs approved and/or under
development for the treatment of anthrax. These include both broad spectrum
antibiotics as well as anthrax specific products. Bayer Corporation produces
Ciprofloxacin, or “Cipro,” which has been approved for the post-exposure
prophylaxis of inhalation anthrax. In late 2004, a number of generic versions
of
Cipro were also approved by the FDA.
In
addition to anthrax therapeutics, anthrax vaccines are currently available
or in
development. At present, only one vaccine is approved for use by the FDA for
the
prevention of anthrax which is BioThrax made by BioPort Corporation, a
subsidiary of Emergent Biosolutions Inc. PharmAthene believes that second
generation vaccines consisting of recombinant protective antigen are being
developed by VaxGen Inc. and Avecia Biotechnology. PharmAthene also believes
that third generation vaccines, consisting of improved formulations of the
anthrax protective antigen are being developed by Avant Immunotherapeutics
Inc.,
BioSante Pharmaceuticals, Cerus Corporation Inc., Dynavax Technologies Inc.,
DVC, Vical and LigoCyte Pharmaceuticals Inc.
Organophosphorous
Nerve Agent Therapeutics:
Nerve
agents are considered to be among the most lethal biowarfare agents, yet there
are few antidotes available. Symptoms of intoxication develop within seconds,
and death can result within minutes after exposure by inhalation, absorption
through the skin, or by oral consumption.
The
current medical regimen for organophospate intoxication includes pretreatment
with carbamates (i.e. pyridostigmine)
to
protect acetylcholinesterase (AChE) from irreversible inhibition, followed
by
anticholinergic drugs (i.e. atropine)
to
counteract the effects of excess acetylcholine, quaternary ammonium oximes
(i.e.
2-PAM)
to
reactivate AChE that was inhibited by organophospate binding, and anticonvulsant
drugs (i.e. diazepam)
to
minimize convulsions and permanent brain damage.
However,
these medical countermeasures against nerve agents are not sufficiently
effective, particularly at protecting the central nervous system. PharmAthene
is
aware of several antidotes to other nerve agents being developed by
pharmaceutical companies, including Meridian Medical Technologies, a subsidiary
of King Pharmaceuticals Inc. and DVC, a division of Computer Sciences Corp.,
in
collaboration with Baxter Healthcare Corporation.
PharmAthene’s
Subsidiary: PharmAthene Canada, Inc.
PharmAthene’s
efforts with respect to Protexia®
are
conducted primarily through its facility in Canada and through its Canadian
subsidiary, PharmAthene Canada, Inc. (“PharmAthene Canada”) through which it
develops and manufactures complex recombinant proteins in the milk of transgenic
goats for medical and industrial applications. PharmAthene Canada’s strength is
producing proteins that cannot be made commercially using other recombinant
systems.
PharmAthene
Management - Directors and Executive Officers
The
following table sets forth the name, position with PharmAthene and principal
occupation of PharmAthene’s executive officers, key employees, directors, and
members of PharmAthene’s scientific advisory board.
|
Name
|
Position
|
Principal
Occupation
|
||
|
David
P. Wright
|
President,
Chief Executive Officer and Director
|
President,
Chief Executive Officer and Director
|
||
|
Christopher
C. Camut
|
Chief
Financial Officer, Treasurer and Vice President
|
Chief
Financial Officer
|
||
|
Solomon
Langermann, Ph.D.
|
Vice
President, Chief Scientific Officer
|
Vice
President, Chief Scientific Officer
|
121
|
Valerie
Riddle, MD
|
Vice
President, Medical Director
|
Vice
President, Medical Director
|
||
|
Eric
I. Richman
|
Senior
Vice President, Business Development and Strategic
Planning
|
Senior
Vice President, Business Development and Strategic
Planning
|
||
|
Francesca
Cook
|
Vice
President, Policy and Government Affairs
|
Vice
President, Policy and Government Affairs
|
||
|
Joel
McCleary
|
Chairman
of the Board
|
Chairman
of the Board, Private Investor
|
||
|
James
Cavanaugh, Ph.D.
|
Director
|
Managing
Director of HealthCare Ventures LLC
|
||
|
Elizabeth
Czerepak
|
Director
|
Member,
Bear Stearns Health Innoventures Management LLC
|
||
|
Ansbert
Gadicke, MD
|
Director
|
General
Partner of MPM Capital, L.P.
|
||
|
John
Gill
|
Director
|
President
and Chief Executive Officer and Director of TetraLogic
Pharmaceuticals
|
||
|
John
Mekalanos, Ph.D.
|
Director
|
Professor
and Chairman of the Department of Microbiology and Molecular Genetics,
Harvard Medical School
|
||
|
Steven
St. Peter, MD
|
Director
|
General
Partner of MPM Capital, L.P.
|
||
|
Mrs.
William McCormick Blair, Jr.
|
Advisor
to the Scientific Advisory Board
|
Vice
President and Director Emeritus of The Albert and Marcy Lasker
Foundation
|
||
|
Stephen
Calderwood, MD
|
Member
Scientific Advisory Board
|
Chief,
Division of Infectious Diseases, and Professor of Medicine (Microbiology
and Molecular Genetics) at Harvard Medical School
|
||
|
John
Collier, Ph.D.
|
Member
Scientific Advisory Board
|
Professor
of Microbiology and Molecular Genetics at Harvard Medical
School
|
||
|
R.
Gordon Douglas, MD
|
Member
Scientific Advisory Board
|
Consultant
to the Vaccine Research Center at the National Institute of
Health
|
||
|
Stephen
Lory, Ph.D.
|
Member
Scientific Advisory Board
|
Professor
of Microbiology and Molecular Genetics at Harvard Medical
School
|
||
|
Jerald
C. Sadoff, MD
|
Member
Scientific Advisory Board
|
President
and Chief Executive Officer of the Aeras Global TB Vaccine
Foundation
|
||
|
John
A.T. Young, Ph.D
|
Member
Scientific Advisory Board
|
Professor,
The Salk Institute for Biological Studies in LaJolla,
CA
|
122
Members
of executive management of PharmAthene have each entered into a written
employment agreement with PharmAthene. The agreements, which contemplate at
will
employment, provide that, in addition to salary, the executives are entitled
to
participate in company benefits as in effect from time to time, including
various insurance plans and pension and bonus plans as and when established.
The
agreements also provide for the grant, at the commencement of employment, of
options to purchase PharmAthene common stock with options vesting over the
term
of employment. Each agreement contains a severance provision which contemplates
payments equal to the employee’s current monthly salary for a specified number
of months following the executive’s termination without cause. The aggregate
current salaries for the six individuals identified above is approximately
$1.6
million excluding any bonuses or options. Historically, bonuses in the form
of
cash or stock options have been awarded at the discretion of the compensation
committee.
Legal
Proceedings
In
June
2006, PharmAthene and SIGA Technologies Inc. (“SIGA”) executed a definitive
Agreement and Plan of Merger (the “SIGA Agreement”). In connection with the SIGA
Agreement, PharmAthene loaned $3.0 million to SIGA pursuant to a Bridge Note
Purchase Agreement, dated March 20, 2006. On October 4, 2006, SIGA terminated
the SIGA Agreement and subsequently repaid the $3.0 million Bridge Notes
including interest. On December 20, 2006, PharmAthene filed a complaint against
SIGA in the Delaware Chancery Court. PharmAthene’s complaint alleges that it has
the right to an exclusive license to develop and market SIGA's drug candidate,
SIGA-246, pursuant to the terminated SIGA Agreement and other agreements between
the parties and the course of performance. The complaint further alleges that
SIGA failed to negotiate in good faith the terms of such a license pursuant
to
the terminated SIGA Agreement and other agreements between the parties and
the
course of performance. SIGA has filed a Motion to Dismiss the
complaint.
PharmAthene
is not a defendant in any material legal proceedings.
Facilities
PharmAthene’s
corporate headquarters are in the Chesapeake Innovation Center (“CIC”) in
Annapolis, Maryland. The CIC is an incubator facility co-sponsored by the State
of Maryland and the National Security Agency.
Employees
As
of
March 31, 2007, PharmAthene had 93 full-time employees. PharmAthene believes
its
relations with its employees are good.
123
PHARMATHENE
EXECUTIVE COMPENSATION
Compensation
Discussion and Analysis
This
discussion and analysis is intended to provide an understanding of PharmAthene’s
executive compensation philosophy, plans and practices, and to give context
for
understanding and evaluating the more specific compensation information
contained in the tables and related disclosures that follow.
Compensation
Philosophy
PharmAthene
believes that compensation should be performance-based, and should vary
with the
attainment of specific individual and corporate objectives, as well as
being
closely aligned with the interests of PharmAthene’s stockholders. PharmAthene’s
Compensation Committee (“Committee”) is responsible for considering,
recommending, overseeing and implementing our compensation policies and
procedures. The Committee’s primary objective is to (i) differentiate and
reward executives’ individual contributions toward collective corporate goals,
(ii) reward the overall attainment of those collective corporate goals, and
(iii) have each executive’s compensation reflect each executive’s level of
leadership and corporate responsibility.
124
The
Committee employs the following core principles to guide its executive
compensation decisions.
| · |
Competitive
Compensation: The
Committee believes in positioning executive compensation at levels
that
are competitive with other similar biotechnology companies in order
to
attract and retain exceptional leadership talent needed to achieve
success
in a small life sciences company such as
PharmAthene.
|
| · |
Performance-based
pay: The
Committee advocates executive compensation programs that balance
annual
and long-term corporate objectives. These programs are structured
to
specifically measure the achievement of individual and corporate
goals and
operational objectives, with the intent of fostering shareholder
value in
the short and long term. Both individual and corporate level performance
affect an executive’s total compensation, including any increase to
salary, and all annual awards, including cash bonuses and ongoing
equity
grants.
|
| · |
Ownership: The
Committee believes that using compensation to build an ownership
culture
effectively aligns the interest of management and our shareholders.
To
this end, the Committee may utilize equity based compensation for
the
Chief Executive Officer and our other executive officers, including
performance-contingent stock option grants, to provide incentives
to
enhance shareholder value.
|
| · |
Comprehensive
view of compensation: The
Committee views all components of compensation together in making
compensation decisions. These components include base salary, annual
incentives, and long-term
incentives.
|
The
Committee approves long-term incentive awards to our new hires and employees.
In
addition, the Committee approves an annual compensation plan that sets average
pay increases, if any, and the annual bonus plan for PharmAthene’s executive
officers and other employees. Within plan guidelines, PharmAthene’s Chief
Executive Officer may approve any base salary increases, bonuses, or new-hire
offer packages.
Members
of executive management of PharmAthene have each
entered into a written employment agreement with PharmAthene. The agreements,
which contemplate at will employment, provide that, in addition to salary,
the
executives are entitled to participate in company benefits as in effect from
time to time, including various insurance plans and pension and bonus plans
as
and when established. The agreements also provide for the grant, at the
commencement of employment, of options to purchase PharmAthene common stock
with
options vesting over the term of employment. Each agreement contains a severance
provision which contemplates payments equal to the employee’s current monthly
salary for a specified number of months following the executive’s termination
without cause. The aggregate current salaries for the six individuals identified
above is approximately $1.6 million excluding any bonuses or options.
Historically, bonuses in the form of cash or stock options have been awarded
at
the discretion of the compensation committee.
Executive
Compensation Tables
The
following tables summarizes compensation information for PharmAthene’s
Chief
Executive Officer, Chief Financial Officer and other most highly compensated
executive officers, whom are collectively refer to as “named executive
officers,” for services rendered to PharmAthene during the fiscal year ended
December 31, 2006.
Summary
Compensation Table. The
table below sets forth for the fiscal year ended December 31, 2006, the
compensation awarded to, earned by, or paid to PharmAthene’s named executive
officers.
SUMMARY
COMPENSATION TABLE
|
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards ($)
|
Option
Awards ($)
|
Non-Equity
Incentive Plan Compen-sation
($)
|
Nonquali-fied
Deferred Compensa-tion Earnings
($)
|
All
Other Compen-sation
($)
|
Total
($)
|
|||||||||||||||||||
|
David
P. Wright, President, Chief Executive Officer and Director
|
2006
|
$
|
334,548
|
-
|
n/a
|
$
|
9,392
|
n/a
|
n/a
|
-
|
$
|
343,940
|
||||||||||||||||
|
Richard
Schoenfeld, Vice President Operations
|
2006
|
$
|
236,933
|
-
|
n/a
|
-
|
n/a
|
n/a
|
$
|
29,370
(a
|
)
|
$
|
266,303
|
|||||||||||||||
|
Ronald
Kaiser, Vice President and Chief Financial Officer, (resigned December
4,
2006)
|
2006
|
$
|
256,859
|
-
|
n/a
|
$
|
1,842
|
n/a
|
n/a
|
-
|
$
|
258,701
|
||||||||||||||||
|
Valerie
Riddle, MD, Vice President, Medical Director
|
2006
|
$
|
233,955
|
-
|
n/a
|
$
|
4,007
|
n/a
|
n/a
|
-
|
$
|
237,962
|
||||||||||||||||
|
Eric
I. Richman, Senior Vice President, Business Development and Strategic
Planning
|
2006
|
$
|
216,915
|
-
|
n/a
|
$
|
3,826
|
n/a
|
n/a
|
-
|
$
|
220,741
|
||||||||||||||||
|
Solomon
Langermann, Ph.D., Vice President, Chief Scientific
Officer
|
2006
|
$
|
201,536
|
-
|
n/a
|
$
|
3,390
|
n/a
|
n/a
|
$
|
|
|
$
|
204,926
|
||||||||||||||
| (a) |
Amount
represents reimbursement of home settlement charges resulting from
Mr.
Schoenfeld’s relocation
|
125
GRANTS
OF
PLAN-BASED AWARDS
The
following table sets forth information concerning grants of plan-based awards
made by PharmAthene during the fiscal year ended December 31, 2006 to the
named
executive officers.
|
Name
|
Grant
Date
|
Estimated
Future Payouts
Under
Non-Equity Incentive
Plan
Awards
|
Estimated
Future Payouts Under
Equity
Incentive Plan Awards
|
All
Other
Stock
|
All
Other
Option
Awards:
|
|
|||||||||||||||||||||||||
|
Thresh-
old
($)
|
Target
($)
|
Maxi-
mum
($)
|
Thresh-
old
(#)
|
Target
(#)
|
Maxi-
mum
(#)
|
Awards:
Number
of
Shares
of
Stock
or
Units
(#)
|
Number
of
Securities
Under-lying
Options
(#)
|
Exercise
or Base Price of Option
Awards
($/Sh)
|
|||||||||||||||||||||||
|
David
P. Wright, President, Chief Executive Officer and Director
|
2/22/2006
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
250,000
|
$
|
0.21
|
||||||||||||||||||||
|
Richard
Schoenfeld, Vice President Operations
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
-
|
|||||||||||||||||||||||
|
Ronald
Kaiser, Vice President and Chief Financial Officer, (resigned December
4,
2006)
|
2/22/2006
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
89,911
|
$
|
0.21
|
||||||||||||||||||||
|
Valerie
Riddle, MD, Vice President, Medical Director
|
2/22/2006
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
85,554
|
$
|
0.21
|
||||||||||||||||||||
|
Eric
I. Richman, Senior Vice President, Business Development and Strategic
Planning
|
2/22/2006
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
81,675
|
$
|
0.21
|
||||||||||||||||||||
|
Solomon
Langermann, Ph.D., Vice President, Chief Scientific
Officer
|
2/22/2006
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
n/a
|
72,370
|
$
|
0.21
|
||||||||||||||||||||
126
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table sets forth information concerning the outstanding equity
awards
of each of the named executive officers as of December 31, 2006.
|
Option
Awards
|
Stock
Awards - n/a
|
|||||||||||||||||||||||||||
|
Name
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
|
Number
of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
|
Equity
Incentive
Plan
Awards:
Number
of
Securities
Underlying
Unexercised
Unearned
Options
(#)
|
Option
Exercise
Price
($)
|
Option
Expiration
Date
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
|
Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
(#)
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value
of
Unearned
Shares,
Units
or
Other
Rights
That
Have
Not
Vested
($)
|
|||||||||||||||||||
|
David
P. Wright, President, Chief Executive Officer and Director
|
561,742
508,634
70,313
|
374,495
339,088
130,208
|
n/a
|
$
$
$
|
0.1634
0.21
0.21
|
7/15/2013
1/18/2015
1/01/2016
|
n/a
|
n/a
|
n/a
|
n/a
|
||||||||||||||||||
|
Richard
Schoenfeld, Vice President Operations
|
125,000
|
375,000
|
n/a
|
$
|
0.21
|
10/17/2015
|
n/a
|
n/a
|
n/a
|
n/a
|
||||||||||||||||||
|
Ronald
Kaiser, Vice President and Chief Financial Officer, (resigned December
4,
2006)
|
239,335
|
n/a
|
n/a
|
$
|
0.21
|
3/04/2007
|
n/a
|
n/a
|
n/a
|
n/a
|
||||||||||||||||||
|
Valerie
Riddle, MD, Vice President, Medical Director
|
86,443
112,458
40,995
|
86,443
41,770
44,559
|
n/a
|
$
$
$
|
0.1634
0.21
0.21
|
10/14/2013
1/15/2015
1/01/2016
|
n/a
|
n/a
|
n/a
|
n/a
|
||||||||||||||||||
|
Eric
I. Richman, Senior Vice President, Business Development and Strategic
Planning
|
388,995
145,833
39,136
|
129,665
54,167
42,539
|
n/a
|
$
$
$
|
0.1634
0.21
0.21
|
11/15/2013
1/15/2015
1/01/2016
|
n/a
|
n/a
|
n/a
|
n/a
|
||||||||||||||||||
|
Solomon
Langermann, Ph.D., Vice President, Chief Scientific
Officer
|
129,665
120,801
34,677
|
129,665
44,869
37,693
|
n/a
|
$
$
$
|
0.1634
0.21
0.21
|
2/09/2014
1/15/2015
1/01/2016
|
n/a
|
n/a
|
n/a
|
n/a
|
||||||||||||||||||
127
OPTION
EXERCISES AND STOCK VESTED
The
following table contains information about PharmAthene’s common stock that may
be issued upon the exercise of options, warrants or rights under all of our
equity compensation plans as of December 31, 2006.
|
Option
Awards
|
Stock
Awards
|
||||||||||||
|
Name
|
Number
of
Shares
Acquired
on
Exercise
(#)
|
Value
Realized
on
Exercise
($)
|
Number
of
Shares
Acquired
on
Vesting
(#)
|
Value
Realized
on
Vesting
($)
|
|||||||||
|
David
P. Wright, President, Chief Executive Officer and
Director
|
1,015,520
|
(1
|
)
|
n/a
|
n/a
|
||||||||
|
Richard
Schoenfeld, Vice President Operations
|
-
|
-
|
n/a
|
n/a
|
|||||||||
|
Ronald
Kaiser, Vice President and Chief Financial Officer, (resigned December
4,
2006)
|
-
|
-
|
n/a
|
n/a
|
|||||||||
|
Valerie
Riddle, MD, Vice President, Medical Director
|
172,886
|
(1
|
)
|
n/a
|
n/a
|
||||||||
|
Eric
I. Richman, Senior Vice President, Business Development and Strategic
Planning
|
-
|
-
|
n/a
|
n/a
|
|||||||||
|
Solomon
Langermann, Ph.D., Vice President, Chief Scientific
Officer
|
-
|
-
|
n/a
|
n/a
|
|||||||||
| (1) |
PharmAthene
is not publicly traded stock and therefore realized value can not
be
determined at this time.
|
PharmAthene
does not provide pension benefits and does not have nonqualified deferred
compensation at this time.
128
Compensation
of Directors
Director
compensation consists principally of cash, an award of options to purchase
shares of PharmAthene’s common stock and awards of shares of restricted stock.
PharmAthene’s non-employee directors received the following amounts of
compensation for our fiscal year ended December 31, 2006.
|
Name
|
Fees
Earned
or
Paid
in
Cash
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive
Plan
Compensation
($)
|
Nonqualified
Deferred
Compensation
Earnings
|
All
Other
Compensation
($)
|
Total
($)
|
|||||||||||||||
|
Joel
McCleary
|
$ |
9,000
|
n/a | — | n/a | n/a | $ | 3,074 |
(a)
|
$ | 12,074 | |||||||||||
|
John
Gill
|
$ | 9,000 | n/a | — | n/a | n/a | $ | 402 | (a) | $ | 9,402 | |||||||||||
|
John
Mekalanos, Ph.D.
|
$ | 9,000 | n/a | — | n/a | n/a | $ | 12,500 | (b) | $ | 21,500 | |||||||||||
|
James
Cavanaugh, Ph.D.
|
— | n/a | — | n/a | n/a | $ | 708 | (a) | $ | 708 | ||||||||||||
|
Elizabeth
Czerepak
|
— | n/a | — | n/a | n/a | $ | 3,251 | (a) | $ | 3,251 | ||||||||||||
| Ansbert Gadicke, MD | — | n/a | — | n/a | n/a | — | — | |||||||||||||||
| Steven St. Peter, MD | — | n/a | — | n/a | n/a | $ | 5,057 | (a) | $ | 5,057 | ||||||||||||
(a)
Amount represents reimbursement for travel and
lodging for Board of Director meetings.
(b)
Amount represents fees earned for participation on
PharmAthene’s Scientific Advisory Board.
Certain
Relationships and Related Party
Transactions
PharmAthene
has no material related party transactions.
129
INFORMATION
ABOUT HAQ
Business
of HAQ
General
We
were
incorporated in Delaware on April 25, 2005, as a blank check company formed
to
serve as a vehicle for the acquisition, through a merger, capital stock
exchange, asset acquisition or other similar business combination of an
operating business whose fair market value is at least equal to 80% of our
net
assets at the time of such business combination.
A
registration statement for our IPO was declared effective on July 28, 2005.
On August 3, 2005, we consummated our IPO of 9,000,000 units. On
August 16, 2005, we consummated the closing of an additional 400,000 units
that were subject to the underwriters' over-allotment option. Each unit consists
of one share of common stock and one redeemable common stock purchase warrant.
Each warrant entitles the holder to purchase from us one share of our common
stock at an exercise price of $6.00 per share. Our common stock and warrants
started trading separately as of October 6, 2005.
Our
net
proceeds from the sale of our units were approximately $69,450,000.
Of this
amount, $67,928,000
was
deposited in trust and the remaining $1,522,000 was held outside of the trust.
The proceeds held outside the trust are available to be used by us, and are
being used by us, to provide for business, legal and accounting due diligence
on
prospective acquisitions and continuing general and administrative expenses.
We
evaluated a number of candidates before moving forward with PharmAthene. If
the
Merger with PharmAthene is not consummated, we will not have enough time or
resources to continue searching for an alternative target and will be forced
to
commence our liquidation of the trust fund in which substantially all of our
assets are held. As of March 31, 2007, the amount held in trust was
approximately $71.4 million.
Employees
We
have
three officers, all of whom are also members of our Board of Directors. These
individuals are not obligated to contribute any specific number of hours per
week and intend to devote only as much time as they deem necessary to our
affairs. The amount of time they will devote in any time period will vary based
on the availability of suitable target businesses to investigate. We do not
intend to have any full time employees prior to the consummation of a business
combination.
Properties
We
maintain our executive offices at 2116 Financial Center, 666 Walnut Street,
Des
Moines, Iowa 50309. We have agreed to pay Equity Dynamics, Inc., an affiliated
third party of which Mr. Pappajohn is the President and principal stockholder,
and Mr. Kinley is a Senior Vice President, approximately $7,500 per month for
office space (located at our executive offices) and certain additional general
and administrative services, such as an allocable share of receptionist,
secretarial and general office services. These offices consist of approximately
2,570 square feet of office space. A prior arrangement with an affiliate of
our
Chief Executive Officer, Derace Schaffer, M.D., pursuant to which we paid $1,500
a month for office space and certain general and administrative services, as
a
portion of the $7,500, was terminated on December 31, 2005.
Periodic
Reporting and Audited Financial Statements
HAQ
has
registered its securities under the Securities Exchange Act of 1934 and has
reporting obligations, including the requirement to file annual and quarterly
reports with the SEC. In accordance with the requirements of the Securities
Exchange Act of 1934, HAQ's annual reports contain financial statements audited
and reported on by HAQ independent accountants. HAQ has filed an Annual Report
on Form 10-K with SEC covering the fiscal year ended December 31,
2006.
Legal
Proceedings
To
the
knowledge of management, there is no litigation currently pending or
contemplated against us or any of our officers or directors in their capacity
as
such.
130
AND
RESULTS OF OPERATIONS OF HAQ
We
were
formed on April 25, 2005, to serve as a vehicle to acquire, through a merger,
capital stock exchange, asset acquisition or other similar business combination,
one or more domestic or international assets or an operating business in the
healthcare industry. Our initial business combination must be with a target
business or businesses whose fair market value is at least equal to 80% of
net
assets at the time of such acquisition. We intend to utilize cash derived from
the proceeds of our recently completed public offering, our capital stock,
debt
or a combination of cash, capital stock and debt, in effecting a business
combination.
On
August
3, 2005, we consummated our initial public offering of 9,000,000 units. On
August 16, 2005, we consummated the closing of an additional 400,000 units
that
were subject to the underwriters’ over-allotment option. Each unit consists of
one share of common stock and one redeemable common stock purchase warrant.
Each
warrant entitles the holder to purchase from us one share of our common stock
at
an exercise price of $6.00.
Our
net
proceeds from the sale of our units, including amounts from exercise of the
underwriters' over-allotment option, after deducting certain offering expenses
of approximately $1,220,000, including $720,000 evidencing the underwriters'
non-accountable expense allowance of 1% of the gross proceeds (excluding the
proceeds from the underwriters' over-allotment), and underwriting discounts
of
approximately $4,512,000, were approximately $69,468,000. Of this amount,
$67,928,000 is being held in trust and the remaining funds are being held
outside of the trust. The remaining proceeds are available to be used by us
to
provide for business, legal and accounting due diligence on prospective
acquisitions and continuing general and administrative expenses. We will use
substantially all of the net proceeds of this offering to acquire a target
business, including identifying and evaluating prospective acquisition
candidates, selecting the target business, and structuring, negotiating and
consummating the business combination. To the extent that our capital stock
is
used in whole or in part as consideration to effect a business combination,
the
proceeds held in the trust fund as well as any other net proceeds not expended
will be used to finance the operations of the target business. We believe we
will have sufficient available funds outside of the trust fund to operate
through August 2007, assuming that a business combination is not consummated
during that time. We do not believe we will need to raise additional funds
in
order to meet the expenditures required for operating our business.
Off-Balance
Sheet Arrangements; Commitments and Contractual
Obligations
As
of
December 31, 2006, HAQ did not have any off-balance sheet arrangements as
defined in Item 303(a)(4)(ii) of Regulation S-K and did not have any
commitments or contractual obligations. No unaudited quarterly operating data
is
included in this proxy statement as HAQ has conducted no operations to
date.
Dissolution
and Liquidation if No Business Combination
We
have
agreed with the trustee to promptly adopt a plan of dissolution and liquidation
and initiate procedures for our dissolution and liquidation if we do not effect
the Merger before August 3, 2007. If the Merger Proposal is not approved, HAQ
will have to commence the winding up, dissolution and liquidation of HAQ. The
plan of dissolution will provide that we liquidate all of our assets, including
the trust account, and after reserving amounts sufficient to cover our
liabilities and obligations and the costs of dissolution and liquidation,
distribute those assets solely to our public stockholders. As discussed below,
the plan of dissolution and liquidation will be subject to stockholder approval
under Delaware law.
Upon
the
approval by our stockholders of our plan of dissolution and liquidation,
we will
liquidate our assets, including the trust account, and after reserving amounts
sufficient to cover our liabilities and obligations and the costs of dissolution
and liquidation, distribute those assets solely to our public stockholders.
Our
initial stockholders, including our officers and directors, have waived
their rights to participate in any liquidating distributions occurring upon
our
failure to consummate a business combination with respect to those shares
of
common stock acquired by them prior to completion of our IPO and have agreed
to
vote all of their shares in favor of any such plan of dissolution and
liquidation. We estimate that, in the event we liquidate the trust account,
our
public stockholders will receive approximately $7.54 (as of December 31,
2006)
per share. We expect that all costs associated with implementing a plan of
dissolution and liquidation as well as payments to any creditors will not
be
able to be funded by the proceeds of our IPO not held in the trust account
and
cannot assure you that any of those funds will be available for such purposes.
HAQ estimates that with the interest that would accrue on the amounts that
are
held in trust through such date, there would be a trust balance of approximately
$72,280,000 or $7.68 per share. This amount, less any liabilities not
indemnified against by certain members of HAQ's Board and not waived by HAQ's
creditors, which we estimate will not exceed $280,000, would be distributed
to
the holders of the 9,400,000 shares of common stock purchased in HAQ's IPO.
We
estimate that as of March 31, 2007, we have claims from creditors,
vendors and tax authorities of approximately $630,000 which have not been
waived. HAQ currently has no outstanding liabilities covered by waivers.
HAQ
currently estimates that, at the end of August 3, 2007, there would be
approximately $280,000 in Delaware franchise tax which are not waived by
such
taxing authorities and our Board members have not agreed to indemnify HAQ
for
such tax claims. Our Board members have agreed to indemnify HAQ for the balance
that HAQ owes to certain of its vendors. HAQ has no other outstanding
liabilities which are not indemnified against by the members of its Board
or for
which it has not received waivers from creditors. As of March 31, 2007, HAQ
has
approximately $467,000 of cash out of trust available to pay for claims and
expenses of which only $280,000 of potential tax claims will not be covered
by
the directors’ indemnification. Thus, HAQ estimates that the total amount
available for distribution upon liquidation would be approximately $72,000,000
or $7.66 per share. Accordingly, if we do not have sufficient or any funds
for those purposes, the amount distributed to our public stockholders will
be
less than $7.60 per share (as of March 31, 2007) as a result of the trust
account being reduced to satisfy the costs associated with a
liquidation.
131
To
mitigate the risk of the amounts in the trust account being reduced by the
claims of creditors:
· Prior
to
completion of the Merger, we will seek to have all vendors, prospective target
businesses and other entities, which we refer to as potential contracted parties
or a potential contracted party, execute valid and enforceable agreements with
us waiving any right, title, interest or claim of any kind in or to any monies
held in the trust account for the benefit of our public stockholders. In the
event that a potential contracted party were to refuse to execute such a waiver,
we will execute an agreement with that entity only if our management first
determines that we would be unable to obtain, on a reasonable basis,
substantially similar services or opportunities from another entity willing
to
execute such a waiver. Examples of instances where we may engage a third party
that has refused to execute a waiver would be the engagement of a third party
consultant whose particular expertise or skills are believed by management
to be
superior to those of other consultants that would agree to execute a waiver
or a
situation in which management does not believe it would be able to find a
provider of required services similar in talent willing to provide the
waiver.
· If
we
enter into an agreement with a potential contracted party that refuses to
execute a valid and enforceable waiver, then our initial directors and officers
will be personally liable to cover the potential claims made by such party
but
only if, and to the extent that, the claims otherwise would reduce the trust
account proceeds payable to our public stockholders in the event of a
dissolution and liquidation and the claims were made by that party for services
rendered or products sold to us.
There
is
no guarantee that vendors, prospective target business, or other entities will
execute such agreements, or even if they execute such agreements that they
would
be prevented from bringing claims against the trust account, including, but
not
limited to, fraudulent inducement, breach of fiduciary responsibility and other
similar claims, as well as claims challenging the enforceability of the waiver,
in each case in order to gain an advantage with a claim against our assets,
including the funds held in the trust account. In addition, the indemnification
provided by certain of our directors and officers is limited to claims by
vendors that do not execute such valid and enforceable agreements. Claims by
target businesses or other entities and vendors that execute such valid and
enforceable agreements would not be indemnified by certain of our directors
and
officers. Based on representations made to us by certain of our directors and
officers, we currently believe they are of substantial means and capable of
funding a shortfall in our trust account to satisfy their foreseeable
indemnification obligations, but we have not asked them to reserve for such
an
eventuality. Despite our belief, we cannot assure you that they will be able
to
satisfy those obligations. The indemnification obligations may be substantially
higher than they currently foresee or expect and/or their financial resources
may deteriorate in the future. As a result, the steps outlined above may not
effectively mitigate the risk of creditors' claims reducing the amounts in
the
trust account.
Furthermore,
creditors may seek to interfere with the distribution of the trust account
pursuant to federal or state creditor and bankruptcy laws which could delay
the
actual distribution of such funds or reduce the amount ultimately available
for
distribution to our public stockholders. If we are forced to file a bankruptcy
case or an involuntary bankruptcy case is filed against us which is not
dismissed, the funds held in our trust account will be subject to applicable
bankruptcy law, and may be included in our bankruptcy estate and subject to
claims of third parties with priority over the claims of our public
stockholders. To the extent bankruptcy claims deplete the trust account, we
cannot assure you we will be able to return to our public stockholders the
liquidation amounts they might otherwise receive.
As
required under Delaware law, we will seek stockholder approval for any plan
of
dissolution and liquidation. We currently believe that any plan of dissolution
and liquidation subsequent to the expiration of the 24 month deadline would
proceed in approximately the following manner (subject to our agreement to
take
earlier action as described below):
· our
Board
will, consistent with its obligations described in our amended
and restated certificate
of incorporation, prior to the passing of such deadline, convene and adopt
a
specific plan of dissolution and liquidation, which it will then vote to
recommend to our stockholders; at such time we will also prepare a preliminary
proxy statement setting out such plan of dissolution and liquidation as well
as
the Board's recommendation of such plan;
132
· upon
such
deadline (or earlier as described below), we would file our preliminary proxy
statement with the SEC;
· if
the
SEC does not review the preliminary proxy statement, then, 10 days following
the
filing date, we will file a definitive proxy statement with the SEC and will
mail the definitive proxy statement to our stockholders, and 30 days following
the mailing, we will convene a meeting of our stockholders, at which they will
either approve or reject our plan of dissolution and liquidation;
and
· if
the
SEC does review the preliminary proxy statement, we currently estimate that
we
will receive their comments approximately 30 days following the filing of the
preliminary proxy statement. We will mail a definitive proxy statement to our
stockholders following the conclusion of the comment and review process (the
length of which we cannot predict with any certainty, and which may be
substantial) and we will convene a meeting of our stockholders as soon as
permitted thereafter.
In
the
event that we seek stockholder approval for a plan of dissolution and
liquidation and do not obtain such approval, we will nonetheless continue to
take all reasonable actions to obtain stockholder approval for our dissolution.
Pursuant to the terms of our amended
and restated certificate
of incorporation, our purpose and powers following the expiration of the
permitted time periods for consummating a business combination will
automatically be limited to acts and activities relating to dissolving and
winding up our affairs, including liquidation. Following the expiration of
such
time periods, the funds held in our trust account may not be distributed except
upon our dissolution and, unless and until such approval is obtained from our
stockholders, the funds held in our trust account will not be released.
Consequently, holders of a majority of our outstanding stock must approve our
dissolution in order to receive the funds held in our trust account, and the
funds will not be available for any other corporate purpose. Our initial
stockholders have agreed to vote all the shares of common stock held by them
in
favor of the dissolution. We cannot assure you that our stockholders will
approve our dissolution in a timely manner or will ever approve our dissolution.
As a result, we cannot provide investors with assurances of a specific time
frame for our dissolution and distribution.
We
expect
that our total costs and expenses associated with the implementing and
completing our stockholder-approved plan of dissolution and liquidation will
be
in the range of $50,000 to $75,000. This amount includes all costs and expenses
related to filing our dissolution in the State of Delaware, the winding up
of
our company and the costs of a proxy statement and meeting relating to the
approval by our stockholders of our plan of dissolution and liquidation. We
believe that there should be sufficient funds available from the proceeds not
held in the trust account to fund the $50,000 to $75,000 of expenses, although
we cannot give you assurances that there will be sufficient funds for such
purposes.
Under
the
Delaware General Corporation Law (“DGCL”), stockholders may be held liable for
claims by third parties against a corporation to the extent of distributions
received by them in a dissolution. If we complied with certain procedures set
forth in Section 280 of the DGCL intended to ensure that a corporation makes
reasonable provision for all claims against it, including a 60-day notice period
during which any third-party claims can be brought against the corporation,
a
90-day period during which the corporation may reject any claims brought, and
an
additional 150-day waiting period before any liquidating distributions are
made
to stockholders, any liability of a stockholder with respect to a liquidating
distribution is limited to the lesser of such stockholder's pro rata share
of
the claim or the amount distributed to the stockholder, and any liability of
the
stockholder would be barred after the third anniversary of the dissolution.
However, it is our intention to make liquidating distributions to our public
stockholders as soon as reasonably possible after dissolution and, therefore,
we
do not intend to comply with those procedures. As such, our public stockholders
could potentially be liable for any claims to the extent of distributions
received by them in a dissolution and any such liability of our public
stockholders will likely extend beyond the third anniversary of such
dissolution. Because we will not be complying with Section 280, we will seek
stockholder approval to comply with Section 281(b) of the DGCL, requiring us
to
adopt a plan of dissolution that will provide for our payment, based on facts
known to us at such time, of (i) all existing claims, (ii) all pending claims,
and (iii) all claims that may be potentially
brought against us within the subsequent 10 years. However, because we are
a
blank check company rather than an operating company, and our operations will
be
limited to searching for prospective target businesses to acquire, the only
likely claims to arise would be from our vendors (such as accountants, lawyers,
investment bankers, etc.) or potential target businesses. As described above,
we
seek to have all vendors and prospective target businesses execute valid and
enforceable agreements with us waiving any right, title, interest or claim
of
any kind in or to any monies held in the trust account and to date have entered
into such agreements with PharmAthene. As a result, we believe the claims that
could be made against us will be significantly reduced and the likelihood that
any claim that would result in any liability extending to the trust will be
limited.
133
FINANCIAL
INFORMATION AS OF MARCH 31, 2007
The
following unaudited pro forma condensed combined consolidated financial
statements combine the historical consolidated balance sheets and statements
of
operations of HAQ and PharmAthene. We are providing the following information
to
aid you in your analysis of the financial aspects of the Merger. We derived
this
information from the unaudited condensed consolidated financial statements
of
HAQ for the three months ended March 31, 2007 and the audited consolidated
financial statements of HAQ for fiscal year ended December 31, 2006 and from
the
unaudited condensed consolidated financial statements of PharmAthene for the
three months ended March 31, 2007 and audited consolidated financial statements
of PharmAthene for fiscal year ended December 31, 2006.
The
unaudited pro forma condensed combined consolidated financial information is
only a summary and you should read it in conjunction with HAQ’s ‘‘Management’s
Discussion and Analysis of Financial Condition and Results of Operations’’, the
historical consolidated financial statements and related notes contained in
its
Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and
its
quarterly report on Form 10-Q incorporated by reference in and accompanying
this
proxy statement, and PharmAthene’s separate historical financial statements and
notes thereto for the three months ended March 31, 2007 and for the year ended
December 31, 2006 as included in this proxy statement.
The
unaudited pro forma condensed combined consolidated balance sheet as of March
31, 2007 gives effect to the Merger as if it had occurred on March 31, 2007.
The
pro forma condensed combined consolidated balance sheet is based on the
historical balance sheet of HAQ as of March 31, 2007 and the historical balance
sheet of PharmAthene as of March 31, 2007. The unaudited pro forma condensed
combined consolidated statement of operations for the three months ended March
31, 2007 is based on historical results of operations of HAQ and PharmAthene
for
the three months ended March 31, 2007 and gives effect to the Merger as if
it
had occurred on January 1, 2007 (the first day of year 2007 for PharmAthene).
The unaudited pro forma condensed combined consolidated statement of operations
for the fiscal year ended December 31, 2006 is based on the historical results
of operations of HAQ and PharmAthene for the year ended December 31, 2006 and
gives effect to the Merger as if it had occurred on January 1, 2006 (the first
day of fiscal year 2006 for PharmAthene).
The
unaudited pro forma condensed combined consolidated financial information is
for
illustrative purposes only. The companies may have performed differently had
they always been combined. You should not rely on the pro forma condensed
combined consolidated financial information as being indicative of the
historical results that would have been achieved had the companies always been
combined or the future results that the combined company will experience after
the Merger.
The
following unaudited pro forma condensed consolidated financial statements have
been prepared using two levels of assumptions with respect to the number of
outstanding shares of our common stock, as follows:
(i)
assuming no conversions and maximum approval - this presentation assumes that
none of our stockholders holding shares sold in our IPO vote against the Merger
and convert their shares into a pro rata portion of the trust account; and
(ii)
assuming maximum conversions and minimum approval - this presentation assumes
that holders of 19.99% of our stock sold in our IPO vote against the Merger
and
convert their shares into a pro rata portion of the trust account.
The
unaudited pro forma condensed consolidated financial statements are based on
the
estimates and assumptions that we believe are reasonable and that are set forth
in the notes to such statements, which are preliminary and have been made solely
for purposes of developing such pro forma information. We are providing this
information to you to aid in your analysis of the financial aspects of the
Merger and related transactions. The unaudited pro forma condensed consolidated
financial statements are not intended to represent or be indicative of our
consolidated results of operations or financial condition that we would have
reported had the Merger, been completed as of the dates presented, and should
not be taken as representative of our future consolidated results of operations
or financial condition.
134
With
Minimum Approval
Unaudited
Pro Forma Condensed Combined Consolidated Balance Sheet
As
of March 31, 2007
|
Historical
PharmAthene
|
Historical
HAQ
|
Pro
Forma
Adjustments
|
Pro
Forma
Combined
|
||||||||||
|
Cash
and cash equivalents
|
$
|
11,910,718
|
$
|
467,388
|
$
|
(2,000,000
|
)
4c
|
$
|
10,378,106
|
||||
|
Cash
held in trust
|
—
|
71,486,888
|
(14,529,206
|
)
4g
|
56,957,682
|
||||||||
|
Accounts
receivable, net
|
2,044,537
|
—
|
—
|
2,044,537
|
|||||||||
|
Prepaid
expenses
|
614,706
|
48,396
|
—
|
663,102
|
|||||||||
|
Other
assets
|
104,772
|
—
|
—
|
104,772
|
|||||||||
|
Total
current assets
|
14,674,733
|
72,002,672
|
(16,529,206
|
)
|
70,148,199
|
||||||||
|
Property
and equipment, net
|
5,401,930
|
—
|
—
|
5,401,930
|
|||||||||
|
Patents,
net
|
1,223,549
|
—
|
—
|
1,223,549
|
|||||||||
|
Other
long term assets
|
188,630
|
—
|
—
|
188,630
|
|||||||||
|
Deferred
financing costs
|
1,573,510
|
372,570
|
—
|
1,946,080
|
|||||||||
|
Total
assets
|
$
|
23,062,352
|
$
|
72,375,242
|
$
|
(16,529,206
|
)
|
$
|
78,908,388
|
||||
|
Current
liabilities:
|
|||||||||||||
|
Accounts
payable
|
$
|
1,138,735
|
$
|
354,654
|
$
|
—
|
$
|
1,493,389
|
|||||
|
Accrued
expenses and other current liabilities
|
2,371,390
|
275,632
|
(6,328
|
)
4e,h
|
2,640,694
|
||||||||
|
Deferred
revenue
|
—
|
711,422
|
711,422
|
||||||||||
|
Notes
payable
|
13,768,089
|
—
|
731,911
|
4a |
14,500,000
|
||||||||
|
Total
current liabilities
|
17,278,214
|
1,341,708
|
725,583
|
19,345,505
|
|||||||||
|
Warrants
to purchase Series C convertible redeemable preferred stock
|
2,617,056
|
—
|
(2,617,056
|
)
4b
|
—
|
||||||||
|
Long
term debt
|
7,798,688
|
—
|
—
|
7,798,688
|
|||||||||
|
Total
liabilities
|
27,693,958
|
1,341,708
|
(1,891,473
|
)
|
27,144,193
|
||||||||
|
Common
stock, subject to possible redemption 1,879,060 shares, at conversion
value
|
—
|
13,578,807
|
(13,578,807
|
)
4g
|
—
|
||||||||
|
Minority
Interest — Series C convertible redeemable preferred stock of PHTN Canada,
par value $0.001 per share; unlimited shares authorized
|
2,624,605
|
—
|
(2,624,605
|
)
4d
|
—
|
||||||||
|
Series
A convertible redeemable preferred stock, par value $0.001 per
share;
authorized 16,442,000 shares
|
19,545,314
|
—
|
(19,545,314
|
)
4d
|
—
|
||||||||
|
Series
B convertible redeemable preferred stock, par value $0.001 per
share;
authorized 30,448,147 shares
|
32,543,119
|
—
|
(32,543,119
|
)
4d
|
—
|
||||||||
|
Series
C convertible redeemable preferred stock, par value $0.001 per
share;
authorized 22,799,574 shares
|
14,956,947
|
—
|
(14,956,947
|
)
4d
|
—
|
||||||||
|
Stockholders’
equity:
|
|||||||||||||
|
Common
stock, par value $0.001 per share; authorized 147,089,104 shares,
12,484,722 issued and outstanding
|
12,485
|
—
|
(12,485
|
)
4d
|
—
|
||||||||
|
Preferred
stock $0.0001 par value; authorized 1,000,000; none issued and
outstanding
|
—
|
—
|
—
|
—
|
|||||||||
|
Common
stock - $0.0001 par value; authorized 100,000,000 shares; 11,650,000
shares issued and outstanding (which includes 1,879,060 subject
to
possible conversion)
|
—
|
1,165
|
1,014
|
4d |
2,179
|
||||||||
|
Additional
paid-in capital
|
—
|
55,818,948
|
16,479,376
|
4f |
72,298,324
|
||||||||
|
Accumulated
other comprehensive loss
|
118,772
|
—
|
—
|
118,772
|
|||||||||
|
Retained
Earnings (Accumulated deficit)
|
(74,432,848
|
)
|
1,634,614
|
52,143,154
|
4g |
(20,655,080
|
)
|
||||||
|
Total
stockholders’ equity
|
(74,301,591
|
)
|
57,454,727
|
68,611,059
|
51,764,195
|
||||||||
|
Total
liabilities, convertible redeemable preferred stock and stockholders’
deficit
|
$
|
23,062,352
|
$
|
72,375,242
|
$
|
(16,529,206
|
)
|
$
|
78,908,388
|
See
accompanying notes to unaudited pro forma condensed combined consolidated
financial statements.
135
With
Maximum Approval
Unaudited
Pro Forma Condensed Combined Consolidated Balance Sheet
As
of March 31, 2007
|
Historical
PharmAthene
|
Historical
HAQ
|
Pro
Forma
Adjustments
|
Pro
Forma
Combined
|
||||||||||
|
Cash
and cash equivalents
|
$
|
11,910,718
|
$
|
467,388
|
$
|
(2,000,000
|
)
4c
|
$
|
10,378,106
|
||||
|
Cash
held in trust
|
—
|
71,486,888
|
—
|
71,486,888
|
|||||||||
|
Accounts
receivable, net
|
2,044,537
|
—
|
—
|
2,044,537
|
|||||||||
|
Prepaid
expenses
|
614,706
|
48,396
|
—
|
663,102
|
|||||||||
|
Other
assets
|
104,772
|
—
|
—
|
104,772
|
|||||||||
|
Total
current assets
|
14,674,733
|
72,002,672
|
(2,000,000
|
)
|
84,677,405
|
||||||||
|
Property
and equipment, net
|
5,401,930
|
—
|
—
|
5,401,930
|
|||||||||
|
Patents,
net
|
1,223,549
|
—
|
—
|
1,223,549
|
|||||||||
|
Other
long term assets
|
188,630
|
—
|
—
|
188,630
|
|||||||||
|
Deferred
financing costs
|
1,573,510
|
372,570
|
—
|
1,946,080
|
|||||||||
|
Total
assets
|
$
|
23,062,352
|
$
|
72,375,242
|
$
|
(2,000,000
|
)
|
$
|
93,437,594
|
||||
|
Current
liabilities:
|
|||||||||||||
|
Accounts
payable
|
$
|
1,138,735
|
$
|
354,654
|
$
|
—
|
$
|
1,493,389
|
|||||
|
Accrued
expenses and other current liabilities
|
2,371,390
|
275,632
|
(6,328
|
)
4e,h
|
2,640,694
|
||||||||
|
Deferred
revenue
|
—
|
711,422
|
711,422
|
||||||||||
|
Notes
payable
|
13,768,089
|
—
|
731,911
|
4a |
14,500,000
|
||||||||
|
Total
current liabilities
|
17,278,214
|
1,341,708
|
725,583
|
19,345,505
|
|||||||||
|
Warrants
to purchase Series C convertible redeemable preferred stock
|
2,617,056
|
—
|
(2,617,056
|
)
4b
|
—
|
||||||||
|
Long
term debt
|
7,798,688
|
7,798,688
|
|||||||||||
|
Total
liabilities
|
27,693,958
|
1,341,708
|
(1,891,473
|
)
|
27,144,193
|
||||||||
|
Common
stock, subject to possible redemption 1,879,060 shares, at conversion
value
|
—
|
13,578,807
|
(13,578,807
|
)
4g
|
—
|
||||||||
|
Minority
Interest — Series C convertible redeemable preferred stock of PHTN Canada,
par value $0.001 per share; unlimited shares authorized
|
2,624,605
|
—
|
(2,624,605
|
)
4d
|
—
|
||||||||
|
Series
A convertible redeemable preferred stock, par value $0.001 per
share;
authorized 16,442,000 shares
|
19,545,314
|
—
|
(19,545,314
|
)
4d
|
—
|
||||||||
|
Series
B convertible redeemable preferred stock, par value $0.001 per
share;
authorized 30,448,147 shares
|
32,543,119
|
—
|
(32,543,119
|
)
4d
|
—
|
||||||||
|
Series
C convertible redeemable preferred stock, par value $0.001 per
share;
authorized 22,799,574 shares
|
14,956,947
|
—
|
(14,956,947
|
)
4d
|
—
|
||||||||
|
Stockholders’
equity:
|
|||||||||||||
|
Common
stock, par value $0.001 per share; authorized 147,089,104 shares,
12,484,722 issued and outstanding
|
12,485
|
—
|
(12,485
|
)
4d
|
—
|
||||||||
|
Preferred
stock $0.0001 par value; authorized 1,000,000; none issued and
outstanding
|
—
|
—
|
—
|
—
|
|||||||||
|
Common
stock - $0.0001 par value; authorized 100,000,000 shares; 11,650,000
shares issued and outstanding (which includes 1,879,060 subject
to
possible conversion)
|
—
|
1,165
|
1,202
|
4d
|
2,367
|
||||||||
|
Additional
paid-in capital
|
—
|
55,818,948
|
16,479,376
|
4f |
72,298,324
|
||||||||
|
Accumulated
other comprehensive loss
|
118,772
|
—
|
—
|
118,772
|
|||||||||
|
Retained
Earnings (Accumulated deficit)
|
(74,432,848
|
)
|
1,634,614
|
66,672,172
|
4g |
(6,126,062
|
)
|
||||||
|
Total
stockholders’ equity
|
(74,301,591
|
)
|
57,454,727
|
83,140,265
|
66,293,401
|
||||||||
|
Total
liabilities, convertible redeemable preferred stock and stockholders’
deficit
|
$
|
23,062,352
|
$
|
72,375,242
|
$
|
(2,000,000
|
)
|
$
|
93,437,594
|
See
accompanying notes to unaudited pro forma condensed combined consolidated
financial statements.
136
Unaudited
Pro Forma Condensed Consolidated Statement of Operations
For
the Three Months Ended March 31, 2007
|
Historical
PharmAthene
|
Historical
HAQ
|
Pro
Forma
Adjustments
|
Pro Forma
Combined
|
||||||||||
|
Revenues:
|
|||||||||||||
|
Grant
Revenue
|
$
|
2,961,759
|
$
|
—
|
$
|
$
|
2,961,759
|
||||||
|
Other
Revenue
|
7,000
|
—
|
7,000
|
||||||||||
|
Total
revenues
|
2,968,759
|
—
|
—
|
2,968,759
|
|||||||||
|
Costs
and expenses:
|
|||||||||||||
|
Research
and Development
|
3,061,059
|
—
|
3,061,059
|
||||||||||
|
General
and Administrative
|
2,510,370
|
124,364
|
2,634,734
|
||||||||||
|
Depreciation
& Amortization
|
147,133
|
—
|
147,133
|
||||||||||
|
Total
costs and expenses
|
5,718,562
|
124,364
|
5,842,926
|
||||||||||
|
Operating
loss
|
(2,749,803
|
)
|
(124,364
|
)
|
(2,874,167
|
)
|
|||||||
|
Other
income (expense):
|
|||||||||||||
|
Interest
Income
|
55,616
|
486,315
|
541,931
|
||||||||||
|
Change
in market value of derivative instruments
|
7,626
|
—
|
(7,626
|
)
4j
|
—
|
||||||||
|
Interest
Expense
|
(241,781
|
)
|
—
|
(14,638
|
)
4e
|
(256,419
|
)
|
||||||
|
Total
other income (loss)
|
(178,539
|
)
|
486,315
|
(22,264)
|
)
|
285,512
|
|||||||
|
Income
(loss) before taxes
|
(2,928,342
|
)
|
361,951
|
(22,264
|
)
|
(2,588,655
|
)
|
||||||
|
Provision
for taxes
|
—
|
(20,966
|
)
|
20,966
|
4h |
—
|
|||||||
|
Net
income (loss)
|
(2,928,342
|
)
|
340,985
|
(1,298
|
)
|
(2,588,655
|
)
|
||||||
|
Accretion
of redeemable convertible preferred stock to redemptive
value
|
(1,732,275
|
)
|
—
|
1,732,275
|
4i |
—
|
|||||||
|
Net
income (loss) attributable to common stockholders
|
$
|
(4,660,617
|
)
|
$
|
340,985
|
$
|
1,730,977
|
$
|
(2,588,655
|
)
|
|||
|
Weighted
average shares outstanding
|
12,483,819
|
11,650,000
|
12,017,200
|
4d |
23,667,200
|
* | |||||||
|
Net
income (loss) per share
|
$
|
(0.37
|
)
|
$
|
0.03
|
$
|
(0.11
|
)*
|
|
*
With minimum approval, pro forma weighted average shares outstanding
would
be 21,348,850 resulting in a pro forma net loss per share of
($0.12).
|
See
accompanying notes to unaudited pro forma condensed combined consolidated
financial statements.
137
Unaudited
Pro Forma Condensed Consolidated Statement of Operations
For
the Year Ended December 31, 2006
|
Historical
PharmAthene
|
Historical
HAQ
|
Pro
Forma
Adjustments
|
Pro Forma
Combined
|
||||||||||
|
Revenues:
|
|||||||||||||
|
Grant
Revenue
|
$
|
1,641,822
|
$
|
—
|
$
|
$
|
$1,641,822
|
||||||
|
Other
Revenue
|
21,484
|
—
|
21,484
|
||||||||||
|
Total
revenues
|
1,663,306
|
—
|
—
|
1,663,306
|
|||||||||
|
Costs
and expenses:
|
|||||||||||||
|
Research
and Development
|
7,140,337
|
—
|
7,140,337
|
||||||||||
|
General
and Administrative
|
8,572,963
|
644,378
|
9,217,341
|
||||||||||
|
Depreciation
& Amortization
|
483,646
|
—
|
483,646
|
||||||||||
|
Acquired
In-Process Research & Development
|
—
|
—
|
—
|
||||||||||
|
Total
costs and expenses
|
16,196,946
|
644,378
|
—
|
16,841,324
|
|||||||||
|
Operating
loss
|
(14,533,640
|
)
|
(644,378
|
)
|
(15,178,018
|
)
|
|||||||
|
Other
income (expense):
|
|||||||||||||
|
Interest
Income
|
289,606
|
1,847,712
|
2,137,318
|
||||||||||
|
Change
in market value of derivative instruments
|
(350,405
|
)
|
—
|
350,405
|
4j |
—
|
|||||||
|
Interest
Expense
|
(538,948
|
)
|
—
|
(461,322
|
)
4e
|
(1,000,270
|
)
|
||||||
|
Total
other income (loss)
|
(599,747
|
)
|
1,847,712
|
(110,917
|
)
|
1,137,048
|
|||||||
|
Income
(loss) before taxes
|
(15,133,387
|
)
|
1,203,334
|
(110,917
|
)
|
(14,040,970
|
)
|
||||||
|
Provision
for taxes
|
—
|
(187,000
|
)
|
187,000
|
4h |
—
|
|||||||
|
Net
income (loss)
|
(15,133,387
|
)
|
1,016,334
|
76,083
|
(14,040,970
|
)
|
|||||||
|
Accretion
of redeemable convertible preferred stock to redemptive
value
|
(6,589,671
|
)
|
—
|
6,589,671
|
4i |
—
|
|||||||
|
Net
income (loss) attributable to common stockholders
|
$
|
(21,723,058
|
)
|
$
|
1,016,334
|
$
|
6,665,754
|
$
|
(14,040,970
|
)
|
|||
|
Weighted
average shares outstanding
|
22,640,432
|
11,650,000
|
12,017,200
|
4d |
23,667,200
|
* | |||||||
|
Net
income (loss) per share
|
$
|
(0.96
|
)
|
$
|
0.09
|
$
|
(0.59
|
)*
|
|
*
With minimum approval, pro forma weighted average shares outstanding
would
be 21,348,850 resulting in a pro forma net loss per share of
($0.66).
|
See
accompanying notes to unaudited pro forma condensed combined consolidated
financial statements.
138
Notes
to Unaudited Pro Forma Condensed Combined Consolidated Financial
Information
| (1) |
Description
of Transactions and Basis of Pro Forma
Presentation
|
On
January 19, 2007, PharmAthene and HAQ entered into an Agreement and Plan of
Merger (the “Merger Agreement”). In connection with the proposed merger (the
“Merger”), HAQ will issue 12,500,000 shares of its common stock for all of
PharmAthene’s outstanding shares of preferred stock and common stock, with
479,065 shares reserved for issuance upon the exercise of PharmAthene’s common
stock options and common stock warrants. For accounting purposes, the
transaction is considered a ‘‘reverse merger’’ under which PharmAthene is
considered to be acquiring HAQ. The 11,650,000 shares of HAQ common stock
outstanding are considered as the basis for determining the consideration in
the
reverse merger transaction. Based on the outstanding shares of PharmAthene
capital stock on December 31, 2006, common stockholders of PharmAthene will
exchange their shares for 621,356 shares of HAQ common stock and preferred
stockholders of PharmAthene and Series C Convertible Preferred Stock warrant
holders will exchange their shares for 11,399,579 shares of HAQ common stock.
In
addition, each PharmAthene stock option that is outstanding on the closing
date
will be converted to HAQ options by multiplying the PharmAthene options in
accordance with agreed upon amounts. The new exercise price will also be
determined by multiplying the old exercise price by the same ratio. Each of
these options will be subject to the same terms and conditions that were in
effect for the related PharmAthene option.
At
the
effective time of the Merger, all options to purchase shares of PharmAthene
stock then outstanding under the PharmAthene, Inc. 2002 Long-Term Incentive
Plan
(as amended, the “PharmAthene Plan”) or issued under any other agreement,
whether vested or unvested, shall be assumed by HAQ. The per-share exercise
price for the shares of HAQ common stock issuable upon exercise of such assumed
outstanding PharmAthene option will be equal to the quotient determined by
dividing the exercise price per share of PharmAthene common stock at which
such
outstanding PharmAthene option was exercisable immediately prior to the closing
of the Merger by the share exchange ratio, and rounding the resulting exercise
price up to the nearest whole cent. PharmAthene has, as of the date hereof,
options and warrants to acquire 9,625,197 shares of its common stock. The share
exchange ratio for the options is .0498 to one. As a consequence, HAQ shall
grant 479,065 options and common stock warrants with an average exercise price
of $4.02 per share in exchange for all of the PharmAthene options and common
stock warrants assumed by HAQ.
The
unaudited pro forma condensed consolidated financial statements have been
prepared using two levels of assumptions with respect to the number of
outstanding shares of our common stock, as follows:
(i)
Assuming no conversions and maximum approval - this presentation assumes that
none of our stockholders holding shares sold in our IPO vote against the Merger
and convert their shares into a pro rata portion of the trust account; and
(ii)
assuming maximum conversions and minimum approval - this presentation assumes
that holders of 19.99% of our stock sold in our IPO vote against the Merger
and
convert their shares into a pro rata portion of the trust account.
| (2) |
Preliminary
Merger Purchase Price
|
The
unaudited pro forma condensed combined consolidated financial statements reflect
the Merger of PharmAthene with HAQ as a reverse merger wherein PharmAthene
is
deemed to be the acquiring entity from an accounting perspective. For accounting
purposes, the transaction is being treated as an acquisition of assets and
not a
business combination because HAQ did not meet the definition of a business
under
EITF 98-3, Determination Whether a Nonmonetary Transaction Involves Receipt
of
Productive Assets or of a Business. Accordingly, the transaction has been
treated as a capital transaction whereby PharmAthene is issuing stock for the
net monetary assets of HAQ, accompanied by a recapitalization. PharmAthene
has
recorded the purchase price as the net assets acquired with the offsetting
credit to equity.
139
| (3) |
Preliminary
Merger Purchase Allocation
|
Based
on
PharmAthene’s preliminary valuation of the fair value of the net assets
acquired, the preliminary purchase price is as follows:
|
Initial
Fair
Value
|
||||
|
Tangible
assets acquired
|
$
|
72,375,242
|
||
|
Liabilities
assumed
|
(1,341,708
|
)
|
||
|
Net
assets acquired
|
$
|
71,033,534
|
The
final
determination of the purchase price allocation will be based on the fair values
of the assets and the fair value of the liabilities assumed at the effective
date of the Merger. The purchase price will remain preliminary until PharmAthene
is able to finalize its valuation of the fair value of the assets and
liabilities acquired. The final determination of purchase price allocation
will
be completed as soon as practical after the effective date of the Merger. The
final amounts allocated to assets and liabilities could differ significantly
from the amounts presented in the unaudited pro forma condensed combined
consolidated balance sheet and related notes.
(4)
Pro Forma Adjustments
|
(a) To
record the conversion of the PharmAthene $11.8 million 8% convertible
notes to the newly issued HAQ $12.5 million in 8% convertible notes
with a
24 month maturity
|
|
(b) To
record the cancellation of PharmAthene warrants convertible into
Series C
convertible redeemable preferred
stock
|
|
(c) To
record merger-related transaction fees of approximately $2.0
million
|
|
(d) To
record the exchange of PharmAthene classes of equity for HAQ common
stock
(See Note 1) and to record issuance of shares to
HAQ
|
|
Shares
|
PharmAthene
shares prior to merger
|
HAQ
Common Stock
|
|||||
|
PharmAthene
common stock
|
12,484,722
shares
|
626,200
shares
|
|||||
|
PharmAthene
Preferred stock
|
61,836,626
shares
|
10,805,286
shares
|
|||||
|
Series
C Exchangeable stock
|
2,591,654
shares
|
585,714
shares
|
|||||
|
Total
|
76,913,002
shares
|
12,017,200
shares
|
|||||
|
For
the three
months
ended
March
31, 2007
|
For
the twelve
months
ended
December
31, 2006
|
||||||
|
HAQ
weighted average shares outstanding
|
11,650,000 | 11,650,000 | |||||
|
Issuance
of shares in exchange for PharmAthene preferred and common
stock
|
12,017,200 | 12,017,200 | |||||
|
Total
weighted average shares outstanding
|
23,667,200 | 23,667,200 |
140
|
(e) To
record interest expense on the $12.5 million 8% convertible notes
payable
assuming a 24 month maturity and additional $14,638 for the three
months
ended March 31, 2007 and $461,323 for the twelve months ended December
31,
2006, respectively
|
|
(f) Pro
forma adjustments to additional paid in capital are an aggregate
of the
following
|
|
To transfer HAQ paid in capital to retained earnings
|
$ | (55,818,948 |
)
|
|
|
To record the cancellation of derivative instruments
|
2,617,056 | |||
|
To record the exchange of PharmAthene preferred and common stock
for HAQ
common stock
|
69,681,268 | |||
|
|
||||
|
|
$
|
16,479,376
|
||
|
|
||||
|
(g) Pro
forma adjustments to accumulated deficit are an aggregate of the
following
|
||||
|
To record the transfer of HAQ capital to retained earnings
|
$ | 55,818,948 | ||
|
To record the transfer of redeemable common stock to retained
earnings
|
13,578,807 | |||
|
To record transaction costs
|
(2,000,000
|
)
|
||
|
To record additional debt placement with the issuance of $12.5 million
8%
convertible notes
|
(731,911 |
)
|
||
|
To record additional debt interest
|
(14,638 |
)
|
||
|
To record elimination of HAQ historic tax provision
|
20,966 | |||
|
Adjustment
if maximum stockholder approval (no conversions)
|
$ | 66,672,172 | ||
|
To
record purchase of common stock of stockholders not in favor of the
Merger, assumes a $7.48 purchase price, and includes interest income
earned
|
(14,529,018
|
)
|
||
|
Adjustment
if minimum stockholder approval (maximum conversions)
|
$
|
52,143,154
|
|
(h) To
record the elimination of historical HAQ tax provision of $20,966
and
$187,000 for the three months ended March 31, 2007 and the twelve
months
ended December 31, 2006, respectively
|
|
(i)
To record the elimination of historical PharmAthene accretion of
redeemable convertible preferred stock
|
|
(j)
To record elimination of historical PharmAthene change in market
value of
derivative instruments
|
141
MERGER
WITH PHARMATHENE
Following
the Merger, it is anticipated that the directors and executive officers of
the
combined company will be the individuals indicated below.
|
Name
|
Age
|
Position
|
|||
|
John
Pappajohn
|
78
|
Chairman
of the Board
|
|||
|
David
P. Wright
|
58
|
Chief
Executive Officer, Director
|
|||
|
James
H. Cavanaugh, Ph.D.
|
69
|
Director
|
|||
|
Elizabeth
Czerepak
|
51
|
Director
|
|||
|
Steven
St. Peter, M.D.
|
40
|
Director
|
|||
|
Joel
McCleary
|
58
|
Director
|
|||
|
Derace
L. Shaffer, M.D.
|
59
|
Director
|
|||
|
John
Gill
|
|
Director
|
|||
John
Pappajohn has served as HAQ’s Chairman and secretary since April 2005. Since
1969, Mr. Pappajohn has been the President and principal stockholder of Equity
Dynamics, Inc., a financial consulting firm, and the sole owner of Pappajohn
Capital Resources, a venture capital firm. He also serves as a director of
the
following public companies: Allion Healthcare, Inc., American CareSource
Holdings, Inc., CareGuide, Inc. MC Informatics, Inc. and ConMed Health
Management, Inc. Mr. Pappajohn has been an active private equity investor in
healthcare companies for more than 30 years and has served as a director of
more
than 40 public companies. Mr. Pappajohn has been a founder in several public
healthcare companies such as Caremark Rx, Inc., Quantum Health Resources, and
Radiologix, Inc. Mr. Pappajohn received his B.S.C. from the University of Iowa.
Mr. Pappajohn will serve as Chairman of the Board of the combined
company.
David
P.
Wright joined PharmAthene as President and Chief Executive Officer in July
2003.
Prior to joining PharmAthene, and during 2003, he served as President and Chief
Operating Officer of GenVec Inc, and previously, from 2001 to 2003, President
and Chief Business Officer of Guilford Pharmaceuticals. Mr. Wright served as
Executive Vice President for MedImmune, Inc. from 1990 to 2000 where he was
responsible for building MedImmune’s commercial operations and growing product
sales from $0 to over $400 million per year. Prior to serving at MedImmune,
he
held various marketing and sales positions at pharmaceutical companies including
SmithKline and French Laboratories, G.D. Searle, and Glaxo. While Mr. Wright
was
involved in numerous drug launches while at MedImmune and elsewhere and may
have
played a role in the successes of that company, stockholders are urged not
to
place undue reliance on the growth of MedImmune as indicative of growth to
be
achieved by PharmAthene as the two companies have different product lines and
objectives.
James
H.
Cavanaugh, Ph.D, has been a Managing Director of HealthCare Ventures LLC since
1989. Prior thereto, Dr. Cavanaugh served as President of SmithKline and French
Laboratories U.S., Inc., from March 1985 to February 1989 and as President
of
SmithKline Clinical Laboratories from 1981 to 1985. Prior thereto, Dr. Cavanaugh
was the President of Allergan International, a specialty eye care company.
Dr.
Cavanaugh also serves as a member of the Board of Directors of. Shire
Pharmaceuticals Group PLC (non-executive Chairman), Diversa Corp. (Chairman),
MedImmune, Inc. and Advancis Pharmaceutical Corporation. Prior to his industry
experience, Dr. Cavanaugh was Deputy Assistant to the President for Domestic
Affairs and Deputy Chief of the White House Staff. Before his White House tour,
he served as Deputy Assistant Secretary for Health and Scientific Affairs in
the
U.S. Department of Health, Education and Welfare and as Special Assistant to
the
Surgeon General of the U.S. Public Health Service. In addition to serving on
the
boards of directors of several health care and biotechnology companies, Dr.
Cavanaugh currently serves as Trustee Emeritus of the California College of
Medicine. He has previously served on the Board of Directors of the National
Venture Capital Association, the Pharmaceutical Research and Manufacturers
Association, Unihealth America, the Proprietary Association and on the Board
of
Trustees of the National Center for Genome Resources. He was a Founding Director
of the Marine National Bank in Santa Ana, California. Dr. Cavanaugh holds a
doctorate and a master’s degree from the University of Iowa and a bachelor of
science degree from Fairleigh Dickinson University.
Elizabeth
Czerepak was a founder of Bear Stearns Health Innoventures and has been a member
of Bear Stearns Health Innoventures Management L.L.C., the general partner
of
the funds comprising the Bear Stearns Health Innoventures group, since its
inception in April 2001. She is an employee of Bear Stearns Asset Management
Inc., the managing member of Bear Stearns Health Innoventures Management LLC.
Prior to joining Bear Stearns Health Innoventures, Ms. Czerepak was vice
president of business development and a member of the executive board at BASF
Pharma/Knoll Pharmaceutical Co. From 1987 to 1995, Ms. Czerepak served in
various senior positions at Hoffmann-La Roche, responsible for licensing,
acquisitions, financial analysis and strategic planning. Ms. Czerepak also
established an internal venture vehicle for Hoffmann-La Roche to facilitate
start-up companies. Ms. Czerepak began her pharmaceutical career at Merck in
1982 where she led the development of a simulation-based model for comprehensive
research and development strategic planning. She was an instructor in the MBA
program at Fairleigh Dickinson University, and holds a bachelor of arts degree
magna cum laude from Marshall University and an MBA degree in finance from
Rutgers University. She is NASD registered and currently serves on the Board
of
Directors of Affymax, Inc., Agensys, Inc., and PharmAthene.
142
Steven
St. Peter, M.D. has served as a member of PharmAthene’s Board of Directors since
October 2004. He joined MPM Asset Management LLC as a principal in 2004 and
became a general partner in 2005. Prior to joining MPM, from 2001 to 2003,
he
was a principal at Apax Partners and from 1999 to 2001, he was a senior
associate at The Carlyle Group. His investment scope has included both venture
and buyout transactions across the medical technology and biopharmaceutical
industries. Dr. St. Peter is board certified in internal medicine and was
previously an assistant clinical professor of Medicine at Columbia University.
He completed his Doctor of Medicine at Washington University. Prior to his
medical training, he was an investment banker at Merrill Lynch. He is also
a
director of Omrix Biopharmaceuticals (Nasdaq: OMRI), Helicos BioSciences
Corporation (NASDAQ: HLCS), Syndax Pharmaceuticals, Inc. and Xanodyne
Pharmaceuticals Inc.
Joel
McCleary has served as Chairman of the Board of PharmAthene since its inception.
He has previously served as a White House Aide, Treasurer of the Democratic
Party, and President of the Sawyer - Miller Group International and President
of
the Institute for Asian Democracy. He has served as a consultant to the
Department of State. He is a co-founder and board member of Raydiance Inc.
and
is also a co-founder of Drinks that Work Inc. He serves on the Harvard Medical
School’s board of advisors and is an advisor to the Center for Biosecurity of
the University of Pittsburgh Medical Center. Mr. McCleary is founding partner
of
Four Seasons Ventures LLC.
Derace
L.
Schaffer, M.D. has served as our Vice Chairman and Chief Executive Officer
of
HAQ since April 2005. Dr. Schaffer is the founder and Chief Executive Officer
of
The Lan Group, a venture capital firm specializing in healthcare and high
technology investments. He also serves as a director of the following public
companies: Allion Healthcare, Inc., American CareSource Holdings, Inc., and
CareGuide, Inc. He has served as Chairman of several healthcare companies
including, Radiologix, Inc when it was private. He has been an active
co-investor with Mr. Pappajohn for more than fifteen years on a variety of
healthcare companies, and they co-founded Allion Healthcare and Radiologix,
all
of which are public companies. In addition, Mr. Pappajohn and Dr. Schaffer
have
worked together on many private healthcare companies, such as Logisticare,
Inc.
and Source Medical Inc. Dr. Schaffer served as Chief Executive Officer and
Chairman of the Board of Ide Imaging Group, P.C. from 1980 to 2001. Dr. Schaffer
has served as a director on many healthcare boards of directors including
several health systems and more than ten healthcare services and technology
companies. Dr. Schaffer received his postgraduate radiology training at Harvard
Medical School and Massachusetts General Hospital, where he served as Chief
Resident. Dr. Schaffer is currently also a Clinical Professor of Radiology
at
Weill Cornell Medical College.
Mr.
Gill
has served as a member of PharmAthene's Board of Directors and as Chairman
of
its audit committee since February 2004. He is currently the President,
Chief
Executive Officer and a Director of TetraLogic Pharmaceuticals Corporation,
a
private biopharmaceutical company, and has served in these positions since
2004.
He is also an advisor or director of other private companies and non-profit
community organizations. Mr. Gill has previously held positions at 3-Dimensional
Pharmaceuticals, SmithKline Beecham Research and Development and Peat,
Marwick,
Mitchell & Company. Mr. Gill is a Certified Public Accountant and received
his B.A. in Accounting and Economics from Rutgers University in 1975. He
served
in the United States Marine Corps from 1971 to 1973.
Other
than their respective relationships with HAQ and PharmAthene,
none of
these individuals has been a principal of or affiliated with a public company
or
blank check company that executed a business plan similar to our business plan,
and none of these individuals is currently affiliated with such an
entity.
After
the
Merger, the officers and employee directors will devote their full time and
attention to the ongoing operations of HAQ and the non-employee directors will
devote such time as is necessary and required to satisfy their duties as a
director of a public company. In addition, upon completion of the Merger, the
following individuals, who are current directors of HAQ, will not be continuing
as directors of the public company: Matthew P. Kinley, Edward B. Berger and
Wayne A. Schellhammer.
143
Board
of Directors and Committees of the Board
After
the
Merger with PharmAthene, our Board of Directors will consist of up to seven
members, and it is anticipated that a majority of which will be considered
“independent.” Under the Merger Agreement, the noteholders will have the right
to have three persons serve on the Board. We expect the Board members to be
John
Pappajohn, Derace M. Schaffer, M.D., James Cavanaugh, Ph.D., Steven St. Peter,
M.D. Elizabeth Czerepak, Joel McCleary and David Wright.
We
do not
currently have a Compensation Committee but we expect to establish a
Compensation Committee as soon as practicable after the consummation of the
Merger. Pursuant to Section 805 of the AMEX Company Guide, compensation of
our Chief Executive Officer, if any, will be determined, or recommended to
the
Board for determination, by a majority of the independent directors on our
Board
of Directors. The Chief Executive Officer will not be present during voting
or
deliberations. Compensation for all other officers, if any, will be determined,
or recommended to the Board for determination, by a majority of the independent
directors on our Board of Directors. None of our officers currently receive
compensation. We do not expect to pay any compensation to any of our officers
until following the consummation of the Merger with PharmAthene.
HAQ's
Board of Directors has established a Nominating Committee and an Audit Committee
to devote attention to specific subjects and to assist the Board in the
discharge of its responsibilities. The functions of these committees and their
current members, as well as anticipated membership, are set forth
below.
Audit
Committee
Our
Audit
Committee currently consists of Mr. Berger and Mr. Schellhammer. We expect
to
modify the composition of the Audit Committee as soon as practicable after
the
consummation of the Merger. The independent directors we appoint to our Audit
Committee will each be an independent member of our Board of Directors, as
defined by the rules of the AMEX and the SEC. Each member of our audit committee
will be financially literate under the current listing standards of the AMEX,
and our Board of Directors has determined that Mr. Berger qualifies as an "audit
committee financial expert," as such term is defined by SEC rules. We expect
that the composition of the Audit Committee subsequent to the Merger will meet
the listing standards of the AMEX and applicable SEC rules.
Upon
completion of the Merger, and in connection with the recommendations of the
Board, we expect that the members of the Audit Committee will be John
Gill, Elizabeth Czerepak and James H. Cavanaugh PH.D.
The
Audit
Committee reviews the professional services and independence of our independent
registered public accounting firm and our accounts, procedures and internal
controls. The audit committee also recommends the firm selected to be our
independent registered public accounting firm, reviews and approves the scope
of
the annual audit, review and evaluates with the independent public accounting
firm our annual audit and annual consolidated financial statements, reviews
with
management the status of internal accounting controls, evaluates problem areas
having a potential financial impact on us that may be brought to the committee's
attention by management, the independent registered public accounting firm
or
the Board of Directors, and evaluates all of our public financial reporting
documents.
Nominating
Committee
We
have
established a Nominating Committee of the Board of Directors, which currently
is
comprised of Mr. Berger and Mr. Schellhammer, each of whom is an independent
director as defined by the rules of the AMEX and the SEC. We expect to modify
the composition of the Nominating Committee as soon as practicable after the
consummation of the Merger. The Nominating Committee is responsible for
overseeing the selection of persons to be nominated to serve on our Board of
Directors. The Nominating Committee considers persons identified by its members,
management, stockholders, investment bankers and others. We expect that the
composition of the Nominating Committee subsequent to the Merger will meet
the
listing standards of the AMEX and applicable SEC rules.
144
Upon
completion of the Merger, and in connection with the recommendations of the
Board, we expect that the members of the Nominating Committee will be ____,
_____ and ______.
Under
the
terms of the Note Exchange Agreement and the Merger Agreement, and in accordance
with the amendments to the Certificate of Incorporation as described under
Proposal 2, we have agreed that the holders of the 8% note to be issued under
the Merger Agreement have the right to have two persons out of the three persons
on the Nominating Committee for as long as at least 30% of the original
principal amount of the 8% notes remain outstanding.
The
guidelines for selecting nominees, which are specified in the nominating
committee charter, generally provide that persons to be nominated should be
actively engaged in business endeavors, have an understanding of financial
statements, corporate budgeting and capital structure, be familiar with the
requirements of a publicly traded company, be familiar with industries relevant
to our business endeavors, be willing to devote significant time to the
oversight duties of the Board of Directors of a public company, and be able
to
promote a diversity of views based on the person's education, experience and
professional employment. The Nominating Committee evaluates each individual
in
the context of the board as a whole, with the objective of recommending a group
of persons that can best implement our business plan, perpetuate our business
and represent stockholder interests. The Nominating Committee may require
certain skills or attributes, such as financial or accounting experience, to
meet specific board needs that arise from time to time. The Nominating Committee
does not distinguish among nominees recommended by stockholders and other
persons.
Compensation
Committee
Effective
at the closing of the Merger, we expect to create a Compensation Committee
of
the Board of Directors. The Compensation Committee will be charged with
reviewing and determining the compensation of our executive officers, including
the negotiation of any employment agreements with such persons. In addition,
the
Compensation Committee will be charged with oversight of the Incentive Plan
and
the grant of options and awards under the Incentive Plan. The Compensation
Committee will be comprised of three (3) persons, at least two of whom shall
be
independent persons.
Upon
completion of the Merger, and in connection with the recommendations of the
Board, we expect that the members of the Compensation Committee will be ____,
_____ and ______.
Under
the
terms of the Note Exchange Agreement and the Merger Agreement, and in accordance
with the amendments to the Certificate of Incorporation as described under
Proposal 2, we have agreed that the holders of the 8% notes to be issued under
the Merger Agreement have the right to have two persons out of the three persons
on the Compensation Committee for as long as 30% of the original principal
amount of the 8% notes remain outstanding.
Code
of Conduct and Ethics
We
have
adopted a code of conduct and ethics applicable to our directors, officers
and
employees in accordance with applicable federal securities laws and the rules
of
the AMEX. You can review this document by accessing our public filings at the
SEC's web site at www.sec.gov. In addition, a copy of the code of conduct and
ethics will be provided without charge upon request to us. We intend to disclose
any amendments to or waivers of certain provisions of our code of ethics within
5 business days of such amendment or waiver or as otherwise required by the
SEC.
Director
Compensation
It
is
anticipated that at or prior to the closing of the Merger with PharmAthene,
the
compensation to be paid to members of the Board of Directors of HAQ will be
established and such compensation will be reasonable and customary for the
industry.
Executive
Compensation
None
of
HAQ’s executive officers or directors has received any cash compensation for
services rendered. Commencing on the effective date of our IPO through the
consummation of a business combination, we have agreed to pay Equity Dynamics,
Inc., an affiliated third party of which Mr. Pappajohn (our Chairman and
Secretary) is the President and principal stockholder, and Mr. Kinley (our
President and Treasurer) is a Senior Vice President, approximately $7,500 per
month for office space and certain additional general and administrative
services. A prior arrangement with an affiliate of our Chief Executive Officer,
Derace Schaffer, M.D., pursuant to which we paid $1,500 per month for office
space and certain general and administrative services, as a portion of the
$7,500, was terminated on December 31, 2005. During 2005 and 2006, approximately
$37,500 and $90,000 was incurred under these arrangements, respectively. The
current agreement with Equity Dynamics, Inc. is for our benefit and is not
intended to provide Mr. Pappajohn compensation in lieu of a salary. We believe
that such fees are at least as favorable as we could have obtained from an
unaffiliated third party. Other than this $7,500 per-month fee, no compensation
of any kind, including finder's and consulting fees, will be paid to any of
our
initial stockholders, including our officers and directors, or any of their
respective affiliates, for services rendered prior to or in connection with
a
business combination. However, persons who were stockholders prior to our IPO,
including our officers and directors, will receive reimbursement for any
out-of-pocket expenses incurred by them in connection with activities on our
behalf, such as identifying potential target businesses and performing due
diligence on suitable business combinations.
145
HAQ
has
required as a condition to closing that Mr. David Wright, the current Chief
Executive Officer of PharmAthene enter into a new employment agreement with
HAQ,
upon terms acceptable to both parties. The parties are negotiating the terms
of
the agreement. In the event that an agreement is not reached, HAQ may determine
not to proceed with the Merger. In addition, upon completion of the Merger,
it
is anticipated that other officers of PharmAthene will be continuing their
employment with PharmAthene.
COMPENSATION
DISCUSSION AND ANALYSIS
Overview
Since
HAQ’S formation, our operations have been limited to organizational activities
and, after the IPO, to activities relating to completing a business combination.
To date, none of HAQ’s executive officers or directors has received any cash
compensation for services rendered. Commencing on the effective date of our
IPO
through the consummation of a business combination, we have agreed to pay Equity
Dynamics, Inc., an affiliated third party of which Mr. Pappajohn (our Chairman
and Secretary) is the President and principal stockholder, and Mr. Kinley (our
President and Treasurer) is a Senior Vice President, approximately $7,500 per
month for office space and certain additional general and administrative
services. A prior arrangement with an affiliate of our Chief Executive Officer,
Derace Schaffer, M.D., pursuant to which we paid $1,500 per month for office
space and certain general and administrative services, as a portion of the
$7,500, was terminated on December 31, 2005. During 2005 and 2006, approximately
$37,500 and $90,000 was incurred under these arrangements, respectively. The
current agreement with Equity Dynamics, Inc. is for our benefit and is not
intended to provide Mr. Pappajohn compensation in lieu of a salary. We believe
that such fees are at least as favorable as we could have obtained from an
unaffiliated third party. Other than this $7,500 per-month fee, no compensation
of any kind, including finder’s and consulting fees, will be paid to any of our
initial stockholders, including our officers and directors, or any of their
respective affiliates, for services rendered prior to or in connection with
a
business combination. However, persons who were stockholders prior to our IPO,
including our officers and directors, will receive reimbursement for any
out-of-pocket expenses incurred by them in connection with activities on our
behalf, such as identifying potential target businesses and performing due
diligence on suitable business combinations.
As
indicated above, we expect to establish a Compensation Committee of the Board
of
Directors after the closing of the Merger. The Compensation Committee, among
other things, will be responsible for oversight of executive compensation.
The
Compensation Committee, once established, will develop a comprehensive executive
compensation program and philosophy with respect to our executive
officers.
The
HAQ
Board approved the 2007 Long-Term Incentive Plan and is recommending its
adoption by the stockholders. See the section entitled “Proposal 3: The
Incentive Plan Proposal.” The Board also approved the employment agreement of
David P. Wright, the Chief Executive Officer of HAQ after consummation of the
Merger. See the section entitled “Directors and Executive Officers of HAQ
Following the Merger with PharmAthene.”
146
Expected
Compensation Policies
Though
we
have not yet developed a comprehensive executive compensation program and
philosophy, we expect that our compensation program will include short and
long-term components, cash and equity, and fixed and contingent payments, in
the
proportions we expect will appropriately incentivize and reward our senior
management. We expect that our executive compensation structure will be
competitive in our industry. In addition, we expect that our compensation
structure would be fair relative to compensation paid to other professionals
within our organization, relative to our short and long-term performance and
relative to the value we deliver to our stockholders. As we develop our
compensation program and philosophy, we intend to implement an approach that
rewards our executive officers when we achieve our goals and objectives and
fosters a performance-oriented culture, where individual performance is aligned
with organizational objectives.
Following
the consummation of the Merger, we anticipate executive compensation generally
to consist of the following elements subject to fine-tuning based upon the
review and input of the Compensation Committee:
Base
Salary.
Base
salaries for executive officers will be established based on each individual’s
job responsibilities and contribution, while taking into account target bonuses
as well as total compensation levels at other companies for similar positions.
Although we expect that base salaries will be reviewed annually, a decrease
in
base salary may be prohibited by an executive officer’s employment
agreement.
Bonuses.
The
Compensation Committee will be responsible for establishing and implementing
pre-established quantitative and qualitative performance standards for executive
bonuses as well as guidelines and requirements for the distribution of such
bonuses.
Long-Term
Incentive Program.
We
believe that compensation paid to executive officers should be closely aligned
with our performance on both a short-term and long-term basis, and that their
compensation should assist us in recognizing and rewarding key executives who
profoundly affect our future success through their contributions. Therefore,
we
have adopted the 2007 Long Term Incentive Plan, which is designed to align
management’s performance objectives with the interests of our stockholders. If
adopted, awards under the 2007 Incentive Plan will be administered by the
Compensation Committee, which will be authorized, among other things, to select
the participants and determine the type of awards to be made to participants,
when the awards will be granted, the number of shares subject to awards and
the
terms, conditions, restrictions and limitations of the awards.
Benefits.
In the
short-term, and after consummation of the Merger, we will maintain PharmAthene’s
already existing employee benefits plans including health and dental insurance,
life insurance, disability insurance and 401(k) plan. Later, after establishment
of the Compensation Committee, we expect the Compensation Committee to review
and establish an employee benefits plan offering benefits consistent with those
benefits offered by other companies and specifically with those companies with
which we will compete for employees.
Employment
Agreements.
A
description of the employment agreement with David P. Wright is set forth below.
The terms and conditions of Mr. Wright’s employment agreement were negotiated
with the HAQ Board of Directors, the PharmAthene Board of Directors as well
as
with Mr. Wright as part of the negotiation of the overall terms and conditions
of the Merger. Other than the employment agreement with Mr. Wright, we have
not
entered into employment agreements with any of our existing executive officers
or proposed executive officers. It is possible that, after consummation of
the
Merger, the Compensation Committee may recommend to the HAQ Board that the
compensation and terms of employment for our other executive officers be
formalized in appropriate employment agreements with them.
Change
in Control and Severance.
We have
not yet developed any comprehensive severance policies for our executive
officers but we expect that the Compensation Committee may do so in connection
with the development of our comprehensive executive compensation program and
philosophy.
Allocating
Elements of Compensation.
In
allocating compensation among various elements such as base salary, bonuses
and
long-term incentive programs, we expect that the Compensation Committee will
select allocations that are consistent with our overall compensation philosophy
described above.
147
Employment
Agreements
In
connection with the proposed Merger, David P. Wright entered into an employment
agreement with HAQ to serve as HAQ’s Chief Executive Officer upon consummation
of the Merger. Under the agreement, Mr. Wright will receive a base salary of
$392,000 per year (which is consistent with the salary he has previously
received as PharmAthene’s Chief Executive Officer) and be eligible to receive
annual bonus compensation of up to 30% of his base salary plus additional
bonuses at the option and discretion of the Compensation Committee. Upon the
consummation of the Merger and, consequently, the effectiveness of the
employment agreement, Mr. Wright will be granted a stock option to purchase
780,000 shares of HAQ’s common stock pursuant to HAQ’s 2007 Long-Term Incentive
Plan at an exercise price equal to the fair market value of a share of HAQ
common stock on the date of the grant as determined by the Compensation
Committee in accordance with applicable law and regulations and a restricted
stock award of 100,000 shares of HAQ common stock. The option shall have a
term
of ten years and both the option and the restricted stock award, subject to
possible acceleration of vesting, will vest over a 5 year period with 25%
vesting on the first anniversary of the grant date and the remainder vesting
monthly on a pro-rata basis over the succeeding 48 months following the first
anniversary date. Mr. Wright shall also be eligible to receive additional grants
of stock options and restricted stock at the discretion of the Compensation
Committee and may participate in HAQ’s standard employee benefits package
(including group medical, dental and vision insurance coverage, paid holiday,
vacation and sick leave, and 401(k) plan participation) and an automobile
allowance in an amount not to exceed $1,000 per month. Also under the employment
agreement, Mr. Wright will be reimbursed for all reasonable, documented business
expenses incurred in the course of performing his duties and for legal expenses,
up to $10,000, incurred in connection with the review and negotiation of his
employment agreement. The agreement requires that during his employment and
for
a period of 12 months following termination of his employment, Mr. Wright shall
not directly or indirectly engage in the development, production, marketing
or
sale of products that compete with the products of HAQ or assist others in
a
competing business or induce other employees of HAQ to terminate their
employment with HAQ or engage in a competing business. The employment agreement
also requires Mr. Wright to refrain from directly or indirectly disclosing
any
confidential information obtained while working at HAQ.
If
Mr.
Wright’s employment is terminated without cause or he resigns for good reason,
in each case as defined under the employment agreement, Mr. Wright shall be
entitled to severance payments in the form of a continuation of his base salary
immediately prior to such termination for a period of 12 months following the
effective date of the termination and, in addition, an amount of shares equal
to
up to 25% of the total aggregate amount of options and restricted stock granted
shall become vested with the remaining balance of unvested options and
restricted stock being forfeited. Further, in the event of a change in control
of HAQ, as defined under the employment agreement, and the termination of Mr.
Wright’s employment either in connection with the change in control or without
cause within 12 months following the change in control, in addition to the
severance payments to which Mr. Wright shall be entitled, all stock options
and
shares of restricted stock held by Mr. Wright that are not then vested shall
become immediately and fully vested.
148
In
April
2005, HAQ issued 1,500,000 shares of our common stock to the individuals set
forth below for an aggregate amount of $25,000 in cash, at an average purchase
price of approximately $0.0167 per share, as follows:
| Name | Number of Shares | Relationship to Us | ||
| John Pappajohn | 600,000 | Chairman and Secretary | ||
| Derace L. Schaffer, M.D. | 600,000 | Vice-Chairman and CEO | ||
| Matthew P. Kinley | 300,000 | President, Treasurer and director |
Further,
in June 2005, Mr. Pappajohn, Dr. Schaffer and Mr. Kinley transferred, for an
aggregate consideration per share which they paid us and pro rata to their
ownership of our common stock, an aggregate of 30,000 shares of our common
stock
equally to Mr. Berger and Mr. Schellhammer.
On
July
8, 2005, our Board of Directors authorized a stock dividend of approximately
.333333 shares of common stock for each outstanding share of common stock,
effectively lowering the initial purchase price to approximately $.0125 per
share.
On
July
22, 2005, our Board of Directors authorized a stock dividend of approximately
.125 shares of common stock for each outstanding share of common stock,
effectively lowering the initial purchase price to approximately $.0111 per
share.
The
holders of the majority of these shares will be entitled to require us, on
up to
two occasions, to register these shares. The holders of the majority of these
shares may elect to exercise these registration rights at any time after the
date on which these shares of common stock are released from the escrow entered
into in connection with our IPO. In addition, these stockholders have certain
"piggy-back" registration rights on registration statements filed subsequent
to
the date on which these shares of common stock are released from escrow. We
will
bear the expenses incurred in connection with the filing of any such
registration statements.
In
connection with our IPO, Mr. Pappajohn, Dr. Schaffer and Mr. Kinley loaned
HAQ a
total of $250,000 which was used to pay a portion of the expenses of our IPO,
such as SEC registration fees, NASD registration fees, AMEX listing fees and
legal and accounting fees and expenses. These loans were repaid out of the
net
proceeds of our IPO not placed in trust.
On
May 2,
2007, three individuals adopted stock purchase plans intended to comply with
the
provisions of SEC Rule 10b5-1. The shares were purchased through an NASD
member
firm at its discretion, subject to the terms of the plans. Pursuant to the
adopted plans, the individuals, John Pappajohn, Matthew Kinley and Derace
Schaffer agreed to make the following open market purchases:
|
Total
Shares
|
Share
Limit Per Day
|
||||||
|
John
Pappajohn
|
100,000
shares
|
10,000
shares
|
|||||
|
Derace
Schaffer
|
100,000
shares
|
10,000
shares
|
|||||
|
Matthew
Kinley
|
50,000
shares
|
5,000
shares
|
The
aggregate number of shares that were purchased did not exceed 250,000 shares.
Further, each adopted a daily limit on the number of shares purchased of not
more than 25,000 shares. The individuals purchased shares at prices up to
$7.60 per share. The plans expire on August 3, 2007.
In
accordance with their agreement with the representative of the underwriters
in
our IPO, Mr. Pappajohn, Dr. Schaffer and Mr. Kinley purchased, pursuant to
the
guidelines set forth in SEC Rule 10b5-1, an aggregate of 354,900 of our
warrants, for aggregate consideration of $386,070, on the open market at prices
up to $1.20 per warrant under established Rule 10b5-1 plans. The Rule 10b5-1
plans terminated on January 6, 2006.
149
We
agreed
to pay Equity Dynamics, Inc., an affiliated third party of which Mr. Pappajohn
is the President and principal stockholder, and Mr. Kinley a Senior Vice
President, approximately $7,500 per month for office space and certain
additional general and administrative services. A prior arrangement with an
affiliate of our Chief Executive Officer, Derace Schaffer, M.D., pursuant to
which we paid $1,500 a month for office space and certain general and
administrative services, as a portion of the $7,500, was terminated on December
31, 2005. As of December 31, 2005 and 2006, we have paid approximately $37,500
and $90,000, respectively, under these arrangements.
We
will
reimburse our officers and directors for any reasonable out-of- pocket business
expenses incurred by them in connection with certain activities on our behalf
such as identifying and investigating possible target businesses and business
combinations. There is no limit on the amount of accountable out-of-pocket
expenses reimbursable by us, which will be reviewed only by our Board or a
court
of competent jurisdiction if such reimbursement is challenged. As of December
31, 2005 and 2006, we have reimbursed such persons an aggregate of $67,642
and
94,314, respectively, in connection with these activities.
Persons
who were stockholders prior to our IPO, including our officers and directors,
will not receive reimbursement for any out-of- pocket expenses incurred by
them
to the extent that such expenses exceed the amount in the trust fund unless
the
business combination is consummated and there are sufficient funds available
for
reimbursement after such consummation. The financial interest of such persons
could influence their motivation in selecting a target business and thus, there
may be a conflict of interest when determining whether a particular business
combination is in the stockholders' best interest.
Other
than the reimbursable out-of-pocket expenses payable to our officers and
directors, no compensation or fees of any kind, including finders and consulting
fees, will be paid to any persons who were stockholders prior to our IPO,
officers or directors who owned our common stock prior to our IPO, or to any
of
their respective affiliates for services rendered to us prior to or with respect
to the business combination.
All
ongoing and future transactions between us and any of our officers and directors
or their respective affiliates, including loans by our officers and directors,
will be on terms believed by us to be no less favorable than are available
from
unaffiliated third parties and such transactions or loans, including any
forgiveness of loans, will require prior approval in each instance by a majority
of our uninterested "independent" directors (to the extent we have any) or
the
members of our board who do not have an interest in the transaction, in either
case who had access, at our expense, to our attorneys or independent legal
counsel.
Advisors
Maxim
Group LLC
HAQ
has
retained Maxim Group LLC, a registered broker dealer firm, to act as its advisor
in connection with the Merger with PharmAthene. In consideration for its
services, we will pay Maxim Group the sum of $500,000 if and only if the Merger
is completed. We retained Maxim on January 8, 2007. Maxim was retained to assist
us in formulating and preparing presentation materials related to obtaining
the
stockholder votes necessary to approve the Merger, as well as coordinating
with
our management and the management of PharmAthene meetings with HAQ stockholders
and the investment community to discuss the Merger. Maxim was not retained
to,
nor did it, assist our management with negotiating the terms of the Merger
with
PharmAthene and did not prepare any formal valuation analysis or fairness
opinion for the HAQ Board of Directors.
Maxim
Group served as the lead underwriter in HAQ’s IPO. As part of the IPO, Maxim
agreed to defer 1% of its underwriting commission ($720,000) until consummation
of a business combination. If the Merger with PharmAthene is completed, Maxim
will be entitled to its deferred underwriting commission. In addition, Maxim
Group holds an underwriter’s unit purchase option to purchase up to 225,000
units from our IPO (comprised of a total of 225,000 shares and 225,000
warrants), which option will expire without value if we do not complete a
business combination before July 28, 2007. As a result, Maxim Group may have
an
interest in having the Merger completed.
150
Bear,
Stearns & Co. Inc.
PharmAthene
entered into an agreement with Bear, Stearns & Co. Inc. on November 2, 2006
whereby PharmAthene retained Bear Stearns as its financial advisor in connection
with the proposed transaction with HAQ. As
an
initial payment against its total fee, Bear Stearns received an initial payment
of $500,000, and if the transaction is completed, the remainder of the total
$1,250,000 fee will be due and payable.
The
Bear
Stearns Companies, Inc. is the parent company of Bear, Stearns & Co. Inc.
and Bear Stearns Asset Management, Inc., which is the sole manager of Bear
Stearns Health Innoventures Management, LLC. Funds affiliated with Bear Stearns
Health Innoventures Management, LLC will beneficially own approximately 5.8%
of
the outstanding voting shares of the combined company (and 20.3% of the HAQ
8%
convertible notes) following the Merger. In addition, Elizabeth Czerepak, is
a
member of Bear Stearns Health Innoventures Management, LLC. and is expected
to
be a member of the Board of Directors of HAQ following the Merger.
151
BENEFICIAL
OWNERSHIP OF SECURITIES
The
following table sets forth information as of June 5, 2007, based on information
obtained from the persons named below, with respect to the beneficial ownership
of shares of HAQ common stock by (i) each person known by us to be the owner
of
more than 5% of our outstanding shares of HAQ common stock, (ii) each director
and (iii) all officers and directors as a group. Except as indicated in the
footnotes to the table, 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.
|
Name
and Address of Beneficial
Owner (1)
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class
|
|||||
|
John
Pappajohn (2)(3)
|
1,123,960
|
9.53
|
%
|
||||
|
Derace
L. Schaffer, M.D. (2)(4)
|
1,123,960
|
9.53
|
%
|
||||
|
Matthew
P. Kinley (2)(5)
|
561,980
|
4.79
|
%
|
||||
|
Edward
B. Berger (6)
|
34,500
|
*
|
|||||
|
Wayne
A. Schellhammer
|
22,500
|
*
|
|||||
|
Sapling,
LLC (7)
|
697,715
|
6.0
|
%
|
||||
|
Fir
Tree Recovery Master Fund, LP (7)
|
325,115
|
2.88
|
%
|
||||
|
QVT
Financial LP (8)
|
619,400
|
5.3
|
%
|
||||
|
Andrew
M. Weiss, PhD (9)
|
617,825
|
5.3
|
%
|
||||
|
All
directors and executive officers as a group (5) persons
|
2,866,900
|
24.35
|
%
|
||||
* Represents
beneficial ownership of less than 1%.
(1)
Includes shares of common stock issuable upon exercise of warrants which are
beneficially owned by certain of the persons named in the above table but which
are not exercisable until the later of (i) July 28, 2006 or (ii) the
consummation by us of a business combination (including our acquisition of
PharmAthene). Unless otherwise indicated, the business address of each of the
individuals is 2116 Financial Center, 666 Walnut Street, Des Moines, Iowa
50309.
(2)
On
May 2, 2007, three individuals adopted stock purchase plans intended to comply
with the provisions of SEC Rule 10b5-1. The shares were purchased through
an
NASD member firm at its discretion, subject to the terms of the plans. Pursuant
to the adopted plans, the individuals, John Pappajohn, Matthew Kinley and
Derace
Schaffer agreed to make the following open market purchases:
|
Total
Shares
|
Share
Limit Per Day
|
||||||
|
John
Pappajohn
|
100,000
shares
|
10,000
shares
|
|||||
|
Derace
Schaffer
|
100,000
shares
|
10,000
shares
|
|||||
|
Matthew
Kinley
|
50,000
shares
|
5,000
shares
|
The
aggregate number of shares that were purchased did not exceed 250,000 shares.
Further, each adopted a daily limit on the number of shares purchased which
in the aggregate was not more than 25,000 shares. The individuals purchased
shares at prices up to $7.60 per share. The plans expire on August 3,
2007.
(3)
Includes 141,960 warrants purchased on behalf of such person pursuant to the
guidelines set forth in SEC Rule 10b5-1 under a Rule 10b5-1 Plan. See footnote
1
above.
(4)
Includes 141,960 warrants purchased on behalf of such person pursuant to the
guidelines set forth in SEC Rule 10b5-1 under a Rule 10b5-1 Plan. See footnote
1
above.
(5)
Includes 70,980 warrants purchased on behalf of such person pursuant to the
guidelines set forth in SEC Rule 10b5-1 under a Rule 10b5-1 Plan. See footnote
1
above.
152
(6)
Includes 12,000 warrants purchased by Mr. Berger in open market purchases.
See
footnote 1 above.
(7)
Based
on information contained in a Statement on Schedule 13G filed by Sapling LLC
in
February 2007. Sapling may direct the vote and disposition of the 697,715 shares
of HAQ common stock, and Fir Tree Recovery may direct the vote and disposition
of 325,115 shares of HAQ common stock. The address of both Sapling LLC and
Fir
Tree Recovery is 535 Fifth Avenue, 31st Floor, New York, New York
10017.
(8)
Based
on information contained in a Statement on Schedule 13G filed by QVT Financial
LP on May 14, 2007. QVT Financial LP (“QVT Financial”) is the investment manager
for QVT Fund LP (the “Fund”), which beneficially owns 541,288 shares of HAQ
common stock. QVT Financial is also the investment manager for a separate
discretionary account managed for Deutsche Bank AG (the “Separate Account”),
which holds 78,112 shares of HAQ common stock. QVT Financial has the power
to
direct the vote and disposition of the HAQ common stock held by each of the
Fund
and the Separate Account. Accordingly, QVT Financial may be deemed to be
the
beneficial owner of an aggregate amount of 619,400 shares of HAQcommon stock,
consisting of the shares owned by the Fund and the shares held in the Separate
Account QVT Financial GP LLC, as General Partner of QVT Financial, may be
deemed
to beneficially own the same number of shares of HAQ common stock reported
by
QVT Financial. Daniel Gold and Lars Bader are each Managing Members of each
of
QVT Financial LP and QVT Financial GP LLC and may therefore be considered
beneficial holders of the securities held by QVT Financial
LP.
(9)
Based
on information contained in a Statement on Schedule 13G filed by Weiss Asset
Management, LLC, Weiss Capital, LLC and Andrew Weiss, PhD on June 4, 2007.
Shares reported for Andrew Weiss include shares beneficially owned by a private
investment partnership of which Weiss Asset Management is the sole general
partner and which may be deemed to be controlled by Mr. Weiss, who is the
Managing Member of Weiss Asset Management, and also includes shares held by
a
private investment corporation which may be deemed to be controlled by Mr.
Weiss, who is the managing member of Weiss Capital, LLC the Investment Manager
of such private investment corporation. Dr. Weiss disclaims beneficial ownership
of the shares reported herein as beneficially owned by him except to the extent
of his pecuniary interest therein.
Other
than the shares purchased by Messrs. Pappajohn and Kinley and Dr. Schaffer
under
10b5-1 plans (an aggregate of 250,000 shares), all of the shares of HAQ
common
stock held by our officers and directors were placed in escrow with Continental
Stock Transfer & Trust Company, as escrow agent, until the earliest of (i)
July 28, 2008; or (ii) the consummation of a liquidation, merger, stock
exchange
or other similar transaction which results in all of our stockholders having
the
right to exchange their shares of common stock for cash, securities or
other
property subsequent to our acquisition of PharmAthene.
During
the escrow period, the holders of these shares are not able to sell or
transfer
their securities except to their spouses and children or to trusts
established for their benefit, but will retain all other rights as our
stockholder including, without limitation, the right to vote their shares
of
common stock and the right to receive cash dividends, if declared. If dividends
are declared and payable in shares of common stock, such dividends will
also be
placed in escrow. If we are unable to effect a business combination and
liquidate, none of these stockholders will receive any portion of the
liquidation proceeds with respect to common stock owned by them prior to
HAQ’s
IPO.
As
described above, certain of our officers and directors determined to purchase
shares of our common stock in open market transactions prior to the Special
Meeting pursuant to Rule 10b5-1 stock purchase plans. Shares purchased
under
these plans (250,000 shares) are entitled to participate in the liquidation
of
the trust fund in the event the Merger is not approved. Our officers and
directors have advised us that they will vote the shares so purchased in
favor
of the Merger Proposal, Amendment Proposal, Incentive Plan Proposal and
Adjournment Proposal. As of June 5, 2007, a total of 250,000 shares have
been
purchased under these plans.
Beneficial
Ownership following the Merger:
Solely
for illustrative purposes, the following table is designed to set forth
information regarding the beneficial ownership of HAQ common stock of each
person who is anticipated to own greater than 5% of HAQ's outstanding common
stock and each person who will act in the capacity of officer or director
following the Merger with PharmAthene, based on the following
assumptions:
|
|
|
|
|
|
·
|
the
current ownership of the entities and individuals identified above
remains
unchanged;
|
|
|
|
|
|
|
·
|
the
capital structure of HAQ remains as prior to the Merger such that
only the
pre-Merger number of shares of 11,650,000 shares of common stock
remains
outstanding and has not increased as a result of any HAQ warrant
exercises; and
|
|
·
|
the
columns reflecting the beneficial ownership after consummation of
the
Merger assume the issuance of all 11,922,634 shares of HAQ common
stock
but no exercise of the options and warrants to purchase 577,366 shares
of
HAQ common stock, issued in the Merger and no conversion of any 8%
convertible notes issued in the Merger by HAQ.
|
153
|
Beneficial
Ownership Of
Healthcare
Acquisition Corp. Common Stock
On
June 6, 2007
|
Beneficial
Ownership Of
Healthcare
Acquisition Corp. Common Stock After Consummation of the
Merger
|
||||||||||||
|
Name
and Address of Beneficial
Owner (1)
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class
|
Amount
and Nature of Beneficial Ownership
|
Percent
of Class
|
|||||||||
|
John
Pappajohn (2)(3)
|
1,123,960
|
9.53
|
%
|
1,123,960
|
4.73
|
%
|
|||||||
|
Derace
L. Schaffer, M.D. (2)(4)
|
1,123,960
|
9.53
|
%
|
1,123,960
|
4.73
|
%
|
|||||||
|
Matthew
P. Kinley(2) (5)
|
561,980
|
4.79
|
%
|
561,980
|
2.37
|
%
|
|||||||
|
Edward
Berger (6)
|
34,500
|
2.95
|
%
|
34,500
|
*
|
||||||||
|
Wayne
A. Schellhammer
|
22,500
|
*
|
22,500
|
*
|
|||||||||
|
Sapling,
LLC (7)
|
697,715
|
6.0
|
%
|
697,715
|
2.9
|
%
|
|||||||
|
Fir
Tree Recovery Master Fund, LP (7)
|
325,115
|
2.88
|
%
|
325,115
|
1.3
|
%
|
|||||||
|
QVT
Financial LP (8)
|
619,400
|
5.3
|
%
|
619,400
|
|||||||||
|
Andrew
M. Weiss, PhD (9)
|
617,825
|
5.3
|
%
|
617,825
|
2.62
|
%
|
|||||||
|
James
H. Cavanaugh, Ph.D (10)
|
-
|
3,157,225
|
13.4
|
%
|
|||||||||
|
Steven
St. Peter, M.D. (11)
|
-
|
995
|
*
|
||||||||||
|
Elizabeth
Czerepak (12)
|
-
|
1,358,739
|
5.8
|
%
|
|||||||||
|
Joel
McCleary (13)
|
-
|
101,415
|
*
|
||||||||||
|
David
P. Wright (14)
|
-
|
164,242
|
*
|
||||||||||
|
Funds
affiliated with Bear Stearns Health Innoventures Management, LLC
(15)
|
-
|
1,357,744
|
5.8
|
%
|
|||||||||
|
Funds
affiliated with MPM Capital L.P. (16)
|
-
|
3,331,851
|
14.1
|
%
|
|||||||||
|
HealthCare
Ventures VII, L.P. (17)
|
-
|
3,154,736
|
13.4
|
%
|
|||||||||
| Nexia Corp. |
-
|
1,673,760
|
7.1
|
%
|
|||||||||
|
All
current directors and executive officers as a group (5)
persons
|
2,866,900
|
24.6
|
%
|
||||||||||
|
All
post-merger directors and executive officers as a group (7) persons
|
7,649,516
|
31.10
|
%
|
||||||||||
*
Represents beneficial ownership of less than 1%
(1)
Includes shares of HAQ common stock issuable upon exercise of warrants which
are
beneficially owned by certain of the persons named in the above table but which
are not exercisable until the later of (i) July 28, 2006 or (ii) the
consummation by us of a business combination. Unless otherwise indicated, the
business address of each of the individuals is 175 Admiral Cochrane Drive,
Suite
#101, Annapolis, MD 21401.
(2)
On
May 2, 2007, three individuals adopted stock purchase plans intended to comply
with the provisions of SEC Rule 10b5-1. The shares were purchased through an
NASD member firm at its discretion, subject to the terms of the plans. Pursuant
to the adopted plans, the individuals, John Pappajohn, Matt Kinley and Derace
Schaffer agreed to make the following open market purchases:
154
|
Total
Shares
|
Share
Limit Per Day
|
||||||
|
John
Pappajohn
|
100,000
shares
|
10,000
shares
|
|||||
|
Derace
Schaffer
|
100,000
shares
|
10,000
shares
|
|||||
|
Matt
Kinley
|
50,000
shares
|
5,000
shares
|
The
aggregate number of shares that were purchased did not exceed 250,000 shares.
Further, each adopted a daily limit on the number of shares purchased which
in the aggregate was not more than 25,000 shares. The individuals purchased
shares at prices up to $7.60 per share. The plans expire on August 3,
2007.
(3)
Includes 141,960 warrants and 100,000 shares of common stock purchased on behalf
of such person pursuant to the guidelines set forth in SEC Rule 10b5-1 under
a
Rule 10b5-1 Plan. See footnotes 1 and 2 above.
(4)
Includes 141,960 warrants and 100,000 shares of common stock purchased on behalf
of such person pursuant to the guidelines set forth in SEC Rule 10b5-1 under
with a Rule 10b5-1 Plan. See footnotes 1 and 2 above.
(5)
Includes 70,980 warrants and 50,000 shares of common stock purchased on behalf
of such person pursuant to the guidelines set forth in SEC Rule 10b5-1 under
a
Rule 10b5-1 Plan. See footnotes 1 and 2 above.
(6) Includes
12,000 warrants purchased by Mr. Berger in open market purchases. See footnote
1.
(7)
Based
on information contained in a Statement on Schedule 13G filed by Sapling LLC
in
February 2007. Sapling may direct the vote and disposition of the 697,715 shares
of HAQ common stock, and Fir Tree Recovery may direct the vote and disposition
of 325,115 shares of HAQ common stock. The address of both Sapling LLC and
Fir
Tree Recovery is 535 Fifth Avenue, 31st Floor, New York, New York
10017. Fir
Tree,
Inc. is the investment manager for each of Sapling LLC and Fir Tree Recovery
Master Fund, LP. Jeffrey Tannenbaum is the President of Fir Tree,
Inc. and
has
the power to vote or dispose of the securities held by these
entities.
(8)
Based
on information contained in a Statement on Schedule 13G filed by QVT Financial
LP on May 14, 2007. QVT Financial LP (“QVT Financial”) is the investment manager
for QVT Fund LP (the “Fund”), which beneficially owns 541,288 shares of HAQ
common stock. QVT Financial is also the investment manager for a separate
discretionary account managed for Deutsche Bank AG (the “Separate Account”),
which holds 78,112 shares of HAQ common stock. QVT Financial has the power
to
direct the vote and disposition of the HAQ common stock held by each of the
Fund
and the Separate Account. Accordingly, QVT Financial may be deemed to be
the
beneficial owner of an aggregate amount of 619,400 shares of HAQ common stock,
consisting of the shares owned by the Fund and the shares held in the Separate
Account QVT Financial GP LLC, as General Partner of QVT Financial, may be
deemed
to beneficially own the same number of shares of HAQ common stock reported
by
QVT Financial. Daniel Gold and Lars Bader are each managing members of each
of
QVT Financial LP and QVT Financial GP LLC and may therefore be considered
beneficial holders of the securities held by QVT Financial
LP.
(9)
Based
on information contained in a Statement on Schedule 13G filed by Weiss Asset
Management, LLC, Weiss Capital, LLC and Andrew Weiss, PhD on June 4, 2007.
Shares reported for Andrew Weiss include shares beneficially owned by a private
investment partnership of which Weiss Asset Management is the sole general
partner and which may be deemed to be controlled by Mr. Weiss, who is the
Managing Member of Weiss Asset Management, and also includes shares held
by a
private investment corporation which may be deemed to be controlled by Mr.
Weiss, who is the managing member of Weiss Capital, LLC the Investment Manager
of such private investment corporation. Dr. Weiss disclaims beneficial ownership
of the shares reported herein as beneficially owned by him except to the
extent
of his pecuniary interest therein.
(10) Dr.
Cavanaugh is a general partner of HealthCare Partners VII, L.P., which is the
general partner of HealthCare Ventures VII, L.P. In such capacity he may be
deemed to share voting and investment power with respect to 3,154,736 shares
of
HAQ common stock to be held by HealthCare Ventures VII, L.P. following the
Merger. Dr. Cavanaugh disclaims beneficial ownership of the shares reported
except to the extent of his proportionate pecuniary interest therein. Dr.
Cavanaugh’s beneficially owned shares will also include options to purchase
2,489 shares of HAQ common stock. Dr. Cavanaugh’s address is c/o Healthcare
Ventures VII, L.P., 44 Nassau Street, Princeton, New Jersey, 08542.
(11)
Consists of options to purchase 995 shares of HAQ common stock.
(12) Elizabeth
Czerepak is a member of Bear Stearns Health Innoventures Management, LLC, which
is the sole general partner of Bear Stearns Health Innoventures, L.P., Bear
Stearns Health Innoventures Offshore, L.P., BX, L.P. and Bear Stearns Health
Innoventures Employee Fund, L.P., and BSHI Members, LLC co-invests with these
funds. The shares reported are directly owned by Bear Stearns Health
Innoventures, L.P., Bear Stearns Health Innoventures Offshore, L.P., BX, L.P.,
Bear Stearns Health Innoventures Employee Fund, L.P. and BSHI Members, LLC.
In
her capacity as a member of Bear Stearns Health Innoventures Management, LLC,
Ms. Czerepak may be deemed to share voting and investment power with respect
to
1,357,744 shares beneficially owned by these funds. Czerepak disclaims
beneficial ownership of these shares except to the extent of her proportionate
pecuniary interest therein. Ms. Czerepak’s beneficially owned shares will also
include options to purchase 995 shares of HAQ common stock. Ms. Czerepak’s
address is c/o Bear Stearns Health Innoventures Management, LLC, 383 Madison
Avenue, New York, NY 10179.
155
(13)
Includes options to purchase 2,489 shares of HAQ common stock.
(14)
Includes options to purchase 113,696 shares of HAQ common stock.
(15) Consists
of 196,493 shares of HAQ common stock to be held by Bear Stearns Health
Innoventures, L.P. following the Merger, 161,652 shares of HAQ common stock
to
be held by Bear Stearns Health Innoventures Offshore, L.P. following the Merger,
780,812 shares of HAQ common stock to be held by BX, L.P. following the Merger,
127,464 shares of HAQ common stock to be held by Bear Stearns Health
Innoventures Employee Fund, L.P. following the Merger and 91,322 shares of
HAQ
common stock to be held by BSHI Members, LLC following the Merger. Elizabeth
Czerepak is a member of Bear Stearns Health Innoventures Management, LLC, which
is the sole general partner of Bear Stearns Health Innoventures, L.P., Bear
Stearns Health Innoventures Offshore, L.P., BX, L.P. and Bear Stearns Health
Innoventures Employee Fund, L.P., and BSHI Members, LLC co-invests with these
funds. Elizabeth Czerepak disclaims beneficial ownership of these shares except
to the extent of her proportionate pecuniary interest therein. The address
for
the Bear Stearns funds is 383 Madison Avenue, New York, New York,
10179.
(16) Consists
of 2,763,347 shares of HAQ common stock to be held by MPM
BioVentures III-QP, L.P. following the Merger, 233,530 shares of HAQ common
stock to be held by MPM BioVentures III GmbH & Co. Beteiligungs KG
following the Merger, 185,817 shares of HAQ common stock to be held by MPM
BioVentures III, L.P. following the Merger, 83,463 shares of HAQ common
stock to be held by MPM BioVentures III Parallel Fund, L.P. following the
Merger and 65,694 shares of HAQ common stock to be held by MPM Asset Management
Investors 2004 BVIII LLC following the Merger. MPM BioVentures III GP, L.P.
and
MPM BioVentures III LLC are the direct and indirect general partners of MPM
BioVentures III-QP, L.P., MPM BioVentures III GmbH & Co. Beteiligungs KG,
MPM BioVentures III, L.P. and MPM BioVentures III Parallel Fund, L.P. The
members of MPM BioVentures III LLC and MPM Asset Management Investors 2004
BVIII
LLC are Luke Evnin, Ansbert Gadicke, Nicholas Galakatos, Dennis Henner, Nicholas
Simon III, Michael Steinmetz and Kurt Wheeler, who disclaim beneficial ownership
of these shares except to the extent of their proportionate pecuniary interest
therein. The address for the MPM Funds is The John Hancock Tower, 200 Clarendon
Street, 54th
floor,
Boston, MA, 02116.
(17)
Consists of 3,154,736 shares of HAQ common stock to be held by HealthCare
Ventures VII, L.P. following the Merger. Dr. Cavanaugh is a general partner
of
HealthCare Partners VII, L.P., which is the general partner of HealthCare
Ventures VII, L.P. In such capacity he may be deemed to share voting and
investment power with respect to these shares. Dr. Cavanaugh disclaims
beneficial ownership of these shares except to the extent of his proportionate
pecuniary interest therein. The address for Healthcare Ventures VII, L.P. is
44
Nassau Street, Princeton, New Jersey 08542.
156
All
of
the shares of HAQ common stock outstanding prior to the effective date of its
IPO (all of which are owned by our directors and officers) were placed in escrow
with Continental Stock Transfer & Trust Company, as escrow agent, and
shall remain in escrow until the earliest of:
|
|
|
|
|
|
·
|
July
28, 2008;
|
|
|
|
|
|
|
·
|
HAQ's
liquidation; or
|
|
|
|
|
|
|
·
|
the
consummation of a liquidation, merger, stock exchange or other similar
transaction which results in all of HAQ's stockholders having the
right to
exchange their shares of common stock for cash, securities or other
property.
|
The
certificates representing shares currently in escrow may be replaced by
certificates representing the shares of the renamed entity.
During
the escrow period, the holders of these shares will not be able to sell or
transfer their securities, except to their spouses and children or trusts
established for their benefit, but will retain all other rights as HAQ
stockholders, including, without limitation, the right to vote their shares
of
common stock and the right to receive cash dividends, if declared. If dividends
are declared and payable in shares of common stock, such dividends will also
be
placed in escrow. If the Merger is not consummated and HAQ is liquidated, none
of HAQ's existing stockholders owning shares of HAQ's common stock prior to
its
IPO will receive any portion of the liquidation proceeds with respect to common
stock owned by them prior to the date of the IPO.
PRICE
RANGE OF SECURITIES AND DIVIDENDS
PharmAthene
Historical
market price information regarding the PharmAthene common stock is not provided
because there is no public market for PharmAthene stock. On June 15, 2007,
there
were approximately 23 record holders of PharmAthene common stock, 1 record
holder of PharmAthene Series A Preferred Stock, 13 record holders of PharmAthene
Series B Preferred Stock, and 15 record holders of PharmAthene Series C
Preferred Stock.
To
date,
PharmAthene has not paid cash dividends on its stock and does not intend to
pay
any cash dividends in the foreseeable future.
Dividends
Upon Completion of the Merger
Upon
completion of the Merger with PharmAthene, HAQ does not intend to pay any
dividends on its shares of common stock. Rather, it intends to reinvest any
earnings back into the combined company. At this time, the combined company
anticipates that it will retain any earnings and will not pay dividends in
the
foreseeable future. The combined company also expects that any loan or credit
facilities that it enters into will limit its ability to pay
dividends.
157
DESCRIPTION
OF SECURITIES
General
HAQ
is
currently authorized to issue 100,000,000 shares of common stock, par value
$.0001, and 1,000,000 shares of preferred stock, par value $.0001. As of May
31,
2007, 11,650,000 shares of common stock are outstanding, held by 6 record
holders. No shares of preferred stock are currently outstanding.
Common
stock
HAQ's
stockholders are entitled to one vote for each share held of record on all
matters to be voted on by stockholders. In connection with the vote required
for
any business combination, all of HAQ's existing stockholders, including all
of
its officers and directors, have agreed to vote their respective shares of
common stock owned by them immediately prior to HAQ's IPO in accordance with
the
majority of the votes cast by the public stockholders. This voting arrangement
shall not apply to shares included in units purchased in HAQ's IPO or purchased
following the offering in the open market by any of HAQ's initial stockholders,
officers and directors. Additionally, HAQ's initial stockholders, officers
and
directors will vote all of their shares in any manner they determine, in their
sole discretion, with respect to any other items that come before a vote of
HAQ's stockholders.
HAQ
will
proceed with a business combination only if: (i) HAQ obtains the
affirmative vote of a majority of the shares of HAQ’s common stock issued in its
IPO that vote on the Merger Proposal at the Special Meeting and (ii) public
stockholders owning less than 20% of the shares sold in HAQ's IPO exercise
their
conversion rights discussed below.
If
HAQ is
forced to liquidate prior to a business combination, holders of HAQ's shares
of
common stock purchased in its IPO are entitled to share ratably in the trust
fund, inclusive of any interest, and any net assets remaining available for
distribution to them after payment of liabilities. HAQ's initial stockholders
have agreed to waive their rights to share in any distribution with respect
to
common stock owned by them prior to the IPO if HAQ is forced to
liquidate.
HAQ's
stockholders have no conversion, preemptive or other subscription rights and
there are no sinking fund or redemption provisions applicable to the common
stock, except that public stockholders have the right to have their shares
of
common stock converted to cash equal to their pro rata share of the trust fund
if they vote against the business combination and the business combination
is
approved and completed. Public stockholders who convert their stock into their
share of the trust fund still have the right to exercise the warrants that
they
received as part of the units.
Holders
of 2,250,000 shares of common stock that were outstanding prior to HAQ's IPO
are
entitled to registration rights. The holders of the majority of these shares
are
entitled to make up to two demands that HAQ register the resale of these shares.
The holders of the majority of these shares can elect to exercise these
registration rights at any time after the date on which these shares of common
stock are released from escrow. In addition, these stockholders have certain
“piggy-back'' registration rights on registration statements filed subsequent
to
the date on which these shares of common stock are released from escrow. HAQ
will bear the expenses incurred in connection with the filing of any such
registration statements.
Preferred
stock
HAQ's
amended
and restated certificate
of incorporation authorizes the issuance of 1,000,000 shares of blank check
preferred stock with such designation, rights and preferences as may be
determined from time to time by HAQ's Board of Directors. Accordingly, HAQ's
Board of Directors is empowered, without stockholder approval, to issue
preferred stock with dividend, liquidation, conversion, voting or other rights
which could adversely affect the voting power or other rights of the holders
of
common stock, although the underwriting agreement prohibits HAQ, prior to a
business combination, from issuing preferred stock which participates in any
manner in the proceeds of the trust fund, or which votes as a class with the
common stock on a business combination. HAQ may issue some or all of the
preferred
stock to
effect a business combination, although HAQ will not issue any preferred stock
in the Merger with PharmAthene. In addition, the preferred stock could be
utilized as a method of discouraging, delaying or preventing a change in control
of HAQ. Although HAQ does not currently intend to
issue
any shares of preferred stock, HAQ cannot assure you that it will not do so
in
the future.
158
Warrants
HAQ
currently has warrants outstanding to purchase 9,400,000 shares of HAQ common
stock. Each warrant entitles the registered holder to purchase one share of
HAQ's common stock at a price of $6.00 per share, subject to adjustment as
discussed below, at any time commencing on the later of:
| § |
the
completion of a business combination; or
|
| § |
July 28,
2006.
|
The
warrants will expire on July 28, 2009, at 5:00 p.m., New York City time.
HAQ may call the warrants for redemption, in whole and not in part, at a price
of $.01 per warrant at any time after the warrants become exercisable, upon
not
less than 30 days' prior written notice of redemption to each warrant holder,
if, and only if, the last reported sale price of the common stock equals or
exceeds $11.50 per share, for any 20 trading days within a 30 trading day period
ending on the third business day prior to the notice of redemption to warrant
holders.
The
warrants are issued in registered form under a warrant agreement between
Continental Stock Transfer & Trust Company, as warrant agent, and
HAQ.
The
exercise price and number of shares of common stock issuable on exercise of
the
warrants may be adjusted in certain circumstances including in the event of
a
stock dividend, or HAQ's recapitalization, reorganization, merger or
consolidation. However, the warrants will not be adjusted for issuances of
common stock at a price below their respective exercise prices.
The
warrants may be exercised upon surrender of the warrant certificate on or prior
to the expiration date at the offices of the warrant agent, with the exercise
form on the reverse side of the warrant certificate completed and executed
as
indicated, accompanied by full payment of the exercise price, by certified
check
payable to HAQ, for the number of warrants being exercised. The warrant holders
do not have the rights or privileges of holders of common stock or any voting
rights until they exercise their warrants and receive shares of common stock.
After the issuance of shares of common stock upon exercise of the warrants,
each
holder will be entitled to one vote for each share held of record on all matters
to be voted on by stockholders.
No
fractional shares will be issued upon exercise of the warrants. If, upon
exercise of the warrants, a holder would be entitled to receive a fractional
interest in a share, HAQ will, upon exercise, round up to the nearest whole
number the number of shares of common stock to be issued to the warrant
holder.
On
January 23, 2007, HAQ entered into a warrant clarification agreement to clarify
the terms of the warrant agreement between HAQ and Continental Stock Transfer
& Trust Company, as warrant agent. The warrant clarification agreement
clarifies that (i) if a registration statement covering the securities issuable
upon the exercise of a warrant was not effective at the time a holder desired
to
exercise the instrument, then the warrant could expire unexercised, and (ii)
in
no event would HAQ be obligated to pay cash or other consideration to the
holders of the warrants or "net-cash settle" the obligations of HAQ under the
warrants.
Unit
Purchase Option
In
connection with its IPO, HAQ agreed to sell to Maxim Group LLC, the
underwriter in HAQ's IPO, for $100, an option to purchase up to a total of
225,000 units. The units issuable upon exercise of this option are identical
to
those offered in HAQ's IPO except that the warrants included in the option
have an exercise price of $7.50 (125% of the exercise price of the warrants
included in the units sold in the IPO). This option is exercisable at
$10.00 per unit commencing on the later of the consummation of a business
combination and July 28, 2007 and expiring July 28, 2010. The
exercise price and number of units issuable upon exercise of the option may
be
adjusted in certain circumstances including in the event of a stock dividend,
or HAQ's recapitalization, reorganization, merger or consolidation.
However, the option will not be adjusted for issuances of common stock at a
price below its exercise price or for any issuances in connection with the
Merger.
159
On
January 23, 2007, HAQ and Maxim Partners, LLC entered into an amendment to
the
unit purchase option. Such amendment clarifies that (i) if a registration
statement covering the securities issuable upon the exercise of the unit
purchase option was not effective at the time Maxim desired to exercise it,
then
the unit purchase option could expire unexercised, and (ii) in no event would
HAQ be obligated to pay cash or other consideration to the holders of the unit
purchase option or "net-cash settle" the obligations of HAQ under the unit
purchase option.
Transfer
Agent and Warrant Agent
The
transfer agent for HAQ's common stock and warrant agent for HAQ's warrants
is
Continental Stock Transfer & Trust Company, 17 Battery Place, New York,
New York 10004.
STOCKHOLDER
PROPOSALS
We
are
not anticipating holding any meeting of stockholders during 2007 other than
the
Special Meeting. Assuming that the Merger with PharmAthene is consummated,
the
HAQ 2008 annual meeting of stockholders will be held on or about April 30,
2008,
unless the date is changed by the Board of Directors. If you are a stockholder
and you want to include a proposal in the proxy statement for the 2007 annual
meeting, you need to provide it to us by no later than December 31,
2007.
WHERE
YOU CAN FIND MORE INFORMATION
HAQ
files
reports, proxy statements and other information with the SEC as required by
the
Securities Exchange Act of 1934, as amended.
You
may
read and copy reports, proxy statements and other information filed by HAQ
with
the SEC at the Securities and Exchange Commission public reference room located
at 100 F Street, N.E., Washington, D.C. 20549.
You
may
obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. You may also obtain copies of the materials described
above at prescribed rates by writing to SEC, Public Reference Section, 100
F
Street, N.E., Washington, D.C. 20549.
HAQ
files
its reports, proxy statements and other information electronically with the
SEC.
You may access information on HAQ at the SEC web site containing reports, proxy
statements and other information at: http://www.sec.gov.
Information
and statements contained in this proxy statement, or any annex to this proxy
statement, are qualified in all respects by reference to the copy of the
relevant contract or other annex filed as an exhibit to this proxy
statement.
All
information contained in this proxy statement relating to HAQ has been supplied
by HAQ, and all such information relating to PharmAthene has been supplied
by
PharmAthene. Information provided by either of HAQ or PharmAthene does not
constitute any representation, estimate or projection of the other.
If
you
would like additional copies of this proxy statement, or if you have questions
about the acquisition or the financing, you should contact:
Healthcare
Acquisition Corp.
Attn:
Matthew Kinley
2116
Financial Center
666
Walnut Street, Des Moines, Iowa 50309
(515)
244-5746.
160
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
|
|
|
Page
|
|
Healthcare
Acquisition Corp.: Financial Statements
|
|
|
|
Report
of Independent Registered Public Accounting
Firm
|
|
FS-1
|
|
Balance
Sheets as of December 31, 2006 and December 31, 2005
|
|
FS-2
|
|
Statements
of Income for the year ended December 31, 2006, for the period
from April
25, 2005 (inception) to December 31, 2005, for the period from
April 25,
2005 (inception) to December 21, 2006
|
|
FS-3
|
|
Statement of
Stockholders’ Equity for the period from April 25, 2005 (inception) to
December 31, 2005 and the year ended December 31, 2006
|
|
FS-4
|
|
Statement
of Cash Flows for the year ended December 31, 2006, the period
from April
25, 2005 (inception) to December 31, 2005, and the period from
April 25,
2005 (inception) to December 31, 2006.
|
|
FS-5
|
|
Notes
to Unaudited Condensed Financial Statements
|
|
FS-6
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
FS-16
|
|
Balance
Sheet as of December 31, 2005
|
|
FS-17
|
|
Statements
of Operations from April 25, 2005 (inception) to December 31,
2005
|
|
FS-18
|
|
Statement
of Changes in Stockholders’ Equity from April 25, 2005 (inception) to
December 31, 2005
|
|
FS-19
|
|
Statement
of Cash Flows from April 25, 2005 (inception) to December 31,
2005
|
|
FS-20
|
|
Notes
to Financial Statements
|
|
FS-21
|
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Financial
Statements
March 31,
2007
Contents
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Audited
Financial Statements
|
|
|
Balance
Sheets
|
F-2
|
|
Statements
of Income
|
F-3
|
|
Statements
of Stockholders' Equity
|
F-4
|
|
Statements
of Cash Flows
|
F-5
|
|
Notes
to Financial Statements
|
F-6
to F-13
|
PharmAthene, Inc.
Consolidated
Financial Statements
Years
ended December 31, 2006, 2005 and 2004
Contents
|
Report
of Independent Auditors
|
F-15
|
|
Audited
Consolidated Financial Statements
|
|
|
Consolidated
Balance Sheets
|
F-16
|
|
Consolidated
Statements of Operations
|
F-17
|
|
Consolidated
Statements of Convertible Redeemable Preferred Stock
and
Stockholders’ Deficit
|
F-18
|
|
Consolidated
Statements of Cash Flows
|
F-19
|
|
Notes
to Consolidated Financial Statements
|
F-20
to F-50
|
PharmAthene, Inc.
Condensed
Consolidated Financial Statements
Three
Months Ending March 31, 2007 and 2006
|
Condensed
Consolidated Financial Statements
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets
|
F-52
|
|
Condensed
Consolidated Statements of Operations
|
F-53
|
|
Condensed
Consolidated Statements of Cash Flows
|
F-54
|
|
Notes
to Condensed Consolidated Financial Statements
|
F-55
to F-77
|
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Healthcare
Acquisition Corp.
We
have
audited the accompanying balance sheets of Healthcare Acquisition Corp.
(a
corporation in the development stage) as of December 31, 2006 and 2005,
and the
related statements of income, stockholders' equity, and cash flows for
the year
ended December 31, 2006 and the period from April 25, 2005 (inception)
to
December 31, 2005, and the period from April 25, 2005 (inception) to December
31, 2006. 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 auditing standards of the Public
Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of Healthcare Acquisition Corp.
(a
corporation in the development stage) as of December 31, 2006 and 2005,
and the
results of its operations and its cash flows for the year ended December
31,
2006, the period from April 25, 2005 (inception) to December 31, 2005,
and the
period from April 25, 2005 (inception) to December 31, 2006, in conformity
with
accounting principles generally accepted in the United States of
America.
/s/
LWBJ,
LLP
LWBJ,
LLP
West
Des
Moines, Iowa
March
12,
2007
FS-1
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Balance
Sheets
December
31, 2006 and 2005
|
2006
|
2005
|
||||||
|
Assets
|
|||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
675,305
|
$
|
1,398,181
|
|||
|
Cash
held in Trust Fund
|
70,887,371
|
68,636,069
|
|||||
|
Prepaid
expense
|
54,115
|
52,500
|
|||||
|
Deferred
legal fees
|
121,953
|
-
|
|||||
|
Total
current assets
|
71,738,744
|
70,086,750
|
|||||
|
Total
assets
|
$
|
71,738,744
|
$
|
70,086,750
|
|||
|
Liabilities
and stockholders' equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
160,514
|
$
|
6,996
|
|||
|
Accrued
expenses
|
90,996
|
98,996
|
|||||
|
State
income tax payable
|
139,034
|
48,000
|
|||||
|
Capital
based taxes payable
|
64,072
|
115,000
|
|||||
|
Deferred
revenue
|
591,579
|
141,543
|
|||||
|
Total
current liabilities
|
1,046,195
|
410,535
|
|||||
|
Common
stock, subject to possible redemption
|
|||||||
|
1,879,060
shares, at conversion value
|
13,578,807
|
13,578,807
|
|||||
|
Stockholders'
equity
|
|||||||
|
Preferred
stock, $.0001 par value, 1,000,000 shares authorized; none
|
|||||||
|
issued
and outstanding
|
-
|
-
|
|||||
|
Common
stock, $.0001 par value, 100,000,000 shares authorized;
|
|||||||
|
11,650,000
shares issued and outstanding (which includes 1,879,060
|
|||||||
|
subject
to possible conversion)
|
1,165
|
1,165
|
|||||
|
Common
stock warrants (9,400,000 outstanding)
|
-
|
-
|
|||||
|
Paid-in
capital in excess of par
|
55,818,948
|
55,818,948
|
|||||
|
Equity
accumulated during the development stage
|
1,293,629
|
277,295
|
|||||
|
Total
stockholders' equity
|
57,113,742
|
56,097,408
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
71,738,744
|
$
|
70,086,750
|
|||
See
accompanying notes to the financial statements
FS-2
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Statements
of Income
|
For
the Year Ended December 31, 2006
|
For
the Period from April 25, 2005 (inception) to December 31,
2005
|
For
the Period from April 25, 2005 (inception) to December 31,
2006
|
||||||||
|
Revenues
|
||||||||||
|
Interest
income
|
$
|
46,446
|
$
|
19,548
|
$
|
65,994
|
||||
|
Interest
and dividend income from Trust Fund
|
1,801,266
|
566,526
|
2,367,792
|
|||||||
|
Total
revenues
|
1,847,712
|
586,074
|
2,433,786
|
|||||||
|
Costs
and expenses
|
||||||||||
|
Capital
based taxes
|
153,285
|
115,000
|
268,285
|
|||||||
|
Management
fees
|
90,000
|
37,986
|
127,986
|
|||||||
|
Insurance
|
95,815
|
37,500
|
133,315
|
|||||||
|
Professional
fees
|
156,391
|
31,036
|
187,427
|
|||||||
|
Travel
|
100,719
|
27,741
|
128,460
|
|||||||
|
General
and administrative
|
48,168
|
9,016
|
57,184
|
|||||||
|
Formation
costs
|
0
|
2,500
|
2,500
|
|||||||
|
Total
expenses
|
644,378
|
260,779
|
905,157
|
|||||||
|
Income
before taxes
|
1,203,334
|
325,295
|
1,528,629
|
|||||||
|
Provision
for income taxes
|
187,000
|
48,000
|
235,000
|
|||||||
|
Net
income
|
$
|
1,016,334
|
$
|
277,295
|
$
|
1,293,629
|
||||
|
Basic
earnings per share
|
$
|
0.09
|
$
|
0.04
|
||||||
|
Diluted
earnings per share
|
$
|
0.07
|
$
|
0.03
|
||||||
|
Weighted
average basic shares outstanding
|
11,650,000
|
7,869,200
|
||||||||
|
Weighted
average diluted shares outstanding
|
13,634,353
|
8,323,201
|
||||||||
See
accompanying notes to the financial statements
FS-3
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Statements
of Stockholders’ Equity
For
the
years ended December 31, 2006 and 2005
|
Equity
|
|||||||||||||||||||
|
Accumulated
|
|||||||||||||||||||
|
Common
|
Common
|
Common
|
Additional
|
During
the
|
|||||||||||||||
|
Stock
|
Par
|
Stock
|
Paid
in
|
Development
|
Stockholders'
|
||||||||||||||
|
Shares
|
Amount
|
Warrants
|
Capital
|
Stage
|
Equity
|
||||||||||||||
|
Common
shares issued to initial
|
|||||||||||||||||||
|
stockholders
at $.0111 per share
|
2,250,000
|
$
|
150
|
-
|
$
|
24,850
|
$
|
-
|
$
|
25,000
|
|||||||||
|
Stock
dividend - July 8, 2005
|
-
|
50
|
-
|
(50
|
)
|
-
|
-
|
||||||||||||
|
Stock
dividend - July 22, 2005
|
-
|
25
|
-
|
(25
|
)
|
-
|
-
|
||||||||||||
|
Sale
of 9,000,000 units, net of
|
|||||||||||||||||||
|
underwriters'
discount and offering
|
|||||||||||||||||||
|
expenses
(includes 1,799,100 shares
|
|||||||||||||||||||
|
subject
to possible conversion)
|
9,000,000
|
900
|
-
|
66,364,920
|
-
|
66,365,820
|
|||||||||||||
|
Proceeds
of exercise of underwriters'
|
|||||||||||||||||||
|
over-allotment
option for 400,000
|
|||||||||||||||||||
|
units,
net of commissions. (includes
|
|||||||||||||||||||
|
79,960
shares subject to possible
|
|||||||||||||||||||
|
conversion).
|
400,000
|
40
|
-
|
3,007,960
|
-
|
3,008,000
|
|||||||||||||
|
Proceeds
subject to possible
|
|||||||||||||||||||
|
conversion
of 1,879,060 shares
|
-
|
-
|
-
|
(13,578,807
|
)
|
-
|
(13,578,807
|
)
|
|||||||||||
|
Proceeds
from issuance of unit options
|
-
|
-
|
-
|
100
|
-
|
100
|
|||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
277,295
|
277,295
|
|||||||||||||
|
Balance
at December 31, 2005
|
11,650,000
|
$
|
1,165
|
-
|
$
|
55,818,948
|
$
|
277,295
|
$
|
56,097,408
|
|||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
1,016,334
|
1,016,334
|
|||||||||||||
|
Balance
at December 31, 2006
|
11,650,000
|
$
|
1,165
|
-
|
$
|
55,818,948
|
$
|
1,293,629
|
$
|
57,113,742
|
|||||||||
See
accompanying notes to the financial statements
FS-4
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Statements
of Cash Flows
|
For
the Year Ended December 31, 2006
|
For
the Period from April 25, 2005 (inception) to December 31,
2005
|
For
the Period from April 25, 2005 (inception) to December 31,
2006
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
income
|
$
|
1,016,334
|
$
|
277,295
|
$
|
1,293,629
|
||||
|
Adjustments
to reconcile net income
|
||||||||||
|
to
net cash provided by operating activities:
|
||||||||||
|
Increase
in prepaid expenses
|
(1,615
|
)
|
(52,500
|
)
|
(54,115
|
)
|
||||
|
Increase
in deferred legal fees
|
(121,953
|
)
|
(121,953
|
)
|
||||||
|
Increase
in accounts payable
|
||||||||||
|
and
accrued expenses
|
145,518
|
24,996
|
170,514
|
|||||||
|
Increase
in deferred revenue
|
450,036
|
141,543
|
591,579
|
|||||||
|
Increase
in income tax payable
|
91,034
|
48,000
|
139,034
|
|||||||
|
Increase
(decrease) in capital based
|
||||||||||
|
taxes
payable
|
(50,928
|
)
|
115,000
|
64,072
|
||||||
|
Net
cash provided by operating activities
|
1,528,426
|
554,334
|
2,082,760
|
|||||||
|
Investing
activities
|
||||||||||
|
Increase
in cash held in Trust Fund
|
(2,251,302
|
)
|
(68,636,069
|
)
|
(70,887,371
|
)
|
||||
|
Financing
activities
|
||||||||||
|
Gross
proceeds from Initial Public Offering
|
-
|
75,200,000
|
75,200,000
|
|||||||
|
Proceeds
from issuance of unit option
|
-
|
100
|
100
|
|||||||
|
Proceeds
from notes payable, stockholders
|
-
|
250,000
|
250,000
|
|||||||
|
Proceeds
from issuance of common stock
|
-
|
25,000
|
25,000
|
|||||||
|
Payments
made on notes payable, stockholders
|
-
|
(250,000
|
)
|
(250,000
|
)
|
|||||
|
Payments
made for costs of initial public offering
|
-
|
(5,745,184
|
)
|
(5,745,184
|
)
|
|||||
|
Net
cash provided by financing activities
|
-
|
69,479,916
|
69,479,916
|
|||||||
|
Net
increase (decrease) in cash
|
(722,876
|
)
|
1,398,181
|
675,305
|
||||||
|
Cash,
beginning of period
|
1,398,181
|
-
|
-
|
|||||||
|
Cash,
end of period
|
$
|
675,305
|
$
|
1,398,181
|
$
|
675,305
|
||||
| Supplemental schedule of non-cash financing activities | ||||||||||
|
Accrual
of deferred offering costs
|
$
|
-
|
$
|
80,996
|
$
|
80,996
|
||||
See
accompanying notes to the financial statements
FS-5
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements
December
31, 2006
1. Nature
of Operations and Summary of Significant Accounting
Policies
Nature
of Operations
Healthcare
Acquisition Corp. (the "Company") was incorporated in Delaware on April
25,
2005, as a blank check company whose objective is to acquire, through a
merger,
capital stock exchange, asset acquisition or other similar business combination,
an operating business.
Primarily
all activity through December 31, 2006 relates to the Company's formation,
the
public offering described below and evaluation of prospective target businesses.
The Company has selected December 31 as its fiscal year-end. The registration
statement for the Company's initial public offering ("Offering") was declared
effective July 28, 2005. The Company consummated the Offering on August
3, 2005
(and further consummated the sale of 400,000 units subject to the underwriters'
over-allotment option on August 16, 2005) and received net proceeds of
approximately $69,450,000 (Note 2). The Company's management has broad
discretion with respect to the specific application of the net proceeds
of this
Offering, although substantially all of the net proceeds of the Offering
are
intended to be generally applied toward consummating a business combination
with
an operating domestic or international company in the healthcare industry,
a
"target business".
In
evaluating a prospective target business, the Company will consider, among
other
factors, the financial condition and results of operation; growth potential;
experience and skill of management; availability of additional personnel;
capital requirements; competitive position; barriers to entry into other
industries; stage of development of the products, processes or services;
degree
of current or potential market acceptance of the products, processes or
services; proprietary features and degree of intellectual property or other
protection of the products, processes or services; regulatory environment
of the
industry; and costs associated with effecting the business combination.
These
criteria are not intended to be exhaustive. Any evaluation relating to
the
merits of a particular business combination will be based, to the extent
relevant, on the above factors, as well as other considerations deemed
relevant
by the Company in effecting a business combination consistent with its
business
objective.
There
are
no assurances the Company will be able to successfully effect a business
combination. An amount of $67,928,000 or approximately 90.3% of the gross
proceeds of this offering (approximately $7.23 per unit) are being held
in an
interest-bearing trust account at JP Morgan Chase NY Bank maintained by
Continental Stock Transfer & Trust Company ("Trust Fund") and invested in
United States Treasury Bills or short-term securities having a maturity
of one
hundred eighty (180) days or less, until the earlier of (i) the consummation
of
the Company's first business combination or (ii) the liquidation of the
Company.
In October 2005, the Company entered into Amendment No. 1 (the "Amendment")
to
the Investment Management Trust Agreement by and among the Company, Continental
Stock Transfer and Trust Company and Maxim Group, LLC. Pursuant to the
terms of
the Amendment, the Company is permitted to invest the funds held in trust
not
only in treasury bills having a maturity of 180 days or less, but also
in any
money market fund meeting the requirements of a "cash item" as set forth
in
Section 3(a)(1)(C) of the Investment Company Act of 1940, as amended, and
any
regulations, no-action letters, exemptive orders or interpretations promulgated
thereunder. The Company believes that the Amendment will
allow it greater flexibility in investing the funds held in trust from
its
initial public offering, as well as reducing its tax liability, by allowing
the
Company to invest in tax-free money market funds. The placing of funds
in the
Trust Fund may not protect those funds from third party claims against
the
Company. Although the Company will seek to have all vendors, prospective
target
businesses or other entities it engages, execute agreements with the Company
waiving any right, title, interest or claim of any kind in or to any monies
held
in the Trust Fund, there is no guarantee that they will execute such agreements.
The Company's officers have severally agreed that they will be personally
liable
to ensure that the proceeds in the Trust Fund are not reduced by the claims
of
target businesses or vendors or other entities that are owed money by the
Company for services rendered or contracted for or products sold to the
Company.
However, there can be no assurance that the officers will be able to satisfy
those obligations. The remaining proceeds, not held in trust, may be used
to pay
for business, legal and accounting expenses, expenses which may be incurred
related to the investigation and selection of a target business, and the
negotiation of an agreement to acquire a target business, and for continuing
general and administrative expenses.
FS-6
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 1. |
Nature
of Operations and Summary of Significant Accounting Policies
(continued)
|
Nature
of Operations (continued)
The
Company's first business combination must be with a business with a fair
market
value of at least 80% of the Company's net asset value at the time of
acquisition. The Company, after signing a definitive agreement for the
acquisition of a target business, will submit such transaction for stockholder
approval. In the event that stockholders owning 20% or more of the outstanding
stock excluding, for this purpose, those persons who were stockholders
prior to
the Offering, vote against the business combination or request their conversion
right as described below, the business combination will not be consummated.
All
of the Company's stockholders prior to the Offering, including all of the
officers and directors of the Company ("Initial Stockholders"), have agreed
to
vote their 2,250,000 founding shares of common stock in accordance with
the vote
of the majority in interest of all other stockholders of the Company ("Public
Stockholders") with respect to any business combination. After consummation
of
the Company's first business combination, all of these voting safeguards
will no
longer be applicable.
With
respect to the first business combination which is approved and consummated,
any
Public Stockholder who voted against the business combination may demand
that
the Company redeem his or her shares. The per share redemption price will
equal
the amount in the Trust Fund as of the record date for determination of
stockholders entitled to vote on the business combination divided by the
number
of shares of common stock held by Public Stockholders at the consummation
of the
Offering. Accordingly, Public Stockholders holding 19.99% of the aggregate
number of shares owned by all Public Stockholders may seek redemption of
their
shares in the event of a business combination. Such Public Stockholders
are
entitled to receive their per share interest in the Trust Fund computed,
without
regard to the shares held by Initial Stockholders. Accordingly, a portion
of the
net proceeds from the Offering (19.99% of the amount held in the Trust
Fund) has
been classified as common stock subject to possible conversion in the
accompanying December 31, 2006 balance sheet and 19.99% of the related
interest
earned on cash held in the Trust Fund has been recorded as deferred
revenue.
FS-7
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 1. |
Nature
of Operations and Summary of Significant Accounting Policies
(continued)
|
The
Company's Amended and Restated Certificate of Incorporation provides for
mandatory liquidation of the Company, without stockholder approval, in
the event
that the Company does not consummate a business combination within eighteen
(18)
months from the date of the consummation of the Offering, or twenty-four
(24)
months from the consummation of the Offering if certain extension criteria
have
been satisfied. Having
satisfied the extension criteria, the Company now has until August 3, 2007
to
complete its business combination (see proposed merger discussed in Note
10.).
In
the
event of liquidation, it is likely that the per share value of the residual
assets remaining available for distribution (including Trust Fund assets)
will
be less than the initial public offering price per share in the Offering
(assuming no value is attributed to the Warrants contained in the Units
to be
offered in the Offering discussed in Note 2.)
Net
Income Per Common Share
Net
income per share is computed by dividing net income by the weighted-average
number of shares of common stock outstanding during the period.
Earnings
Per Share
Basic
earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted-average number of common shares
(the denominator) for the period. The computation of diluted earnings per
share
is similar to basic earnings per share, except that the denominator is
increased
to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares had been issued.
The
denominator in the calculation is based on the following weighted-average
number
of common shares at December 31:
|
2006
|
2005
|
||||||
| Basic | |||||||
|
Add:
|
11,650,000
|
7,869,200
|
|||||
| Shares issuable pursuant to | |||||||
|
Common
Stock Warrants
|
1,984,353
|
454,001
|
|||||
|
Diluted
|
13,634,353
|
8,323,201
|
|||||
As
stated
in Note 8, Warrants began trading separately from the Company's stock on
October
6, 2005.
FS-8
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 1. |
Nature
of Operations and Summary of Significant Accounting Policies
(continued)
|
Derivative
Financial Instruments
Derivative
financial instruments consist of Warrants issued as part of the Offering,
as
described in Note 2, and a Purchase Option that was sold to an underwriter
as
described in Note 5. Based on Emerging Issues Task Force 00-19, Accounting
for
Derivative Financial Instruments Indexed to, and Potentially Settle in,
a
Company's Own Stock, the issuance of the Warrants and sale of the Purchase
Option were reported in permanent equity and accordingly, there is no impact
on
the Company's financial position and results of operation, except for the
$100
in proceeds from sale of the Purchase Option. Subsequent changes in fair
value
will not be recognized as long as the Warrants and Purchase Option continue
to
be classified as equity instruments.
At
date
of issuance the Company had determined the Purchase Option had a fair market
value of approximately $850,000 using a Black-Scholes pricing model.
On
January 23, 2007, the Company entered into agreements to clarify the terms
of
the Warrants and Purchase Option as follows: (1) if a registration statement
covering the securities issuable upon the exercise of a Warrant or the
Purchase
Option was not effective at the time a holder desired to exercise the
instrument, then the Warrant or Purchase Option could expire unexercised,
and
(2) in no event would the Company be obligated to pay cash or other
consideration to the holders of the Warrants or the Purchase Option or
“net-cash
settle” the obligations of the Company under any such
agreements.
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 at the date of the financial statements and the reported amounts
of
expenses during the reporting period. Actual results could differ from
those
estimates.
Income
Taxes
Current
tax expense related entirely to state taxes, amounted to $187,000 and $48,000
for the years ended December 31, 2006 and 2005, respectively.
At
December 31, 2006, the Company had a net operating loss carryforward for
federal
income tax purposes of approximately $1,055,000, which is available to
offset
future federal taxable income.
Deferred
income taxes are provided for the differences between the basis of assets
and
liabilities for financial reporting and income tax purposes. A valuation
allowance is established to reduce deferred tax assets to the amount expected
to
be realized.
The
Company recorded a deferred income tax asset for the tax effect of net
operating
loss carryforwards and temporary differences related to revenue recognition
aggregating to approximately $576,000 and $145,000 for the years ended
December 31, 2006 and 2005, respectively. In recognition of the uncertainty
regarding the ultimate amount of income tax benefits to be derived, the
Company
had recorded a full valuation allowance at December 31, 2006 and
2005.
FS-9
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 1. |
Nature
of Operations and Summary of Significant Accounting Policies
(continued)
|
The
effective tax rate differs from the statutory rate of 35% primarily due
to
substantially all interest being tax exempt for federal tax purposes and
the
valuation allowance.
Recent
Accounting Pronouncements
In
July
2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes” (FIN 48). FIN 48 clarifies the accounting and reporting for
uncertainty in income taxes recognized in accordance with SFAS No. 109,
“Accounting for Income Taxes”. This Interpretation prescribes a recognition
threshold and measurement attribute for financial statement recognition
and
measurement of a tax position taken or expected to be taken in a tax return,
and
also provides guidance on various related matters such as derecognition,
interest and penalties, and disclosure. The Company will adopt FIN 48 in
the
first quarter of 2007, and does not expect the adoption of this interpretation
to have a material impact on its Financial Statements.
| 2. |
Initial
Public Offering
|
On
July
28, 2005, the Company sold 9,000,000 units ("Units") in the Offering. On
August
16, 2005 an additional 400,000 Units were sold. Each Unit consists of one
share
of the Company's common stock, $.0001 par value and one Redeemable Common
Stock
Purchase Warrant ("Warrant"). Each Warrant entitles the holder to purchase
from
the Company one share of common stock at an exercise price of $6.00 commencing
the later of the completion of a business combination with a target business
or
one (1) year from the effective date of the Offering and expiring four
(4) years
from the effective date of the Offering. The Warrants will be redeemable
by the
Company at a price of $.01 per Warrant, upon thirty (30) days notice after
the
Warrants become exercisable, only in the event that the last sales price
of the
common stock is at least $11.50 per share for any twenty (20) trading days
within a thirty (30) trading-day period ending on the third day prior to
date on
which notice of redemption is given. The
Warrants
began trading separately from the Company's common stock on October 5,
2005.In
connection with the Offering, the Company paid the underwriter a discount
of 6%
of the gross proceeds of the Offering and a non-accountable expense allowance
of
1% of the gross proceeds of the Offering.
| 3. |
Notes
Payable, Stockholders
|
The
Company issued unsecured promissory notes to three Initial Stockholders,
amounting to $250,000, who are also officers. These notes were non-interest
bearing and were repaid from the proceeds of this Offering.
FS-10
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 4. |
Unit
Option
|
In
connection with the Offering, the Company issued to the representative
of the
underwriters for $100, an option to purchase up to a total of 225,000 units,
exercisable at $10 per unit ("Purchase Option"). In lieu of payment of
the
exercise price in cash, the holder of the Purchase Option has the right
(but not
the obligation) to convert any exercisable portion of the Purchase Option
into
units using a cashless exercise based on the difference between current
market
value of the units and its exercise price. The Warrants issued in conjunction
with these units are identical to those offered by the prospectus, except
that
they have an exercise price of $7.50 (125% of the exercise price of the
warrants
included in the Units sold in the offering). This option commences on the
later
of the consummation of a business combination and one (1) year from the
date of
the prospectus and expiring five (5) years from the date of the prospectus.
Additionally, the option may not be sold, transferred, assigned, pledged
or
hypothecated for a one-year period (including the foregoing 180-day period)
following July 28, 2005. However, the option may be transferred to any
underwriter and selected dealer participating in the offering and their
bona
fide officers or partners. The purchase option grants to holders demand
and
"piggy back" rights for periods of five (5) and seven (7) years, respectively,
from July 28, 2005 with respect to the registration under the Securities
Act of
the securities directly and indirectly issuable upon exercise of the option.
The
Company will bear all fees and expenses attendant to registering the securities,
other than underwriting commissions, which will be paid for by the holders
themselves. The exercise price and number of units issuable upon exercise
of the
option may be adjusted in certain circumstances, including in the event
of a
stock dividend, or our recapitalization, reorganization, merger or
consolidation. However, the option will not be adjusted for issuances of
common
stock at a price below its exercise price.
| 5. |
Commitments
and Contingencies
|
The
Company presently occupies office space in one location, provided by an
affiliate of an Initial Stockholder. This affiliate has agreed that, until
the
Company consummates a business combination, it will make such office space,
as
well as certain office and secretarial services, available to the Company,
as
may be required by the Company from time to time. The Company currently
pays
this affiliate $7,500 per month for such services under an office services
agreement. Upon completion of a business combination or liquidation, the
Company
will no longer be required to pay this monthly fee.
The
Company has engaged a representative of the underwriters, on a non-exclusive
basis, as its agent for the solicitation of the exercise of the Warrants.
To the
extent not inconsistent with the guidelines of the NASD and the rules and
regulations of the Securities and Exchange Commission, the Company has
agreed to
pay the representative for bona fide services rendered, a commission equal
to 4%
of the exercise price for each Warrant exercised more than one (1) year
after
July 28, 2005 if the exercise was solicited by the underwriters. In addition
to
soliciting, either orally or in writing, the exercise of the Warrants,
the
representative's services may also include disseminating information, either
orally or in writing, to Warrant holders about the Company or the market
for its
securities, and assisting in the processing of the exercise of the Warrants.
No
compensation will be paid to the representative upon the exercise of the
Warrants if:
FS-11
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| · |
the
market price of the underlying shares of common stock is lower
than the
exercise price;
|
| · |
the
holder of the Warrants has not confirmed in writing that the
underwriters
solicited the exercise;
|
| · |
the
Warrants are held in a discretionary
account;
|
| · |
the
Warrants are exercised in an unsolicited transaction;
or
|
| · |
the
arrangement to pay the commission is not disclosed in the prospectus
provided to Warrant holders at the time of
exercise.
|
The
Initial Stockholders, who are holders of 2,250,000 issued and outstanding
shares
of common stock, are entitled to registration rights pursuant to an agreement
signed on the effective date of the Offering. The holders of the majority
of
these shares are entitled to request the Company, on up to two (2) occasions,
to
register these shares. The holders of the majority of these shares can
elect to
exercise these registration rights at any time after the date on which
these
shares of common stock are released from escrow. In addition, these stockholders
have certain "piggy-back" registration rights on registration statements
filed
subsequent to the date on which these shares of common stock are released
from
escrow. The Company will bear the expenses incurred in connection with
the
filing of any such registration statements.
| 6. |
Preferred
Stock
|
The
Company is authorized to issue 1,000,000 shares of preferred stock with
such
designations, voting and other rights and preferences, as may be determined
from
time to time by the board of directors.
| 7. |
Common
Stock
|
On
July
8, 2005, the Company's board of directors authorized a .333333 to 1 stock
dividend. On July 22, 2005, the Company's board of directors authorized
a .125
to 1 stock dividend. All references in the accompanying financial statements
to
the number of shares of stock have been retroactively restated to reflect
these
transactions.
| 8. |
Common
Stock Warrants
|
Each
Warrant entitles the holder to purchase from the Company one share of common
stock at an exercise price of $6.00 commencing the later of the completion
of a
business combination with a target business or one (1) year from the effective
date of the Offering and expiring four (4) years from the effective date
of the
Offering. The Warrants will be redeemable by the Company at a price of
$.01 per
Warrant, upon thirty (30) days notice after the Warrants become exercisable,
only in the event that the last sales price of the common stock is at least
$11.50 per share for any twenty (20) trading days within a thirty (30)
trading-day period ending on the third day prior to date on which notice
of
redemption is given. The warrants began trading separately from the Company's
common stock on October 6, 2005.
FS-12
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 9. |
Summarized
Quarterly Data (unaudited)
|
Financial
information for each quarter for the period from April 25, 2005 (inception)
to
December 31, 2006 is as follows:
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
||||||||||
|
2005
|
2005
|
2005
|
2005
|
||||||||||
|
Total
revenue
|
$
|
-
|
$
|
-
|
$
|
206,261
|
$
|
379,813
|
|||||
|
Income
(loss) from operations
|
-
|
(2,500
|
)
|
156,476
|
171,319
|
||||||||
|
Net
income (loss)
|
-
|
(2,500
|
)
|
146,476
|
133,319
|
||||||||
|
Basic
earnings per share
|
-
|
-
|
.02
|
.01
|
|||||||||
|
Diluted
earnings per share
|
-
|
-
|
.02
|
.01
|
|||||||||
|
March
31,
|
June
30,
|
September
30,
|
December
31,
|
||||||||||
|
2006
|
2006
|
2006
|
2006
|
||||||||||
|
Total
revenue
|
$
|
405,023
|
$
|
466,048
|
$
|
484,485
|
$
|
492,156
|
|||||
|
Income
from operations
|
237,450
|
337,894
|
359,141
|
268,849
|
|||||||||
|
Net
income
|
204,450
|
283,894
|
301,141
|
226,849
|
|||||||||
|
Basic
earnings per share
|
.02
|
.02
|
.03
|
.02
|
|||||||||
|
Diluted
earnings per share
|
.01
|
.02
|
.02
|
.02
|
|||||||||
| 10. |
Subsequent
Event
|
On
January 19, 2007, the Company signed a plan of merger with PharmAthene,
Inc.
Pursuant
to the terms of the agreement, and subject to certain adjustments as hereafter
described, PharmAthene stockholders and noteholders will receive:
|
(i)
|
an
aggregate of 12,500,000 shares of the Company’s common stock;
|
|
|
(ii)
|
$12,500,000
in 8% convertible notes of the Company in exchange for $11,800,000
of
currently-outstanding 8% convertible PharmAthene notes, pursuant
to a Note
Exchange Agreement; and
|
|
|
(iii)
|
up
to $10,000,000 in milestone payments (if certain conditions are
met).
|
It
is
anticipated that shareholders of PharmAthene, Inc. will own at least 52%
of the
outstanding basic shares of the combined company, which is anticipated
to remain
listed on the American Stock Exchange. The transaction is subject to certain
approvals required by the Company and PharmAthene, Inc. shareholders as
described in their articles of incorporation (see Note 1 for the Company’s
requirements), and as prescribed by the rules and regulations of the American
Stock Exchange, as well as other regulatory approvals and other customary
closing conditions.
In
connection with the above, effective January 19, 2007, the Company entered
into
an advisory agreement related to the Company’s merger with PharmAthene, Inc.
Under the terms of this agreement, the Company will pay a success fee of
$500,000 upon successful completion of the transaction. The Company will
also
pay expenses, not to exceed an aggregate of $15,000, regardless of the
successful closing of the transaction.
FS-13
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Healthcare
Acquisition Corp.
We
have
reviewed the accompanying balance sheets of Healthcare Acquisition Corp.
as of
March 31, 2007, and the related statements of operations and cash flows
for the
three months ended March 31, 2007 and 2006, the period from April 25, 2005
(inception) to March 31, 2006, and the period from April 25, 2005 (inception)
to
March 31, 2007. We have also reviewed the statement of stockholders' equity
for
the period from April 25, 2005 (inception) to March 31, 2007. These financial
statements are the responsibility of the Company's management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and
making
inquiries of persons responsible for financial and accounting matters.
It is
substantially less in scope than an audit conducted in accordance with
the
standards of the Public company Accounting Oversight Board, the objective
of
which is the expression of an opinion regarding the financial statements
taken
as a whole. Accordingly, we do not express such an opinion.
Based
on
our reviews, we are not aware of any material modifications that should
be made
to the financial statements referred to above for them to be in conformity
with
United States generally accepted accounting principles.
We
have
previously audited, in accordance with auditing standards of the Public
Company
Accounting Oversight Board (United States), the balance sheet of Healthcare
Acquisition Corp. as of December 31, 2006, and the related statements of
income,
Stockholders' equity and cash flows for the period from April 25, 2005
(inception) to March 31, 2006 (not presented herein); and in our report
dated
March 12, 2007, we expressed an unqualified opinion on those financial
statements.
/s/
LWBJ,
LLP
LWBJ,
LLP
West
Des
Moines, Iowa
May
8,
2007
F-1
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Balance
Sheets
|
March
31, 2007
|
December
31, 2006
|
||||||
|
Assets
|
(audited)
|
||||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
467,388
|
$
|
675,305
|
|||
|
Cash
held in Trust Fund
|
71,486,888
|
70,887,371
|
|||||
|
Prepaid
expense
|
48,396
|
54,115
|
|||||
|
Deferred
merger fees
|
372,570
|
121,953
|
|||||
|
Total
current assets
|
72,375,242
|
71,738,744
|
|||||
|
Total
assets
|
$
|
72,375,242
|
$
|
71,738,744
|
|||
|
Liabilities
and stockholders' equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Accounts
payable
|
$
|
354,654
|
$
|
160,514
|
|||
|
Accrued
expenses
|
83,496
|
90,996
|
|||||
|
State
income tax payable
|
160,000
|
139,034
|
|||||
|
Capital
based taxes payable
|
32,136
|
64,072
|
|||||
|
Deferred
revenue
|
711,422
|
591,579
|
|||||
|
Total
current liabilities
|
1,341,708
|
1,046,195
|
|||||
|
Common
stock, subject to possible redemption
|
|||||||
|
1,879,060
shares, at conversion value
|
13,578,807
|
13,578,807
|
|||||
|
Stockholders'
equity
|
|||||||
|
Preferred
stock, $.0001 par value, 1,000,000 shares
|
|||||||
|
authorized;
none issued and outstanding
|
-
|
-
|
|||||
|
Common
stock, $.0001 par value, 100,000,000 shares
|
|||||||
|
authorized;
11,650,000 shares issued and outstanding
|
|||||||
|
(which
includes 1,879,060 subject to possible conversion)
|
1,165
|
1,165
|
|||||
|
Common
stock warrants (9,400,000 outstanding)
|
-
|
-
|
|||||
|
Paid-in
capital in excess of par
|
55,818,948
|
55,818,948
|
|||||
|
Equity
accumulated during the development stage
|
1,634,614
|
1,293,629
|
|||||
|
Total
stockholders' equity
|
57,454,727
|
57,113,742
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
72,375,242
|
$
|
71,738,744
|
|||
See
accompanying notes to the financial statements
F-2
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Statements
of Income
|
For
the Three Months Ended
March
31, 2007
|
For
the Three Months Ended
March
31, 2006
|
For
the Period from April 25, 2005 (inception) to March 31,
2007
|
||||||||
|
Revenues
|
||||||||||
|
Interest
income
|
$
|
6,641
|
$
|
14,310
|
$
|
72,635
|
||||
|
Interest
and dividend income from Trust Fund
|
479,674
|
390,713
|
2,847,466
|
|||||||
|
Total
revenues
|
486,315
|
405,023
|
2,920,101
|
|||||||
|
Costs
and expenses
|
||||||||||
|
Capital
based taxes
|
32,136
|
41,168
|
300,421
|
|||||||
|
Management
fees
|
22,500
|
22,500
|
150,486
|
|||||||
|
Insurance
|
24,070
|
22,500
|
157,385
|
|||||||
|
Professional
fees
|
7,625
|
45,820
|
195,052
|
|||||||
|
Travel
|
17,055
|
19,403
|
145,515
|
|||||||
|
General
and administrative
|
20,978
|
16,182
|
78,162
|
|||||||
|
Formation
costs
|
-
|
-
|
2,500
|
|||||||
|
Total
expenses
|
124,364
|
167,573
|
1,029,521
|
|||||||
|
Income
before taxes
|
361,951
|
237,450
|
1,890,580
|
|||||||
|
Provision
for income taxes
|
20,966
|
33,000
|
255,966
|
|||||||
|
Net
income
|
$
|
340,985
|
$
|
204,450
|
$
|
1,634,614
|
||||
|
Basic
earnings per share
|
$
|
0.03
|
$
|
0.02
|
||||||
|
Diluted
earnings per share
|
$
|
0.02
|
$
|
0.01
|
||||||
|
Weighted
average basic shares outstanding
|
11,650,000
|
11,650,000
|
||||||||
|
Weighted
average diluted shares outstanding
|
13,667,801
|
13,725,325
|
||||||||
See
accompanying notes to the financial statements
*
See
Weighted average calculation tab
F-3
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Statements
of Stockholders' Equity
For
the
period from April 25, 2005 (inception) to March 31, 2007
|
Common
Stock
Shares
|
Common
Par
Amount
|
Common
Stock
Warrants
|
Additional
Paid
in
Capital
|
Equity
Accumulated
During
the
Development
Stage
|
Stockholders'
Equity
|
||||||||||||||
|
Common
shares issued to initial stockholders at $.0111 per share
|
2,250,000
|
$
|
150
|
-
|
$
|
24,850
|
$
|
-
|
$
|
25,000
|
|||||||||
|
Stock
dividend - July 8, 2005
|
-
|
50
|
-
|
(50
|
)
|
-
|
-
|
||||||||||||
|
Stock
dividend - July 22, 2005
|
-
|
25
|
-
|
(25
|
)
|
-
|
-
|
||||||||||||
|
Sale
of 9,000,000 units, net of underwriters' discount and offering
expenses
(includes 1,799,100 shares subject to possible conversion)
|
9,000,000
|
900
|
-
|
66,364,920
|
-
|
66,365,820
|
|||||||||||||
|
Proceeds
of exercise of underwriters' over-allotment option for 400,000
units, net
of commissions. (includes 79,960 shares subject to possible
conversion).
|
400,000
|
40
|
-
|
3,007,960
|
-
|
3,008,000
|
|||||||||||||
|
Proceeds
subject to possible conversion of 1,879,060 shares
|
-
|
-
|
-
|
(13,578,807
|
)
|
-
|
(13,578,807
|
)
|
|||||||||||
|
Proceeds
from issuance of unit options
|
-
|
-
|
-
|
100
|
-
|
100
|
|||||||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
277,295
|
277,295
|
|||||||||||||
|
Balance
at December 31, 2005
|
11,650,000
|
$
|
1,165
|
-
|
$
|
55,818,948
|
$
|
277,295
|
$
|
56,097,408
|
|||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
1,016,334
|
1,016,334
|
|||||||||||||
|
Balance
at December 31, 2006
|
11,650,000
|
$
|
1,165
|
-
|
$
|
55,818,948
|
$
|
1,293,629
|
$
|
57,113,742
|
|||||||||
|
Net
income
|
-
|
-
|
-
|
-
|
340,985
|
340,985
|
|||||||||||||
|
Balance
at March 31, 2007
|
11,650,000
|
$
|
1,165
|
-
|
$
|
55,818,948
|
$
|
1,634,614
|
$
|
57,454,727
|
|||||||||
See
accompanying notes to the financial statements
F-4
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Statements
of Cash Flows
|
For
the Three Months Ended
March
31, 2007
|
For
the Three Months Ended
March
31, 2006
|
For
the Period from April 25, 2005 (inception) to March 31,
2007
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
income
|
$
|
340,985
|
$
|
204,450
|
$
|
1,634,614
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Decrease
(increase) in prepaid expenses
|
5,719
|
2,172
|
(48,396
|
)
|
||||||
|
Increase
in deferred merger fees
|
(250,617
|
)
|
-
|
(372,570
|
)
|
|||||
|
Increase
in accounts payable and accrued expenses
|
186,640
|
34,232
|
357,154
|
|||||||
|
Increase
in deferred revenue
|
119,843
|
97,617
|
711,422
|
|||||||
|
Increase
in income tax payable
|
20,966
|
33,000
|
160,000
|
|||||||
|
Increase
(decrease) in capital based taxes payable
|
(31,936
|
)
|
41,293
|
32,136
|
||||||
|
Net
cash provided by operating activities
|
391,600
|
412,764
|
2,474,360
|
|||||||
|
Investing
activities
|
||||||||||
|
Increase
in cash held in Trust Fund
|
(599,517
|
)
|
(488,330
|
)
|
(71,486,888
|
)
|
||||
|
Financing
activities
|
||||||||||
|
Gross
proceeds from Initial Public Offering
|
-
|
-
|
75,200,000
|
|||||||
|
Proceeds
from issuance of unit option
|
-
|
-
|
100
|
|||||||
|
Proceeds
from notes payable, stockholders
|
-
|
-
|
250,000
|
|||||||
|
Proceeds
from issuance of common stock
|
-
|
-
|
25,000
|
|||||||
|
Payments
made on notes payable, stockholders
|
-
|
-
|
(250,000
|
)
|
||||||
|
Payments
made for costs of initial public offering
|
-
|
-
|
(5,745,184
|
)
|
||||||
|
Net
cash provided by financing activities
|
-
|
-
|
69,479,916
|
|||||||
|
Net
increase (decrease) in cash
|
(207,917
|
)
|
(75,566
|
)
|
467,388
|
|||||
|
Cash,
beginning of period
|
675,305
|
1,398,181
|
-
|
|||||||
|
Cash,
end of period
|
$
|
467,388
|
$
|
1,322,615
|
$
|
467,388
|
||||
|
Supplemental
schedule of non-cash financing activities
|
||||||||||
|
Accrual
of deferred offering costs
|
$
|
-
|
$
|
-
|
$
|
80,996
|
||||
See
accompanying notes to the financial statements
F-5
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements
March
31,
2007
| 1. |
Basis
of Presentation
|
The
financial statements at March 31, 2007 and for the three months ended March
31,
2007, and the period from April 25, 2005 (inception) to March 31, 2007
are
unaudited. In the opinion of management, all adjustments (consisting of
normal
accruals) have been made that are necessary to present fairly the financial
position of Healthcare Acquisition corp. (the "Company") as of March 31,
2007
and the results of its operations and its cash flow for the three months
ended
March 31, 2007 and the period from April 25, 2005 (inception) to March
31, 2007.
Operating results for the interim period are not necessarily indicative
of the
results to be expected for the full year.
| 2. |
Nature
of Operations and Summary of Significant Accounting
Policies
|
Nature
of Operations
Healthcare
Acquisition Corp. (the "Company") was incorporated in Delaware on April
25,
2005, as a blank check company whose objective is to acquire, through a
merger,
capital stock exchange, asset acquisition or other similar business combination,
an operating business.
Primarily
all activity through December 31, 2006, relates to the Company's formation
and
the public offering described below identifying and evaluating prospective
target businesses. On January 19, 2007, the Company signed an agreement
and plan
of merger with PharmAthene, Inc. (see proposed business combination discussed
in
Note 3.) The Company has until August 3, 2007 to complete the business
combination.
The
registration statement for the Company's initial public offering ("Offering")
was declared effective July 28, 2005. The Company consummated the Offering
on
August 3, 2005 (and further consummated the sale of 400,000 units subject
to the
underwriters' over-allotment option on August 16, 2005) and received net
proceeds of approximately $69,450,000 (Note 4). The Company's management
has
broad discretion with respect to the specific application of the net proceeds
of
this Offering, although substantially all of the net proceeds of the Offering
are intended to be generally applied toward consummating a business combination
with an operating domestic or international company in the healthcare industry,
a "target business".
F-6
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 2. |
Nature
of Operations and Summary of Significant Accounting Policies
(continued)
|
Nature
of Operations (continued)
There
are
no assurances the Company will be able to successfully effect a business
combination. An amount of $67,928,000 or approximately 90.3% of the gross
proceeds of this offering (approximately $7.23 per unit) are being held
in an
interest-bearing trust account at JP Morgan Chase NY Bank maintained by
Continental Stock Transfer & Trust Company ("Trust Fund") and invested in
United States Treasury Bills or short-term securities having a maturity
of 180
days or less, until the earlier of (i) the consummation of the Company's
first
business combination or (ii) the liquidation of the Company. In October
2005,
the Company entered into Amendment No. 1 (the "Amendment") to the Investment
Management Trust Agreement by and among the Company, Continental Stock
Transfer
and Trust Company and Maxim Group, LLC. Pursuant to the terms of the Amendment,
the Company is permitted to invest the funds held in trust not only in
treasury
bills having a maturity of 180 days or less, but also in any money market
fund
meeting the requirements of a "cash item" as set forth in Section 3(a)(1)(C)
of
the Investment Company Act of 1940, as amended, and any regulations, no-action
letters, exemptive orders or interpretations promulgated thereunder. The
Company
believes that the Amendment allows it greater flexibility in investing
the funds
held in trust from its initial public offering, as well as reducing its
tax
liability, by allowing the Company to invest in tax-free money market funds.
The
placing of funds in the Trust Fund may not protect those funds from third
party
claims against the Company. Although the Company will seek to have all
vendors,
prospective target businesses or other entities it engages, execute agreements
with the Company waiving any right, title, interest or claim of any kind
in or
to any monies held in the Trust Fund, there is no guarantee that they will
execute such agreements. The Company's officers have severally agreed that
they
will be personally liable to ensure that the proceeds in the Trust Fund
are not
reduced by the claims of target businesses or vendors or other entities
that are
owed money by the Company for services rendered or contracted for or products
sold to the Company. However, there can be no assurance that the officers
will
be able to satisfy those obligations. The remaining proceeds, not held
in trust,
may be used to pay for business, legal and accounting expenses, expenses
which
may be incurred related to the investigation and selection of a target
business,
and the negotiation of an agreement to acquire a target business, and for
continuing general and administrative expenses.
The
Company's first business combination must be with a business with a fair
market
value of at least 80% of the Company's net asset value at the time of
acquisition. The Company, after signing a definitive agreement for the
acquisition of a target business, will submit such transaction for stockholder
approval. In the event that stockholders owning 20% or more of the outstanding
stock excluding, for this purpose, those persons who were stockholders
prior to
the Offering, vote against the business combination or request their conversion
right as described below, the business combination will not be consummated.
All
of the Company's stockholders prior to the Offering, including all of the
officers and directors of the Company ("Initial Stockholders"), have agreed
to
vote their 2,250,000 founding shares of common stock in accordance with
the vote
of the majority in interest of all other stockholders of the Company ("Public
Stockholders") with respect to any business combination. After consummation
of
the Company's first business combination, all of these voting safeguards
will no
longer be applicable.
F-7
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 2. |
Nature
of Operations and Summary of Significant Accounting Policies
(continued)
|
Nature
of Operations (continued)
With
respect to the first business combination which is approved and consummated,
any
Public Stockholder who voted against the business combination may demand
that
the Company redeem his or her shares. The per share redemption price will
equal
the amount in the Trust Fund as of the record date for determination of
stockholders entitled to vote on the business combination divided by the
number
of shares of common stock held by Public Stockholders at the consummation
of the
Offering. Accordingly, Public Stockholders holding 19.99% of the aggregate
number of shares owned by all Public Stockholders may seek redemption of
their
shares in the event of a business combination. Such Public Stockholders
are
entitled to receive their per share interest in the Trust Fund computed,
without
regard to the shares held by Initial Stockholders. Accordingly, a portion
of the
net proceeds from the Offering (19.99% of the amount held in the Trust
Fund) has
been classified as common stock subject to possible conversion in the
accompanying March 31, 2007 balance sheet and 19.99% of the related interest
earned on cash held in the Trust Fund has been recorded as deferred
revenue.
The
Company's Amended and Restated Certificate of Incorporation provides for
mandatory liquidation of the Company, without stockholder approval, in
the event
that the Company does not consummate a business combination within eighteen
(18)
months from the date of the consummation of the Offering, or twenty-four
(24)
months from the consummation of the Offering if certain extension criteria
have
been satisfied. Having satisfied the extension criteria, the Company now
has
until August 3, 2007 to complete its business combination (see proposed
business
combination discussed in Note 3.) In the event of liquidation, it is likely
that
the per share value of the residual assets remaining available for distribution
(including Trust Fund assets) will be less than the initial public offering
price per share in the Offering (assuming no value is attributed to the
Warrants
contained in the Units to be offered in the Offering discussed in Note
4.)
Net
Income Per Common Share
Net
income per share is computed by dividing net income by the weighted-average
number of shares of common stock outstanding during the period.
Derivative
Financial Instruments
Derivative
financial instruments consist of Warrants issued as part of the Offering,
as
described in Note 4, and a Purchase Option that was sold to an underwriter
as
described in Note 6. Based on Emerging Issues Task Force 00-19, Accounting
for
Derivative Financial Instruments Indexed to, and Potentially Settle in,
a
Company's Own Stock, the issuance of the Warrants and sale of the Purchase
Option were reported in permanent equity and accordingly, there is no impact
on
the Company's financial position and results of operation, except for the
$100
in proceeds from sale of the Purchase Option. Subsequent changes in fair
value
will not be recognized as long as the Warrants and Purchase Option continue
to
be classified as equity instruments.
F-8
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 2. |
Nature
of Operations and Summary of Significant Accounting Policies
(continued)
|
Derivative
Financial Instruments (continued)
At
date
of issuance, the Company had determined the Purchase Option had a fair
market
value of approximately $850,000 using a Black-Scholes pricing
model.
On
January 23, 2007, the Company entered into agreements to clarify the terms
of
the Warrants and Purchase Option as follows: (1) if a registration statement
covering the securities issuable upon the exercise of a Warrant or the
Purchase
Option was not effective at the time a holder desired to exercise the
instrument, then the Warrant or Purchase Option could expire unexercised,
and
(2) in no event would the Company be obligated to pay cash or other
consideration to the holders of the Warrants or the Purchase Option or
"net-cash
settle" the obligations of the Company under any such agreements.
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 at the date of the financial statements and the reported amounts
of
expenses during the reporting period. Actual results could differ from
those
estimates.
Income
Taxes
Deferred
income taxes are provided for the differences between the basis of assets
and
liabilities for financial reporting and income tax purposes. A valuation
allowance is established to reduce deferred tax assets to the amount expected
to
be realized.
The
effective tax rate differs from the statutory rate of 35% primarily due
to
substantially all interest being tax exempt for federal tax purposes and
the
valuation allowance.
Recent
Accounting Pronouncements
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes ("FIN
48"). FIN 48 clarifies the accounting and reporting for uncertainty in
income
taxes recognized in accordance with SFAS No. 109, Accounting
for Income Taxes.
This
Interpretation prescribes a recognition threshold and measurement attribute
for
financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return, and also provides guidance on various
related matters such as derecognition, interest and penalties, and disclosure.
The Company adopted FIN48 in the first quarter of 2007, with no material
impact
to the financial statements.
F-9
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
| 3. |
Agreement
and Plan of Merger
|
On
January 19, 2007, the Company signed an agreement and plan of merger with
PharmAthene, Inc. ("PharmAthene"). Pursuant to the terms of the agreement,
and
subject to certain adjustments as hereafter described, PharmAthene stockholders
and noteholders will receive:
| (a) |
an
aggregate of 12,500,000 shares of the Company's common
stock;
|
| (b) |
$12,500,000
in 8% convertible notes of the Company in exchange for $11,800,000
of
currently-outstanding 8% convertible PharmAthene notes, pursuant
to a Note
Exchange Agreement; and
|
| (c) |
Up
to $10,000,000 in milestone payments (if certain conditions
are
met).
|
It
is
anticipated that shareholders of PharmAthene will own at least 52% of the
outstanding basic shares of the combined company, which is anticipated
to remain
listed on the American Stock Exchange. The transaction is subject to certain
approvals required by the Company and PharmAthene shareholders as described
in
their respective charter documents (see Note 1 for the Company's requirements),
and as prescribed by the rules and regulations of the American Stock Exchange,
as well as other regulatory approvals and other customary closing
conditions.
The
preliminary proxy statement filed by the Company with respect to the plan
of
merger also seeks approval of the following matters:
| (a) |
the
amendment to the Company's amended and restarted certificate
of
incorporation to
|
| (i) |
change
the Company's name to "PharmAthene,
Inc."
|
|
(ii)
|
remove
certain provisions containing procedural and approval requirements
currently applicable to the Company that will no longer be
operative after
the consummation of the merger,
and
|
|
(iii)
|
grant
to holders of convertible promissory notes issued in the merger
the right
to designate three (3) members to the Company's Board of Directors
for so
long as at least thirty percent (30%) of the original face
value of such
notes remain outstanding.
|
| (b) |
the
adoption of a Long-Term Incentive Plan pursuant to which the
Company will
receive 3,500,000 shares of common stock for issuance pursuant,
and
|
| (c) |
such
other business as may properly come before the meeting or any
adjournment
or postponement thereof.
|
In
connection with the above, effective January 19, 2007, the Company entered
into
an advisory agreement with Maxim Group, LLC, the Company's underwriter
in its
public offering, related to the Company's merger with PharmAthene. Under
the
terms of this agreement, the Company will pay a success fee of $500,000
upon
successful completion of the transaction. The Company will also pay expenses,
not to exceed an aggregate of $15,000, regardless of the successful closing
of
the transaction.
F-10
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
4. Initial
Public Offering
On
July
28, 2005, the Company sold 9,000,000 units ("Units") in the Offering. On
August
16, 2005, an additional 400,000 Units were sold. Each Unit consists of
one (1)
share of the Company's common stock, $.0001 par value and one (1) Redeemable
Common Stock Purchase Warrant ("Warrant"). Each Warrant entitles the holder
to
purchase from the Company one (1) share of common stock at an exercise
price of
$6.00 commencing the later of the completion of a business combination
with a
target business or one (1) year from the effective date of the Offering
and
expiring four (4) years from the effective date of the Offering. The Warrants
will be redeemable by the Company at a price of $.01 per Warrant, upon
thirty
(30) days notice after the Warrants become exercisable, only in the event
that
the last sales price of the common stock is at least $11.50 per share for
any
twenty (20) trading days within a thirty (30) trading-day period ending
on the
third day prior to date on which notice of redemption is given. The Warrants
began trading separately from the Company's common stock on October 5,
2005. In
connection with the Offering, the Company paid the underwriter a discount
of 6%
of the gross proceeds of the Offering and a non-accountable expense allowance
of
1% of the gross proceeds of the Offering.
5. Notes
Payable, Stockholders
The
Company issued unsecured promissory notes to three (3) Initial Stockholders,
who
are also officers, amounting to $250,000. These notes were non-interest
bearing
and were repaid from the proceeds of this Offering.
6.
Unit
Option
In
connection with the Offering, the Company issued to the representative
of the
underwriters, for $100, an option to purchase up to a total of 225,000
Units,
exercisable at $10 per Unit ("Purchase Option"). In lieu of payment of
the
exercise price in cash, the holder of the Purchase Option has the right
(but not
the obligation) to convert any exercisable portion of the Purchase Option
into
Units using a cashless exercise based on the difference between current
market
value of the Units and its exercise price. The Warrants issued in conjunction
with these Units are identical to those offered by the prospectus, except
that
they have an exercise price of $7.50 (125% of the exercise price of the
warrants
included in the Units sold in the Offering). This option commences on the
later
of the consummation of a business combination and one (1) year from the
date of
the prospectus and expiring five (5) years from the date of the prospectus.
Additionally,
the option may not be sold, transferred, assigned, pledged or hypothecated
for a
one-year period (including the foregoing 180-day period) following July
28,
2005. However, the option may be transferred to any underwriter and selected
dealer participating in the Offering and their bona fide officers or partners.
The Purchase Option grants to holders demand and "piggy back" rights for
periods
of five (5) and seven (7) years, respectively, from July 28, 2005, with
respect
to the registration under the Securities Act of the securities directly
and
indirectly issuable upon exercise of the option. The Company will bear
all fees
and expenses attendant to registering the securities, other than underwriting
commissions, which will be paid for by the holders themselves. The exercise
price and number of units issuable upon exercise of the option may be adjusted
in certain circumstances, including in the event of a stock dividend,
recapitalization, reorganization, merger or consolidation. However, the
option
will not be adjusted for issuances of common stock at a price below its
exercise
price.
F-11
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
7. Commitments
and Contingencies
The
Company presently occupies office space in one (1) location, provided by
an
affiliate of an Initial Stockholder. This affiliate has agreed that, until
the
Company consummates a business combination, it will make such office space,
as
well as certain office and secretarial services, available to the Company,
as
may be required by the Company from time to time. The Company currently
pays
this affiliate $7,500 per month for such services under an office services
agreement. Upon completion of a business combination or liquidation, the
Company
will no longer be required to pay this monthly fee.
The
Company has engaged a representative of the underwriters, on a non-exclusive
basis, as its agent for the solicitation of the exercise of the Warrants.
To the
extent not inconsistent with the guidelines of the NASD and the rules and
regulations of the Securities and Exchange Commission, the Company has
agreed to
pay the representative for bona fide services rendered, a commission equal
to 4%
of the exercise price for each Warrant exercised more than one (1) year
after
July 28, 2005, if the exercise was solicited by the underwriters. In addition
to
soliciting, either orally or in writing, the exercise of the Warrants,
the
representative's services may also include disseminating information, either
orally or in writing, to Warrant holders about the Company or the market
for its
securities, and assisting in the processing of the exercise of the Warrants.
No
compensation will be paid to the representative upon the exercise of the
Warrants if:
| · |
the
market price of the underlying shares of common stock is lower
than the
exercise price;
|
| · |
the
holder of the Warrants has not confirmed in writing that the
underwriters
solicited the exercise;
|
| · |
the
Warrants are held in a discretionary
account;
|
| · |
the
Warrants are exercised in an unsolicited transaction;
or
|
| · |
the
arrangement to pay the commission is not disclosed in the prospectus
provided to Warrant holders at the time of
exercise.
|
The
Initial Stockholders who are holders of 2,250,000 issued and outstanding
shares
of common stock are entitled to registration rights pursuant to an agreement
signed on the effective date of the Offering. The holders of the majority
of
these shares are entitled to request the Company, on up to two (2) occasions,
to
register these shares. The holders of the majority of these shares can
elect to
exercise these registration rights at any time after the date on which
these
shares of common stock are released from escrow. In addition, these stockholders
have certain "piggy-back" registration rights on registration statements
filed
subsequent to the date on which these shares of common stock are released
from
escrow. The Company will bear the expenses incurred in connection with
the
filing of any such registration statements.
8.
Preferred Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock with
such
designations, voting and other rights and preferences, as may be determined
from
time to time by the Board of Directors.
F-12
HEALTHCARE
ACQUISITION CORP.
(a
corporation in the development stage)
Notes
to
Financial Statements (continued)
9.
Common Stock
On
July
8, 2005, the Company's Board of Directors authorized a .333333 to 1 stock
dividend. On July 22, 2005, the Company's Board of Directors authorized
a .125
to 1 stock dividend. All references in the accompanying financial statements
to
the number of shares of stock have been retroactively restated to reflect
these
transactions, assuming they occurred at the beginning of the
period.
10.
Common Stock Warrants
Each
Warrant entitles the holder to purchase from the Company one (1) share
of common
stock at an exercise price of $6.00 commencing the later of the completion
of a
business combination with a target business or one (1) year from the effective
date of the Offering and expiring four (4) years from the effective date
of the
Offering. The Warrants will be redeemable by the Company at a price of
$.01 per
Warrant, upon thirty (30) days notice after the Warrants become exercisable,
only in the event that the last sales price of the common stock is at least
$11.50 per share for any twenty (20) trading days within a thirty (30)
trading-day period ending on the third day prior to the date on which notice
of
redemption is given. The Warrants began trading separately from the Company's
common stock on October 6, 2005.
F-13
PharmAthene, Inc.
Consolidated
Financial Statements
Years
ended December 31, 2006, 2005 and 2004
with
Report of Independent Auditors
F-14
Report
of
Independent Auditors
Board
of
Directors
PharmAthene, Inc.
We
have
audited the accompanying consolidated balance sheets of PharmAthene, Inc.
as of
December 31, 2006 and 2005, and the related consolidated statements of
operations, convertible redeemable preferred stock and stockholders’ deficit,
and cash flows for each of the three years in the period ended December 31,
2006. 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 auditing standards generally accepted
in
the 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. We were not engaged to perform an audit of the Company’s
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of PharmAthene, Inc.
at
December 31, 2006 and 2005, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
December 31, 2006 in conformity with accounting principles generally
accepted in the United States.
As
discussed in Note 3 to the financial statements, the Company changed its
method of accounting for share-based compensation in 2006 upon adoption of
Statement of Financial Accounting Standards No. 123(R), “Share-Based
Payment.”
/s/
Ernst
& Young LLP
McLean,
Virginia
April 10,
2007
F-15
PharmAthene, Inc.
Consolidated
Balance Sheets
|
December 31
|
|||||||
|
2006
|
2005
|
||||||
|
Assets
|
|
||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
5,112,212
|
$
|
7,938,116
|
|||
|
Accounts
receivable
|
1,455,538
|
494,652
|
|||||
|
Prepaid
expenses
|
877,621
|
1,549,711
|
|||||
|
Other
current assets
|
104,772
|
8,657
|
|||||
|
Total
current assets
|
7,550,143
|
9,991,136
|
|||||
|
Property
and equipment, net
|
5,230,212
|
4,906,467
|
|||||
|
Patents,
net
|
1,246,236
|
1,382,631
|
|||||
|
Other
long term assets
|
153,336
|
-
|
|||||
|
Deferred
costs
|
587,577
|
-
|
|||||
|
Total
assets
|
$
|
14,767,504
|
$
|
16,280,234
|
|||
|
Liabilities,
convertible redeemable preferred stock, and stockholders’
deficit
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
839,120
|
$
|
783,070
|
|||
|
Accrued
expenses and other liabilities
|
1,587,017
|
658,257
|
|||||
|
Notes
payable
|
11,768,089
|
-
|
|||||
|
Total
current liabilities
|
14,194,226
|
1,441,327
|
|||||
|
Warrants
to purchase Series C convertible redeemable preferred
stock
|
2,423,370
|
2,072,965
|
|||||
|
Total
liabilities
|
16,617,596
|
3,514,292
|
|||||
|
Minority
interest - Series C convertible redeemable preferred stock of PharmAthene
Canada, Inc., $0.001 par value; unlimited shares authorized; 2,591,654
issued and outstanding; liquidation preference in the aggregate
of
$2,719,178
|
2,545,785
|
2,243,637
|
|||||
|
Series
A convertible redeemable preferred stock, $0.001 par value; 16,442,000
shares authorized, issued and outstanding; liquidation preference
in the
aggregate of $19,355,388
|
19,130,916
|
17,564,998
|
|||||
|
Series
B convertible redeemable preferred stock, $0.001 par value; 65,768,001
shares authorized; 30,448,147 issued and outstanding; liquidation
preference in the aggregate of $33,010,797
|
31,780,064
|
28,886,718
|
|||||
|
Series
C convertible redeemable preferred stock, $0.001 par value; 22,799,574
shares authorized; 14,946,479 issued and outstanding; liquidation
preference in the aggregate of $15,681,930
|
14,480,946
|
12,652,687
|
|||||
|
Stockholders’
deficit:
|
|||||||
|
Common
stock, $0.001 par value; 147,089,104 shares authorized; 12,483,472
at
December 31, 2006 and 10,942,906 at December 31, 2005 shares
issued and outstanding
|
12,483
|
10,943
|
|||||
|
Additional
paid-in capital
|
-
|
-
|
|||||
|
Accumulated
other comprehensive income
|
63,954
|
115,160
|
|||||
|
Accumulated
deficit
|
(69,864,240
|
)
|
(48,708,201
|
)
|
|||
|
Total
stockholders’ deficit
|
(69,787,803
|
)
|
(48,582,098
|
)
|
|||
|
Total
liabilities, convertible redeemable preferred stock, and stockholders’
deficit
|
$
|
14,767,504
|
$
|
16,280,234
|
|||
See
accompanying notes.
F-16
PharmAthene, Inc.
Consolidated
Statements of Operations
|
Year
ended December 31
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
|
||||||||||
|
Contract
and grant revenue
|
$
|
1,641,822
|
$
|
1,045,751
|
$
|
1,037,979
|
||||
|
Other
revenue
|
21,484
|
52,649
|
-
|
|||||||
|
1,663,306
|
1,098,400
|
1,037,979
|
||||||||
|
Operating
expenses:
|
||||||||||
|
Research
and development
|
7,140,337
|
6,351,157
|
7,843,863
|
|||||||
|
General
and administrative
|
8,572,963
|
5,009,267
|
3,327,571
|
|||||||
|
Acquired
in-process research and development
|
-
|
12,812,000
|
-
|
|||||||
|
Depreciation
and amortization
|
483,646
|
660,567
|
25,198
|
|||||||
|
Total
operating expenses
|
16,196,946
|
24,832,991
|
11,196,632
|
|||||||
|
Loss
from operations
|
(14,533,640
|
)
|
(23,734,591
|
)
|
(10,158,653
|
)
|
||||
|
Other
income (expense):
|
||||||||||
|
Interest
income
|
289,606
|
381,840
|
72,374
|
|||||||
|
Interest
expense
|
(538,948
|
)
|
(988
|
)
|
(32,666
|
)
|
||||
|
Change
in market value of derivative instruments
|
(350,405
|
)
|
-
|
-
|
||||||
|
Total
other income (expense)
|
(599,747
|
)
|
380,852
|
39,708
|
||||||
|
Net
loss
|
(15,133,387
|
)
|
(23,353,739
|
)
|
(10,118,945
|
)
|
||||
|
Accretion
of redeemable convertible preferred stock
to
redemptive value
|
(6,589,671
|
)
|
(5,809,716
|
)
|
(2,322,699
|
)
|
||||
|
Net
loss attributable to common shareholders
|
$
|
(21,723,058
|
)
|
$
|
(29,163,455
|
)
|
$
|
(12,441,644
|
)
|
|
|
Basic
and diluted net loss per share
|
$
|
(1.90
|
)
|
$
|
(2.70
|
)
|
$
|
(1.16
|
)
|
|
|
Weighted
average shares used in calculation
of
basic and diluted net loss per share
|
11,407,890
|
10,817,949
|
10,740,000
|
|||||||
See
accompanying notes.
F-17
PharmAthene, Inc.
Consolidated
Statements of Convertible Redeemable Preferred Stock and Stockholders’
Deficit
|
Stockholders’
Deficit
|
|||||||||||||||||||||||||||||||||||||
|
Convertible
Redeemable Preferred Stock
|
Additional
|
Accumulated
Other
|
|||||||||||||||||||||||||||||||||||
|
Series
A
|
Series
B
|
Series
C
|
Common
Stock
|
Paid-In
|
Comprehensive
|
Accumulated
|
Stockholders’
|
||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Income
|
Deficit
|
Deficit
|
||||||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||||||||||||||||
|
Balance
as of 12/31/2003
|
13,769,230
|
$
|
15,265,583
|
-
|
$
|
-
|
-
|
$
|
-
|
10,740,000
|
$
|
10,740
|
$
|
-
|
$
|
-
|
$
|
(10,353,122
|
)
|
$
|
(10,342,382
|
)
|
|||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(10,118,945
|
)
|
(10,118,945
|
)
|
|||||||||||||||||||||||
|
Accrual
of Series A dividends
|
-
|
1,229,194
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,229,194
|
)
|
-
|
-
|
(1,229,194
|
)
|
|||||||||||||||||||||||
|
Accretion
of Series A issuance costs
|
-
|
21,100
|
-
|
-
|
-
|
-
|
-
|
-
|
(21,100
|
)
|
-
|
-
|
(21,100
|
)
|
|||||||||||||||||||||||
|
Issuance
of Series B convertible redeemable preferred stock and warrants
at
approximately $0.9123 per share, net of issuance costs of
$207,288
|
-
|
-
|
28,803,951
|
24,237,901
|
-
|
-
|
-
|
-
|
1,832,589
|
-
|
-
|
1,832,589
|
|||||||||||||||||||||||||
|
Conversion
of bridge loan
|
-
|
-
|
1,644,196
|
1,298,254
|
-
|
-
|
-
|
-
|
201,746
|
-
|
-
|
201,746
|
|||||||||||||||||||||||||
|
Issuance
of Series A Convertible Redeemable Preferred Stock as deemed
dividend
|
2,672,770
|
(436,731
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
436,731
|
-
|
-
|
436,731
|
||||||||||||||||||||||||
|
Accretion
of Series A deemed dividend
|
-
|
25,869
|
-
|
-
|
-
|
-
|
-
|
-
|
(25,869
|
)
|
-
|
-
|
(25,869
|
)
|
|||||||||||||||||||||||
|
Accrual
of Series B dividends
|
-
|
-
|
-
|
523,592
|
-
|
-
|
-
|
-
|
(523,592
|
)
|
-
|
-
|
(523,592
|
)
|
|||||||||||||||||||||||
|
Accretion
of Series B issuance costs
|
-
|
-
|
-
|
10,364
|
-
|
-
|
-
|
-
|
(10,364
|
)
|
-
|
-
|
(10,364
|
)
|
|||||||||||||||||||||||
|
Accretion
of common stock purchase warrants
|
-
|
-
|
-
|
101,718
|
-
|
-
|
-
|
-
|
(101,718
|
)
|
-
|
-
|
(101,718
|
)
|
|||||||||||||||||||||||
|
Stock
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
2,448
|
-
|
-
|
2,448
|
|||||||||||||||||||||||||
|
Balance
as of 12/31/2004
|
16,442,000
|
16,105,015
|
30,448,147
|
26,171,829
|
-
|
-
|
10,740,000
|
10,740
|
561,677
|
-
|
(20,472,067
|
)
|
(19,899,650
|
)
|
|||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(23,353,739
|
)
|
(23,353,739
|
)
|
|||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
115,160
|
-
|
115,160
|
|||||||||||||||||||||||||
|
Comprehensive
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(23,238,579
|
)
|
||||||||||||||||||||||||
|
Exercise
of common stock options
|
-
|
-
|
-
|
-
|
-
|
-
|
202,906
|
203
|
27,067
|
-
|
-
|
27,270
|
|||||||||||||||||||||||||
|
Accrual
of Series A dividends
|
-
|
1,327,798
|
-
|
-
|
-
|
-
|
-
|
-
|
(927,320
|
)
|
-
|
(400,478
|
)
|
(1,327,798
|
)
|
||||||||||||||||||||||
|
Accretion
of Series A issuance costs
|
-
|
21,100
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(21,100
|
)
|
(21,100
|
)
|
|||||||||||||||||||||||
|
Accretion
of Series A deemed dividend
|
-
|
111,085
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(111,085
|
)
|
(111,085
|
)
|
|||||||||||||||||||||||
|
Accrual
of Series B dividends
|
-
|
-
|
-
|
2,263,509
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,263,509
|
)
|
(2,263,509
|
)
|
|||||||||||||||||||||||
|
Accretion
of Series B issuance costs
|
-
|
-
|
-
|
44,508
|
-
|
-
|
-
|
-
|
-
|
-
|
(44,508
|
)
|
(44,508
|
)
|
|||||||||||||||||||||||
|
Accretion
of common stock purchase warrants
|
-
|
-
|
-
|
406,872
|
-
|
-
|
-
|
-
|
-
|
-
|
(406,872
|
)
|
(406,872
|
)
|
|||||||||||||||||||||||
|
Issuance
of Series C convertible redeemable preferred stock and warrants
at
approximately $0.9123 per share, net of issuance costs of
$330,495
|
-
|
-
|
-
|
-
|
14,946,479
|
11,249,869
|
-
|
-
|
335,059
|
-
|
-
|
335,059
|
|||||||||||||||||||||||||
|
Accrual
of Series C dividends
|
-
|
-
|
-
|
-
|
-
|
884,635
|
-
|
-
|
-
|
-
|
(1,038,027
|
)
|
(1,038,027
|
)
|
|||||||||||||||||||||||
|
Accretion
of Series C issuance costs
|
-
|
-
|
-
|
-
|
-
|
64,697
|
-
|
-
|
-
|
-
|
(64,697
|
)
|
(64,697
|
)
|
|||||||||||||||||||||||
|
Accretion
of common stock purchase warrants
|
-
|
-
|
-
|
-
|
-
|
49,774
|
-
|
-
|
-
|
-
|
(58,405
|
)
|
(58,405
|
)
|
|||||||||||||||||||||||
|
Accretion
of preferred stock purchase warrants
|
-
|
-
|
-
|
-
|
-
|
403,712
|
-
|
-
|
-
|
-
|
(473,714
|
)
|
(473,714
|
)
|
|||||||||||||||||||||||
|
Stock
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
3,517
|
-
|
-
|
3,517
|
|||||||||||||||||||||||||
|
Balance
as of
12/31/2005
|
16,442,000
|
17,564,998
|
30,448,147
|
28,886,718
|
14,946,479
|
12,652,687
|
10,942,906
|
10,943
|
-
|
115,160
|
(48,708,201
|
)
|
(48,582,098
|
)
|
|||||||||||||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(15,133,387
|
)
|
(15,133,387
|
)
|
|||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(51,206
|
)
|
-
|
(51,206
|
)
|
|||||||||||||||||||||||
|
Comprehensive
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(15,184,593
|
)
|
||||||||||||||||||||||||
|
Exercise
of common stock options
|
-
|
-
|
-
|
-
|
-
|
-
|
1,340,566
|
1,341
|
242,450
|
-
|
-
|
243,790
|
|||||||||||||||||||||||||
|
Exercise
of common stock options
|
-
|
-
|
-
|
-
|
-
|
-
|
200,000
|
200
|
1,800
|
-
|
-
|
2,000
|
|||||||||||||||||||||||||
|
Accrual
of Series A dividends
|
-
|
1,433,732
|
-
|
-
|
-
|
-
|
-
|
-
|
(567,018
|
)
|
-
|
(866,714
|
)
|
(1,433,732
|
)
|
||||||||||||||||||||||
|
Accretion
of Series A issuance costs
|
-
|
21,100
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(21,100
|
)
|
(21,100
|
)
|
|||||||||||||||||||||||
|
Accretion
of Series A deemed dividend
|
-
|
111,085
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(111,085
|
)
|
(111,085
|
)
|
|||||||||||||||||||||||
|
Accrual
of Series B dividends
|
-
|
-
|
-
|
2,445,244
|
-
|
-
|
-
|
-
|
-
|
-
|
(2,445,244
|
)
|
(2,445,244
|
)
|
|||||||||||||||||||||||
|
Accretion
of Series B issuance costs
|
-
|
-
|
-
|
41,458
|
-
|
-
|
-
|
-
|
-
|
-
|
(41,458
|
)
|
(41,458
|
)
|
|||||||||||||||||||||||
|
Accretion
of common stock purchase warrants
|
-
|
-
|
-
|
406,644
|
-
|
-
|
-
|
-
|
-
|
-
|
(406,644
|
)
|
(406,644
|
)
|
|||||||||||||||||||||||
|
Accrual
of Series C dividends
|
-
|
-
|
-
|
-
|
-
|
1,161,622
|
-
|
-
|
-
|
-
|
(1,363,042
|
)
|
(1,363,042
|
)
|
|||||||||||||||||||||||
|
Accretion
of Series C issuance costs
|
-
|
-
|
-
|
-
|
-
|
95,846
|
-
|
-
|
-
|
-
|
(95,846
|
)
|
(95,846
|
)
|
|||||||||||||||||||||||
|
Accretion
of common stock purchase warrants
|
-
|
-
|
-
|
-
|
-
|
62,172
|
-
|
-
|
-
|
-
|
(73,144
|
)
|
(73,144
|
)
|
|||||||||||||||||||||||
|
Accretion
of preferred stock purchase warrants
|
-
|
-
|
-
|
-
|
-
|
508,619
|
-
|
-
|
-
|
-
|
(598,375
|
)
|
(598,375
|
)
|
|||||||||||||||||||||||
|
Stock
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
322,768
|
-
|
-
|
322,768
|
|||||||||||||||||||||||||
|
Balance
as of 12/31/2006
|
16,442,000
|
$
|
19,130,916
|
30,448,147
|
$
|
31,780,064
|
14,946,479
|
$
|
14,480,946
|
12,483,472
|
$
|
12,483
|
$
|
-
|
$
|
63,954
|
$
|
(69,864,240
|
)
|
$
|
(69,787,803
|
)
|
|||||||||||||||
See
accompanying notes.
F-18
PharmAthene, Inc.
Consolidated
Statements of Cash Flows
|
Year
ended December 31
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Operating
activities
|
||||||||||
|
Net
loss
|
$
|
(15,133,387
|
)
|
$
|
(23,353,739
|
)
|
$
|
(10,118,945
|
)
|
|
|
Adjustments
to reconcile net loss to net cash
used
in operating activities:
|
||||||||||
|
Write-off
of acquired in-process research and development
|
-
|
12,812,000
|
-
|
|||||||
|
Change
in market value of derivative instruments
|
350,405
|
-
|
-
|
|||||||
|
Depreciation
and amortization
|
483,646
|
660,567
|
25,198
|
|||||||
|
Compensatory
option expense
|
322,768
|
3,517
|
2,448
|
|||||||
|
Changes
in operating assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(960,886
|
)
|
(494,652
|
)
|
355,355
|
|||||
|
Prepaid
expenses and other current assets
|
575,975
|
979,805
|
(2,037,023
|
)
|
||||||
|
Other
assets
|
(153,336
|
)
|
-
|
-
|
||||||
|
Accounts
payable
|
56,050
|
(218,216
|
)
|
(2,076,181
|
)
|
|||||
|
Accrued
expenses
|
928,760
|
(380,146
|
)
|
1,016,056
|
||||||
|
Net
cash used in operating activities
|
(13,530,005
|
)
|
(9,990,864
|
)
|
(12,833,092
|
)
|
||||
|
Investing
activities
|
||||||||||
|
Purchase
of property and equipment
|
(786,483
|
)
|
(329,594
|
)
|
(46,574
|
)
|
||||
|
Purchase
of Nexia assets
|
-
|
(12,277,005
|
)
|
-
|
||||||
|
Net
cash used in investing activities
|
(786,483
|
)
|
(12,606,599
|
)
|
(46,574
|
)
|
||||
|
Financing
activities
|
||||||||||
|
Net
proceeds from the issuance of redeemable
preferred
stock
|
-
|
8,858,766
|
26,070,490
|
|||||||
|
Proceeds
from stock options exercised
|
245,790
|
27,270
|
-
|
|||||||
|
Proceeds
from issuance of bridge loan
|
11,768,089
|
-
|
1,500,000
|
|||||||
|
Merger
financing costs
|
(587,577
|
)
|
-
|
-
|
||||||
|
Net
cash provided by financing activities
|
11,426,302
|
8,886,036
|
27,570,490
|
|||||||
|
Effects
of exchange rates on cash
|
64,282
|
(12,574
|
)
|
-
|
||||||
|
(Decrease)
increase in cash and cash equivalents
|
(2,825,904
|
)
|
(13,724,001
|
)
|
14,690,824
|
|||||
|
Cash
and cash equivalents, at beginning of year
|
7,938,116
|
21,662,117
|
6,971,293
|
|||||||
|
Cash
and cash equivalents, at end of year
|
$
|
5,112,212
|
$
|
7,938,116
|
$
|
21,662,117
|
||||
|
Non-cash
financing activities
|
||||||||||
|
Issuance
of Series C redeemable preferred stock
and
warrants for assets
|
$
|
-
|
$
|
(1,212,622
|
)
|
$
|
-
|
|||
See
accompanying notes.
F-19
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements
December 31,
2006, 2005 and 2004
1. Organization
and Business
PharmAthene, Inc.
(the Company) was incorporated on March 13, 2001 (inception), under the
laws of the State of Delaware. The Company is a biopharmaceutical company
focused on developing anti-infectives for biodefense applications. The Company
has generated an accumulated deficit of $69,864,240 since inception. The
Company
anticipates incurring additional losses until such time, if ever, as it can
generate significant sales of its products currently in development. Substantial
additional financing will be needed by the Company to fund its operations
and to
commercially develop its products. There is no assurance that such financing
will be available when needed.
As
further discussed in Note 15, the Company has signed a merger agreement and
entered into a $10 million debt financing subsequent to December 31,
2006.
The
Company is subject to those risks associated with any biopharmaceutical company
that has substantial expenditures for research and development. There can
be no
assurance that the Company’s research and development projects will be
successful, that products developed will obtain necessary regulatory approval,
or that any approved product will be commercially viable. In addition, the
Company operates in an environment of rapid technological change and is largely
dependent on the services of its employees and consultants.
The
Company has incurred cumulative net losses and expects to incur additional
losses to perform further research and development activities. The Company
does
not have commercial products and has limited capital resources. Management’s
plans with regard to these matters include continued development of its
products
as well as seeking additional research support funds and financial arrangements.
Although Management
continues to pursue these plans, there is no assurance that the Company
will be
successful in obtaining sufficient financing on commercial reasonable terms
or
that the Company will be able to secure financing from anticipated government
contracts and grants.
F-20
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
2. Nexia
Asset Purchase
On
March 10, 2005, the Company acquired substantially all of the assets and
liabilities of Nexia Biotechnologies Inc. (Nexia) that relate to its
Protexia®
(recombinant human butyrylcholinesterase) compound. The Company paid
approximately $19.1 million in cash, Series C Convertible Redeemable
Preferred Stock (the Series C Preferred Stock), and warrants. Specifically,
the
Company delivered to Nexia (i) 7,465,501 shares of Series C Preferred Stock
valued at approximately $0.91 per share; (ii) warrants to acquire 2,239,650
shares of Series C Preferred Stock, which are exercisable at approximately
$0.91
per share and which expire on March 10, 2008; and (iii) warrants to acquire
1,343,790 common shares, which are exercisable at $0.01 per share, subject
to
reduction if certain business milestones are met by the Company, as specified
in
the warrants and which expire in October 2014. In addition, the Company
delivered to Nexia $11,763,176 in cash. The purchased assets and liabilities
are
held by PharmAthene Canada, Inc., a variable interest entity consolidated
by the
Company, which was established by PharmAthene in connection with the purchase
to
allow for the holding of the assets and the investment of certain shareholders
as further described in Note 8.
The
purchase price of the Nexia assets was allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed based on
their
estimated fair values at the acquisition date. The results of Nexia’s operations
have been included in the financial statement since the acquisition date.
The
following table summarizes the purchase price allocation to estimated fair
values of the assets acquired and liabilities assumed as of the acquisition
date:
|
Prepaid
expenses and other current assets
|
$
|
248,000
|
||
|
Property
and equipment, net
|
5,021,000
|
|||
|
In-process
research and development
|
12,812,000
|
|||
|
Acquired
identifiable intangibles
|
1,407,000
|
|||
|
Accounts
payable
|
(371,000
|
)
|
||
|
Total
assets acquired
|
$
|
19,117,000
|
In
connection with the acquisition and as calculated by a third party appraiser,
the Company recorded $12.8 million of the purchase price of the Nexia Asset
Purchase as acquired in-process research and development. The fair value
was
determined utilizing a present value technique involving a discounted cash
flow
analysis. Under this approach, fair value reflects the present value of the
projected free cash flow that will be generated by the in-process research
and
development.
F-21
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
2. Nexia
Asset Purchase (continued)
At
the
date of the acquisition, the development of Protexia®
was not
complete, had not reached technological feasibility and had no known alternative
uses. Consequently, there is considerable uncertainty as to the technological
feasibility of this product at the date of the acquisition. The Company does
not
foresee any alternative future benefit from the acquired in-process research
and
development. Significant technological and regulatory approval risks are
associated with the development of the product. Development of a product
will
require significant amounts of future time, effort, and substantial development
costs, which will be incurred by the Company. The efforts required to develop
the acquired in-process research and development into commercially viable
products include the development of the compound for use in intended subjects
and the reformulation of an alternate purification process for the compound,
as
well as the conducting of applicable clinical-trial testing, regulatory approval
and the development of a product suitable for commercialization. The principal
risks relating to achieving an indication under development are the outcomes
of
clinical studies of the alternatively purified compound and receiving positive
results regulatory filings and approval. Since pharmaceutical products cannot
be
marketed without regulatory approvals, the Company will not receive any benefits
unless regulatory approval is obtained. Accordingly, the portion of the purchase
price related to these products under development was allocated to acquired
in-process research and development and was expensed at the date of acquisition.
3. Summary
of Significant Accounting Policies
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of the Company and
its
subsidiary, PharmAthene Canada, Inc., which was formed in March of 2005.
All significant intercompany transactions and balances have been
eliminated.
The
FASB
has issued FASB Interpretation (FIN) No. 46 (revised December 2003),
Consolidation
of Variable Interest Entities,
(FIN
46R). FIN 46R expands consolidated financial statements to include certain
variable interest entities (VIEs). VIEs are to be consolidated by the company
which is considered to be the primary beneficiary of that entity, even
if the
company does not have majority control. FIN 46R is immediately effective
for
VIEs created after January 31, 2003, and is effective for the Company in
2005 for VIEs created prior to February 1, 2003. The Company’s subsidiary,
PharmAthene Canada, Inc., is a VIE and the Company is the primary beneficiary.
Therefore,
the Company has consolidated PharmAthene Canada, Inc. as of its date of
inception.
F-22
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
3. Summary
of Significant Accounting Policies (continued)
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
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 from those estimates.
Comprehensive
Loss and Foreign Currency Translation
The
financial statements of subsidiaries located outside of the United States
are
measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the rates of exchange
at the
balance sheet date. The resultant translation adjustments are included in
accumulated other comprehensive income (loss), a separate component of
stockholders’ equity. Income and expense items are translated at average monthly
rates of exchange. Gains and losses from foreign currency transactions of
these
subsidiaries are included in net earnings.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturities of three
months
or less when purchased to be cash equivalents. Cash equivalents consist of
a
short-term money market account with a bank.
Accounts
Receivable
Through
its inception to date, substantially all of PharmAthene’s accounts receivable
have been associated with U.S. government contracts and grants or with the
receipt of Quebec provincial or Canadian Federal credits for internally and
externally generated research and development expenditures. Amounts invoiced
or
recorded as billed under these programs but not yet collected are reported
as
outstanding accounts receivable.
While
the
Company has a policy to provide an allowance for any amount of accounts
receivable which it determines to be uncollectible and the Company will write
off any uncollectible account when the likelihood of that account’s collection
is determined to be not probable, the Company has not historically found
it
necessary to record any write-offs of accounts receivable or to record an
allowance for uncollectible accounts. At December 31, 2006, the Company’s
accounts receivable balance included approximately $853,600 related to U.S
government contracts.
F-23
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
3. Summary
of Significant Accounting Policies (continued)
Property
and Equipment
Property
and equipment consist of land, building and leasehold improvements, laboratory,
computer, farm and office equipment and furniture and are recorded at cost.
Property and equipment are depreciated using the straight-line method over
the
estimated useful lives of the respective assets as follows:
|
Asset
Category
|
Estimated
Useful Life
(
in years)
|
|||
|
Building
and leasehold improvements
|
4
- 20
|
|||
|
Laboratory
equipment
|
7
|
|||
|
Furniture,
farm and office equipment
|
5
- 7
|
|||
|
Computer
equipment
|
3
|
|||
Intangible
Assets
Intangible
assets consist of patents and are being amortized using the straight-line
method
over an 11 year period. The intangible assets are reviewed for impairment
when
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is considered to have occurred if expected future
undiscounted cash flows are insufficient to recover the carrying value of
the
asset. If impaired, the asset’s carrying value is reduced to fair
value.
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets,
long-lived assets such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever
events
or changes in circumstances indicate that the carrying amount of an asset
may
not be recoverable. Recoverability of assets to be held and used is measured
by
a comparison of the carrying amount of an asset to estimated undiscounted
future
cash flows expected to be generated by the asset. If the carrying amount
of an
asset exceeds its estimated future cash flows, then an impairment charge
is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheets and reported at the lower of the carrying amount
or fair
value, less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held-for-sale would be presented
separately in the appropriate asset and liability sections of the balance
sheets. As of December 31, 2006, management believes that no revision of
the remaining useful lives or write-down of long-lived assets is
required.
F-24
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
3. Summary
of Significant Accounting Policies (continued)
Revenue
Recognition
Grant
Revenue
The
Company recognizes revenue when all terms and conditions of the agreements
have
been met including persuasive evidence of an arrangement, services have been
rendered, price is fixed or determinable, and collectibility is reasonably
assured. For reimbursable cost research grants, the Company recognizes revenue
as costs are incurred and appropriate regulatory approvals have been obtained
or
approval criteria are met for invoicing the related government
agency.
All
of
the grant revenue the Company recognized was received under a cost reimbursement
grant from the U.S. government to fund the development of pharmaceutical
products for biodefense applications. Receipts pursuant to such cost
reimbursement grants are contingent upon the successful completion of related
tasks, the granting agency may modify the contract at any time, and reimbursed
costs are subject to review and adjustment by the granting agency.
In
September 2006, the Company was awarded a multi-year cost reimbursement
contract valued at up to $213 million from the Department of Defense Army
Space and Missile Command for advanced development of the Company’s broad
spectrum chemical nerve agent prophylaxis, Protexia®. The Department of Defense
has allocated $34.7 million for the initial stage of development, including
manufacturing process development, preclinical and toxicity testing activities,
of this contract. The Company recognized $1.5 million of revenue on this
contract for the year ended December 31, 2006.
F-25
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
3. Summary
of Significant Accounting Policies (continued)
Research
and Development and In-Process Research and Development
Research
and development costs are charged to expense as incurred.
Stock
Compensation
On
January 1, 2006, the Company adopted the fair value recognition provisions
of SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
No. 123R”) using the modified prospective method to record compensation
expense for all share-based payments to employees, including grants of employee
stock options. The fair value of each option grant is estimated on the date
of
grant using the Black-Scholes option-pricing model based on the selected
inputs.
Option valuation models, including the Black-Scholes option-pricing model,
require the input of subjective assumptions, and changes in the assumptions
could materially affect the grant date value of the award. These assumptions
include the risk-free rate of interest, expected dividend yield, expected
volatility and the expected life of the award. The resulting compensation
expense is recognized ratably over the requisite service period that an employee
must provide to earn the award, the “vesting period”.
The
fair
value for the 2006 awards was estimated at the date of grant using the
Black-Scholes option-pricing model assuming a weighted-average volatility
of
approximately 72%, a risk-free interest rate of 4.5%, a dividend yield of
0%,
and a weighted-average expected life of the option of 9.4 years. The Company
recognized compensation expense related to the awarding of stock options
to
employees of $322,768 for the year ended December 31, 2006.
Prior
to
the adoption of SFAS No. 123R, the Company accounted for stock-based
employee compensation arrangements using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees
(APB
25), and related interpretations and complied with the disclosure provisions
of
SFAS No. 123, Accounting
for Stock-Based Compensation
(SFAS
123) for the periods ended December 31, 2005 and 2004, respectively. Under
APB 25, compensation expense was based on the difference, if any, on the
date of
the grant between the fair value of the Company’s stock and the exercise price
of the option.
F-26
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
3. Summary
of Significant Accounting Policies (continued)
Stock
Compensation (continued)
The
Company accounts for equity instruments issued to non-employees in accordance
with SFAS 123 and Emerging Issues Task Force (EITF) 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling, Goods or Services.
Accordingly, the estimated fair value of the equity instrument is recorded
on
the earlier of the performance commitment date or the date the services required
are completed.
In
accordance with SFAS No. 148, Accounting
for Stock-Based Compensation—Transition and Disclosure (SFAS
148), the effect on net loss if the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation for
the
periods ended December 31, 2005 and 2004 is as follows:
|
Year
ended December 31
|
|||||||
|
2005
|
2004
|
||||||
|
Net
loss attributable to common shareholders, as reported
|
$
|
(29,163,455
|
)
|
$
|
(12,441,644
|
)
|
|
|
Deduct:
Total stock-based employee compensation expense
determined
under fair value-based method for all awards
|
(242,340
|
)
|
(81,413
|
)
|
|||
|
Pro
forma net loss attributable to common shareholders
|
$
|
(29,405,795
|
)
|
$
|
(12,523,057
|
)
|
|
|
Basic
and diluted net loss per share:
|
|||||||
|
As
reported
|
(2.70
|
)
|
(1.16
|
)
|
|||
|
Pro
forma
|
(2.72
|
)
|
(1.17
|
)
|
|||
Prior
to
January 1, 2006, the following assumptions were used to determine the fair
value of options granted.
|
Year
ended December 31
|
|||||||
|
2005
|
2004
|
||||||
|
Weighted
average volatility
|
60.0
|
%
|
60.0
|
%
|
|||
|
Risk-free
interest rate
|
3.9
|
4.1
|
|||||
|
Expected
dividend yield
|
-
|
-
|
|||||
|
Expected
weighted average life, in years
|
8.7
|
7.0
|
|||||
F-27
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
3. Summary of Significant Accounting Policies (continued)
Basic
and Diluted Net Loss Per Share
Basic
net
loss per share of common stock excludes dilution for potential common stock
issuances and is computed by dividing net loss by the weighted-average number
of
shares outstanding for the period. Diluted net loss per share reflects the
potential dilution that could occur if securities were exercised into common
stock. However, for all periods presented, diluted net loss per share is
the
same as basic net loss attributable to common shareholders per share as the
inclusion of weighted average shares of common stock issuable upon the exercise
of stock options and warrants would be anti-dilutive. Securities outstanding
in
the amount of 116,652,000, 118,374,000 and 31,964,000 shares for the years
ended
December 31, 2006, 2005 and 2004, respectively, were excluded from the
calculation of diluted net loss per share since their inclusion would be
anti-dilutive.
The
following table provides a reconciliation of the numerators and denominators
used in computing basic and diluted net loss per share:
|
Year
ended December 31
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Numerator:
|
||||||||||
|
Net
loss
|
$
|
(15,133,387
|
)
|
$
|
(23,353,739
|
)
|
$
|
(10,118,945
|
)
|
|
|
Dividends
on and accretion of convertible
preferred
stock
|
(6,589,671
|
)
|
(5,809,716
|
)
|
(2,322,699
|
)
|
||||
|
Net
loss available to common stockholders
|
$
|
(21,723,058
|
)
|
$
|
(29,163,455
|
)
|
$
|
(12,441,644
|
)
|
|
|
Denominator:
|
||||||||||
|
Weighted-average
shares of common stock
outstanding
- basic and diluted
|
11,407,890
|
10,817,949
|
10,740,000
|
|||||||
Income
Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes
(SFAS
109), which requires that deferred tax assets and liabilities be recognized
using enacted tax rates for the effect of temporary differences between the
book
and tax bases of recorded assets and liabilities. SFAS 109 also requires
that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion of the deferred tax asset will not be realized.
In
evaluating the need for a valuation allowance, the Company takes into account
various factors, including the expected level of future taxable income and
available tax planning strategies. If actual results differ from the assumptions
made in the evaluation of the Company’s valuation allowance, the Company records
a change in valuation allowance through income tax expense in the period
such
determination is made.
F-28
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
3. Summary
of Significant Accounting Policies (continued)
Fair
Value of Financial Instruments and Concentration of Credit
Risk
The
carrying amounts of the Company’s financial instruments, which include cash
equivalents, accounts receivable, accounts payable, and accrued expenses,
approximate their fair values because of their short maturities at
December 31, 2006 and 2005.
Reclassifications
Certain
prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
4. Property
and Equipment
Property
and equipment consisted of the following:
|
December 31
|
|||||||
|
2006
|
2005
|
||||||
|
Land
|
$
|
471,536
|
$
|
471,860
|
|||
|
Building
and leasehold improvements
|
4,188,746
|
4,014,717
|
|||||
|
Furniture,
farm and office equipment
|
83,293
|
66,379
|
|||||
|
Laboratory
equipment
|
797,653
|
576,825
|
|||||
|
Computer
equipment
|
372,055
|
115,945
|
|||||
|
5,913,283
|
5,245,726
|
||||||
|
Less
accumulated depreciation
|
(683,071
|
)
|
(339,259
|
)
|
|||
|
Property
and equipment, net
|
$
|
5,230,212
|
$
|
4,906,467
|
|||
Depreciation
expense for the years ended December 31, 2006, 2005 and 2004 was $353,949,
$559,306 and $25,198, respectively. Depreciation expense in 2005 includes
the
write off of leasehold improvements of approximately $245,000, adjusted based
on
current foreign currency rates.
F-29
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
5. Patents
In
conjunction with the Nexia Asset Purchase described in Note 2, the Company
recorded intangible assets related to patents of $1,407,000 with a useful
life
of 11 years. The gross carrying value and accumulated amortization, adjusted
based on current foreign currency rates, was $1,481,952 and $235,716,
respectively, at December 31, 2006. The gross carrying value and
accumulated amortization, adjusted based on current foreign currency rates,
was
$1,483,892 and $101,261, respectively, at December 31, 2005. For the years
ended December 31, 2006 and 2005, the Company has recorded amortization
expense of $129,697 and $101,261, respectively. Amortization expense related
to
the above intellectual property is expected to be approximately
$127,910 per year for the next five years.
6. Preferred
Stock
Series
A Convertible Redeemable Preferred Stock
The
Series A Preferred Stock bears a cumulative dividend rate of 8% per annum.
Accrued and unpaid dividends for Series A Preferred Stock at December 31,
2006 and 2005 totaled $4,355,388 and $2,921,923, respectively.
Each
share of the Series A Preferred Stock is convertible into shares of common
stock
at the then-applicable conversion rate, as defined, at any time and at the
option of the holder. The shares of Series A Preferred Stock are currently
convertible into 16,442,000 common shares. The conversion rate is subject
to
adjustment for certain defined equity transactions. At December 31, 2006
and 2005, the Company has reserved 16,442,000 shares of common stock for
the
potential conversion. The Series A Preferred Stock will automatically convert
into common stock at the then-applicable conversion rate in the event of
an
initial public offering of the Company’s common stock resulting in aggregate
proceeds to the Company of $50 million and a price per share of at least
$2.74.
F-30
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
6. Preferred
Stock (continued)
Series
A Convertible Redeemable Preferred Stock (continued)
The
Series A Preferred Stock has a liquidation preference in an amount equal
to the
redefined original purchase price of $0.91 per share plus accumulated but
unpaid
dividends, whether or not declared, in the event of a liquidation, dissolution,
winding-up, sale, or merger. This liquidation preference is junior to the
Series
B Convertible Redeemable Preferred Stock (the Series B Preferred Stock)
and the
Series C Preferred Stock, and senior to the common stock.
The
Company recorded the Series A Preferred Stock at its fair value on the date
of
issuance of approximately $15,000,000, less issuance costs of $105,502. The
issuance costs are accreted to the carrying value of the preferred stock
up to
the earliest redemption period using the effective interest method. The Company
has classified the Series A Preferred Stock outside of permanent equity as
a
result of certain redemption features. Because the Series A Preferred Stock
contains contingently adjustable conversion ratios, the Company evaluated
the
Series A Preferred Stock for potential beneficial conversion features under
EITF
98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,
and
EITF 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments.
The
contingently adjustable conversion ratio changed with the issuance of Series
B
Preferred Stock causing the Company to re-evaluate the potential beneficial
conversion feature. In both cases, based on the fact that the adjusted implied
conversion price of the Series A Preferred Stock exceeded the fair value
of the
common stock into which the Series A Preferred Stock converts, no beneficial
conversion feature was deemed to exist. The implied conversion price was
calculated by dividing the fair value of the Series A Preferred Stock, net
of
the fair value allocated to the warrants issued to the holders of Series
A
Preferred Stock in conjunction with the Series B Preferred Stock offering,
by
the adjusted number of common shares into which the Series A Preferred Stock
converts.
In
conjunction with the Series B Preferred Stock financing, the Series A Preferred
stockholders were granted 5,400,000 contingent warrants to purchase common
stock
for $0.01. The Company deemed 1,620,000 warrants to be probable of issuance.
Accordingly, 1,620,000 warrants were valued using the Black-Scholes model
and
were recorded as a $201,746 discount to the Series A Preferred Stock. This
discount is being accreted through the period up to the first redemption
date
using the effective interest method. The fair value of the warrants were
estimated at the date of grant using the Black-Scholes model assuming a
weighted-average volatility of approximately 60%, a risk free interest rate
of
4.3%, a dividend yield of 0% and a weighted-average expected life of the
warrant
of 8.8 years.
F-31
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
6. Preferred
Stock (continued)
Series
A Convertible Redeemable Preferred Stock (continued)
Commencing
September 11, 2008, the holder of the Series A Preferred Stock may require
the Company to redeem the Series A Preferred Stock then outstanding for
an
amount equal to the original purchase price plus any unpaid dividends,
whether
or not declared. The right of redemption is junior to the Series B Preferred
Stock and Series C Preferred Stock redemption rights.
The
holder of the Series A Preferred Stock is entitled to the number of votes
equal
to the number of common shares into which its shares are
convertible.
Series
B Convertible Redeemable Preferred Stock
In
October 2004, the Company sold 30,448,147 shares of Series B Preferred
Stock to the Series A Preferred Stock investor and four additional investors
at
a price of approximately $0.91 per share for net proceeds of $27,570,490.
Purchasers of the Series B Preferred Stock also received warrants to purchase
common stock as described in Note 8.
The
Series B Preferred Stock bears a cumulative dividend rate of 8% per annum.
Accrued and unpaid dividends for Series B Preferred Stock at December 31,
2006 and 2005 total $5,232,953 and $2,787,101, respectively.
Each
share of the Series B Preferred Stock is convertible into shares of common
stock
at the then-applicable conversion rate, as defined, at any time and at the
option of the holder. The initial conversion rate is one common share for
each
preferred share, which is subject to adjustment for certain defined equity
transactions. At December 31, 2006, the Company has reserved 65,768,001
shares of common stock for the potential conversion. The Series B Preferred
Stock will automatically convert into common stock at the then-applicable
conversion rate in the event of an initial public offering of the Company’s
common stock resulting in aggregate proceeds to the Company of $50 million
and a price per share of at least $2.74.
The
Series B Preferred Stock has a liquidation preference in an amount equal
to the
original purchase price per share plus accumulated but unpaid dividends,
whether
or not declared, in the event of a liquidation, dissolution, winding-up,
sale,
or merger. This liquidation preference is senior to the Series A Preferred
Stock
and the common stock and equal to the liquidation preference of the Series
C
Preferred Stock.
F-32
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
6. Preferred
Stock (continued)
Series
B Convertible Redeemable Preferred Stock (continued)
The
Company recorded the Series B Preferred Stock at its fair value on the date
of
issuance of approximately $27,777,778, less the fair value assigned to warrants
of $3,332,589, less issuance costs of $207,288. The issuance costs are accreted
to the carrying value of the preferred stock up to the earliest redemption
period using the effective interest method. The Company has classified the
Series B Preferred Stock outside of permanent equity as a result of certain
redemption features. Because detachable warrants were granted with the financing
and the Series B Preferred Stock contains contingently adjustable conversion
ratios, the Company evaluated the Series B Preferred Stock for potential
beneficial conversion features under EITF 98-5, Accounting
for Convertible Securities with Beneӿcial Conversion Features or Contingently
Adjustable Conversion Ratios,
and
EITF 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments.
Based
on the fact that the adjusted implied conversion price of the Series B Preferred
Stock exceeded the fair value of the common stock into which the Series B
Preferred Stock converts, no beneficial conversion feature was deemed to
exist.
The implied conversion price was calculated by dividing the fair value of
the
Series B Preferred Stock, net of the fair value of the warrants, by the number
of common shares into which the Series B Preferred Stock converts.
In
conjunction with the Series B financing, the Series B Preferred stockholders
were granted 15,400,000 contingent warrants to purchase common stock for
$0.01.
The Company deemed 10,780,000 warrants to be probable of issuance. Accordingly,
10,780,000 warrants were valued using the Black-Scholes model and were recorded
as a $2,034,335 discount to the Series B Preferred Stock. This discount is
being
accreted through the period up to the first redemption date using the effective
interest method. The fair value of the warrants were estimated at the date
of
grant using the Black-Scholes model assuming a weighted-average volatility
of
approximately 60%, a risk free interest rate of 4.3%, a dividend yield of
0% and
a weighted-average expected life of the warrant of 8.8 years.
Commencing
October 7, 2009, the holders of the Series B Preferred Stock may require
the Company to redeem the Series B Preferred Stock then outstanding for an
amount equal to the original purchase price plus any unpaid dividends, whether
or not declared, and in preference to the Series A Preferred Stock liquidation
rights.
The
holders of the Series B Preferred Stock are entitled to the number of votes
equal to the number of common shares into which its shares are
convertible.
F-33
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
6. Preferred
Stock (continued)
Series
B Convertible Redeemable Preferred Stock (continued)
In
conjunction with this financing, the conversion price of the investor’s Series A
Preferred Stock was adjusted in accordance with the terms of the Series A
Preferred Stock, which resulted in the Series A Preferred Stock being
convertible into an additional 2,672,770 shares, or a total of 16,442,000
shares, of the Company’s common stock.
Series
C Convertible Redeemable Preferred Stock
Contemporaneously
with the consummation of the Nexia asset acquisition transaction (as described
in Note 2), the Company sold 7,480,978 shares of Series C Preferred Stock
to investors at a price of approximately $0.91 per share for net proceeds
of
$6,824,896. Included in these proceeds were two Canadian investors, who
previously invested in Nexia, who purchased an aggregate of 3,370,479 shares
of
Series C Preferred Stock for net proceeds of $3,074,880. Those proceeds were
used to partially fund the acquisition of the Nexia assets. In addition,
the
Company issued to such investors (i) warrants to acquire 2,244,296 shares
of
Series C Preferred Stock, which are exercisable at approximately $0.91 per
share
and which expire on March 10, 2008, and (ii) warrants to acquire 1,346,630
common shares, which are exercisable at $0.01 per share, subject to reduction
if
certain business milestones are met by the Company, as specified in the warrants
and which expire in October 2014.
The
Series C Preferred Stock bears a cumulative dividend rate of 8% per annum.
Accrued and unpaid dividends for Series C Preferred Stock at December 31,
2006 and 2005 total $2,046,257 and $884,635, respectively.
Each
share of the Series C Preferred Stock is convertible into shares of common
stock
at the then-applicable conversion rate, as defined, at any time and at the
option of the holder. The initial conversion rate is one common share for
each
preferred share, which is subject to adjustment for certain defined equity
transactions. At December 31, 2006, the Company has reserved 22,799,574
shares of common stock for the potential conversion. The Series C Preferred
Stock will automatically convert into common stock at the then-applicable
conversion rate in the event of an initial public offering of the Company’s
common stock resulting in aggregate proceeds to the Company of $50 million
and a price per share of at least $2.74.
F-34
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
6. Preferred
Stock (continued)
Series
C Convertible Redeemable Preferred Stock (continued)
The
Series C Preferred Stock has a liquidation preference in an amount equal
to the
original purchase price per share plus accumulated but unpaid dividends,
whether
or not declared, in the event of a liquidation, dissolution, winding-up,
sale,
or merger. This liquidation preference is senior to the Series A Preferred
Stock
and the common stock and equal to the liquidation preference of the Series
B
Preferred Stock.
The
Company recorded the Series C Preferred Stock at its fair value on the date
of
issuance of approximately $13,261,481, less the fair value assigned to warrants
of $2,408,024 and issuance costs of $330,495. The discount on the Series
C
Preferred Stock from the value assigned to the warrants and issuance costs
is
accreted to the carrying value of the preferred stock up to the earliest
redemption period using the effective interest method. The Company has
classified the Series C Preferred Stock outside of permanent equity as a
result
of certain redemption features. Because detachable warrants were granted
with
the financing and the Series C Preferred Stock contains contingently adjustable
conversion ratios, the Company evaluated the Series C Preferred Stock for
potential beneficial conversion features under EITF 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,
and
EITF 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments.
Based
on the fact that the adjusted implied conversion price of the Series C Preferred
Stock exceeded the fair value of the common stock into which the Series C
Preferred Stock converts, no beneficial conversion feature was deemed to
exist.
The implied conversion price was calculated by dividing the fair value of
the
Series C Preferred Stock, net of the fair value of the warrants, by the number
of common shares into which the Series C Preferred Stock converts.
In
conjunction with the Series C Preferred Stock financing, the Series C Preferred
stockholders were granted 4,483,946 warrants to purchase preferred stock
for
$0.91. These warrants were valued using the Black-Scholes model and were
recorded as a $2,072,965 discount to the Series C Preferred Stock. This discount
is being marked to market on a quarterly basis. The fair value of the warrants
were estimated at the date of grant using the Black-Scholes model assuming
a
weighted-average volatility of approximately 60%, a risk free interest rate
of
3.9%, a dividend yield of 0% and a weighted-average expected life of the
warrant
of 3.0 years.
F-35
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
6. Preferred
Stock (continued)
Series
C Convertible Redeemable Preferred Stock (continued)
In
conjunction with the Series C Preferred Stock financing, the Series C Preferred
stockholders were granted 2,690,420 contingent warrants to purchase common
stock
for $0.01. The Company deemed 1,614,225 warrants to be probably of issuance.
Accordingly, 1,614,225 warrants were valued using the Black-Scholes model
and
were recorded as a $285,546 discount to the Series C Preferred Stock. This
discount is being accreted through the period up to the first redemption
date
using the effective interest method. The fair value of the warrants were
estimated at the date of grant using the Black-Scholes model assuming a
weighted-average volatility of approximately 60%, a risk free interest rate
of
4.5%, a dividend yield of 0% and a weighted-average expected life of the
warrant
of 9.6 years.
Commencing
October 7, 2009, the holders of the Series C Preferred Stock may require
the Company to redeem the Series C Preferred Stock then outstanding for an
amount equal to the original purchase price plus any unpaid dividends, whether
or not declared, and in preference to the Series A Preferred Stock liquidation
rights.
The
holders of the Series C Preferred Stock are entitled to the number of votes
equal to the number of common shares into which its shares are convertible.
7. Minority
Interest - Series C Convertible Redeemable Preferred Stock of PharmAthene
Canada, Inc.
Through
its ownership of 100% of the common stock in PharmAthene Canada, Inc., the
Company controls all of the voting stock of PharmAthene Canada, Inc. and
considers itself to be the majority interest primary beneficiary of PharmAthene
Canada, Inc., a variable interest entity. In March 2005, a Canadian
investor purchased 2,591,654 shares of Series C Convertible Preferred Stock
of
PharmAthene Canada, Inc. for net proceeds of $2,364,366. The shares of Series
C
Convertible Preferred Stock of PharmAthene Canada, Inc. are convertible at
the
discretion of the investors into an equal number of shares of Series C Preferred
Stock of the Company. In addition, the Company issued to such investors (i)
warrants to acquire 777,496 Series C Preferred Stock of PharmAthene Canada,
Inc.
(also convertible into Series C Preferred Stock of the Company) exercisable
at
approximately $0.91 per share, which expire on March 10, 2008, and (ii)
warrants to acquire 466,498 common shares of PharmAthene Canada, Inc.
exercisable at $0.01 per share, convertible into shares of common stock of
the
Company on a 1-for-1 basis, subject to reduction if certain business milestones
are met by the Company, as specified in the warrants and which expire in
October 2014.
F-36
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
7. Minority
Interest - Series C Convertible Redeemable Preferred Stock of PharmAthene
Canada, Inc. (continued)
In
conjunction with the Series C financing, the Series C Preferred Stock of
PharmAthene Canada, Inc. stockholders were granted 777,496 warrants to purchase
preferred stock for $0.91. These warrants were valued using the Black-Scholes
model and were recorded as a $265,513 discount to the Series C Preferred
Stock
of PharmAthene Canada, Inc. This discount is being accreted through the period
up to the first redemption date using the effective interest method. The
fair
value of the warrants were estimated at the date of grant using the
Black-Scholes model assuming a weighted-average volatility of approximately
60%,
a risk free interest rate of 3.9%, a dividend yield of 0% and a weighted-average
expected life of the warrant of 3.0 years.
In
conjunction with the Series C financing, the Series C Preferred Stock of
PharmAthene Canada, Inc. stockholders were granted 466,498 contingent warrants
to purchase common stock for $0.01. The Company deemed 279,894 warrants to
be
probable of issuance. Accordingly, 279,894 warrants were valued using the
Black-Scholes model and were recorded as a $49,512 discount to the Series
C
Preferred Stock of PharmAthene Canada, Inc. This discount is being accreted
through the period up to the first redemption date using the effective interest
method. The fair value of the warrants were estimated at the date of grant
using
the Black-Scholes model assuming a weighted-average volatility of approximately
60%, a risk free interest rate of 4.5%, a dividend yield of 0% and a
weighted-average expected life of the warrant of 9.6 years.
The
Series C Convertible Preferred Stock of PharmAthene Canada, Inc. bears a
cumulative dividend rate of 8% per annum. Accrued and unpaid dividend for
the
Series C Convertible Preferred Stock of PharmAthene Canada, Inc. at
December 31, 2006 and 2005 total $354,812 and $153,392, respectively.
The
holders of Series C Convertible Preferred Stock of PharmAthene Canada, Inc.
have
no voting rights.
F-37
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
8. Stockholders’
Deficit
Common
Stock
In
conjunction with the Series A Preferred Stock closing, the common stockholders
agreed to certain limitations on their rights to sell their stock. Further,
the
common stockholders agreed that 5,370,000 shares of common stock would be
subject to a right of repurchase by the Company and the Series A Preferred
Stock
investor in the event of a termination of the relationship between the Company
and the Series A Preferred Stock investor. The repurchase price will be either
cost or fair market value, depending on the termination event. The number
of
shares subject to the repurchase right decreased by 41.67% on December 11,
2004, and further decreases by 8.33% quarterly thereafter until
September 11, 2006. As of December 31, 2006, no shares remained
subject to the right of repurchase.
2002
Long-Term Incentive Plan
The
Company adopted the 2002 Long-Term Incentive Plan (the Plan) to provide an
incentive to eligible employees, consultants, and officers. The Plan provides
for the granting of stock options, restricted common stock, and stock
appreciation rights. As of December 31, 2006, the Company had reserved
10,919,372 shares of common stock for distribution under the Plan, of which
1,854,846 remain available for future grants. Stock options granted under
the
Plan may be either incentive stock options, as defined by the Internal Revenue
Code, or non-qualified stock options. The Board of Directors determines who
will
receive options, the vesting period which is generally four years, and the
exercise price. Options may have a maximum term of no more than 10
years.
F-38
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
8. Stockholders’
Deficit (continued)
2002
Long-Term Incentive Plan (continued)
The
following table summarizes the activity of the Company’s stock option
plan:
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Contractual Term
|
||||||||
|
Outstanding,
January 1, 2004
|
2,920,296
|
$
|
0.16
|
|||||||
|
Granted
|
514,330
|
0.17
|
||||||||
|
Exercised
|
-
|
-
|
||||||||
|
Outstanding,
December 31, 2004
|
3,434,626
|
$
|
0.16
|
|||||||
|
Exercisable,
December 31, 2004
|
650,603
|
$
|
0.16
|
|||||||
|
Outstanding,
January 1, 2005
|
3,434,626
|
$
|
0.16
|
|||||||
|
Granted
|
5,497,677
|
0.21
|
||||||||
|
Exercised
|
202,906
|
0.13
|
||||||||
|
Forfeited
|
743,394
|
0.19
|
||||||||
|
Outstanding,
December 31, 2005
|
7,986,003
|
$
|
0.19
|
|||||||
|
Exercisable,
December 31, 2005
|
2,405,369
|
$
|
0.18
|
|||||||
|
Outstanding,
January 1, 2006
|
7,986,003
|
$
|
0.19
|
7.7
years
|
||||||
|
Granted
|
1,631,676
|
0.21
|
||||||||
|
Exercised
|
1,340,566
|
0.18
|
||||||||
|
Forfeited
|
770,059
|
0.21
|
||||||||
|
Outstanding,
December 31, 2006
|
7,507,054
|
$
|
0.20
|
8.0
years
|
||||||
|
Exercisable,
December 31, 2006
|
3,844,376
|
$
|
0.19
|
7.7
years
|
||||||
|
Vested,
December 31, 2006
|
3,844,376
|
|||||||||
The
total
intrinsic value of options exercised during the year ended December 31,
2006 was $37,792. As of December 31, 2006, there was $770,079 of total
unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under the Plan. That cost is expected to be recognized
over
a weighted-average period of 1.9 years. The total fair value of shares vested
during the year ended December 31, 2006 was $280,281.
F-39
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
8. Stockholders’
Deficit (continued)
2002
Long-Term Incentive Plan (continued)
Exercise
prices for options granted during 2006 were $0.21 per share. The
weighted-average remaining contractual life of those options is approximately
9.4 years. As of the date of grant, the weighted-average fair value of the
options granted in 2006 was $0.17.
Exercise
prices for options granted during 2005 were $0.21 per share. The
weighted-average remaining contractual life of those options is approximately
9.2 years. As of the date of grant, the weighted-average fair value of the
options granted in 2005 was $0.14.
Exercise
prices for options granted during 2004 ranged from $0.16 to $0.21 per share.
The
weighted-average remaining contractual life of those options is approximately
8.7 years. As of the date of grant, the weighted-average fair value of the
options granted in 2004 was $0.10.
The
weighted-average expected life of options outstanding at December 31, 2006
is approximately 8.0 years.
In
2004
and 2005, the Company granted options to non-employees to purchase up to
200,000
and 125,000 shares, respectively, of the Company’s common stock at exercise
prices of $0.16 and $0.21 per share, respectively. The 2004 and 2005 options
vest over four years. Stock-based compensation expense recorded during the
years
ended December 31, 2006, 2005 and 2004 was $4,647, $3,517 and $2,448,
respectively.
Warrants
In
conjunction with the Series B Preferred Stock issuance in October 2004, the
Company issued warrants to purchase 15,400,000 shares of common stock at
an
exercise price of $0.01 per share, subject to reduction if certain business
milestones are met by the Company, as specified in the warrants and expiring
in
October 2014. As of December 31, 2004, milestones related to 1,540,000
shares of common stock underlying of the warrants to purchase common stock
were
attained, with the outstanding total of warrants reduced to 13,860,000.
Following the Nexia asset purchase in March 2005 (as described in
Note 2), an additional milestone related to 6,160,001 shares of common
stock underlying of the warrants was achieved, and the total warrants
outstanding were further reduced to 7,699,999.
F-40
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
8. Stockholders’
Deficit (continued)
Warrants
(continued)
In
connection with a licensing agreement for rights to certain patents, the
Company
issued warrants to purchase 200,000 shares of common stock at an exercise
price
of $0.01 per share to a research company in January 2006. In
August 2006, the research company exercised the warrants for common
stock.
The
following table summarizes the activity of the Company’s warrants:
|
Warrants
for Shares of Common Stock
|
Weighted-Average
Exercise Price
|
Warrants
for Shares of Preferred Stock
|
Weighted-Average
Exercise Price
|
||||||||||
|
Outstanding
at January 1, 2004
|
263,296
|
$
|
0.01
|
-
|
$
|
-
|
|||||||
|
Granted
|
15,400,000
|
0.01
|
-
|
-
|
|||||||||
|
Forfeited
|
(1,540,000
|
)
|
0.01
|
-
|
-
|
||||||||
|
Outstanding
at December 31, 2004
|
14,123,296
|
0.01
|
-
|
-
|
|||||||||
|
Granted
|
3,156,918
|
0.01
|
5,261,442
|
0.91
|
|||||||||
|
Forfeited
|
(6,160,001
|
)
|
0.01
|
-
|
-
|
||||||||
|
Outstanding
at December 31, 2005
|
11,120,213
|
0.01
|
5,261,442
|
0.91
|
|||||||||
|
Granted
|
200,000
|
0.01
|
-
|
-
|
|||||||||
|
Exercised
|
(200,000
|
)
|
0.01
|
-
|
-
|
||||||||
|
Outstanding
at December 31, 2006
|
11,120,213
|
$
|
0.01
|
5,261,442
|
$
|
0.91
|
|||||||
F-41
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
9. Income
Taxes
For
the
years ended December 31, 2006, 2005 and 2004, there is no current provision
for income taxes, and the deferred tax provision has been entirely offset
by a
valuation allowance. Actual income tax benefit differs from the expected
income
tax benefit computed at the federal statutory rate as follows:
|
December 31
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Statutory
federal tax benefit
|
$
|
(5,059,836
|
)
|
$
|
(7,654,035
|
)
|
$
|
(3,351,673
|
)
|
|
|
State
income tax, net of federal benefit
|
(465,700
|
)
|
(326,400
|
)
|
(453,900
|
)
|
||||
|
Other
permanent differences
|
250,100
|
16,700
|
7,300
|
|||||||
|
Other,
net
|
16,985
|
(96,331
|
)
|
(616
|
)
|
|||||
|
Increase
in valuation allowance
|
5,258,451
|
8,060,066
|
3,798,889
|
|||||||
|
|
$ |
-
|
$
|
-
|
$
|
-
|
||||
The
Company’s net deferred tax assets consisted of the following:
|
December 31
|
|||||||
|
2006
|
2005
|
||||||
|
Deferred
tax assets:
|
|||||||
|
Net
operating loss carryforwards
|
$
|
15,183,957
|
$
|
10,188,453
|
|||
|
Depreciation/amortization
|
3,429,465
|
3,967,637
|
|||||
|
Research
and development credits
|
1,056,414
|
267,764
|
|||||
|
Accrued
expenses and other
|
67,149
|
54,680
|
|||||
|
19,736,985
|
14,478,534
|
||||||
|
Deferred
tax liabilities:
|
|||||||
|
Depreciation/amortization
|
-
|
-
|
|||||
|
|
-
|
-
|
|||||
|
Gross
deferred tax assets
|
19,736,985
|
14,478,534
|
|||||
|
Less:
valuation allowance
|
(19,736,985
|
)
|
(14,478,534
|
)
|
|||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
|||
F-42
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
9. Income
Taxes (continued)
The
deferred tax amounts discussed above are classified as follows:
|
December 31
|
|||||||
|
2006
|
2005
|
||||||
|
Current
deferred tax assets
|
$
|
67,149
|
$
|
322,444
|
|||
|
Non-current
deferred tax assets
|
19,669,836
|
14,156,090
|
|||||
|
19,736,985
|
14,478,534
|
||||||
|
Less:
valuation allowance
|
(19,736,985
|
)
|
(14,478,534
|
)
|
|||
|
Net
deferred tax assets
|
$
|
-
|
$
|
-
|
|||
In
assessing the realizability of deferred tax assets, management considers
whether
it is more likely than not that some or all of the deferred tax asset will
not
be realized. The ultimate realization of the deferred tax asset is dependent
upon the generation of future taxable income during the periods in which
the net
operating loss carryforwards are available. Management considers projected
future taxable income, the scheduled reversal of deferred tax liabilities
and
available tax planning strategies that can be implemented by the Company
in
making this assessment. Based upon the level of historical taxable income
and
projections for future taxable income over the periods in which the net
operating loss carryforwards are available to reduce income taxes payable,
management has established a full valuation allowance.
The
U.S. federal net operating loss carryforwards of approximately
$33.8 million will begin to expire in various years beginning 2022. The use
of the Company’s net operating loss carryforwards may be restricted because of
changes in company ownership in accordance with I.R.C. Section 382. The
Canadian net operating loss carryforwards of approximately $6.7 million
will expire in 2015. Certain Canadian net operating losses may have an unlimited
life. Additionally, despite the net operating loss carryforwards, the Company
may have a future tax liability due to alternative minimum tax or state tax
requirements.
The
Company intends to permanently reinvest foreign earnings within the foreign
country.
F-43
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
10. Commitments
and Contingencies
Leases
The
Company leases offices in the United States under a month-to-month operating
lease agreement. In September 2006, the Company entered into a 10 year
office lease, which is anticipated to commence on April 1, 2007.
Additionally, following the Nexia asset purchase in March 2005, the Company
entered into a two year renewable lease agreement for office space in Canada.
This lease is renewable for an additional two years and provides for expansion
into additional facility space if available. Annual minimum payments are
as
follows:
|
2007
|
$
|
309,700
|
||
|
2008
|
311,300
|
|||
|
2009
|
320,600
|
|||
|
2010
|
330,300
|
|||
|
2011
and thereafter
|
2,400,400
|
|||
|
$
|
3,672,300
|
Total
rent expense under operating lease agreements approximated $310,518, $520,365
and $69,333 for the years ended December 31, 2006, 2005 and 2004,
respectively.
License
Agreements
In
March 2005, the Company licensed certain patent rights from a company. The
license agreement required a $75,000 up front payment. Additionally, the
license
agreement requires royalties payments equal to specific percentages of future
sales of products subject to the license through the expiration of the licensed
patent. In the event that the minimum annual royalty amount of $75,000 has
not
been met by either the earliest of obtaining a biologics license application
or
three years upon execution of the license agreement, the Company will pay
the
difference between the minimum royalty payment and those royalties actually
paid.
In
January 2006, the Company licensed certain patent rights from a research
company. The license agreement required a $50,000 up-front payment.
Additionally, payments within the agreement included a sublicense fee of
20% and
milestone payments of $25,000 upon the granting of a U.S. patent, $200,000
upon the initiation of certain studies or trials, and $250,000 upon BLA
approval. Upon commercialization, the license agreement requires royalty
payments equal to a specified percentage of future sales of products for
both
government procurement and commercial market sales subject to the license
through the expiration of the licensed patents.
F-44
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
10. Commitments
and Contingencies (continued)
License
Agreements (continued)
In
August 2006, the Company entered into a research and licensing agreement
allowing for the licensing of certain patent rights. The agreement includes
research expense reimbursement payments and certain development milestone
payments. Upon commercialization, the license agreement requires royalty
payments equal to a specified percentage of future sales of products for
both
government procurement and commercial market sales subject to the license
through the expiration of the licensed patents. During 2006, the Company
expensed $50,000 related to this agreement.
11. Related
Party Transactions
The
Company leases its office space from an entity that is affiliated with the
organization to which the Company issued warrants for 263,296 shares of common
stock in August 2003 (see Note 8). The Company paid $118,109, $78,448
and $69,333 in rent expense related to this operating lease for the years
ended
December 31, 2006, 2005 and 2004, respectively.
As
further disclosed in footnote 14, several directors and officers of the Company
participated in the Convertible 8% Bridge Notes for approximately $190,000
in
the second and third quarters of 2006.
12. Medarex
Collaboration
In
November 2004, the Company and Medarex, Inc. entered into a collaboration
agreement under which the companies plan to develop and commercialize MDX-1303,
a fully human monoclonal antibody targeting the Bacillus
anthracis protective
antigen. MDX-1303 was developed by Medarex using its UltiMAb Human Antibody
Development System®,
and
this antibody is currently in preclinical development by Medarex for use
against
human anthrax infection.
F-45
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
12. Medarex
Collaboration (continued)
Under
the
terms of the agreement, Medarex and PharmAthene have agreed jointly to continue
to investigate the potential for MDX-1303 to be used as a therapeutic for
individuals with active disease as well as for prophylactic treatment of
individuals exposed to anthrax. In December 2004, Medarex received a
deposit from PharmAthene against potential future development activities
for
MDX-1303, against which Medarex must submit reports of the use of costs as
they
are incurred in order to take draw downs against the deposit. If the project
is
terminated or if development activities for MDX-1303 by Medarex are completed
prior to exhaustion of the deposit, amounts remaining under the deposit are
to
be returned to PharmAthene. For the twelve months ended December 31, 2006
and 2005, PharmAthene recorded the use of these funds for development activities
for MDX-1303 as Research and Development operating expenses of $917,000 and
$577,000, respectively. As of December 31, 2006 and December 31, 2005,
approximately $0.4 million and $1.3 million, respectively, of this
deposit remained. PharmAthene is fully responsible for funding all future
research and development activities that are not supported by government
funds.
The companies will share profits according to a pre-agreed allocation
percentage.
13. Terminated
Merger Agreement
On
March 9, 2006, the Company entered into a term sheet for the merger of the
Company with SIGA Technologies Inc. (SIGA). On September 9, 2006, the
boards of directors of both companies approved the merger in a definitive
agreement. In conjunction with the transaction, the Company agreed to enter
into
a Bridge Note Purchase Agreement providing SIGA with interim financing, subject
to the execution of a definitive merger agreement, of up to $3.0 million.
The Company paid $3.0 million of this interim financing to
SIGA.
On
October 4, 2006, SIGA terminated the merger agreement and subsequently
repaid the $3.0 million bridge notes including interest. Additionally, the
Company expensed approximately $1.5 million in merger related costs which
had been recorded on the balance sheet as of September 30, 2006.
On
December 20, 2006, the Company filed a complaint against SIGA in the
Delaware Chancery Court. The Company’s complaint alleges that it has the right
to license exclusively development and marketing rights for SIGA’s drug
candidate, SIGA-246, pursuant to the terminated merger agreement with SIGA.
The
complaint further alleges that SIGA failed to negotiate in good faith the
terms
of such a license pursuant to the terminated merger agreement.
F-46
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
14. Convertible
8% Notes
In
June 2006, certain of the Company’s investors in the Series B Preferred
Stock and the Series C Preferred Stock among others and the Company entered
into
an agreement providing for the issuance of $9.8 million in convertible
notes (the ‘‘Bridge Notes’’). The Bridge Notes are convertible (i) if the
closing of the merger does not occur, into Series B redeemable convertible
preferred stock at $0.91 per share plus an equal number of common shares
(ii)
upon the closing of the merger with SIGA and a contingent financing with
gross
proceeds in excess of $25 million, into the same securities sold in such
financing, at a 10% price discount, or (iii) upon a separate financing into
such
financing securities at a 25% price discount and an equal number of common
shares. The Company may have a future beneficial conversion feature based
upon
the pricing of future financings. Accordingly, the Company will assess whether
a
beneficial conversion feature exists when the contingent event occurs and
record
the amount, if any, at that time.
In
August 2006, the investor in Series C Convertible Preferred Stock of
PharmAthene Canada, Inc. and the Company purchased an additional
$2.0 million of Bridge Notes.
The
Company has recognized interest expense related to the Bridge Notes of
approximately $538,700 through December 31, 2006.
F-47
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
15. Subsequent
Events
Definitive
Merger Agreement
On
January 19, 2007 the Company signed a definitive merger agreement with
Healthcare Acquisition Corp. (“HAQ”). Pursuant to the terms of the agreement,
HAQ will issue 12.5 million new shares to the Company’s shareholders. It is
anticipated that shareholders of the Company will own at least 52% of the
outstanding basic shares of the combined company, which is anticipated to
remain
listed on the American Stock Exchange. Additionally, it is anticipated that
the
Company’s $11.8 million of outstanding secured convertible notes will be
exchanged for $12.5 million of new unsecured 8% convertible notes maturing
in 24 months. These convertible notes will be convertible at the option of
the
holders into common stock at $10.00 per share and may be redeemed by the
Company
without penalty after 12 months. In the event that the Company enters into
a
contract prior to December 31, 2007 for the sale of Valortim™ with the
U.S. government for more than $150,000,000 in anticipated revenue, the
Company’s current shareholders will be eligible for additional cash payments,
not to exceed $10 million, equal to 10% of the actual collections from the
sale of Valortim™. Subject to certain approvals required of the HAQ and
PharmAthene shareholder by applicable state law and the rules and regulations
of
the American Stock Exchange, as well as other regulatory approvals and other
customary closing conditions, the Company expects the merger to close in
the
second or third quarter of 2007.
Licensing
Agreement
Through
the Nexia acquisition, the Company acquired a license agreement originally
executed in September 2004 for the rights to certain technologies. This
agreement included an option to license product
processing technology
necessary to perform development of Protexia® as required under its government
contract with the Department of Defense.
The
Company executed a new licensing agreement with the development company on
March 2, 2007 which results in a license to all
technology provided under the original agreement including the necessary
purification technology previously included in an option and access to
additional information and technology deemed to be essential for development
of
Protexia®
and
performance under the Department
of Defense
contract. Under the new agreement, the Company must pay $200,000 over a period
of six years with $100,000 due in the first year. This expense is eligible
for
reimbursement by the US government under the contract with the Department
of
Defense.
F-48
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
15. Subsequent
Events (continued)
$10 million
Debt Financing
On
March 30, 2007, the Company entered into a $10 million credit facility
with Silicon Valley Bank and Oxford Finance Corporation. Under the credit
facility the Company e borrowed $10 million which loan bears interest at
the rate of 11.5%. Pursuant to the terms of the loan and security agreement
evidencing the credit facility, the Company will make monthly payments of
interest only through September 30, 2007 and, thereafter, will make monthly
payments of principal and interest over the remaining 29 months of the loan.
The
loan is secured by a security interest on all of the Company’s assets other than
certain intellectual property. In addition, in the event that the proposed
Merger is not consummated by August 3, 2007, the Company has agreed to
provide the lenders with a mortgage on its Canadian real estate. the Company
may
not repay the loan for the first six months but thereafter may prepay provided
it pays certain prepayment fees. In connection with the credit facility,
the
Company issued to Silicon Valley Bank and Oxford Financial Corporation warrants
to purchase an aggregate of 438,453 shares of PharmAthene Series C Preferred
Stock through March 30, 2017 at an exercise price of $0.91. As a
consequence of the issuance of the warrants, the Merger Allocation Agreement
was
amended and restated in order to recalculate the Merger Consideration payable
to
the holders of the various classes of capital stock of the Company taking
into
account the newly issued warrants.
16. Quarterly
Information (Unaudited)
Set
forth
below is the Company’s quarterly financial information for the previous two
fiscal years:
|
Three
months ended
|
|||||||||||||
|
March 31,
2006
|
June 30,
2006
|
September 30,
2006
|
December 31,
2006
|
||||||||||
|
|
|||||||||||||
|
Total
revenue
|
$
|
186,442
|
$
|
-
|
$
|
1,590
|
$
|
1,475,274
|
|||||
|
Loss
from operations
|
(3,220,075
|
)
|
(2,962,777
|
)
|
(3,430,012
|
)
|
(4,920,777
|
)
|
|||||
|
Net
loss attributable to common shareholders
|
(5,130,584
|
)
|
(4,583,454
|
)
|
(5,342,692
|
)
|
(6,666,328
|
)
|
|||||
|
Net
loss attributable to common shareholders
per
share - basic and diluted
|
(0.47
|
)
|
(0.42
|
)
|
(0.48
|
)
|
(0.53
|
)
|
|||||
F-49
PharmAthene, Inc.
Notes
to
Consolidated Financial Statements (continued)
16. Quarterly
Information (Unaudited) (continued)
|
Three
months ended
|
|||||||||||||
|
March 31,
20051
|
June 30,
2005
|
September 30,
2005
|
December 31,
2005
|
||||||||||
|
Total
revenue
|
$
|
277,389
|
$
|
440,210
|
$
|
200,061
|
$
|
180,740
|
|||||
|
Loss
from operations
|
(15,175,457
|
)
|
(2,347,838
|
)
|
(2,398,396
|
)
|
(3,812,900
|
)
|
|||||
|
Net
loss attributable to common shareholders
|
(16,199,126
|
)
|
(3,805,650
|
)
|
(3,872,130
|
)
|
(5,286,549
|
)
|
|||||
|
Net
loss attributable to common shareholders per share - basic and
diluted
|
(1.51
|
)
|
(0.35
|
)
|
(0.36
|
)
|
(0.48
|
)
|
|||||
1
As
described in Note 2, loss from operations for the three months ended
March 31, 2005 includes a $12,812,000 charge to acquired in-process
research and development related to the Nexia asset acquisition.
F-50
PharmAthene, Inc.
Consolidated
Financial Statements
Three
Months Ending March 31, 2007 and 2006
F-51
PharmAthene, Inc.
Condensed
Consolidated
Balance Sheets
|
March
31,
|
December 31
|
||||||
|
2007
|
2006
|
||||||
|
Assets
|
(Unaudited)
|
||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
11,910,718
|
$
|
5,112,212
|
|||
|
Accounts
receivable
|
2,044,537
|
1,455,538
|
|||||
|
Prepaid
expenses
|
614,706
|
877,621
|
|||||
|
Other
current assets
|
104,772
|
104,772
|
|||||
|
Total
current assets
|
14,674,733
|
7,550,143
|
|||||
|
Property
and equipment, net
|
5,401,930
|
5,230,212
|
|||||
|
Patents,
net
|
1,223,549
|
1,246,236
|
|||||
|
Other
long term assets
|
188,630
|
153,336
|
|||||
|
Deferred
costs
|
1,573,510
|
587,577
|
|||||
|
Total
assets
|
$
|
23,062,352
|
$
|
14,767,504
|
|||
|
Liabilities,
convertible redeemable preferred stock, and stockholders’
deficit
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
1,138,735
|
$
|
839,120
|
|||
|
Accrued
expenses and other liabilities
|
2,371,390
|
1,587,017
|
|||||
|
Notes
payable
|
11,768,089
|
11,768,089
|
|||||
|
Current
portion of long term debt
|
2,000,000
|
-
|
|||||
|
Total
current liabilities
|
17,278,214
|
14,194,226
|
|||||
|
Warrants
to purchase Series C convertible redeemable preferred
stock
|
2,617,056
|
2,423,370
|
|||||
|
Long
term debt
|
7,798,688
|
-
|
|||||
|
Total
liabilities
|
27,693,958
|
16,617,596
|
|||||
|
Minority
interest - Series C convertible redeemable preferred stock of
PharmAthene
Canada, Inc., $0.001 par value; unlimited shares authorized;
2,591,654
issued and outstanding; liquidation preference in the aggregate
of
$2,719,178
|
2,624,605
|
2,545,785
|
|||||
|
Series
A convertible redeemable preferred stock, $0.001 par value; 16,442,000
shares authorized, issued and outstanding; liquidation preference
in the
aggregate of $19,355,388
|
19,545,314
|
19,130,916
|
|||||
|
Series
B convertible redeemable preferred stock, $0.001 par value; 65,768,001
shares authorized; 30,448,147 issued and outstanding; liquidation
preference in the aggregate of $33,010,797
|
32,543,119
|
31,780,064
|
|||||
|
Series
C convertible redeemable preferred stock, $0.001 par value; 22,799,574
shares authorized; 14,946,479 issued and outstanding; liquidation
preference in the aggregate of $15,681,930
|
14,956,947
|
14,480,946
|
|||||
|
Stockholders’
deficit:
|
|||||||
|
Common
stock, $0.001 par value; 147,089,104 shares authorized; 12,484,722
at
March 31, 2007 and 12,483,472 at December 31, 2006 shares issued
and outstanding
|
12,485
|
12,483
|
|||||
|
Additional
paid-in capital
|
-
|
-
|
|||||
|
Accumulated
other comprehensive income
|
118,772
|
63,954
|
|||||
|
Accumulated
deficit
|
(74,432,848
|
)
|
(69,864,240
|
)
|
|||
|
Total
stockholders’ deficit
|
(74,301,591
|
)
|
(69,787,803
|
)
|
|||
|
Total
liabilities, convertible redeemable preferred stock, and stockholders’
deficit
|
$
|
23,062,352
|
$
|
14,767,504
|
|||
See
accompanying notes.
F-52
PharmAthene, Inc.
Condensed
Consolidated
Statements of Operations
(Unaudited)
|
Three
Months Ending March 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Contract
and grant revenue
|
$
|
2,961,759
|
$
|
178,701
|
|||
|
Other
revenue
|
7,000
|
7,741
|
|||||
|
2,968,759
|
186,442
|
||||||
|
Operating
expenses:
|
|||||||
|
Research
and development
|
3,061,059
|
1,750,580
|
|||||
|
General
and administrative
|
2,510,370
|
1,519,601
|
|||||
|
Depreciation
and amortization
|
147,133
|
136,336
|
|||||
|
Total
operating expenses
|
5,718,562
|
3,406,517
|
|||||
|
Loss
from operations
|
(2,749,803
|
)
|
(3,220,075
|
)
|
|||
|
Other
income (expense):
|
|||||||
|
Interest
income
|
55,616
|
72,258
|
|||||
|
Interest
expense
|
(241,781
|
)
|
(61
|
)
|
|||
|
Change
in market value of derivative instruments
|
7,626
|
(353,835
|
)
|
||||
|
Total
other income (expense)
|
(178,539
|
)
|
(281,638
|
)
|
|||
|
Net
loss
|
(2,928,342
|
)
|
(3,501,713
|
)
|
|||
|
Accretion
of redeemable convertible preferred stock to redemptive
value
|
(1,732,275
|
)
|
(1,628,871
|
)
|
|||
|
Net
loss attributable to common shareholders
|
$
|
(4,660,617
|
)
|
$
|
(5,130,584
|
)
|
|
|
Basic
and diluted net loss per share
|
$
|
(0.37
|
)
|
$
|
(0.47
|
)
|
|
|
Weighted
average shares used in calculation of basic and diluted net loss
per
share
|
12,483,819
|
10,942,906
|
|||||
See
accompanying notes.
F-53
PharmAthene, Inc.
Condensed
Consolidated
Statements of Cash Flows
(Unaudited)
|
Three
months ended March 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Operating
activities
|
|||||||
|
Net
loss
|
$
|
(2,928,342
|
)
|
$
|
(3,501,713
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Change
in market value of derivative instruments
|
(7,626
|
)
|
353,835
|
||||
|
Depreciation
and amortization
|
147,133
|
136,336
|
|||||
|
Compensatory
option expense
|
90,760
|
84,839
|
|||||
|
Changes
in operating assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(588,999
|
)
|
(68,037
|
)
|
|||
|
Prepaid
expenses and other current assets
|
262,915
|
398,184
|
|||||
|
Other
assets
|
(35,295
|
)
|
-
|
||||
|
Accounts
payable
|
299,615
|
(115,972
|
)
|
||||
|
Accrued
expenses
|
784,373
|
(158,934
|
)
|
||||
|
Net
cash used in operating activities
|
(1,975,466
|
)
|
(2,871,462
|
)
|
|||
|
Investing
activities
|
|||||||
|
Purchase
of property and equipment
|
(247,266
|
)
|
(189,054
|
)
|
|||
|
Issuance
of note receivable
|
-
|
(1,000,000
|
)
|
||||
|
Net
cash used in investing activities
|
(247,266
|
)
|
(1,189,054
|
)
|
|||
|
Financing
activities
|
|||||||
|
Proceeds
from stock options exercised
|
1,249
|
-
|
|||||
|
Proceeds
from bank loan
|
10,000,000
|
-
|
|||||
|
Financing
costs
|
(985,933
|
)
|
-
|
||||
|
Net
cash provided by financing activities
|
9,015,316
|
-
|
|||||
|
Effects
of exchange rates on cash
|
5,922
|
(43,841
|
)
|
||||
|
(Decrease)
increase in cash and cash equivalents
|
6,798,506
|
(4,104,357
|
)
|
||||
|
Cash
and cash equivalents, at beginning of year
|
5,112,212
|
7,938,116
|
|||||
|
Cash
and cash equivalents, at end of year
|
$
|
11,910,718
|
$
|
3,833,759
|
|||
See
accompanying notes.
F-54
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements
March
31, 2007
1. Organization
and Business
The
condensed consolidated financial statements do not include footnotes and
certain
financial information normally presented annually under accounting principles
generally accepted in the United States, and therefore, should be read
in
conjunction with the Consolidated Financial Statements for the year ended
December 31, 2006. Accounting measurements at interim dates inherently
involve
greater reliance on estimates than at year-end. The results of operations
for
the quarterly period ended March 31, 2007 are not necessarily indicative
of
results that can be expected for the fiscal year ending December 31, 2007.
The
condensed consolidated financial statements included herein are unaudited;
however, they contain all adjustments (consisting of normal recurring accruals),
which, in the opinion of the Company, are necessary to present fairly its
consolidated financial position at March 31, 2007 and December 31, 2006,
and its
consolidated results of operations and cash flows for the three months
ended
March 31, 2007 and 2006, in conformity with accounting principles generally
accepted in the United States.
PharmAthene, Inc.
(the Company) was incorporated on March 13, 2001 (inception), under the
laws of the State of Delaware. The Company is a biopharmaceutical company
focused on developing anti-infectives for biodefense applications. The
Company
has generated an accumulated deficit of $74,432,848 since inception. The
Company
anticipates incurring additional losses until such time, if ever, as it
can
generate significant sales of its products currently in development. Substantial
additional financing will be needed by the Company to fund its operations
and to
commercially develop its products. There is no assurance that such financing
will be available when needed.
The
Company is subject to those risks associated with any biopharmaceutical
company
that has substantial expenditures for research and development. There can
be no
assurance that the Company’s research and development projects will be
successful, that products developed will obtain necessary regulatory approval,
or that any approved product will be commercially viable. In addition,
the
Company operates in an environment of rapid technological change and is
largely
dependent on the services of its employees and consultants.
F-55
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
2. Summary
of Significant Accounting Policies
Principles
of Consolidation
The
Consolidated Financial Statements include the accounts of the Company and
its
subsidiary, PharmAthene Canada, Inc., which was formed in March of 2005.
All significant intercompany transactions and balances have been
eliminated.
The
FASB
has issued FASB Interpretation (FIN) No. 46 (revised December 2003),
Consolidation
of Variable Interest Entities,
(FIN
46R). FIN 46R expands consolidated financial statements to include certain
variable interest entities (VIEs). VIEs are to be consolidated by the company
which is considered to be the primary beneficiary of that entity, even
if the
company does not have majority control. FIN 46R is immediately effective
for
VIEs created after January 31, 2003, and is effective for the Company in
2005 for VIEs created prior to February 1, 2003. The Company’s subsidiary,
PharmAthene Canada, Inc., is a VIE and the Company is the primary beneficiary.
Therefore,
the Company has consolidated PharmAthene Canada, Inc. as of its date of
inception.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States requires management to make
estimates
and assumptions that affect the reported amounts of assets and liabilities,
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 from those estimates.
F-56
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
2. Summary
of Significant Accounting Policies (continued)
Comprehensive
Loss and Foreign Currency Translation
The
financial statements of subsidiaries located outside of the United States
are
measured using the local currency as the functional currency. Assets and
liabilities of these subsidiaries are translated at the rates of exchange
at the
balance sheet date. The resultant translation adjustments are included
in
accumulated other comprehensive income (loss), a separate component of
stockholders’ equity. Income and expense items are translated at average monthly
rates of exchange. Gains and losses from foreign currency transactions
of these
subsidiaries are included in net earnings. Comprehensive loss for each
of the
three-month periods ended March 31, 2007 and 2006 was approximately $2,873,523
and $2,805,938, respectively.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with maturities of three
months
or less when purchased to be cash equivalents. Cash equivalents consist
of a
short-term money market account with a bank.
Accounts
Receivable
Through
its inception to date, substantially all of PharmAthene’s accounts receivable
have been associated with U.S. government contracts and grants or with the
receipt of Quebec provincial or Canadian Federal credits for internally
and
externally generated research and development expenditures. Amounts invoiced
or
recorded as billed under these programs but not yet collected are reported
as
outstanding accounts receivable.
While
the
Company has a policy to provide an allowance for any amount of accounts
receivable which it determines to be uncollectible and the Company will
write
off any uncollectible account when the likelihood of that account’s collection
is determined to be not probable, the Company has not historically found
it
necessary to record any write-offs of accounts receivable or to record
an
allowance for uncollectible accounts. At March 31, 2007, the Company’s
accounts receivable balance included approximately $1,318,709, including
unbilled receivables of approximately $1,004,773, related to U.S government
contracts.
F-57
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
2. Summary
of Significant Accounting Policies (continued)
Property
and Equipment
Property
and equipment consist of land, building and leasehold improvements, laboratory,
computer, farm and office equipment and furniture and are recorded at cost.
Property and equipment are depreciated using the straight-line method over
the
estimated useful lives of the respective assets as follows:
|
Asset
Category
|
Estimated
Useful Life
(
in years)
|
|||
|
Building
and leasehold improvements
|
4
- 20
|
|||
|
Laboratory
equipment
|
7
|
|||
|
Furniture,
farm and office equipment
|
5
- 7
|
|||
|
Computer
equipment
|
3
|
|||
Intangible
Assets
Intangible
assets consist of patents and are being amortized using the straight-line
method
over an 11 year period. The intangible assets are reviewed for impairment
when
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment is considered to have occurred if expected future
undiscounted cash flows are insufficient to recover the carrying value
of the
asset. If impaired, the asset’s carrying value is reduced to fair
value.
F-58
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
2. Summary
of Significant Accounting Policies (continued)
Impairment
of Long-Lived Assets
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets,
long-lived assets such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever
events
or changes in circumstances indicate that the carrying amount of an asset
may
not be recoverable. Recoverability of assets to be held and used is measured
by
a comparison of the carrying amount of an asset to estimated undiscounted
future
cash flows expected to be generated by the asset. If the carrying amount
of an
asset exceeds its estimated future cash flows, then an impairment charge
is
recognized by the amount by which the carrying amount of the asset exceeds
the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheets and reported at the lower of the carrying amount
or fair
value, less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held-for-sale would be presented
separately in the appropriate asset and liability sections of the balance
sheets. As of March 31, 2007, management believes that no revision of the
remaining useful lives or write-down of long-lived assets is
required.
Revenue
Recognition
Grant
Revenue
The
Company recognizes revenue when all terms and conditions of the agreements
have
been met including persuasive evidence of an arrangement, services have
been
rendered, price is fixed or determinable, and collectibility is reasonably
assured. For reimbursable cost research grants, the Company recognizes
revenue
as costs are incurred and appropriate regulatory approvals have been obtained
or
approval criteria are met for invoicing the related government
agency.
All
of
the grant revenue the Company recognized was received under a cost reimbursement
grant from the U.S. government to fund the development of pharmaceutical
products for biodefense applications. Receipts pursuant to such cost
reimbursement grants are contingent upon the successful completion of related
tasks, the granting agency may modify the contract at any time, and reimbursed
costs are subject to review and adjustment by the granting agency.
In
September 2006, the Company was awarded a multi-year cost reimbursement
contract valued at up to $213 million from the Department of Defense Army
Space and Missile Command for advanced development of the Company’s broad
spectrum chemical nerve agent prophylaxis, Protexia®. The Department of Defense
has allocated $34.7 million for the initial stage of development, including
manufacturing process development, preclinical and toxicity testing activities,
of this contract. The Company recognized $2.9 million of revenue on this
contract for the three months ended March 31, 2007.
F-59
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
2. Summary
of Significant Accounting Policies (continued)
Research
and Development
Research
and development costs are charged to expense as incurred.
Stock
Compensation
On
January 1, 2006, the Company adopted the fair value recognition provisions
of SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS
No. 123R”) using the modified prospective method to record compensation
expense for all share-based payments to employees, including grants of
employee
stock options. The fair value of each option grant is estimated on the
date of
grant using the Black-Scholes option-pricing model based on the selected
inputs.
Option valuation models, including the Black-Scholes option-pricing model,
require the input of subjective assumptions, and changes in the assumptions
could materially affect the grant date value of the award. These assumptions
include the risk-free rate of interest, expected dividend yield, expected
volatility and the expected life of the award. The resulting compensation
expense is recognized ratably over the requisite service period that an
employee
must provide to earn the award, the “vesting period”.
The
Company recognized compensation expense related to the awarding of stock
options
to employees of $90,760 and $84,839 for the three months ended March 31,
2007
and 2006, respectively. The fair value for the 2007 and 2006 awards were
estimated at the date of grant using the Black-Scholes option-pricing model
using the following assumptions:
|
Three
months ended March 31
|
|||||||
|
2007
|
2006
|
||||||
|
Weighted
average volatility
|
72.0
|
%
|
72.0
|
%
|
|||
|
Risk-free
interest rate
|
4.6
|
%
|
4.8
|
%
|
|||
|
Expected
dividend yield
|
-
|
-
|
|||||
|
Expected
weighted average life, in years
|
9.8
|
9.7
|
|||||
F-60
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
2. Summary
of Significant Accounting Policies (continued)
Basic
and Diluted Net Loss Per Share
Basic
net
loss per share of common stock excludes dilution for potential common stock
issuances and is computed by dividing net loss by the weighted-average
number of
shares outstanding for the period. Diluted net loss per share reflects
the
potential dilution that could occur if securities were exercised into common
stock. However, for all periods presented, diluted net loss per share is
the
same as basic net loss attributable to common shareholders per share as
the
inclusion of weighted average shares of common stock issuable upon the
exercise
of stock options and warrants would be anti-dilutive. Securities outstanding
in
the amount of 106,287,800 and 106,649,300 shares for the three months ended
March 31, 2007 and 2006, respectively, were excluded from the calculation
of
diluted net loss per share since their inclusion would be
anti-dilutive.
The
following table provides a reconciliation of the numerators and denominators
used in computing basic and diluted net loss per share:
|
Three
months ended March 31,
|
|||||||
|
2007
|
2006
|
||||||
|
Numerator:
|
|||||||
|
Net
loss
|
$
|
(2,928,342
|
)
|
$
|
(3,501,713
|
)
|
|
|
Dividends
on and accretion of convertible preferred stock
|
(1,732,275
|
)
|
(1,628,871
|
)
|
|||
|
Net
loss available to common stockholders
|
$
|
(4,660,617
|
)
|
$
|
(5,130,584
|
)
|
|
|
Denominator:
|
|||||||
|
Weighted-average
shares of common stock outstanding - basic and diluted
|
12,483,819
|
10,942,906
|
|||||
Income
Taxes
The
Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes
(SFAS
109), which requires that deferred tax assets and liabilities be recognized
using enacted tax rates for the effect of temporary differences between
the book
and tax bases of recorded assets and liabilities. SFAS 109 also requires
that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion of the deferred tax asset will not be realized.
In
evaluating the need for a valuation allowance, the Company takes into account
various factors, including the expected level of future taxable income
and
available tax planning strategies. If actual results differ from the assumptions
made in the evaluation of the Company’s valuation allowance, the Company records
a change in valuation allowance through income tax expense in the period
such
determination is made.
F-61
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements
(continued)
2. Summary
of Significant Accounting Policies (continued)
Fair
Value of Financial Instruments and Concentration of Credit
Risk
The
carrying amounts of the Company’s financial instruments, which include cash
equivalents, accounts receivable, accounts payable, and accrued expenses,
approximate their fair values because of their short maturities at March
31,
2007 and December 31, 2006.
Reclassifications
Certain
prior year amounts in the consolidated financial statements have been
reclassified to conform to the current year presentation.
Recent
Accounting Pronouncements
For
the
quarter ended March 31, 2007, the Company adopted Financials Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (“FIN 48”) on January 1, 2007. No adjustments were required to
financials statements amounts as a result of adopting FIN 48. As of December
31,
2006, the Company had recognized a valuation allowance to the full extent
of its
deferred tax assets since the likelihood of realization of the benefit
cannot be
determined. The Company believes that any of its uncertain tax positions
would
not result in adjustments to its effective income tax rate because likely
corresponding adjustments to deferred tax assets would be offset by adjustments
to recorded valuation allowances. The Company recognizes potential interest
and
penalties related to uncertain tax positions in income tax expense. The
Company
has no interest or penalties accrued as of March 31, 2007. The Company’s income
taxes have not been subject to examination by any tax jurisdiction since
its
inception. Accordingly, all income tax returns filed the by the Company
are
subject to examination by taxing jurisdictions.
3. Property
and Equipment
Property
and equipment consisted of the following:
|
March
31
|
December 31
|
||||||
|
2007
|
2006
|
||||||
|
Land
|
$
|
475,820
|
$
|
471,536
|
|||
|
Building
and leasehold improvements
|
4,402,055
|
4,188,746
|
|||||
|
Furniture,
farm and office equipment
|
83,841
|
83,293
|
|||||
|
Laboratory
equipment
|
809,092
|
797,653
|
|||||
|
Computer
equipment
|
434,314
|
372,055
|
|||||
|
6,205,122
|
5,913,283
|
||||||
|
Less
accumulated depreciation
|
(803,192
|
)
|
(683,071
|
)
|
|||
|
Property
and equipment, net
|
$
|
5,401,930
|
$
|
5,230,212
|
|||
Depreciation
expense for the three months ended March 31, 2007 and 2006 was $112,026
and
$104,359, respectively.
F-62
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements
(continued)
4. Patents
In
conjunction with the Nexia Asset Purchase, the Company recorded intangible
assets related to patents of $1,407,000 with a useful life of 11 years.
The
gross carrying value and accumulated amortization, adjusted based on current
foreign currency rates, was $1,496,345 and $272,797, respectively, at
March 31, 2007. The gross carrying value and accumulated amortization,
adjusted based on current foreign currency rates, was $1,481,952 and $235,716,
respectively, at December 31, 2006. For the three months ended March 31,
2007 and 2006, the Company has recorded amortization expense of $35,107
and
$31,977, respectively. Amortization expense related to the above intellectual
property is expected to be approximately $127,910 per year for the next
five years.
5. Preferred
Stock
Series
A Convertible Redeemable Preferred Stock
The
Series A Preferred Stock bears a cumulative dividend rate of 8% per annum.
Accrued and unpaid dividends for Series A Preferred Stock at March 31,
2007 and
December 31, 2006 totaled $4,737,193 and $4,355,388, respectively.
Each
share of the Series A Preferred Stock is convertible into shares of common
stock
at the then-applicable conversion rate, as defined, at any time and at
the
option of the holder. The shares of Series A Preferred Stock are currently
convertible into 16,442,000 common shares. The conversion rate is subject
to
adjustment for certain defined equity transactions. At March 31, 2007 and
December 31, 2006, the Company has reserved 16,442,000 shares of common
stock for the potential conversion. The Series A Preferred Stock will
automatically convert into common stock at the then-applicable conversion
rate
in the event of an initial public offering of the Company’s common stock
resulting in aggregate proceeds to the Company of $50 million and a price
per share of at least $2.74.
The
Series A Preferred Stock has a liquidation preference in an amount equal
to the
redefined original purchase price of $0.91 per share plus accumulated but
unpaid
dividends, whether or not declared, in the event of a liquidation, dissolution,
winding-up, sale, or merger. This liquidation preference is junior to the
Series
B Convertible Redeemable Preferred Stock (the Series B Preferred Stock)
and the
Series C Preferred Stock, and senior to the common stock.
The
Company recorded the Series A Preferred Stock at its fair value on the
date of
issuance of approximately $15,000,000, less issuance costs of $105,502.
The
issuance costs are accreted to the carrying value of the preferred stock
up to
the earliest redemption period using the effective interest method. The
Company
has classiӿed the Series A Preferred Stock outside of permanent equity as a
result of certain redemption features. Because the Series A Preferred Stock
contains contingently adjustable conversion ratios, the Company evaluated
the
Series A Preferred Stock for potential beneficial conversion features under
EITF
98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,
and
EITF 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments.
The
contingently adjustable conversion ratio changed with the issuance of Series
B
Preferred Stock causing the Company to re-evaluate the potential beneficial
conversion feature. In both cases, based on the fact that the adjusted
implied
conversion price of the Series A Preferred Stock exceeded the fair value
of the
common stock into which the Series A Preferred Stock converts, no beneӿcial
conversion feature was deemed to exist. The implied conversion price was
calculated by dividing the fair value of the Series A Preferred Stock,
net of
the fair value allocated to the warrants issued to the holders of Series
A
Preferred Stock in conjunction with the Series B Preferred Stock offering,
by
the adjusted number of common shares into which the Series A Preferred
Stock
converts.
F-63
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
5. Preferred
Stock (continued)
Series
A Convertible Redeemable Preferred Stock (continued)
In
conjunction with the Series B Preferred Stock financing, the Series A Preferred
stockholders were granted 5,400,000 contingent warrants to purchase common
stock
for $0.01. The Company deemed 1,620,000 warrants to be probable of issuance.
Accordingly, 1,620,000 warrants were valued using the Black-Scholes model
and
were recorded as a $201,746 discount to the Series A Preferred Stock. This
discount is being accreted through the period up to the first redemption
date
using the effective interest method. The fair value of the warrants were
estimated at the date of grant using the Black-Scholes model assuming a
weighted-average volatility of approximately 60%, a risk free interest
rate of
4.3%, a dividend yield of 0% and a weighted-average expected life of the
warrant
of 8.8 years.
Commencing
September 11, 2008, the holder of the Series A Preferred Stock may require
the Company to redeem the Series A Preferred Stock then outstanding for
an
amount equal to the original purchase price plus any unpaid dividends,
whether
or not declared. The right of redemption is junior to the Series B Preferred
Stock and Series C Preferred Stock redemption rights.
The
holder of the Series A Preferred Stock is entitled to the number of votes
equal
to the number of common shares into which its shares are
convertible.
Series
B Convertible Redeemable Preferred Stock
In
October 2004, the Company sold 30,448,147 shares of Series B Preferred
Stock to the Series A Preferred Stock investor and four additional investors
at
a price of approximately $0.91 per share for net proceeds of $27,570,490.
Purchasers of the Series B Preferred Stock also received warrants to purchase
common stock as described in Note 9.
The
Series B Preferred Stock bears a cumulative dividend rate of 8% per annum.
Accrued and unpaid dividends for Series B Preferred Stock at March 31,
2007 and
December 31, 2006 totaled $5,884,125 and $5,232,953, respectively.
Each
share of the Series B Preferred Stock is convertible into shares of common
stock
at the then-applicable conversion rate, as defined, at any time and at
the
option of the holder. The initial conversion rate is one common share
for each
preferred share, which is subject to adjustment for certain defined equity
transactions. At March 31, 2007 and December 31, 2006, the Company has
reserved 65,768,001 shares of common stock for the potential conversion.
The
Series B Preferred Stock will automatically convert into common stock
at the
then-applicable conversion rate in the event of an initial public offering
of
the Company’s common stock resulting in aggregate proceeds to the Company of
$50 million and a price per share of at least $2.74.
F-64
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
5. Preferred
Stock (continued)
Series
B Convertible Redeemable Preferred Stock (continued)
The
Series B Preferred Stock has a liquidation preference in an amount equal
to the
original purchase price per share plus accumulated but unpaid dividends,
whether
or not declared, in the event of a liquidation, dissolution, winding-up,
sale,
or merger. This liquidation preference is senior to the Series A Preferred
Stock
and the common stock and equal to the liquidation preference of the Series
C
Preferred Stock.
The
Company recorded the Series B Preferred Stock at its fair value on the
date of
issuance of approximately $27,777,778, less the fair value assigned to
warrants
of $3,332,589, less issuance costs of $207,288. The issuance costs are
accreted
to the carrying value of the preferred stock up to the earliest redemption
period using the effective interest method. The Company has classiӿed the Series
B Preferred Stock outside of permanent equity as a result of certain redemption
features. Because detachable warrants were granted with the financing and
the
Series B Preferred Stock contains contingently adjustable conversion ratios,
the
Company evaluated the Series B Preferred Stock for potential beneficial
conversion features under EITF 98-5, Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios,
and
EITF 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments.
Based
on the fact that the adjusted implied conversion price of the Series B
Preferred
Stock exceeded the fair value of the common stock into which the Series
B
Preferred Stock converts, no beneficial conversion feature was deemed to
exist.
The implied conversion price was calculated by dividing the fair value
of the
Series B Preferred Stock, net of the fair value of the warrants, by the
number
of common shares into which the Series B Preferred Stock converts.
In
conjunction with the Series B financing, the Series B Preferred stockholders
were granted 15,400,000 contingent warrants to purchase common stock for
$0.01.
The Company deemed 10,780,000 warrants to be probable of issuance. Accordingly,
10,780,000 warrants were valued using the Black-Scholes model and were
recorded
as a $2,034,335 discount to the Series B Preferred Stock. This discount
is being
accreted through the period up to the first redemption date using the effective
interest method. The fair value of the warrants were estimated at the date
of
grant using the Black-Scholes model assuming a weighted-average volatility
of
approximately 60%, a risk free interest rate of 4.3%, a dividend yield
of 0% and
a weighted-average expected life of the warrant of 8.8 years.
Commencing
October 7, 2009, the holders of the Series B Preferred Stock may require
the Company to redeem the Series B Preferred Stock then outstanding for
an
amount equal to the original purchase price plus any unpaid dividends,
whether
or not declared, and in preference to the Series A Preferred Stock liquidation
rights.
F-65
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
5. Preferred
Stock (continued)
Series
B Convertible Redeemable Preferred Stock (continued)
The
holders of the Series B Preferred Stock are entitled to the number of votes
equal to the number of common shares into which its shares are
convertible.
In
conjunction with this financing, the conversion price of the investor’s Series A
Preferred Stock was adjusted in accordance with the terms of the Series
A
Preferred Stock, which resulted in the Series A Preferred Stock being
convertible into an additional 2,672,770 shares, or a total of 16,442,000
shares, of the Company’s common stock.
Series
C Convertible Redeemable Preferred Stock
Contemporaneously
with the consummation of the Nexia asset acquisition transaction, the Company
sold 7,480,978 shares of Series C Preferred Stock to investors at a price
of
approximately $0.91 per share for net proceeds of $6,824,896. Included
in these
proceeds were two Canadian investors, who previously invested in Nexia,
who
purchased an aggregate of 3,370,479 shares of Series C Preferred Stock
for net
proceeds of $3,074,880. Those proceeds were used to partially fund the
acquisition of the Nexia assets. In addition, the Company issued to such
investors (i) warrants to acquire 2,244,296 shares of Series C Preferred
Stock,
which are exercisable at approximately $0.91 per share and which expire
on
March 10, 2008, and (ii) warrants to acquire 1,346,630 common shares, which
are exercisable at $0.01 per share, subject to reduction if certain business
milestones are met by the Company, as specified in the warrants and which
expire
in October 2014.
The
Series C Preferred Stock bears a cumulative dividend rate of 8% per annum.
Accrued and unpaid dividends for Series C Preferred Stock at March 31,
2007 and
December 31, 2006 total $2,355,599 and $2,046,257, respectively.
Each
share of the Series C Preferred Stock is convertible into shares of common
stock
at the then-applicable conversion rate, as defined, at any time and at
the
option of the holder. The initial conversion rate is one common share for
each
preferred share, which is subject to adjustment for certain defined equity
transactions. At March 31, 2007 and December 31, 2006, the Company has
reserved 22,799,574 shares of common stock for the potential conversion.
The
Series C Preferred Stock will automatically convert into common stock at
the
then-applicable conversion rate in the event of an initial public offering
of
the Company’s common stock resulting in aggregate proceeds to the Company of
$50 million and a price per share of at least $2.74.
F-66
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
5. Preferred
Stock (continued)
Series
C Convertible Redeemable Preferred Stock (continued)
The
Series C Preferred Stock has a liquidation preference in an amount equal
to the
original purchase price per share plus accumulated but unpaid dividends,
whether
or not declared, in the event of a liquidation, dissolution, winding-up,
sale,
or merger. This liquidation preference is senior to the Series A Preferred
Stock
and the common stock and equal to the liquidation preference of the Series
B
Preferred Stock.
The
Company recorded the Series C Preferred Stock at its fair value on the
date of
issuance of approximately $13,261,481, less the fair value assigned to
warrants
of $2,408,024 and issuance costs of $330,495. The discount on the Series
C
Preferred Stock from the value assigned to the warrants and issuance costs
is
accreted to the carrying value of the preferred stock up to the earliest
redemption period using the effective interest method. The Company has
classiӿed
the Series C Preferred Stock outside of permanent equity as a result of
certain
redemption features. Because detachable warrants were granted with the
financing
and the Series C Preferred Stock contains contingently adjustable conversion
ratios, the Company evaluated the Series C Preferred Stock for potential
beneӿcial conversion features under EITF 98-5, Accounting
for Convertible Securities with Beneӿcial Conversion Features or Contingently
Adjustable Conversion Ratios,
and
EITF 00-27, Application
of Issue No. 98-5 to Certain Convertible Instruments.
Based
on the fact that the adjusted implied conversion price of the Series C
Preferred
Stock exceeded the fair value of the common stock into which the Series
C
Preferred Stock converts, no beneficial conversion feature was deemed to
exist.
The implied conversion price was calculated by dividing the fair value
of the
Series C Preferred Stock, net of the fair value of the warrants, by the
number
of common shares into which the Series C Preferred Stock converts.
In
conjunction with the Series C Preferred Stock financing, the Series C Preferred
stockholders were granted 4,483,946 warrants to purchase preferred stock
for
$0.91. These warrants were valued using the Black-Scholes model and were
recorded as a $2,072,965 discount to the Series C Preferred Stock. This
discount
is being marked to market on a quarterly basis. The fair value of the warrants
were estimated at the date of grant using the Black-Scholes model assuming
a
weighted-average volatility of approximately 60%, a risk free interest
rate of
3.9%, a dividend yield of 0% and a weighted-average expected life of the
warrant
of 3.0 years.
F-67
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
5. Preferred
Stock (continued)
Series
C Convertible Redeemable Preferred Stock (continued)
In
conjunction with the Series C Preferred Stock financing, the Series C Preferred
stockholders were granted 2,690,420 contingent warrants to purchase common
stock
for $0.01. The Company deemed 1,614,225 warrants to be probably of issuance.
Accordingly, 1,614,225 warrants were valued using the Black-Scholes model
and
were recorded as a $285,546 discount to the Series C Preferred Stock. This
discount is being accreted through the period up to the first redemption
date
using the effective interest method. The fair value of the warrants were
estimated at the date of grant using the Black-Scholes model assuming a
weighted-average volatility of approximately 60%, a risk free interest
rate of
4.5%, a dividend yield of 0% and a weighted-average expected life of the
warrant
of 9.6 years.
Commencing
October 7, 2009, the holders of the Series C Preferred Stock may require
the Company to redeem the Series C Preferred Stock then outstanding for
an
amount equal to the original purchase price plus any unpaid dividends,
whether
or not declared, and in preference to the Series A Preferred Stock liquidation
rights.
The
holders of the Series C Preferred Stock are entitled to the number of votes
equal to the number of common shares into which its shares are convertible.
6. Minority
Interest - Series C Convertible Redeemable Preferred Stock of PharmAthene
Canada, Inc.
Through
its ownership of 100% of the common stock in PharmAthene Canada, Inc.,
the
Company controls all of the voting stock of PharmAthene Canada, Inc. and
considers itself to be the majority interest primary beneficiary of PharmAthene
Canada, Inc., a variable interest entity. In March 2005, a Canadian
investor purchased 2,591,654 shares of Series C Convertible Preferred Stock
of
PharmAthene Canada, Inc. for net proceeds of $2,364,366. The shares of
Series C
Convertible Preferred Stock of PharmAthene Canada, Inc. are convertible
at the
discretion of the investors into an equal number of shares of Series C
Preferred
Stock of the Company. In addition, the Company issued to such investors
(i)
warrants to acquire 777,496 Series C Preferred Stock of PharmAthene Canada,
Inc.
(also convertible into Series C Preferred Stock of the Company) exercisable
at
approximately $0.91 per share, which expire on March 10, 2008, and (ii)
warrants to acquire 466,498 common shares of PharmAthene Canada, Inc.
exercisable at $0.01 per share, convertible into shares of common stock
of the
Company on a 1-for-1 basis, subject to reduction if certain business milestones
are met by the Company, as specified in the warrants and which expire in
October 2014.
F-68
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
6. Minority
Interest - Series C Convertible Redeemable Preferred Stock of PharmAthene
Canada, Inc. (continued)
In
conjunction with the Series C financing, the Series C Preferred Stock of
PharmAthene Canada, Inc. stockholders were granted 777,496 warrants to
purchase
preferred stock for $0.91. These warrants were valued using the Black-Scholes
model and were recorded as a $265,513 discount to the Series C Preferred
Stock
of PharmAthene Canada, Inc. This discount is being accreted through the
period
up to the first redemption date using the effective interest method. The
fair
value of the warrants were estimated at the date of grant using the
Black-Scholes model assuming a weighted-average volatility of approximately
60%,
a risk free interest rate of 3.9%, a dividend yield of 0% and a weighted-average
expected life of the warrant of 3.0 years.
In
conjunction with the Series C financing, the Series C Preferred Stock of
PharmAthene Canada, Inc. stockholders were granted 466,498 contingent warrants
to purchase common stock for $0.01. The Company deemed 279,894 warrants
to be
probable of issuance. Accordingly, 279,894 warrants were valued using the
Black-Scholes model and were recorded as a $49,512 discount to the Series
C
Preferred Stock of PharmAthene Canada, Inc. This discount is being accreted
through the period up to the first redemption date using the effective
interest
method. The fair value of the warrants were estimated at the date of grant
using
the Black-Scholes model assuming a weighted-average volatility of approximately
60%, a risk free interest rate of 4.5%, a dividend yield of 0% and a
weighted-average expected life of the warrant of 9.6 years.
The
Series C Convertible Preferred Stock of PharmAthene Canada, Inc. bears
a
cumulative dividend rate of 8% per annum. Accrued and unpaid dividend for
the
Series C Convertible Preferred Stock of PharmAthene Canada, Inc. at March
31,
2007 and December 31, 2006 total $408,450 and $354,812, respectively.
The
holders of Series C Convertible Preferred Stock of PharmAthene Canada,
Inc. have
no voting rights.
F-69
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
7. Stockholders’
Deficit
Common
Stock
In
conjunction with the Series A Preferred Stock closing, the common stockholders
agreed to certain limitations on their rights to sell their stock. Further,
the
common stockholders agreed that 5,370,000 shares of common stock would
be
subject to a right of repurchase by the Company and the Series A Preferred
Stock
investor in the event of a termination of the relationship between the
Company
and the Series A Preferred Stock investor. The repurchase price will be
either
cost or fair market value, depending on the termination event. The number
of
shares subject to the repurchase right decreased by 41.67% on December 11,
2004, and further decreases by 8.33% quarterly thereafter until
September 11, 2006. As of March 31, 2007, no shares remained subject to the
right of repurchase.
2002
Long-Term Incentive Plan
The
Company adopted the 2002 Long-Term Incentive Plan (the Plan) to provide
an
incentive to eligible employees, consultants, and officers. The Plan provides
for the granting of stock options, restricted common stock, and stock
appreciation rights. As of March 31, 2007, the Company had reserved 10,919,372
shares of common stock for distribution under the Plan, of which 250,085
remain
available for future grants. Stock options granted under the Plan may be
either
incentive stock options, as defined by the Internal Revenue Code, or
non-qualified stock options. The Board of Directors determines who will
receive
options, the vesting period which is generally four years, and the exercise
price. Options may have a maximum term of no more than 10 years.
F-70
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
7. Stockholders’
Deficit (continued)
2002
Long-Term Incentive Plan (continued)
The
following table summarizes the activity of the Company’s stock option
plan:
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted-Average
Contractual Term
|
||||||||
|
Outstanding,
January 1, 2005
|
3,434,626
|
$
|
0.16
|
|||||||
|
Granted
|
5,497,677
|
0.21
|
||||||||
|
Exercised
|
202,906
|
0.13
|
||||||||
|
Forfeited
|
743,394
|
0.19
|
||||||||
|
Outstanding,
December 31, 2005
|
7,986,003
|
$
|
0.19
|
|||||||
|
Exercisable,
December 31, 2005
|
2,405,369
|
$
|
0.18
|
|||||||
|
Outstanding,
January 1, 2006
|
7,986,003
|
$
|
0.19
|
|||||||
|
Granted
|
1,631,676
|
0.21
|
||||||||
|
Exercised
|
1,340,566
|
0.18
|
||||||||
|
Forfeited
|
770,059
|
0.21
|
||||||||
|
Outstanding,
December 31, 2006
|
7,507,054
|
$
|
0.20
|
|||||||
|
Exercisable,
December 31, 2006
|
3,844,376
|
$
|
0.19
|
|||||||
|
Outstanding,
January 1, 2007
|
7,507,054
|
$
|
0.20
|
7.7
years
|
||||||
|
Granted
|
1,849,846
|
0.21
|
||||||||
|
Exercised
|
1,250
|
0.21
|
||||||||
|
Forfeited
|
245,085
|
0.21
|
||||||||
|
Outstanding,
March 31, 2007
|
9,110,565
|
$
|
0.20
|
8.2
years
|
||||||
|
Exercisable,
March 31, 2007
|
3,921,169
|
$
|
0.19
|
7.5
years
|
||||||
|
Vested,
March 31, 2007
|
3,921,169
|
|||||||||
F-71
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements
(continued)
7. Stockholders’
Deficit (continued)
2002
Long-Term Incentive Plan (continued)
Exercise
prices for options granted during 2007 were $0.21 per share. The
weighted-average remaining contractual life of those options is approximately
9.8 years. As of the date of grant, the weighted-average fair value of
the
options granted in 2007 was $0.17.
Exercise
prices for options granted during 2006 were $0.21 per share. The
weighted-average remaining contractual life of those options is approximately
9.4 years. As of the date of grant, the weighted-average fair value of
the
options granted in 2006 was $0.17.
Exercise
prices for options granted during 2005 were $0.21 per share. The
weighted-average remaining contractual life of those options is approximately
9.2 years. As of the date of grant, the weighted-average fair value of
the
options granted in 2005 was $0.14.
The
weighted-average expected life of options outstanding at March 31, 2007 is
approximately 8.2 years.
In
2004
and 2005, the Company granted options to non-employees to purchase up to
200,000
and 125,000 shares, respectively, of the Company’s common stock at exercise
prices of $0.16 and $0.21 per share, respectively. The 2004 and 2005 options
vest over four years. Stock-based compensation expense recorded for the
three
months ended March 31, 2007 and 2006 was $1,162, respectively.
Warrants
In
conjunction with the Series B Preferred Stock issuance in October 2004, the
Company issued warrants to purchase 15,400,000 shares of common stock at
an
exercise price of $0.01 per share, subject to reduction if certain business
milestones are met by the Company, as specified in the warrants and expiring
in
October 2014. As of December 31, 2004, milestones related to 1,540,000
shares of common stock underlying of the warrants to purchase common stock
were
attained, with the outstanding total of warrants reduced to 13,860,000.
Following the Nexia asset purchase in March 2005, an additional milestone
related to 6,160,001 shares of common stock underlying of the warrants
was
achieved, and the total warrants outstanding were further reduced to 7,699,999.
F-72
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
7. Stockholders’
Deficit (continued)
Warrants
(continued)
In
connection with a licensing agreement for rights to certain patents, the
Company
issued warrants to purchase 200,000 shares of common stock at an exercise
price
of $0.01 per share to a research company in January 2006. In
August 2006, the research company exercised the warrants for common stock.
In connection with the credit facility further discussed in Note 13, the
Company
issued warrants to purchase an aggregate of 438,453 shares of PharmAthene
Series
C Preferred Stock through March 30, 2017 at an exercise price of
$0.91.
The
following table summarizes the activity of the Company’s warrants:
|
Warrants
for Shares of Common Stock
|
Weighted-Average
Exercise Price
|
Warrants
for Shares of Preferred Stock
|
Weighted-Average
Exercise Price
|
||||||||||
|
Outstanding
at December 31, 2004
|
14,123,296
|
0.01
|
-
|
-
|
|||||||||
|
Granted
|
3,156,918
|
0.01
|
5,261,442
|
0.91
|
|||||||||
|
Forfeited
|
(6,160,001
|
)
|
0.01
|
-
|
-
|
||||||||
|
Outstanding
at December 31, 2005
|
11,120,213
|
0.01
|
5,261,442
|
0.91
|
|||||||||
|
Granted
|
200,000
|
0.01
|
-
|
-
|
|||||||||
|
Exercised
|
(200,000
|
)
|
0.01
|
-
|
-
|
||||||||
|
Outstanding
at December 31, 2006
|
11,120,213
|
$
|
0.01
|
5,261,442
|
$
|
0.91
|
|||||||
|
Granted
|
-
|
-
|
438,453
|
0.91
|
|||||||||
|
Exercised
|
-
|
-
|
-
|
-
|
|||||||||
|
Outstanding
at March 31, 2007
|
11,120,213
|
$
|
0.01
|
5,699,895
|
$
|
0.91
|
|||||||
F-73
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements
(continued)
8. Commitments
and Contingencies
Leases
The
Company leases offices in the United States under a month-to-month operating
lease agreement. In September 2006, the Company entered into a 10 year
office lease, which is anticipated to commence on June 1, 2007. Additionally,
following the Nexia asset purchase in March 2005, the Company entered into
a two year renewable lease agreement for office space in Canada. This lease
is
renewable for an additional two years and provides for expansion into additional
facility space if available. Annual minimum payments are as
follows:
|
2007
|
$
|
314,600
|
||
|
2008
|
372,700
|
|||
|
2009
|
383,900
|
|||
|
2010
|
395,400
|
|||
|
2011
and thereafter
|
2,874,100
|
|||
|
$
|
4,340,700
|
Total
rent expense under operating lease agreements approximated $79,633 and
$75,038
for the three months ended March 31, 2007 and 2006, respectively.
License
Agreements
In
January 2006, the Company licensed certain patent rights from a research
company. The license agreement required a $50,000 up-front payment.
Additionally, payments within the agreement included a sublicense fee of
20% and
milestone payments of $25,000 upon the granting of a U.S. patent, $200,000
upon the initiation of certain studies or trials, and $250,000 upon BLA
approval. Upon commercialization, the license agreement requires royalty
payments equal to a specified percentage of future sales of products for
both
government procurement and commercial market sales subject to the license
through the expiration of the licensed patents.
In
August 2006, the Company entered into a research and licensing agreement
allowing for the licensing of certain patent rights. The agreement includes
research expense reimbursement payments and certain development milestone
payments. Upon commercialization, the license agreement requires royalty
payments equal to a specified percentage of future sales of products for
both
government procurement and commercial market sales subject to the license
through the expiration of the licensed patents. During 2006, the Company
expensed $50,000 related to this agreement.
F-74
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements
(continued)
8. Commitments
and Contingencies (continued)
License
Agreements (continued)
Through
the Nexia acquisition, the Company acquired a license agreement originally
executed in September 2004 for the rights to certain technologies. This
agreement included an option to license product
processing technology
necessary to perform development of Protexia® as required under its government
contract with the Department of Defense.
The
Company executed a new licensing agreement with the development company
on
March 2, 2007 which results in a license to all
technology provided under the original agreement including the necessary
purification technology previously included in an option and access to
additional information and technology deemed to be essential for development
of
Protexia®
and
performance under the Department
of Defense
contract. Under the new agreement, the Company must pay $200,000 over a
period
of six years with $100,000 due in the first year. This expense is eligible
for
reimbursement by the US government under the contract with the Department
of
Defense.
9. Related
Party Transactions
The
Company leases its office space from an entity that is affiliated with
the
organization to which the Company issued warrants for 263,296 shares of
common
stock in August 2003 (see Note 8). The Company paid $33,131 and
$27,846 in rent expense related to this operating lease for the three months
ended March 31, 2007 and 2006, respectively.
As
further disclosed in footnote 11, several directors and officers of the
Company
participated in the Convertible 8% Bridge Notes for approximately $190,000
in
the second and third quarters of 2006.
10. Medarex
Collaboration
In
November 2004, the Company and Medarex, Inc. entered into a collaboration
agreement under which the companies plan to develop and commercialize MDX-1303,
a fully human monoclonal antibody targeting the Bacillus
anthracis protective
antigen. MDX-1303 was developed by Medarex using its UltiMAb Human Antibody
Development System®,
and
this antibody is currently in preclinical development by Medarex for use
against
human anthrax infection.
F-75
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
10. Medarex
Collaboration (continued)
Under
the
terms of the agreement, Medarex and PharmAthene have agreed jointly to
continue
to investigate the potential for MDX-1303 to be used as a therapeutic for
individuals with active disease as well as for prophylactic treatment of
individuals exposed to anthrax. In December 2004, Medarex received a
deposit from PharmAthene against potential future development activities
for
MDX-1303, against which Medarex must submit reports of the use of costs
as they
are incurred in order to take draw downs against the deposit. If the project
is
terminated or if development activities for MDX-1303 by Medarex are completed
prior to exhaustion of the deposit, amounts remaining under the deposit
are to
be returned to PharmAthene. For the three months ended March 31, 2007 and
2006, PharmAthene recorded the use of these funds for development activities
for
MDX-1303 as Research and Development operating expenses of $188,583 and
$473,839, respectively. As of March 31, 2007 and December 31, 2006,
approximately $0.2 million and $0.4 million, respectively, of this
deposit remained. PharmAthene is fully responsible for funding all future
research and development activities that are not supported by government
funds.
The companies will share profits according to a pre-agreed allocation
percentage.
11. Convertible
8% Notes
In
June 2006, certain of the Company’s investors in the Series B Preferred
Stock and the Series C Preferred Stock among others and the Company entered
into
an agreement providing for the issuance of $9.8 million in convertible
notes (the ‘‘Bridge Notes’’). The Bridge Notes are convertible (i) if the
closing of the merger does not occur, into Series B redeemable convertible
preferred stock at $0.91 per share plus an equal number of common shares
(ii)
upon the closing of the merger with SIGA and a contingent financing with
gross
proceeds in excess of $25 million, into the same securities sold in such
financing, at a 10% price discount, or (iii) upon a separate financing
into such
financing securities at a 25% price discount and an equal number of common
shares. The Company may have a future beneficial conversion feature based
upon
the pricing of future financings. Accordingly, the Company will assess
whether a
beneficial conversion feature exists when the contingent event occurs and
record
the amount, if any, at that time.
In
August 2006, the investor in Series C Convertible Preferred Stock of
PharmAthene Canada, Inc. and the Company purchased an additional
$2.0 million of Bridge Notes.
The
Company has recognized interest expense related to the Bridge Notes of
approximately $241,800 for the three month period ending March 31,
2007.
F-76
PharmAthene, Inc.
Notes
to
Condensed Consolidated Financial Statements (continued)
12. Definitive
Merger Agreement
On
January 19, 2007 the Company signed a definitive merger agreement with
Healthcare Acquisition Corp. (“HAQ”). Pursuant to the terms of the agreement,
HAQ will issue 12.5 million new shares to the Company’s shareholders. It is
anticipated that shareholders of the Company will own at least 52% of the
outstanding basic shares of the combined company, which is anticipated
to remain
listed on the American Stock Exchange. Additionally, it is anticipated
that the
Company’s $11.8 million of outstanding secured convertible notes will be
exchanged for $12.5 million of new unsecured 8% convertible notes maturing
in 24 months. These convertible notes will be convertible at the option
of the
holders into common stock at $10.00 per share and may be redeemed by the
Company
without penalty after 12 months. In the event that the Company enters into
a
contract prior to December 31, 2007 for the sale of Valortim™ with the
U.S. government for more than $150,000,000 in anticipated revenue, the
Company’s current shareholders will be eligible for additional cash payments,
not to exceed $10 million, equal to 10% of the actual collections from the
sale of Valortim™. Subject to certain approvals required of the HAQ and
PharmAthene shareholder by applicable state law and the rules and regulations
of
the American Stock Exchange, as well as other regulatory approvals and
other
customary closing conditions, the Company expects the merger to close in
the
second or third quarter of 2007.
13. $10 million
Debt Financing
On
March 30, 2007, the Company entered into a $10 million credit facility
with Silicon Valley Bank and Oxford Finance Corporation. Under the credit
facility the Company borrowed $10 million which loan bears interest at the
rate of 11.5%. Pursuant to the terms of the loan and security agreement
evidencing the credit facility, the Company will make monthly payments
of
interest only through September 30, 2007 and, thereafter, will make monthly
payments of principal and interest over the remaining 30 months of the
loan. The
loan is secured by a security interest on all of the Company’s assets other than
certain intellectual property. In addition, in the event that the proposed
Merger is not consummated by August 3, 2007, the Company has agreed to
provide the lenders with a mortgage on its Canadian real estate. The Company
may
not repay the loan for the first six months but thereafter may prepay provided
it pays certain prepayment fees. In connection with the credit facility,
the
Company issued to Silicon Valley Bank and Oxford Financial Corporation
warrants
to purchase an aggregate of 438,453 shares of PharmAthene Series C Preferred
Stock through March 30, 2017 at an exercise price of $0.91. As a
consequence of the issuance of the warrants, the Merger Allocation Agreement
was
amended and restated in order to recalculate the Merger Consideration payable
to
the holders of the various classes of capital stock of the Company taking
into
account the newly issued warrants.
F-77
ANNEX
A
execution
document
AGREEMENT
AND PLAN OF MERGER
DATED
AS OF
JANUARY
19,
2007
BY
AND AMONG
HEALTHCARE
ACQUISITION CORP.,
PAI
ACQUISITION CORP.
AND
PHARMATHENE,
INC.
TABLE
OF
CONTENTS
| page | ||
|
ARTICLE
I
|
THE
MERGER
|
1
|
|
1.1.
|
Defined
Terms
|
1
|
|
1.2.
|
The
Merger
|
1
|
|
1.3.
|
Closing
|
2
|
|
1.4.
|
Effective
Time
|
2
|
|
1.5.
|
Effects
of the Merger
|
2
|
|
1.6.
|
Certificate
of Incorporation
|
2
|
|
1.7.
|
Bylaws
|
2
|
|
1.8.
|
Directors
and Officers.
|
2
|
|
1.9.
|
Effect
of Merger on Company Capital Stock and Options; Merger
Consideration
|
3
|
|
1.10.
|
Merger
Sub Stock
|
6
|
|
1.11.
|
Dissenters’
Rights
|
6
|
|
1.12.
|
Certain
Other Adjustments
|
6
|
|
1.13.
|
Distributions
with Respect to Unexchanged Shares
|
6
|
|
1.14.
|
No
Further Ownership Rights in Company Capital Stock
|
7
|
|
1.15.
|
No
Fractional Shares of Parent Common Stock.
|
7
|
|
1.16.
|
No
Liability
|
7
|
|
1.17.
|
Surrender
of Certificates
|
7
|
|
1.18.
|
Lost,
Stolen or Destroyed Certificates
|
8
|
|
1.19.
|
Withholding
Rights
|
8
|
|
1.20.
|
Further
Assurances
|
8
|
|
1.21.
|
Stock
Transfer Books
|
8
|
|
1.22.
|
Tax
Consequences
|
9
|
|
1.23.
|
Escrow
|
9
|
|
1.24.
|
Rule
145
|
9
|
|
ARTICLE
II
|
REPRESENTATIONS
AND WARRANTIES
|
9
|
|
2.1.
|
Representations
and Warranties of Parent
|
9
|
|
2.2.
|
Representations
and Warranties of Parent with Respect to Merger Sub
|
18
|
|
2.3.
|
Representations
and Warranties of Company
|
19
|
|
ARTICLE
III
|
COVENANTS
RELATING TO CONDUCT OF BUSINESS
|
46
|
|
3.1.
|
Conduct
of Business of Company Pending the Merger
|
46
|
|
3.2.
|
Conduct
of Business of Parent Pending the Merger
|
46
|
|
3.3.
|
Operational
Matters
|
51
|
|
ARTICLE
IV
|
ADDITIONAL
AGREEMENTS
|
52
|
i
TABLE
OF CONTENTS (Continued)
| page | ||
|
4.1.
|
Preparation
of Proxy Statement.
|
52
|
|
4.2.
|
Access
to Information
|
54
|
|
4.3.
|
Commercially
Reasonable Efforts.
|
55
|
|
4.4.
|
No
Solicitation of Transactions
|
56
|
|
4.5.
|
Employee
Benefits Matters
|
56
|
|
4.6.
|
Notification
of Certain Matters
|
56
|
|
4.7.
|
Public
Announcements
|
57
|
|
4.8.
|
Affiliates
|
57
|
|
4.9.
|
[reserved]
|
57
|
|
4.10.
|
Takeover
Statutes
|
57
|
|
4.11.
|
Transfer
Taxes
|
57
|
|
4.12.
|
AMEX
Listing; Symbol
|
57
|
|
4.13.
|
Trust
Fund Closing Confirmation.
|
57
|
|
4.14.
|
Directors
and Officers of Parent After the Merger
|
58
|
|
ARTICLE
V
|
Post
Closing Covenants
|
58
|
|
5.1.
|
General
|
58
|
|
5.2.
|
Litigation
Support
|
59
|
|
5.3.
|
Transition
|
59
|
|
5.4.
|
Tax-Free
Reorganization Treatment
|
59
|
|
5.5.
|
Headquarters
of Surviving Corporation
|
59
|
|
5.6.
|
Indemnification
of Directors and Officers of Company
|
59
|
|
5.7.
|
Continuity
of Business Enterprise
|
60
|
|
5.8.
|
Substantially
All Requirement
|
60
|
|
5.9.
|
Composition
of the Board of Directors of Parent
|
60
|
|
ARTICLE
VI
|
CONDITIONS
PRECEDENT
|
61
|
|
6.1.
|
Conditions
to Each Party’s Obligation to Effect the Merger
|
61
|
|
6.2.
|
Additional
Conditions to Obligations of Parent and Merger Sub
|
61
|
|
6.3.
|
Additional
Conditions to Obligations of Company
|
64
|
|
ARTICLE
VII
|
TERMINATION
AND AMENDMENT
|
66
|
|
7.1.
|
Termination
|
66
|
|
7.2.
|
Effect
of Termination.
|
67
|
|
7.3.
|
Trust
Fund Waiver
|
68
|
|
7.4.
|
Fees
and Expenses
|
68
|
|
ARTICLE
VIII
|
REMEDIES
FOR BREACH OF AGREEMENT
|
69
|
ii
TABLE
OF CONTENTS (Continued)
| page | ||
|
8.1.
|
Survival
of Representations and Warranties
|
69
|
|
8.2.
|
Indemnification
Provisions for Benefit of Parent
|
69
|
|
8.3.
|
Matters
Involving Third Parties.
|
69
|
|
8.4.
|
Determination
of Adverse Consequences
|
71
|
|
8.5.
|
Escrow
of Shares by Indemnifying Stockholders
|
71
|
|
8.6.
|
Determination/Resolution
of Claims.
|
74
|
|
8.7.
|
Indemnification
Threshold
|
75
|
|
8.8.
|
Other
Indemnification Provisions.
|
76
|
|
ARTICLE
IX
|
GENERAL
PROVISIONS
|
76
|
|
9.1.
|
Survival
|
76
|
|
9.2.
|
Notices
|
76
|
|
9.3.
|
Interpretation
|
77
|
|
9.4.
|
Counterparts
|
78
|
|
9.5.
|
Entire
Agreement; No Third-Party Beneficiaries.
|
78
|
|
9.6.
|
Governing
Law; Waiver of Jury Trial.
|
78
|
|
9.7.
|
Severability
|
79
|
|
9.8.
|
Amendment
|
79
|
|
9.9.
|
Extension;
Waiver
|
79
|
|
9.10.
|
Assignment
|
79
|
|
9.11.
|
Submission
to Jurisdiction; Waivers.
|
80
|
|
9.12.
|
Enforcement;
Specific Performance
|
80
|
|
ARTICLE
X
|
DEFINITIONS
|
80
|
|
Schedule
1.9(b)(i)
|
Exchange
Ratio
|
|
|
Schedule
1.24
|
Company
Affiliates
|
|
|
Schedule
X(o)
|
PA
Management Team
|
|
Exhibit
A
|
Form
of 8% of Convertible Note
|
|
Exhibit
B
|
Form
of Stock Escrow Agreement
|
|
Exhibit
C
|
Form
of Lockup Agreement
|
|
Exhibit
D
|
Form
of Registration Rights Agreement
|
|
Exhibit
E
|
Form
of Note Exchange Agreement
|
iii
AGREEMENT
AND PLAN OF MERGER,
dated
as of January 19, 2007 (this “Agreement”),
by
and among Healthcare Acquisition Corp., a Delaware corporation (“Parent”),
PAI
Acquisition Corp., a Delaware corporation and a direct, wholly-owned
subsidiary
of Parent (“Merger
Sub”),
and
PharmAthene, Inc., a Delaware corporation (“Company”).
WITNESSETH:
WHEREAS,
the
respective Boards of Directors of Parent and Company have determined
that it is
advisable and in the best interests of each corporation and its stockholders
that Parent and Company engage in a business combination in order to
advance the
long-term strategic business interests of Parent and Company; and
WHEREAS,
in
furtherance of such determination, Parent and Company desire to engage
in a
business combination transaction by means of a merger pursuant to which
Merger
Sub, a direct, wholly-owned subsidiary of Parent formed solely for
the purpose
of effecting the merger, will merge with and into Company as a result
of which
Company will be the surviving corporation and a direct, wholly-owned
subsidiary
of Parent; and
WHEREAS,
in
furtherance of such desire, the respective Boards of Directors of Parent,
Merger
Sub and Company have adopted or approved this Agreement, pursuant to
which,
subject to the terms and conditions hereof and in accordance with the
General
Corporation Law of the State of Delaware, Merger Sub will be merged
with and
into Company with Company being the surviving corporation (the “Merger”);
and
WHEREAS,
prior
to
or concurrently with the execution of this Agreement, the holders of
a Requisite
Majority of the Company Capital Stock (each as defined herein) have
executed or
are executing an Allocation Agreement (as defined herein), pursuant
to which
they, among other things, are agreeing to the allocation of the Merger
Consideration (as defined herein) as set forth therein;
NOW,
THEREFORE,
in
consideration of the foregoing and the respective representations,
warranties,
covenants and agreements of the parties set forth in this Agreement,
and
intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE
I
THE
MERGER
1.1. Defined
Terms.
All
terms not otherwise defined throughout this Agreement shall have the
meanings
ascribed to such terms in Article X of this Agreement.
1.2. The
Merger.
Upon
the terms and subject to the conditions set forth in this Agreement,
and in
accordance with the Delaware General Corporation Law (the “DGCL”),
Merger Sub shall be merged with and into Company at the Effective Time
(as
defined in Section 1.4). Upon consummation of the Merger, the separate
corporate
existence of Merger Sub shall cease and Company shall continue as the
surviving
corporation (the “Surviving
Corporation”).
1.3. Closing.
Subject
to the terms and conditions hereof, the closing of the Merger and the
transactions contemplated by this Agreement (the “Closing”)
will
take place on or before the third Business Day after the satisfaction
or waiver
(subject to applicable law) of the conditions set forth in Article
VI (other
than any such conditions which by their terms cannot be satisfied until
the
Closing, which shall be required to be so satisfied or waived (subject
to
applicable law) on the Closing Date) unless another time or date is
agreed to in
writing by the parties hereto (the actual time and date of the Closing
being
referred to herein as the “Closing
Date”).
The
Closing shall be held at the offices of Ellenoff Grossman & Schole, LLP, 370
Lexington Avenue, New York, New York, unless another place is agreed
to in
writing by the parties hereto.
1.4. Effective
Time.
At the
Closing, the parties shall file a certificate of merger (the “Certificate
of Merger”)
in
such form as is required by and executed in accordance with the relevant
provisions of the DGCL. The Merger shall become effective at such time
as the
Certificate of Merger is duly filed with the Secretary of State of
the State of
Delaware, or at such subsequent time as Parent and Company shall agree
and as
shall be specified in the Certificate of Merger (the date and time
that the
Merger becomes effective being referred to herein as the “Effective
Time”).
1.5. Effects
of the Merger.
At and
after the Effective Time, the effect of the Merger shall be as provided
in this
Agreement and the applicable provisions of the DGCL. Without limiting
the
generality of the foregoing, and subject thereto, at the Effective
Time all of
the property, rights, privileges, powers and franchises of Company
and Merger
Sub shall be vested in the Surviving Corporation, and all debts, liabilities
and
duties of Company and Merger Sub shall be the debts, liabilities and
duties of
the Surviving Corporation.
1.6. Certificate
of Incorporation.
At the
Effective Time and without any further action on the part of Company
or Merger
Sub, the certificate of incorporation of Company, as in effect immediately
prior
to the Effective Time, shall be the certificate of incorporation of
the
Surviving Corporation, and thereafter shall continue to be the certificate
of
incorporation until changed or amended as provided therein and under
applicable
law. Notwithstanding the foregoing, the certificate of incorporation
of Company
shall be amended and restated as of the Effective Time to provide for
the
changing of the name of Company and to eliminate all classes of equity
securities other than common stock.
1.7. Bylaws.
At the
Effective Time and without any further action on the part of Company
and Merger
Sub, the bylaws of Company, as in effect immediately prior to the Effective
Time, shall be the bylaws of the Surviving Corporation, and thereafter
shall
continue to be the bylaws until changed or amended or repealed as provided
therein, in the certificate of incorporation of the Surviving Corporation
and
under applicable law.
1.8. Directors
and Officers.
(a) Members
of Board of Directors.
From
and after the Effective Time, the members of the Board of Directors
of both the
Parent and the Surviving Corporation shall consist of John Pappajohn,
Derace M.
Schaffer, M.D., James Cavanaugh, Steven St. Peter, Elizabeth Czerepak,
Joel
McCleary and David Wright, each to serve until his or her successor
is elected
and qualified or until his or her earlier death, resignation or removal.
If at
or after the Effective Time a vacancy shall exist in the Board of Directors
of
Parent and the Surviving Corporation, such vacancy may thereafter be
filled in
the manner provided by law, the certificate of incorporation and bylaws
of
Parent and the Surviving Corporation, as the case may be.
-2-
(b) Officers
of Parent and Surviving Corporation.
From
and after the Effective Time, the officers of Parent and of the Surviving
Corporation shall be elected by the Board of Directors of each entity
provided,
however, that David Wright shall be elected Chief Executive Officer
of each such
entity to serve until his successor is elected and qualified or until
his
earlier death, resignation or termination.
1.9. Effect
of Merger on Company Capital Stock and Options; Merger
Consideration.
Subject
to the terms and conditions of this Agreement, at the Effective Time,
by virtue
of the Merger and this Agreement and without any action on the part
of Merger
Sub, Company or the holder of any shares of Company Capital Stock (as
defined in
clause (b)(i) below) the following shall occur:
(a) Company
Treasury Shares. All
shares of Company Common Stock (as defined in clause (b)(i) below)
that are held
by Company as treasury stock (the “Company
Treasury Shares”)
or
owned by Merger Sub, Parent or any direct, or indirect, wholly-owned
subsidiary
of Parent immediately prior to the Effective Time shall be canceled
and shall
cease to exist and no cash, Parent Common Stock (as defined in clause
(b)(i)
below) or other consideration shall be delivered in exchange
therefor.
(b) Company
Capital Stock.
(i) The
shares of common stock of Company, $.001 par value (the ‘‘Company
Common Stock”),
Series
A Convertible Preferred Stock of Company, $.001 par value (the “Company
Series A Preferred Stock”‘),
Series B Convertible Preferred Stock of Company, $.001 par value (the
“Company
Series B Preferred Stock”),
and
Series C Convertible Preferred Stock of Company, $.001 par value (the
“Company
Series C Preferred Stock”
and
together with the Company Series A Preferred Stock, and the Company
Series B
Preferred Stock, the “Company
Preferred Stock” and
together with the Company Common Stock collectively referred to as“Company
Capital Stock”,
outstanding immediately prior to the Effective Time, shall be deemed
canceled
and converted into the right to receive the merger consideration comprised
of:
(y) 12,500,000 shares of Common Stock of Parent, $.0001 par value (“Parent
Common Stock”),
subject to upward adjustment pursuant to clause (c) below (the “Stock
Consideration”)
and (z)
to the extent applicable, the Milestone Payments (as defined in Article
X).
-3-
(ii) The
specific ratio of exchange for the Company Common Stock for shares
of Parent
Common Stock (“Share
Exchange Ratio”)
as
well as the specific Merger Consideration to be received by the holders
of other
classes of Company Capital Stock have been prepared by Company in accordance
with the Recapitalization and Proceeds Allocation Agreement, dated
the date of
this Agreement, entered into by and among Company and the holders of
a Requisite
Majority of the Company Common Stock and Company Preferred Stock and
the holders
of the PharmAthene Notes (as defined below) (the “Allocation
Agreement”),
and
are set forth on Schedule 1.9(b)(i) and will be confirmed or adjusted
by the
Company, as applicable, at Closing. The holders of Company’s issued and
outstanding secured 8% convertible notes and the Subsidiary’s issued and
outstanding secured 8% convertible note, collectively with an aggregate
principal amount of $11,800,000 (collectively the “PharmAthene
Notes”)
shall
exchange such notes for 8% Convertible Notes of Parent in the aggregate
principal amount of $12.5 million (the “Note
Consideration”)
in
substantially the form of Exhibit A attached hereto, pursuant to the
Note
Exchange Agreement, as further described in Section 6.3(j)(viii) below.
Parent
shall issue the Merger Consideration (as defined in the next sentence)
in
accordance with the Allocation Agreement. For purposes of this Agreement,
the
term “Merger
Consideration”
shall be
deemed to include (a) the Stock Consideration; (b) the Milestone Payments
and
(c) the Note Consideration.
(c) Adjustments
to the Merger Consideration.
The
Merger Consideration shall be subject to the following adjustments:
(i) To
the
extent that the stockholders of Parent owning more than 5% of the outstanding
Parent Common Stock exercise their conversion rights as set forth in
Section
6.1(b), the number of shares of Parent Common Stock comprising the
Stock
Consideration shall be adjusted upward by the product of (x) the number
(as a
percentage) that is the difference between the percentage of Parent
Common Stock
that is converted and 5% and (y) 2.25 million.
(ii) To
the
extent that there are Outstanding Employee Options (as defined in clause
(d)
below) there shall be no increase in the number of shares of Stock
Consideration
being issued, but the number of shares of Parent Common Stock issued
at the
Closing as part of the Stock Consideration shall be adjusted downward
by an
amount equal to the number of shares necessary to reserve for issuances
under
any Outstanding Employee Options in accordance with the Allocation
Agreement.
(iii) Except
for any warrants issued pursuant to a Company Subsequent Issuance (as
defined in
clause (c)(iv) below), the terms of which shall be subject to the provisions
of
clause (c)(iv) below, to the extent that there are outstanding warrants
to
purchase shares of Company Common Stock (“Company
Warrants”),
there
shall be no increase in the number of shares of Stock Consideration
being
issued, but the number of shares of Parent Common Stock issued at the
Closing as
part of the Stock Consideration shall be adjusted downward by an amount
equal to
the number of shares necessary to reserve for issuances under any outstanding
Company Warrants in accordance with the Allocation Agreement.
-4-
(iv) If,
prior
to the date that the Proxy Statement (as defined in Section 4.1) to
be filed by
Parent pursuant to Article IV hereof is approved by the SEC, Company
issues
additional shares of its Common Stock (or any equity or debt securities
convertible into Common Stock) for cash consideration of up to $5 million
(subject to the limitation that the securities of the Company issued
to the
purchasers (the “Subsequent
Issuance Securities”)
thereof
will not convert into more than 625,000 shares of Parent Common Stock
in the
Merger, which number of shares would be proportionately reduced to
reflect the
sale of less than $5 million) (a “Company
Subsequent Issuance”),
then
the number of shares of Parent Common Stock comprising the Stock Consideration
shall be increased by the number of shares of Parent Common Stock into
which the
Subsequent Issuance Securities will be converted in the Merger.
(d) Options.
(i) Immediately
after the Effective Time, all options to purchase Company Common Stock
then
outstanding (individually, an “Outstanding
Employee Option,”
and
collectively, the “Outstanding
Employee Options”)
under
the PharmAthene, Inc. 2002 Long-Term Incentive Plan (as amended, the
“Option
Plan”)
or
issued under any other agreement shall, whether vested or unvested,
be assumed
by Parent. Each such Outstanding Employee Option so assumed by Parent
under this
Agreement shall continue to have, and be subject to, the same terms
and
conditions set forth in the Option Plan, option agreements thereunder
and other
relevant documentation in existence immediately prior to the Effective
Time,
except that each such Outstanding Employee Option will be converted
into an
option to purchase that number of shares of Parent Common Stock calculated
by
multiplying such Outstanding Employee Option by the Share Exchange
Ratio and
rounding down to the nearest whole share of Parent Common Stock. The
per-share
exercise price for the shares of Parent Common Stock issuable upon
exercise of
such assumed Outstanding Employee Option will be equal to the quotient
determined by dividing the exercise price per share of Company Common
Stock at
which such Outstanding Employee Option was exercisable immediately
prior to the
Effective Time by the Share Exchange Ratio, and rounding the resulting
exercise
price up to the nearest whole cent.
(ii) Parent
shall establish a new option plan containing terms no less favorable
to holders
of Outstanding Employee Options as applicable to the Outstanding Employee
Options and Parent shall reserve for issuance under such plan a sufficient
number of shares of Parent Common Stock for delivery upon exercise
of
Outstanding Employee Options assumed by Parent under this Agreement
plus
an
additional 3,000,000 shares.
(iii) Unless
provided for in the option grant or Option Plan of Company, the vesting
of each
Outstanding Employee Option will not automatically accelerate pursuant
to its
terms as a result of, or in connection with, the transactions contemplated
hereby. Company shall ensure that none of its Board of Directors nor
any
committee thereof nor any other body or person within its control shall
take any
discretionary action so as to cause the vesting of any Outstanding
Employee
Option which does not vest by its terms prior to the Effective
Time.
-5-
1.10. Merger
Sub Stock.
Each
share of common stock, par value $.0001, of Merger Sub outstanding
immediately
prior to the Effective Time shall be deemed canceled and converted
into and
shall represent the right to receive one share of common stock, $.01
par value,
of the Surviving Corporation (the “Surviving
Common Stock”).
1.11. Dissenters’
Rights.
Notwithstanding Section 1.9(b)(i) and (ii), any shares of Company Common
Stock
outstanding immediately prior to the Effective Time and held by a person
who has
not voted in favor of the Merger and who has properly demanded in writing
appraisal for such shares in accordance with Section 262 of the DGCL
(the
“Dissenting
Shares”)
shall
not be converted into the right to receive the Merger Consideration
or be
entitled to cash in lieu of fractional shares of Parent Common Stock
or any
dividends or other distributions pursuant to this Article I unless
and until the
holder thereof (“Dissenting
Stockholder”)
shall
have failed to perfect or shall have effectively withdrawn or lost
such holder’s
right to appraisal of such shares of Company Common Stock held by such
holder
under Section 262 of the DGCL, and any Dissenting Stockholder shall
be entitled
to receive only the payment provided by Section 262 of the DGCL with
respect to
shares of Company Common Stock owned by such Dissenting Stockholder.
If any
person who otherwise would be deemed a Dissenting Stockholder shall
have failed
to properly perfect or shall have effectively withdrawn or lost the
right to
dissent with respect to any shares of Company Common Stock, such shares
of
Company Common Stock shall thereupon be treated as though such shares
of Company
Common Stock had been converted into the right to receive the Merger
Consideration pursuant to Section 1.9 hereof. Company shall give Parent
(i)
prompt notice of any written demands for appraisal, attempted withdrawals
of
such demands and any other instruments served pursuant to applicable
law
received by Company relating to stockholders’ rights of appraisal and (ii) the
opportunity to participate in and direct all negotiations and proceedings
with
respect to any such demands for appraisal under the DGCL. Company shall
not,
except with the prior written consent of Parent, make any payment with
respect
to any demands for appraisals of Dissenting Shares, offer to settle
or settle
any such demands or approve any withdrawal of any such demands.
1.12. Certain
Other Adjustments.
If,
between the date of this Agreement and the Effective Time, the outstanding
Parent Common Stock or Company Common Stock shall have been changed
into a
different number of shares or different class by reason of any reclassification,
recapitalization, stock split, split-up, combination or exchange of
shares or a
stock dividend or dividend payable in any other securities shall be
declared
with a record date within such period, or any similar event shall have
occurred,
the Merger Consideration shall be appropriately adjusted to provide
to the
holders of Company Common Stock the same economic effect as contemplated
by this
Agreement prior to such event.
1.13. Distributions
with Respect to Unexchanged Shares.
No
dividends or other distributions declared or made with respect to shares
of
Parent Common Stock with a record date after the Effective Time shall
be paid to
the holder of any unsurrendered certificate for Company Capital Stock
(a
“Company
Certificate”)
with
respect to the shares of Parent Common Stock that such holder would
be entitled
to receive upon surrender of such Company Certificate until such holder
shall
surrender such Company Certificate. Subject to the effect of applicable
laws,
following surrender of any such Company Certificate, there shall be
paid to such
holder of shares of Parent Common Stock issuable in exchange therefor,
without
interest, (a) promptly after the time of such surrender, the amount
of dividends
or other distributions with a record date after the Effective Time
but prior to
such surrender and a payment date prior to such surrender payable with
respect
to such shares of Parent Common Stock and (b) at the appropriate payment
date,
the amount of dividends or other distributions with a record date after
the
Effective Time but prior to such surrender and a payment date subsequent
to such
surrender payable with respect to such shares of Parent Common
Stock.
-6-
1.14. No
Further Ownership Rights in Company Capital Stock.
The
Merger Consideration delivered or deliverable to the holders of Company
Capital
Stock in accordance with the terms of this Article I shall be deemed
to have
been issued or paid in full satisfaction of all rights pertaining to
the shares
of Company Capital Stock. Until surrendered as contemplated by this
Agreement,
each Company Certificate representing Company Capital Stock shall be
deemed at
any time after the Effective Time to represent only the right to receive
upon
such surrender solely the Merger Consideration (and any cash to be
paid pursuant
hereto for fractional shares). In addition, until surrendered as contemplated
by
this Agreement, each PharmAthene Note shall be deemed at any time after
the
Effective Time to represent only the right to receive upon such surrender
solely
an 8% Convertible Note hereunder and no further interest shall accrue
on the
PharmAthene Notes after the Effective Time.
1.15. No
Fractional Shares of Parent Common Stock.
(a) Fractional
Shares. No
certificates or scrip representing fractional shares of Parent Common
Stock or
book-entry credit of the same shall be issued upon the surrender for
exchange of
Company Certificates and such fractional share interests will not entitle
the
owner thereof to vote or to have any rights of a stockholder of
Parent.
(b) Cash
for Fractional Shares. Notwithstanding
any other provision of this Agreement, each holder of shares of Company
Common
Stock exchanged pursuant to the Merger who would otherwise have been
entitled to
receive a fraction of a share of Parent Common Stock (after taking
into account
all Company Certificates delivered by such holder) shall receive, in
lieu
thereof, cash (without interest) in an amount equal to the product
of (i) such
fractional part of a share of Parent Common Stock multiplied by (ii)
the closing
price for a share of Parent Common Stock on The American Stock Exchange
LLC (the
“AMEX”)
on the
date of the Effective Time or, if such date is not a Business Day,
the Business
Day immediately before the date on which the Effective Time occurs.
1.16. No
Liability.
None of
Parent, Merger Sub, Company or the Surviving Corporation shall be liable
to any
Person (as defined in Section 2.3(z)) in respect of any Merger Consideration
delivered to a public official pursuant to any applicable abandoned
property,
escheat or similar law.
1.17. Surrender
of Certificates.
Upon
surrender of Company Certificates at Closing, the holders of such Company
Certificates shall receive in exchange therefor Merger Consideration
in
accordance with Schedule 1.9(b)(i) attached hereto, as amended if applicable,
and the Company Certificates surrendered shall be canceled. Until so
surrendered, outstanding Company Certificates shall be deemed, from
and after
the Effective Time, to evidence only the right to receive the applicable
Merger
Consideration issuable pursuant hereto and the Allocation
Agreement.
-7-
1.18. Lost,
Stolen or Destroyed Certificates.
If any
Company Certificate shall have been lost, stolen or destroyed, upon
the making
of an affidavit of that fact by the Person claiming such Company Certificate
to
be lost, stolen or destroyed, Parent shall issue in exchange for such
lost,
stolen or destroyed certificate the Merger Consideration payable in
exchange
therefor; provided, however, that as a condition precedent to the issuance
of
such Merger Consideration, the holder of such lost, stolen or destroyed
Company
Certificates shall indemnify Parent against any claim that may be made
against
Parent or the Surviving Corporation with respect to the Company Certificates
alleged to have been lost, stolen or destroyed.
1.19. Withholding
Rights.
Each of
the Surviving Corporation and Parent shall be entitled to deduct and
withhold
from the Merger Consideration payable pursuant to this Agreement to
any holder
of shares of Company Common Stock such amounts as are required to be
deducted
and withheld with respect to the making of such payment under the Code
and the
rules and Treasury Regulations promulgated thereunder, or any provision
of
state, local or foreign tax law. To the extent that amounts are so
withheld by
the Surviving Corporation or Parent, as the case may be, such withheld
amounts
shall be treated for all purposes under this Agreement as having been
paid to
the holder of the shares of Company Common Stock in respect of which
such
deduction and withholding was made by the Surviving Corporation or
Parent, as
the case may be, and such amounts shall be delivered by the Surviving
Corporation or Parent, as the case may be, to the applicable taxing
authority.
1.20. Further
Assurances.
If at
any time after the Effective Time the Surviving Corporation shall consider
or be
advised that any deeds, bills of sale, assignments or assurances or
any other
acts or things are necessary, desirable or proper (a) to vest, perfect
or
confirm, of record of otherwise, in the Surviving Corporation its right,
title
or interest in, to or under any of the rights, privileges, powers,
franchises,
properties or assets of either Company or Merger Sub or (b) otherwise
to carry
out the purposes of this Agreement, the Surviving Corporation and its
proper
officers and directors or their designees shall be authorized to execute
and
deliver, in the name and on behalf of either Company or Merger Sub,
all such
deeds, bills of sale, assignments and assurances and do, in the name
and on
behalf of Company or Merger Sub, all such other acts and things necessary,
desirable or proper to vest, perfect or confirm its rights, title or
interest
in, to or under any of the rights, privileges, powers, franchises,
properties or
assets of Company or Merger Sub, as applicable, and otherwise to carry
out the
purposes of this Agreement.
1.21. Stock
Transfer Books.
The
stock transfer books of Company shall be closed immediately upon the
Effective
Time and there shall be no further registration of transfers of shares
of
Company Capital Stock thereafter on the records of Company. On or after
the
Effective Time, any Company Certificate presented to Parent for any
reason shall
be converted into the Merger Consideration with respect to the shares
of Company
Capital Stock formerly represented thereby, any cash in lieu of fractional
shares of Parent Common Stock to which the holders thereof are entitled
and any
dividends or other distributions to which the holders thereof are
entitled.
-8-
1.22. Tax
Consequences.
For
U.S.
federal income tax purposes, the parties intend that the Merger be
treated as a
reorganization within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E)
of
the Code, and that this Agreement shall be, and is hereby, adopted
as a plan of
reorganization for purposes of Section 368 of the Code. Accordingly,
unless
otherwise required by Law (as defined in Section 2.3(z)), no party
shall take
any action that reasonably could be expected to jeopardize the treatment
of the
Merger as a reorganization within the meaning of Sections 368(a)(1)(A)
and
368(a)(2)(E) of the Code, and the parties shall not take any position
on any Tax
Return (as defined herein) or in any proceeding relating to the Tax
consequences
of the Merger inconsistent with this Section 1.22. Notwithstanding
the forgoing,
the parties understand and agree that only the Stock Consideration
portion of
the Merger Consideration shall be deemed eligible for a “tax free” exchange
under Section 368 of the Code.
1.23. Escrow.
As the
sole remedy for the indemnity obligations set forth in Article VIII
hereof, at
the Closing, an aggregate of 1,375,000 shares of Parent Common Stock
issued or
issuable as a result of the Merger (the “Escrow
Shares”)
shall
be deposited into escrow to be held during the period commencing on
the Closing
Date and ending on the one year anniversary thereof, which shares shall
be
allocated among the holders of Company Capital Stock and of Company
Options and
Company Warrants in accordance with the terms and conditions of the
Allocation
Agreement and the Escrow Agreement to be entered into between Parent,
Stockholders’ Representative (as defined in Article VIII) and Continental Stock
Transfer & Trust Company, as escrow agent, in substantially the form of
Exhibit B (the “Escrow
Agreement”).
1.24. Rule
145.
All
shares of Parent Common Stock issued pursuant to this Agreement to
“affiliates”
of Company identified on Schedule 1.24 attached hereto will be subject
to
certain resale restrictions under Rule 145 promulgated under the Securities
Act
(as defined herein) and all certificates representing such shares shall
bear an
appropriate restrictive legend.
ARTICLE
II
REPRESENTATIONS
AND WARRANTIES
2.1. Representations
and Warranties of Parent.
Parent
represents and warrants to Company, that the statements contained in
this
Section 2.1 are correct and complete as of the date of this Agreement
and will
be correct and complete as of the Closing Date (as though made then
and as
though the Closing Date were substituted for the date of this Agreement
throughout this Section 2.1), except as set forth in the disclosure
schedule to
be delivered to Company by Parent on the date hereof and initialed
by the
parties (the “Parent
Disclosure Schedule”).
Disclosures made in the Parent Disclosure Schedule shall not be deemed
to
constitute additional representations or warranties of Parent but set
forth
disclosures, exceptions and exclusions called for under this Agreement
provided
they are set forth with reasonable particularity and describe the relevant
facts
in reasonable detail. The Parent Disclosure Schedule will be arranged
in
paragraphs corresponding to the numbered and lettered paragraphs contained
in
this Section 2.1.
-9-
(a) Organization,
Standing and Power. Parent
is
a corporation duly organized, validly existing and in good standing
(as defined
in Article X) under the laws of the State of Delaware, has the requisite
power
and authority to own, lease and operate its properties and to carry
on its
business as now being conducted. Parent is duly qualified or licensed
as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of the properties owned, leased or
operated by
it or the nature of its activities makes such qualification or licensing
necessary, except for such failures to be so duly qualified or licensed
and in
good standing that could not reasonably be expected to have a Material
Adverse
Effect (as defined in Article X). Complete and correct copies of the
certificate
of incorporation and bylaws of Parent, as amended and currently in
effect, have
been provided to Company and Parent is not in violation of any of the
provisions
of such organization documents. Merger Sub is a newly-formed single
purpose
entity which has been formed solely for the purposes of the Merger
and has not
carried on, and prior to the Closing will not carry on, any business
or engaged
in any activities other than those reasonably related to the Merger.
Except for
Merger Sub, which is a direct, wholly-owned subsidiary of Parent, Parent
has no
subsidiaries and does not own, directly or indirectly, any equity,
profit or
voting interest in any person or has any agreement or commitment to
purchase any
such interest and Parent has not agreed and is not obligation to make
nor is
bound by any written, oral or other agreement, contract, subcontract,
lease,
binding understanding, instrument, note, option, warranty, purchase
order,
license, sublicense, insurance policy, benefit plan, commitment or
undertaking
of any nature, as of the date hereof or as may hereafter be in effect
under
which it may become obligated.
(b) Capital
Structure.
The
authorized capital stock of Parent consists of (i) 100,000,000 shares
of Parent
Common Stock, of which 11,650,000 shares were outstanding as of September
30,
2006 and (ii) 1,000,000 shares of preferred stock, $.0001 par value,
none of
which are outstanding. No shares of Parent Common Stock have been issued
between
August 16, 2005 and the date hereof. All issued and outstanding shares
of the
capital stock of Parent are duly authorized, validly issued, fully
paid and
nonassessable, and no class of capital stock is entitled to (or has
been issued
in violation of) preemptive rights. As of the date hereof, there are
(i) options
with an exercise price of $10.00 per unit to purchase up to 225,000
units issued
to the underwriter in Parent’s initial public offering completed pursuant to a
final prospectus of Parent, dated July 28, 2006, as filed under the
Securities
Act (the “IPO”),
each
unit consisting of a single share of Parent Common Stock and a single
warrant to
purchase a single share of Parent Common Stock, and (ii) 9,400,000
outstanding
warrants with an exercise price of $6.00 per share issued in the IPO
(the
“Parent
Warrants”)
and no
other issued or outstanding rights to acquire capital stock from Parent.
All
outstanding shares of Parent Common Stock and all outstanding Parent
Warrants
have been issued and granted in compliance with (x) all applicable
securities
laws and (in all material respects, other applicable laws and regulations,
and
(y) all requirements set forth in any applicable Parent contract. Parent
has
delivered to Company complete and correct copies of the Parent Warrants
including all documents relating thereto. All shares of Parent Common
Stock to
be issued in connection with the Merger and the other transactions
contemplated
hereby will, when issued in accordance with the terms hereof, have
been duly
authorized, be validly issued, fully paid and non-assessable, free
and clear of
all Liens (as defined in Article X). Except as set forth in Section
2.1(b) of
the Parent Disclosure Schedule, or as contemplated by this Agreement,
there are
no registration rights and there is no voting trust, proxy, rights
plan,
anti-takeover plan or other agreements or understandings to which Parent
is a
party or by which the Parent is bound with respect to any equity securities
of
any class of Parent.
-10-
(c) Authority;
No Conflicts.
(i) Parent
has all requisite corporate power and authority to enter into this
Agreement and
to consummate the transactions contemplated hereby, including, without
limitation, the issuance of the shares of Parent Common Stock to be
issued in
the Merger (the “Share
Issuance”).
The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized
by all
necessary corporate action on the part of Parent and no other corporate
proceedings on the part of Parent are necessary to authorize this Agreement
or
to consummate the transactions contemplated hereby other than the Parent
Stockholder Approval (as defined in Section 6.1(b)). This Agreement
has been
duly and validly executed and delivered by Parent and, assuming that
this
Agreement constitutes a valid and binding agreement of Company, constitutes
a
valid and binding agreement of Parent, enforceable against Parent in
accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to
or affecting
creditors generally or by general equity principles (regardless of
whether such
enforceability is considered in a proceeding in equity or at law) or
by an
implied covenant of good faith and fair dealing.
(ii) The
execution and delivery of this Agreement by Parent do not, and the
consummation
by Parent of the Merger and the other transactions contemplated hereby
will not,
conflict with, or result in any violation of, or constitute a default
(with or
without notice or lapse of time, or both) under, or give rise to a
right of
termination, amendment, cancellation or acceleration of any obligation
or the
loss of a material benefit under, or the creation of a Lien on any
assets (any
such conflict, violation, default, right of termination, amendment,
cancellation
or acceleration, loss or creation, is hereinafter referred to as a
“Violation”)
pursuant to:
(A) any
provision of the certificate of incorporation or bylaws of Parent;
or
(B) except
as
would not reasonably be expected to have, individually or in the aggregate,
a
Material Adverse Effect on Parent, and subject to obtaining or making
the
consents, approvals, orders, authorizations, registrations, declarations
and
filings referred to in paragraph (iii) below, any loan or credit agreement,
note, mortgage, bond, indenture, lease, benefit plan or other agreement,
obligation, instrument, permit, concession, franchise, license, judgment,
order,
decree, statute, law, ordinance, rule or regulation applicable to Parent
or its
properties or assets.
-11-
(iii) No
consent, approval, order or authorization of, or registration, declaration
or
filing with, any supranational, national, state, municipal, local or
foreign
government, any instrumentality, subdivision, tribunal, court, arbitrator,
administrative agency or commission or other authority or instrumentality
thereof, or any quasi-governmental or private body exercising any regulatory,
taxing, importing or other governmental or quasi-governmental authority
(a
“Governmental
Entity”)
or
expiry of any related waiting period is required by or with respect
to Parent in
connection with the execution and delivery of this Agreement by Parent
or Merger
Sub or the consummation of the Merger and the other transactions contemplated
hereby, except for those required under or in relation to:
(A) state
securities or “blue sky” laws;
(B) the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder (the “Securities
Act”);
(C) the
Securities and Exchange Act of 1934, as amended, and the rules and
regulations
promulgated thereunder (the “Exchange
Act”);
(D) the
DGCL
with respect to the filing of the Certificate of Merger;
(E) Canadian
provincial securities laws relating to the resale of the Parent Common
Stock
issued to security holders of the Company resident in Canada; and
(F) such
consents, approvals, orders, authorizations, registrations, declarations
and
filings and expiry of waiting periods the failure of which to make
or obtain or
expire would not reasonably be expected to have, individually or in
the
aggregate, a Material Adverse Effect on Parent.
For
purposes of this Agreement, consents, approvals, orders, authorizations,
registrations, declarations and filings required under or in relation
to any of
the foregoing clauses (A) through (E) are hereinafter referred to as
“Necessary
Consents.”
(iv) The
Board
of Directors of Parent, at a meeting duly called and held, duly and
unanimously
adopted resolutions (A) approving and declaring advisable this Agreement
and the
transactions contemplated hereby, (B) determining that the terms of
the Merger
and the transactions contemplated thereby are fair to and in the best
interests
of Parent and its stockholders, (C) determining that the fair market
value of
Company is equal to at least 80% of Parent’s net assets and (D) recommending
that Parent’s stockholders approve the Merger and the transactions contemplated
thereby.
(v) The
only
vote of holders of any class or series of Parent capital stock necessary
to
approve this Agreement and the transactions contemplated hereby is
the approval
and adoption by the holders of a majority of the outstanding publicly-held
shares of Parent Common Stock; provided,
however,
that
the Parent may not consummate the Merger if the holders of 20% or more
in
interest of the Parent Common Stock issued in the IPO (“IPO
Shares”)
shall
have demanded that Parent convert such shares into cash pursuant to
the Parent’s
amended and restated certificate of incorporation (“Parent
Charter”).
-12-
(d) Reports
and Financial Statements.
(i) Parent
has filed all required registration statements, reports, schedules,
forms,
statements and other documents required to be filed by it with the
SEC since
July 28, 2005 (collectively, as they have been amended since the time
of their
filing and including all exhibits thereto, the “Parent
SEC Reports”).
None
of the Parent SEC Reports, as of their respective dates (and, if amended
or
superseded by a filing prior to the date of this Agreement or the Closing
Date,
then on the date of such filing), contained any untrue statement of
a material
fact or omitted to state a material fact required to be stated therein
or
necessary to make the statements therein, in light of the circumstances
under
which they were made, not misleading. Except as set forth on Section
2.1(d) of
the Parent Disclosure Schedule, each of the financial statements (including
the
related notes) included in the Parent SEC Reports presents fairly,
in all
material respects, the consolidated financial position and consolidated
results
of operations and cash flows of Parent as of the respective dates or
for the
respective periods set forth therein, all in conformity with generally
accepted
accounting principles in the United States (“GAAP”)
applied on a consistent basis throughout the periods involved except
as
otherwise noted therein, and subject, in the case of the unaudited
interim
financial statements, to normal and recurring adjustments that were
not or are
not expected to be material in amount, and lack footnote disclosure.
All of such
Parent SEC Reports (including any financial statements included or
incorporated
by reference therein), as of their respective dates (and as of the
date of any
amendment to the respective Parent SEC Report), complied as to form
in all
material respects with the applicable requirements of the Securities
Act and the
Exchange Act and the rules and regulations promulgated thereunder.
(ii) Except
(A) to the extent reflected in the balance sheet of Parent included
in the
Parent SEC Report last filed prior to the date hereof or (B) incurred
in the
ordinary course of business since the date of the balance sheet referred
to in
the preceding clause (A), Parent does not have any liabilities or obligations
of
any nature, whether known or unknown, absolute, accrued, contingent
or otherwise
and whether due or to become due, that have or would reasonably be
expected to
have, individually or in the aggregate, a Material Adverse Effect on
Parent.
(e) Information
Supplied.
-13-
(i) None
of
the information supplied or to be supplied by Parent for inclusion
or
incorporation by reference in the Proxy Statement to be filed with
the SEC by
Parent in connection with the Merger, or any of the amendments or supplements
thereto (as defined below) will, at the time such documents are filed
with the
SEC, or at any time they are amended or supplemented, contain any untrue
statement of a material fact or omit to state any material fact required
to be
stated therein or necessary to make the statements therein not misleading.
Such
documents will each comply as to form in all material respects with
the
requirements of the Exchange Act and the Securities Act and the rules
and
regulations of the SEC thereunder.
(ii) Notwithstanding
the foregoing provisions of this Section 2.1(e), no representation
or warranty
is made by Parent with respect to statements made or incorporated by
reference
in the Proxy Statement based on information not supplied by it or Merger
Sub.
(f) Trust
Funds; Liquidation.
(i) Since
August 16, 2005, Parent has had at least $67,928,000, plus accrued
interest (the
“Trust
Fund”),
invested in U.S. government securities in a trust account at a New
York branch
of JP Morgan Chase (the “Trust
Account”),
held
in trust by Continental Stock Transfer & Trust Company (the “Trustee”)
pursuant to the Investment Management Trust Agreement dated as of July
28, 2005,
between Parent and the Trustee (the “Trust
Agreement”).
Upon
consummation of the Merger and notice thereof to the Trustee, the Trust
Account
will terminate and the Trustee shall thereupon be obligated to release
as
promptly as practicable to Parent the Trust Fund held in the Trust
Account,
which Trust Fund will be free of any Lien whatsoever and, after taking
into
account any funds paid to holders of IPO Shares who shall have demanded
that
Parent convert their IPO Shares into cash pursuant to the Parent Charter
shall
be an amount at least equal to $54,342,400.
(ii) Effective
as of the Effective Time, the obligations of Parent to dissolve or
liquidate
within the specified time period contained in the Parent Charter will
terminate,
and effective as of the Effective Time Parent shall have no obligation
whatsoever to dissolve and liquidate the assets of Parent by reason
of the
consummation of the Merger or the transactions contemplated thereby,
and
following the Effective Time no Parent stockholder shall be entitled
to receive
any amount from the Trust Account except to the extent such stockholder
votes
against the approval of this Agreement and the transactions contemplated
thereby
and demands, contemporaneous with such vote, that Parent convert such
stockholder’s shares of Parent Common Stock into cash pursuant to the Parent
Charter.
-14-
(g) Absence
of Certain Changes or Events. Except
for liabilities incurred in connection with this Agreement or the transactions
contemplated hereby, since December 31, 2005, there has not been any
change,
circumstance or event which has had, or would reasonably be expected
to have,
individually or in the aggregate, a Material Adverse Effect on Parent,
nor has
there by (i) any declaration, setting aside or payment of any dividend
on, or
other distribution (whether in cash, stock or property) in respect
of any class
or series of its capital stock or any purchase, redemption or other
acquisition
by Parent of any class or series of its capital stock or any other
securities of
Parent, (ii) any split, combination or reclassification of any capital
stock,
(iii) any granting by Parent of any increase in compensation or fringe
benefits
and any granting by Parent of any increase in severance or termination
pay or
any entry by Parent into any currently effective employment, severance,
termination or indemnification agreement, (iv) any material change
by Parent in
its accounting methods, principles or practices except as required
by concurrent
changes in U.S. GAAP, (v) any change in auditors of Parent, or (vi)
any issuance
of Parent capital stock.
(h) Investment
Company Act.
Parent
is not, and will not be after the Effective Time, an “investment
company”
or
a
person directly or indirectly “controlled”
by
or
acting on behalf of an “investment
company”,
in
each case within the meaning of the Investment Company Act of 1940,
as
amended.
(i) Litigation.
There
are
no claims, suits, actions or proceedings pending or to Parent’s Knowledge (as
defined in Article X), threatened against Parent, before any court,
governmental
department, commission, agency, instrumentality or authority, or any
arbitrator
that seeks to restrain or enjoin the consummation of the transactions
contemplated by this Agreement or which could reasonably be expected,
either
singularly or in the aggregate with all such claims, actions or proceedings,
to
have a Material Adverse Effect on Parent or have a Material Adverse
Effect on
the ability of the parties hereto to consummate the Merger.
(j) Employees;
Employee Benefit Plans. Parent
currently does not have and never has had any employees in Canada.
Parent does
not maintain, and has no liability under, any plan, and neither the
execution
and delivery of this Agreement nor the consummation of the transactions
contemplated hereby will (i) result in any payment (including severance,
unemployment compensation, golden parachute, bonus or otherwise) becoming
due to
any stockholder, director or employee of Parent, or (ii) result in
the
acceleration of the time of payment or vesting of any such
benefits.
(k) No
Undisclosed Liabilities. Except
as
set forth in Section 2.1(k) of the Parent Disclosure Schedule, Parent
has no
liabilities (absolute, accrued, contingent or otherwise) of a nature
required to
be disclosed on a balance sheet or in the related notes to the financial
statements included in Parent SEC Reports which are, individually or
in the
aggregate, material to the business, results of operations or financial
condition of Parent, except (i) liabilities provided for in or otherwise
disclosed in Parent SEC Reports filed prior to the date hereof, and
(ii)
liabilities incurred since September 30, 2006 in the ordinary course
of
business, none of which would have a Material Adverse Effect on Parent.
Merger
Sub has no assets or properties of any kind, does not now conduct and
has never
conducted any business, and does not now have and will not have at
the Closing
any obligations or liabilities of any nature whatsoever except such
obligations
and liabilities as are imposed under this Agreement.
-15-
(l) Title
to Property. Except
as
set forth in Section 2.1(l) of the Parent Disclosure Schedule, Parent
does not
own or lease any real property or personal property. Except as set
forth in
Section 2.1(l) of the Parent Disclosure Schedule, there are no options
or other
contracts under which Parent has a right or obligation to acquire or
lease any
interest in real property or personal property.
(m) Taxes.
(i) Parent
has timely filed all Tax Returns required to be filed by Parent with
any Tax
authority prior to the date hereof. All such Tax Returns are true,
correct and
complete in all material respects. Parent has paid all Taxes shown
to be due on
such Tax Returns.
(ii) All
Taxes
that Parent is required by law to withhold or collect have been duly
withheld or
collected, and have been timely paid over to the proper governmental
authorities
to the extent due and payable.
(iii) Parent
has not been delinquent in the payment of any material Tax nor is there
any
material Tax deficiency outstanding, proposed or assessed against Parent,
nor
has Parent executed any unexpired waiver of any statute of limitations
on or
extending the period for the assessment or collection of any Tax (as
defined in
Section 2.3(k)).
(iv) No
audit
or other examination of any Tax Return of Parent by any Tax authority
is
presently in progress, nor has Parent been notified of any request
for such an
audit or other examination.
(v) No
adjustment relating to any Returns filed by Parent has been proposed
in writing,
formally or informally, by any Tax authority to Parent or any representative
thereof.
(vi) Parent
has no liability for any material unpaid Taxes which have not been
accrued for
or reserved on Parent’s balance sheets included in the audited financial
statements for the most recent fiscal year ended, whether asserted
or
unasserted, contingent or otherwise, which is material to Parent, other
than any
liability for unpaid Taxes that may have accrued since the end of the
most
recent fiscal year in connection with the operation of the business
of Parent in
the ordinary course of business, none of which is material to the business,
results of operations or financial condition of Parent.
(vii) Parent
has not taken any action and does not know of any fact, agreement,
plan or other
circumstance that is reasonably likely to prevent the Merger from qualifying
as
a reorganization within the meaning of Section 368(a) of the Code.
(n) Environmental
Matters. Except
for such matters that, individually or in the aggregate, are not reasonably
likely to have a Material Adverse Effect: (i) Parent has, to Parent’s Knowledge,
complied with all applicable Environmental Laws (as defined in Section
2.3(s);
(ii) Parent has not received any notice, demand, letter, claim or request
for
information alleging that Parent may be in violation of or liable under
any
Environmental Law; and (iii) Parent is not subject to any orders, decrees,
injunctions or other arrangements with any governmental entity or subject
to any
indemnity or other agreement with any third party relating to liability
under
any Environmental Law.
-16-
(o) Brokers.
Except
as
set forth in Section 2.1(o) of the Parent Disclosure Schedule, Parent
has not
incurred, nor will it incur, directly or indirectly, any liability
for brokerage
or finders’ fees or agent’s commissions or any similar charges in connection
with this Agreement or any transactions contemplated hereby.
(p) Intellectual
Property. Parent
does not own, license or otherwise have any right, title or interest
in any
Intellectual Property Rights (as defined in Section 2.3(t)).
(q) Agreements,
Contracts and Commitments.
(i) Except
as
set forth in the Parent SEC Reports filed prior to the date of this
Agreement,
there are no contracts, agreements, leases, mortgages, indentures,
notes, bonds,
liens, license, permit, franchise, purchase orders, sales orders or
other
understandings, commitments or obligations (including without limitation
outstanding offers or proposals) of any kind, whether written or oral,
to which
Parent is a party or by or to which any of the properties or assets
of Parent
may be bound, subject or affected, which either (x) creates or imposes
a
liability greater than $25,000, or (y) may not be cancelled by Parent
on less
than thirty (30) days’ or less prior notice (“Parent
Contracts”).
All
Parent Contracts are set forth in Section 2.1(q) of the Parent Disclosure
Schedule, other than those that are exhibits to the Parent SEC
Reports.
(ii) Other
than as set forth in Section 2.1(q) of the Parent Disclosure Schedule,
each
Parent Contract was entered into at arms’ length and in the ordinary course, is
in full force and effect and is valid and binding upon and enforceable
against
each of the parties thereto. Correct and complete copies of all Parent
Contracts
(or written summaries in the case of oral Parent Contracts) and of
all
outstanding offers or proposals of Parent have been heretofore delivered
to
Company.
(iii) Neither
Parent nor, to Parent’s Knowledge, any other party thereto is in breach of or in
default under, and no event has occurred which with notice or lapse
of time or
both would become a breach of or default under, any Parent Contract,
and no
party to any Parent Contract has given any written notice of any claim
of any
such breach, default or event, which, individually or in the aggregate,
are
reasonably likely to have a Material Adverse Effect on Parent. Each
agreement,
contract or commitment to which Parent is a party or by which it is
bound that
has not expired by its terms is in full force and effect, except where
such
failure to be in full force and effect is not reasonably likely to
have a
Material Adverse Effect on Parent.
-17-
(r) Insurance.
Set
forth
in Section 2.1(r) of the Parent Disclosure Schedule, is a complete
list of all
liability insurance coverage maintained by Parent which coverage is
in full
force and effect.
(s) Interested
Party Transactions. Except
as
set forth in the Parent SEC Reports filed prior to the date of this
Agreement,
no employee, officer, director or stockholder of Parent or a member
of his or
her immediate family is indebted to Parent nor is Parent indebted (or
committed
to make loans or extend or guarantee credit) to any of them, other
than
reimbursement for reasonable expenses incurred on behalf of Parent.
To Parent’s
Knowledge, none of such individuals has any direct or indirect ownership
interest in any Person with whom Parent is affiliated or with whom
Parent has a
material contractual relationship, or any Person that competes with
Parent,
except that each employee, stockholder, officer or director of Parent
and
members of their respective immediate families may own less than 5%
of the
outstanding stock in publicly traded companies that may compete with
Parent. To
Parent’s Knowledge, no officer, director or stockholder or any member of their
immediate families is, directly or indirectly, interested in any material
contract with Parent (other than such contracts as relate to any such
individual
ownership of capital stock or other securities of Parent).
(t) Indebtedness.
Parent
has no indebtedness for borrowed money.
2.2. Representations
and Warranties of Parent with Respect to Merger Sub. Parent and Merger
Sub
represent and warrant to Company as follows:
(a) Organization;
Reporting. Merger
Sub is a corporation duly incorporated, validly existing and in good
standing
under the laws of the State of Delaware. Merger Sub is a direct, wholly-
owned
subsidiary of Parent. Merger Sub has never been subject to the reporting
requirements of Sections 13(a) and 15(d) of the Exchange Act.
(b) Corporate
Authorization. Merger
Sub has all requisite corporate power and authority to enter into this
Agreement
and to consummate the transactions contemplated hereby. The execution,
delivery
and performance by Merger Sub of this Agreement and the consummation
by Merger
Sub of the transactions contemplated hereby have been duly authorized
by all
necessary corporate action on the part of Merger Sub. Parent, in its
capacity as
sole stockholder of Merger Sub, has approved this Agreement and the
other
transactions contemplated hereby as required by the DGCL. This Agreement
has
been duly executed and delivered by Merger Sub and, assuming that this
Agreement
constitutes the valid and binding agreement of Company, constitutes
a valid and
binding agreement of Merger Sub, enforceable against it in accordance
with its
terms, except as such enforceability may be limited by bankruptcy,
insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors generally or by general equity principles (regardless of
whether such
enforceability is considered in a proceeding in equity or at law) or
by an
implied covenant of good faith and fair dealing.
-18-
(c) Non-Contravention.
The
execution, delivery and performance by Merger Sub of this Agreement
and the
consummation by Merger Sub of the transactions contemplated hereby
do not and
will not contravene or conflict with the certificate of incorporation
or the
bylaws of Merger Sub.
(d) No
Business Activities. Merger
Sub has not conducted any activities other than in connection with
the
organization of Merger Sub, the negotiation and execution of this Agreement
and
the consummation of the transactions contemplated hereby. Merger Sub
has no
subsidiaries.
2.3. Representations
and Warranties of Company.
Company
represents and warrants to Parent and Merger Sub that the statements
contained
in this Section 2.3 are correct and complete as of the date of this
Agreement
and will be correct and complete as of the Closing Date (as though
made then and
as though the Closing Date were substituted for the date of this Agreement
throughout this Section 2.3), except as set forth in the disclosure
schedule to
be delivered by Company to Parent on the date hereof and initialed
by the
parties (the “Company
Disclosure Schedule”).
Disclosures made in the Company Disclosure Schedule shall not be deemed
to
constitute additional representations or warranties of Company but
set forth
disclosures, exceptions and exclusions called for under this Agreement
provided
that they are set forth with reasonable particularity and describe
the relevant
facts in reasonable detail. The Company Disclosure Schedule will be
arranged in
paragraphs corresponding to the lettered and numbered paragraphs contained
in
this Section 2.3 and Company shall make reasonable effort to specifically
cross
reference all sections where a particular disclosure qualifies or
applies.
(a) Organization,
Standing and Power.
(i) Company
is duly organized, validly existing and in good standing under the
laws of the
State of Delaware and has full corporate power and authority to own
or hold
under lease the assets and properties which it owns or holds under
lease, to
conduct its business as currently conducted, to perform all of its
obligations
under the agreements to which it is a party, including, without limitation,
this
Agreement, and upon the receipt of authorization of the holders of
Company
Capital Stock in accordance with the DGCL, to consummate the Merger.
Company is
in good standing in each other jurisdiction wherein the failure so
to qualify,
individually or in the aggregate, would have a Material Adverse Effect.
The
copies of the certificate of incorporation and by-laws of Company which
have
been delivered to Parent by Company are complete and correct. Company
has made available to Parent correct and complete copies of the minutes
of all
meetings of (w) Company stockholders, (x) the Board of Directors of
Company and
(y) each committee of the Board of Directors of Company held since
inception.
-19-
(ii) Company
has only one subsidiary, PharmAthene Canada, Inc. (the “Subsidiary”).
Company does not, directly or indirectly, beneficially or legally own
or hold
any capital stock or other proprietary interest of an other corporation,
partnership, joint venture, business trust or other legal entity. Section
2.3(a)
of the Company Disclosure Schedule indicates the jurisdiction of the
Subsidiary’s incorporation or formation, and Company’s direct or indirect
ownership thereof. The Subsidiary is a corporation duly organized,
validly
existing and in good standing under the laws of the jurisdiction of
its
incorporation, and has full corporate power and authority to own or
hold under
lease the assets and properties which it owns or holds under lease
and to
perform all its obligations under the agreements to which it is a party
and to
conduct the Subsidiary’s business. The Subsidiary is in good standing in each
other jurisdiction wherein the failure so to qualify would, individually
or in
the aggregate, would have a Material Adverse Effect. Except as set
forth on
Section 2.3(a) of the Company Disclosure Schedule, all of the outstanding
shares
of the capital stock of the Subsidiary is owned by Company and is duly
authorized and validly issued, fully paid and non-assessable, issued
without
violation of the preemptive rights of any person, and are owned free
and clear
of any mortgages, deeds of trust, pledges, liens, security interests
or any
charges or encumbrances of any nature. Except as set forth on Section
2.3(a) of
the Company Disclosure Schedule, no shares of capital stock or other
proprietary
interest of the Subsidiary is subject to any option, call, commitment
or other
agreement of any nature, and except as set forth on Section 2.3(a)
of the
Company Disclosure Schedule, there are no subscriptions, warrants,
options,
calls, commitments by agreements to which Company or the Subsidiary
is bound
relating to the issuance or purchase of any shares of capital stock
of the
Subsidiary. Except as set forth on Section 2.3(a) of the Company Disclosure
Schedule, neither Company nor the Subsidiary is party to any agreement
or
arrangement relating to the voting or control of any capital stock
of the
Subsidiary, or obligating Company or the Subsidiary to sell any assets
of the
Subsidiary, which is material to Company’s business or condition. The copies of
the certificate of incorporation and by-laws, or other instruments
of formation,
of the Subsidiary, which have been delivered or made available to Parent
by
Company are complete and correct. Company has made available to Parent
correct
and complete copies of the minutes of all meetings of (w) stockholders
of the
Subsidiary, (x) the Board of Directors of the Subsidiary and (y) each
committee
of the Board of Directors of the Subsidiary held since inception. Each
reference
to a “subsidiary”
or
“subsidiaries”
of
any
person means any corporation, partnership, joint venture or other legal
entity
of which such person (either above or through or together with any
other
subsidiary), owns, directly or indirectly, more than 50% of the stock
or other
equity interests the holder of which are generally entitled to vote
for the
election of the board of directors or other governing body of such
corporation
or other legal entity.
(b) Capital Structure.
-20-
(i) The
authorized capital stock of Company consists of (i) 147,089,105 shares
of
Company Common Stock, of which 10,942,906 shares are issued and outstanding
and
(ii) 105,009,575 shares of Company Preferred Stock, of which (A) 16,442,000
shares have been designated as Series A Convertible Preferred Stock,
16,442,000
of which are issued or outstanding, (B) 65,768,001 shares have been
designated
as Series B Convertible Preferred Stock, 30,448,147 of which are issued
or
outstanding, and (C) 22,799,574 shares have been designated as Series
C
Convertible Preferred Stock, of which 14,946,479 shares are issued
and
outstanding. There are no other classes of capital stock of Company
authorized,
issued or outstanding. All of the outstanding shares of Company Capital
Stock
are, and all outstanding shares of Company Capital Stock issuable upon
exercise
of Company Options and Company Warrants will be, duly authorized, validly
issued
and fully paid and non-assessable, issued without violation of the
preemptive
rights of any person. Except as set forth on Section 2.3(b) of the
Company
Disclosure Schedule, there are no subscriptions, warrants, options,
calls,
commitments by or agreements to which Company is bound relating to
the issuance,
conversion, or purchase of any shares of Company Common Stock, or any
other
Company Capital Stock. Except as set forth on Section 2.3(b) of the
Company
Disclosure Schedule, Company is not a party to any agreement or arrangement
relating to the voting or control of any of the Company Capital Stock,
or
obligating Company, directly or indirectly, to sell any asset which
is material
to the businesses, financial condition, results of operations or prospects
of
Company and its Subsidiary, taken as a whole (hereinafter referred
to as
“Company’s
business or condition”).
Except as set forth in Section 2.3(b) of the Company Disclosure Schedule,
Company has not agreed to register any securities under the Securities
Act under
any arrangements that would require any such registration as a result
of this
Agreement or the transactions contemplated hereby or otherwise. All
outstanding
shares of Company Capital Stock, all outstanding Company Options, and
all
outstanding Company Warrants have been issued or granted in compliance
with all
applicable securities laws.
(ii) The
authorized capital stock of the Subsidiary (the “Subsidiary Capital Stock”)
consists of an unlimited number of Class A common shares of which 1,000
shares
are issued and outstanding, an unlimited number of Class B common shares
of
which none are outstanding (of which 466,498 shares issuable upon exercise
of
warrants), an unlimited number of Class B non-voting preferred shares
of which
none are issued and outstanding and an unlimited number of Class C
non-voting
preferred shares of which 2,591,654 are issued and outstanding (and
of which
777,496 are issuable upon exercise of warrants). There are no other
classes of
capital stock of the Subsidiary authorized, issued or outstanding.
All of the
outstanding shares of Subsidiary Capital Stock are, and all outstanding
shares
of Subsidiary Capital Stock issuable upon exercise Subsidiary Warrants
(as
defined below) will be, duly authorized, validly issued and fully paid
and
non-assessable, issued without violation of the preemptive rights of
any person.
Except as set forth on Section 2.3(b) of the Company Disclosure Schedule,
there
are no subscriptions, warrants, options, calls, commitments by or agreements
to
which the Subsidiary is bound relating to the issuance, conversion,
or purchase
of any shares of Subsidiary Capital Stock. The Warrants described on
Section
2.3(b) of the Company Disclosure Schedule are referred to herein as
the
“Subsidiary
Warrants.”
Except
as set forth on Section 2.3(b) of the Company Disclosure Schedule,
Subsidiary is
not a party to any agreement or arrangement relating to the voting
or control of
any of the Subsidiary Capital Stock, or obligating Subsidiary, directly
or
indirectly, to sell any asset which is material to Company’s business or
condition. Except as set forth in Section 2.3(b) of the Company Disclosure
Schedule, Subsidiary has not agreed to register any securities under
the
Securities Act or like foreign statute, rule or regulation under any
arrangements that would require any such registration as a result of
this
Agreement or the transactions contemplated hereby or otherwise. All
outstanding
shares of Subsidiary Capital Stock and all outstanding Subsidiary Warrants
have
been issued or granted in compliance with all applicable securities
laws or like
foreign statutes, rules or regulations. Upon completion of the Merger,
at the
Effective Time, Company shall own all of the Subsidiary Capital Stock
and there
shall not be outstanding any options, warrants or other convertible
securities
or any other rights to acquire any Subsidiary Capital Stock.
-21-
(c) Authority;
No Conflicts.
(i) Company
has all requisite corporate power and authority to enter into this
Agreement and
to consummate the transactions contemplated hereby. The execution and
delivery
of this Agreement and the consummation of the transactions contemplated
hereby
have been duly authorized by all necessary corporate action on the
part of
Company. This Agreement has been duly executed and delivered by Company
and,
assuming that this Agreement constitutes a valid and binding agreement
of Parent
and Merger Sub, constitutes a valid and binding agreement of Company,
enforceable against it in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and similar laws relating to or affecting creditors generally
or by
general equity principles (regardless of whether such enforceability
is
considered in a proceeding in equity or at law) or by an implied covenant
of
good faith and fair dealing.
(ii) The
execution and delivery of this Agreement by Company does not, and the
consummation by Company of the Merger and the other transactions contemplated
hereby will not, conflict with, or result in a Violation pursuant to:
(A) any
provision of the certificate of incorporation or bylaws of Company
or (B) except
as set forth in Section 2.3(c) of the Company Disclosure Schedule or
as would
not reasonably be expected to have, individually or in the aggregate,
a Material
Adverse Effect on Company, and subject to obtaining or making the consents,
approvals, orders, authorizations, registrations, declarations and
filings
referred to in paragraph (iii) below, any loan or credit agreement,
note,
mortgage, bond, indenture, lease, benefit plan or other agreement,
obligation,
instrument, permit, concession, franchise, license, judgment, order,
decree,
statute, law, ordinance, rule or regulation applicable to Company or
its
properties or assets.
(iii) No
consent, approval, order or authorization of, or registration, declaration
or
filing with, any Governmental Entity or expiry of any related waiting
period is
required by or with respect to Company in connection with the execution
and
delivery of this Agreement by Company or the consummation of the Merger
and the
other transactions contemplated hereby, except the Necessary Consents,
the
approvals set forth in Section 2.3(c) of the Company Disclosure Schedule
and
such consents, approvals, orders, authorizations, registrations, declarations
and filings and expiry of waiting periods the failure of which to make
or obtain
or expire would not reasonably be expected to have, individually or
in the
aggregate, a Material Adverse Effect on Company.
-22-
(iv) The
Board
of Directors of Company has taken all actions so that the restrictions
contained
in Section 203 of the DGCL applicable to a “business
combination”
(as
defined in Section 203 of the DGCL) will not apply to the execution,
delivery or
performance of this Agreement or to the consummation of the transactions
contemplated by this Agreement.
(v) The
Allocation Agreement has been duly and validly executed by Company,
and to its
Knowledge, each of the other signatories thereto, and constitutes the
valid and
binding obligation of the parties thereto. There have been no amendments
or
modifications, written or otherwise, to the Allocation Agreement. Company
has
delivered to Parent a true and correct copy of the Allocation
Agreement.
(d) Financial
Statements.
(i) Company
has heretofore furnished Parent with copies of the following consolidated
financial statements of Company and its Subsidiary: (a) consolidated
balance
sheet as at September 30, 2006; (b) consolidated statements of operations
for
the year ended on December 31, 2005; (c) a balance sheet (the “Reference
Balance Sheet”)
as at
September 30, 2006 (the “Reference
Balance Sheet Date”);
(d) a
consolidated statement of operations (the “Reference
Income Statement”)
for
the 9 months ended September 30, 2006 and (e) consolidated audited
financial
statements for the fiscal years ending December 31, 2005 and December
31, 2004.
Company will furnish consolidated audited financial statements for
the fiscal
years ending December 31, 2006 as soon as they become available and
in no event
later that February 14, 2007. Except as set forth on Section 2.3(d)
to the
Company Disclosure Schedule, all such consolidated financial statements
are or
will be complete and correct, were or will be prepared in accordance
with
generally accepted accounting principles of the United States (“GAAP”),
consistently applied throughout the periods indicated, and have been
or will be
prepared in accordance with the books and records of Company and its
Subsidiary,
and present or will present fairly the financial position of Company
and its
Subsidiary at such dates and the results of its consolidated operations
and cash
flows for the periods then ended, subject to such inaccuracies, if
any, which
are not material in nature or amount. The consolidated financial statements
of
Company and its Subsidiary provided or to be provided to Parent pursuant
to this
Section 2.3(d) are referred to herein as the “Company
Financial Statements.”
(ii) There
are
no liabilities of or against Company or its Subsidiary of any nature
(accrued,
absolute or contingent, unasserted, known or unknown, or otherwise),
except: (a)
as and to the extent reflected or reserved against on the Reference
Balance
Sheet; (b) as set forth on Section 2.3(d) to the Company Disclosure
Schedule;
(c) those that are individually, or in the aggregate, not material
and were
incurred since the Reference Balance Sheet Date in the ordinary course
of
business consistent with prior practice; or (d) open purchase or sales
orders or
agreements for delivery of goods and services in the ordinary course
of business
consistent with prior practice.
-23-
(iii) Each
of
Company and its Subsidiary: maintains a system of internal accounting
controls
sufficient to provide reasonable assurance that (i) transactions are
executed in
accordance with management’s general or specific authorizations; (ii)
transactions are recorded timely as necessary to permit preparation
of financial
statements in conformity with generally accepted accounting principles
and to
maintain asset accountability; (iii) access to assets is permitted
only in
accordance with management’s general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets
at
reasonable intervals and appropriate action is taken with respect to
any
differences. Since December 31, 2004, there have been no changes in
the internal
accounting controls or in other factors that could affect Company’s internal
accounting controls.
(e) Information
Supplied.
None of
the information supplied or to be supplied by Company for inclusion
or
incorporation by reference in the Proxy Statement (as defined below),
at the
time such document is filed with the SEC, or at any time it is amended
or
supplemented, contain any untrue statement of a material fact or omit
to state
any material fact required to be stated therein or necessary to make
the
statements therein not misleading. Notwithstanding the foregoing, no
representation or warranty is made by Company with respect to statements
made or
incorporated by reference in such documents based on information supplied
by
Parent or Merger Sub.
(f) Approval. i)
The
Board of Directors of Company, by resolutions duly adopted at a meeting
duly
called and held and not subsequently rescinded or modified in any way,
has
unanimously (1) declared that this Agreement, the Merger and the other
transactions contemplated hereby are advisable and in the best interests
of
Company and the stockholders of Company, and (2) approved this Agreement,
the
Merger and the transactions contemplated hereby. The Board of Directors
of
Company has approved this Agreement, the Merger, and the transactions
contemplated hereby and thereby for purposes of Section 203 of the
DGCL, and,
except for Section 203 of the DGCL (which does not apply as a result
of such
approval of the Board of Directors of Company), no other “moratorium,” “control
share,” “fair price,” or other state takeover statute applies to this Agreement,
the Merger or the transactions contemplated hereby and thereby.
(ii) The
affirmative vote or consent of a Requisite Majority of the Company
Capital Stock
(the “Required
Company Vote”)
is the
only vote of the holders of any class or series of Company Capital
Stock
necessary to approve the transactions contemplated hereby.
(g) Brokers
or Finders. Except
as set forth in Section 2.3(g) of the Company Disclosure Schedule,
neither
Company, nor its Subsidiary, nor any director, officer, agent or employee
thereof has employed any broker or finder or has incurred or will incur
any
broker’s, finder’s or similar fees, commissions or expenses, in each case in
connection with the transactions contemplated by this Agreement.
-24-
(h) Litigation;
Permits.
(i) Except
as set forth in Section 2.3(h) of the Company Disclosure Schedule,
there
is
no action, suit, proceeding, or claim, pending or to Company’s Knowledge,
threatened, and no investigation by any court or government or governmental
agency or instrumentality, domestic or foreign, pending or to Company’s
Knowledge, threatened, against Company or its Subsidiary, before any
court,
government or governmental agency or instrumentality, domestic or foreign,
nor
is there any outstanding order, writ, judgment, stipulation, injunction,
decree,
determination, award, or other order of any court or government or
governmental
agency or instrumentality, domestic or foreign, against Company or
its
Subsidiary.
(ii) Except
as
would not reasonably be expected to have, individually or in the aggregate,
a
Material Adverse Effect on Company, Company holds all permits, licenses,
variances, exemptions, orders and approvals of all Governmental Entities
necessary for the operation of the businesses of Company (the “Company
Permits”).
Company is in compliance with the terms of the Company Permits, except
where the
failure to so comply would not reasonably be expected to have, individually
or
in the aggregate, a Material Adverse Effect on Company. The business
of Company
is not being conducted in violation of, and Company has not received
any notices
of violations with respect to, any Law, ordinance or regulation of
any
Governmental Entity, except for actual or possible violations which
would not
reasonably be expected to have, individually or in the aggregate, a
Material
Adverse Effect on Company. Since January 1, 2004, Company has timely
filed all
material regulatory reports, schedules, statements, documents, filings,
submissions, forms, registrations and other documents, together with
any
amendments required to be made with respect thereto, that each was
required to
file with any Governmental Entity, including state health and regulatory
authorities (“Company
Regulatory Filings”)
and
any applicable Federal regulatory authorities, and have timely paid
all Taxes,
fees and assessments due and payable in connection therewith, except
where the
failure to make such filings on a timely basis or payments would not
be material
to Company. All such Company Regulatory Filings complied in all material
respects with applicable Law. All rates, plans, policy forms and terms
established or used by Company or its Subsidiary that are required
to be filed
with and/or approved by Governmental Entities have been so filed and/or
approved, the rates charged conform in all material respects to the
rates so
filed and/or approved and comply in all material respects with the
Laws
applicable thereto, and to Company’s Knowledge, no such premiums are subject to
any investigation by any Governmental Entity.
(iii) Persons
employed or otherwise contracted with by Company to provide healthcare
services
hold all material permits, licenses, exemptions, orders and approvals
of all
Governmental Entities necessary for such Persons to function in the
capacity for
which they were employed or contracted.
-25-
(i) Absence
of Certain Changes or Events. Since
December 31, 2005, Company and its Subsidiary have operated their respective
businesses in the ordinary course consistent with past practice. Without
limiting the generality of the immediately preceding sentence, except
as set
forth in Section 2.3(i) of the Company Disclosure Schedule, since December
31,
2005, neither Company nor its Subsidiary has:
(i) amended
or otherwise modified its constituting documents or by-laws (or similar
organizational documents);
(ii) altered
any term of any of its outstanding securities or made any change in
its
outstanding shares of capital stock or other ownership interests or
its
capitalization, whether by reason of a reclassification, recapitalization,
stock
split or combination, exchange or readjustment of shares, stock dividend
or
otherwise;
(iii) with
respect to, any shares of its capital stock or any other of its securities,
granted, encumbered, issued or sold, or authorized for grant or encumbrance,
issuance or sale, or granted, encumbered, issued or sold any options,
warrants,
purchase agreements, put agreement, call agreements, participation
agreements,
subscription rights, conversion rights, exchange rights or other securities,
contracts, arrangements, understanding or commitments fixed or contingent
that
could directly or indirectly, require Company or its Subsidiary to
issue, sell,
pledge, dispose of or otherwise cause to become outstanding, any of
its
authorized but unissued shares of capital stock or ownership interests,
as
appropriate, or any securities convertible into, exchangeable for or
carrying a
right or option to purchase shares of capital stock, or to create,
authorize,
issue, sell or otherwise cause to become outstanding any new class
of capital
stock or ownership interests, as appropriate or entered into any agreement,
commitment or understanding calling for any of the above;
(iv) declared,
set aside or made any payment, dividend or other distribution upon
any capital
stock or, directly or indirectly, purchased, redeemed or otherwise
acquired or
disposed of any shares of capital stock or other securities of or other
ownership interests in Company or its Subsidiary;
(v) incurred
any liability or obligation under agreements or otherwise, except current
liabilities entered into or incurred in the ordinary course of business
consistent with past practice; issued any notes or other corporate
debt
securities or paid or discharged any outstanding indebtedness, except
in the
ordinary course of business consistent with past practice; or waived
any of its
respective rights;
(vi) mortgaged,
pledged, subjected to any Lien (as hereinafter defined) or granted
any security
interest in any of its assets or properties; entered into any lease
of real
property or buildings; or, except in the ordinary course of business
consistent
with past practice, entered into any lease of machinery or equipment,
or sold,
transferred, leased to others or otherwise disposed of any tangible
or
intangible asset or property;
-26-
(vii) effected
any increase in salary, wages or other compensation of any kind, whether
current
or deferred, to any employee or agent, other than routine increases
in the
ordinary course of business consistent with past practice or as was
required
from time to time by governmental legislation affecting wages (provided,
however, that in no event was any such increase in compensation made
with
respect to any employee or agent earning in excess of $100,000 per
annum); made
any bonus, pension, option, deferred compensation, or retirement payment,
severance, profit sharing, or like payment to any employee or agent,
except as
required by the terms of plans or arrangements existing prior to such
date
(provided, however, that in no event was any such payment made with
respect to
any employee or agent earning in excess of $100,000 per annum); or
entered into
any salary, wage, severance, or other compensation agreement with a
term of one
year or longer with any employee or agent or made any contribution
to any trust
or plan for the benefit of any employee or agent, except as required
by the
terms of plans or arrangements existing prior to such date; or lost
the
employment services of any employee whose annual salary exceeded
$100,000;
(viii) adopted
or, except as required by law, amended, any employee benefit plan other
than as
necessary in connection with the transactions contemplated hereby;
(ix) entered
into any transaction other than in the ordinary course of business
consistent
with past practice, except in connection with the execution and performance
of
this Agreement and the transactions contemplated hereby;
(x) terminated
or modified any Company Material Contract (as defined below), or received
any
written notice of termination of any Company Material Contract, except
for
terminations of Company Material Contracts upon their expiration during
such
period in accordance with their terms;
(xi) incurred
or assumed any indebtedness for borrowed money or guaranteed any obligation
or
the net worth of any entity or person;
(xii) discharged
or satisfied any Lien other than those then required to be discharged
or
satisfied during such period in accordance with their original
terms;
(xiii) paid
any
material obligation or liability (absolute, accrued, contingent or
otherwise),
whether due or to become due, except for any current liabilities, and
the
current portion of any long term liabilities, shown on the Company
Financial
Statements or incurred since December 31, 2005 in the ordinary course
of
business consistent with past practice;
(xiv) cancelled,
waived or compromised any material debt or claim;
-27-
(xv) suffered
any damage, destruction, or loss to any of its assets or properties
(whether or
not covered by insurance) except for damage, destruction or loss occurring
in
the ordinary course of business which, individually or in the aggregate,
would
not have a Material Adverse Effect;
(xvi) made
any
loan or advance to any entity or person other than travel and other
similar
routine advances to employees in the ordinary course of business consistent
with
past practice;
(xvii) made
any
capital expenditures or capital additions or betterments in amounts
which exceed
$50,000 in the aggregate;
(xviii) purchased
or acquired any capital stock or other securities of any other corporation
or
any ownership interest in any other business enterprise;
(xix) changed
its method of accounting or its accounting principles or practices,
including
any policies or practices with respect to the establishment of reserves
for
work-in-process and accounts receivable, utilized in the preparation
of the
Company Financial Statements, other than as required by GAAP;
(xx) instituted
or settled any litigation or any legal, administrative or arbitration
action or
proceeding before any court, government or governmental agency or
instrumentality, domestic or foreign, relating to it or any of its
properties or
assets;
(xxi) made
any
new elections, changed any current elections or settled or compromised
any
liability with respect to its Taxes;
(xxii) entered
into any agreement or commitment to do any of the foregoing;
(xxiii) suffered
any Material Adverse Effect; or
(xxiv) since
December 31, 2005, there has been no condition, development or contingency
which, so far as reasonably may be foreseen, may, individually or in
the
aggregate, have a Material Adverse Effect.
(j) Compliance
with Laws and Regulations.
(i) Company
and its Subsidiary have complied with all applicable Laws (including
rules,
regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and
charges thereunder) of Governmental Entities (and all agencies thereof)
except
where such non-compliance has not and would not have a Material Adverse
Effect
on their businesses or operations, and no action, suit, proceeding,
hearing,
investigation, charge, complaint, claim, demand, or notice has been
filed or
commenced against any of them alleging any failure so to comply. Company
and its
Subsidiary hold all licenses and permits, required to be held by them
under the
laws all jurisdictions in which they operate in order to operate their
businesses as currently operated and Company has not received any notice,
written or otherwise, of the initiation of proceedings to revoke any
such
license or permit, except where such failure to hold any such licenses
or
permits would not have a Material Adverse Effect. Section 2.3(j) of
the Company
Disclosure Schedule sets forth the names of those states in which Company
operates.
-28-
(ii) Neither
Company nor its Subsidiary has, since its incorporation, entered into
a
memorandum of understanding, consent decree or similar instrument with
any
governmental agency or has been the subject of any investigation or
legal
proceeding, which could have a Material Adverse Effect on its business
or
operations.
(iii) Neither
Company nor any of its respective officers, directors, employees or
agents, has
directly or indirectly: (A) offered or paid any amount to, or made
any financial
arrangement with, any of its accounts in order to promote business
from such
accounts, other than standard pricing or discount arrangements consistent
with
proper business practices; (B) given, or agreed to give, or is aware
that there
has been made, or that there is an agreement to make, any gift or gratuitous
payment of any kind, nature or description (whether in money, property
or
services) to any current account or supplier, source of financing,
landlord,
sub-tenant, licensee or anyone else; or (C) made, or has agreed to
make, any
payments to any person with the intention or understanding that any
part of such
payment was to be used directly or indirectly for the benefit of any
current
account or employee, supplier or landlord of such current account,
or for any
purpose other than that reflected in the documents supporting the
payments.
(iv) Company
and its Subsidiary are in compliance with, and are not in default or
violation
of, (A) its respective certificate of incorporation and bylaws, (B)
any Law or
order by which any of its respective assets or properties are bound
or affected
and (C) the terms of all notes, bonds, mortgages, indentures, contracts,
permits, franchises and other instruments or obligations to which it
is a party
or by which it is or any of its assets or properties are bound or affected,
except, in the case of clauses (B) and (C), for any such failures of
compliance,
defaults and violations which could not, individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect. Company is
in
compliance with the terms of all approvals, except where the failure
to so
comply could not, individually or in the aggregate, reasonably be expected
to
have a Material Adverse Effect. Except as set forth in the Company
Disclosure
Schedule or as could not, individually or in the aggregate, reasonably
be
expected to have a Material Adverse Effect, neither Company nor its
Subsidiary
has received notice of any revocation or modification of any Approval
of any
Governmental Entity that is material to Company.
-29-
(v) The
operations of Company and its Subsidiary are and have been conducted
at all
times in compliance with applicable financial recordkeeping and reporting
requirements of the Currency and Foreign Transactions Reporting Act
of 1970, as
amended, the money laundering statutes of all jurisdictions, the rules
and
regulations thereunder and any related or similar rules, regulations
or
guidelines, issued, administered or enforced by any Governmental Entity
(collectively, the “Money
Laundering Law”)
and no
action, suit or proceeding by or before any court or governmental agency,
authority or body or any arbitrator involving Company with respect
to the Money
Laundering Laws is pending or, to Company’s Knowledge, threatened, except, in
each case, as would not reasonably be expected to materially and adversely
affect the condition, financial or otherwise, or the earnings, business
or
operations of Company and its Subsidiary, taken as a whole.
(vi) Company
and its Subsidiary are in material compliance with all statutory and
regulatory
requirements under the Arms Export Control Act (22 U.S.C. 2778), the
International Traffic in Arms Regulations (22 C.F.R. § 120 et seq.), the Export
Administration Regulations (15 C.F.R. §730 et seq.) and associated executive
orders, the laws implemented by the Office of Foreign Assets Controls,
United
States Department of Treasury and all other domestic or foreign laws
relating to
export control (collectively, the “Export
Control Laws”)
except
as would not individually or in the aggregate be material to Company
taken as a
whole. Company has not received any written communication that alleges
that
Company is not, or may not be, in compliance with, or has, or may have,
any
liability under Export Control Laws. Company has all necessary authority
under
the Export Control Laws to conduct its business substantially in the
manner
conducted prior to the date hereof and substantially as it is being
conducted on
the date hereof except as would not, individually or in the aggregate,
be
material to Company.
(vii) Company
is in compliance with all national security obligations, including,
without
limitation, those specified in the National Industrial Security Program
Operating Manual, DOD 5220.22-M (January 1995). To Company’s Knowledge, it has
not, within the last five (5) years, received any invalidation of a
facility
clearance or other adverse action of a Governmental Entity with respect
to any
facility clearance or any adverse determination with respect to personal
security clearances for officers, directors or employees of
Company.
(k) Taxes.
Except
as
set forth in Section 2.3(k) of the Company Disclosure Schedule:
-30-
(i) Company
and its Subsidiary has timely and accurately filed, or caused to be
timely and
accurately filed, all Tax Returns required to be filed by it, and has
paid,
collected or withheld, or caused to be paid, collected or withheld,
all amounts
of Taxes required to be paid, collected or withheld, other than such
Taxes for
which adequate reserves have been established and which are being contested
in
good faith. There are no claims or assessments pending against Company
or its
Subsidiary for any alleged deficiency in any Tax, there are no pending
or, to
Company’s Knowledge, threatened audits or investigations for or relating to
any
liability in respect of any Taxes, and Company has not been notified
in writing
of any proposed Tax claims or assessments against Company or its Subsidiary
(other than in each case, claims or assessments for which adequate
reserves have
been established and which are being contested in good faith). Neither
Company
nor its Subsidiary has executed any waivers or extensions of any applicable
statute of limitations to assess any amount of Taxes. There are no
outstanding
requests by Company or its Subsidiary for any extension of time within
which to
file any Tax Return or within which to pay any amounts of Taxes shown
to be due
on any Tax Return. To the Company’s Knowledge, there are no liens for Taxes on
the assets of Company or its Subsidiary except for statutory liens
for current
Taxes not yet due and payable. There are no outstanding powers of attorney
enabling any party to represent Company or its Subsidiary with respect
to Taxes.
Other than with respect to Company or its Subsidiary, neither Company
nor its
Subsidiary is liable for Taxes of any other Person, or is currently
under any
contractual obligation to indemnify any person with respect to any
amounts of
Taxes (except for customary agreements to indemnify lenders or security
holders
in respect of Taxes), or is a party to any tax sharing agreement or
any other
agreement providing for payments by Company or its Subsidiary with
respect to
any amounts of Taxes. Neither Company nor its Subsidiary has engaged
in any
transaction which requires its participation to be disclosed under
Treas. Reg.
Sec. 1.6011-4.
(ii) For
purposes of this Agreement, the term “Tax”
shall
mean any United States or Canadian federal, national, state, provincial,
territorial, local or other jurisdictional income, gross receipts,
property,
sales, goods and services, use, license, excise, franchise, employment,
payroll
(including employee withholding taxes), estimated, alternative, or
add-on
minimum, ad valorem, transfer or excise tax, goods and services or
any other
tax, custom, duty, governmental fee or other like assessment or charge
imposed
by any governmental authority, together with any interest or penalty
imposed
thereon. The term “Tax
Return”
shall
mean a report, return or other information (including any attached
schedules or
any amendments to such report, return or other information) required
to be
supplied to or filed with a governmental authority with respect to
any Tax,
including an information return, claim for refund, amended return or
declaration
or estimated Tax.
(l) Accounting
and Financial Matters. Since
January 1, 2004, except as set forth in Section 2.3(l) of the Company
Disclosure
Schedule, Company has not received written notice from any Governmental
Entity
that any of its accounting policies or practices are or may be the
subject of
any review, inquiry, investigation or challenge by a Governmental Entity.
Since
January 1, 2004, Company’s independent public accounting firm has not informed
Company that it has any material questions, challenges or disagreements
regarding or pertaining to Company’s accounting policies or practices. Since
January 1, 2004, no officer or director of Company has received, or
is entitled
to receive, any material compensation from any entity that has engaged
in or is
engaging in any material transaction with Company or its Subsidiary.
Set forth
in Section 2.3(l) of the Company Disclosure Schedule is a list of all
off-balance sheet special purpose entities and financing arrangements
of Company
and its Subsidiary.
-31-
(m) Third-Party
Payors.
All
contracts with third-party payors were entered into by Company or its
Subsidiary
in the ordinary course of business. Company and its Subsidiary have
properly
charged and billed in accordance with the terms of those contracts
in all
material respects, including, where applicable, billing and collection
of all
deductibles and co-payments.
(n) Government
Contracts.
(i) Except
as set forth in Section 2.3(n) of the Company Disclosure Schedule,
with
respect to each contract, agreement, bid or proposal between Company,
its
Subsidiary and any (A) Governmental Entity, including any facilities
contract
for the use of government-owned facilities or (B) third party relating
to a
contract between such third party and any Governmental Entity (each
a
“Government
Contract”),
(1)
Company and its Subsidiary have complied in all material respects with
all
requirements of all applicable laws, or agreements pertaining to such
Government
Contract; (2) all representations and certifications executed, acknowledged
or
set forth in or pertaining to such Government Contract were complete
and correct
as of their effective dates and Company has complied with all such
representations and certifications; (3) neither the United States government
nor
any prime contractor, subcontractor or other Person has notified Company,
in
writing or orally, that Company has breached or violated any Law, certification,
representation, clause, provision or requirement pertaining to such
Government
Contract; (4) neither Company nor its Subsidiary has received any notice
of
termination for convenience, notice of termination for default, cure
notice or
show cause notice pertaining to such Government Contract; (5) other
than in the
ordinary course of business, no cost incurred by Company or its Subsidiary
pertaining to such Government Contract has been questioned or challenged,
is the
subject of any audit or investigation or has been disallowed by any
Governmental
Entity; and (6) no payments due to Company or its Subsidiary pertaining
to such
Government Contract have been withheld or set off, nor has any claim
been made
to withhold or set off money, and Company is entitled to all progress
or other
payments received with respect thereto, except, in the case of (1)
through (6)
above, as would not be material to Company, taken as a whole.
(ii) Company
or to Company’s Knowledge, any of its directors, officers, employees or
authorized agents is not, or since January 1, 2004 has not been under
(A) any
civil or criminal investigation or indictment by any Governmental Entity
or
under investigation by Company or its Subsidiary or (B) administrative
investigation or audit by any Governmental Entity in either case with
respect to
any alleged improper act or omission arising under or relating to any
Government
Contract.
-32-
(iii) There
exist (A) no outstanding material claims against Company or its Subsidiary,
either by any Governmental Entity or by any prime contractor, subcontractor,
vendor or other Person, arising under or relating to any Government
Contract,
and (B) no material disputes between Company and the United States
government
under the Contract Disputes Act, as amended, or any other federal statute,
or
between Company or its Subsidiary, on the one hand, and any prime contractor,
subcontractor or vendor on the other, arising under or relating to
any
Government Contract. Company does not have any interest in any material
pending
claim against any prime contractor, subcontractor, vendor or other
Person
arising under or relating to any Government Contract.
(iv) Since
January 1, 2004, neither Company nor its Subsidiary has been debarred
or
suspended from participation in the award of Contracts with the United
States
government or any other Governmental Entity. To Company’s Knowledge, there exist
no facts or circumstances that would warrant the institution of suspension
or
debarment proceedings or the finding of non-responsibility or ineligibility
on
the part of Company or any of its directors, officers or employees.
Company has
no Knowledge of any claim, potential claim or potential liability for
defective
pricing, false statements or false claims with respect to any of their
Government Contracts.
(o) Property
Interests.
(i) Set
forth
in Section 2.3(o) of the Company Disclosure Schedule attached hereto
is a list
of every parcel of real estate owned by Company or its Subsidiary and
a list of
each lease agreement under which Company or its Subsidiary is lessee
of, or
holds or operates, any real estate owned by any third party (collectively
hereinafter referred to as the “Company
Real Properties”).
Company or its Subsidiary has good and marketable title to the properties
owned
by Company or its Subsidiary set forth on Section 2.3(o) of the Company
Disclosure Schedule and all fixtures thereon in fee simple absolute,
subject to
no Liens. There is no option or right held by any third party to purchase
any
such properties or any part thereof, or any of the fixtures and equipment
thereon. All buildings, driveways and other improvements on such properties,
respectively, are within its boundary lines, and no improvements on
adjoining
properties extend across the boundary lines onto such properties. Each
lease
agreement described in Section 2.3(o) of the Company Disclosure Schedule
is in
full force and effect and constitutes a legal, valid and binding obligation
of
the respective parties thereto. Neither Company nor its Subsidiary
is in a
default under any such lease agreement, nor to the Company’s Knowledge is any
other party to any such lease agreement in default thereunder, and
no event has
occurred, or is alleged to have occurred, which constitutes, or with
lapse of
time or giving of notice or both would constitute, a default by any
party to any
such lease agreement or a basis for a claim of force majeure or other
claim of
excusable delay or non-performance thereunder, other than with respect
to any
default, event or claim which, individually or in the aggregate, would
not have
a Material Adverse Effect;
-33-
(ii) Except
as
set forth in Section 2.3(o) of the Company Disclosure Schedule, Company
and its
Subsidiary have good and marketable title to all of their respective
assets and
properties, in each case free and clear of all Liens. Company and its
Subsidiary
lease or own all properties and assets necessary for the operation
of their
respective businesses as presently conducted, and the assets and properties
of
Company and its Subsidiary include all of the assets, of every kind
and nature,
whether tangible or intangible, and wherever located, which are utilized
by
Company or its Subsidiary in the conduct of their respective businesses.
Neither
Company nor its Subsidiary have received notice of any violation of,
or default
under, any Law, ordinance, order, regulation, or governmental or contractual
requirement relating to the assets and properties of Company or its
Subsidiary
which remains uncured or has not been dismissed, other than with respect
to any
violation which, individually or in the aggregate, would not have a
Material
Adverse Effect. All leases and licenses pursuant to which Company or
its
Subsidiary lease or license personal and intangible property from others,
are in
good standing, valid and effective in accordance with their respective
terms,
and there is not, under any of such leases or licenses, any existing
default or
event of default (or event which with notice or lapse of time, or both,
would
constitute a default, or would constitute a basis for a claim of force
majeure
or other claim of excusable delay or non-performance) which would result
in a
Material Adverse Effect. All the tangible personal property owned or
leased by
Company or its Subsidiary is in good operating condition and repair,
subject
only to ordinary wear and tear, and conforms in all respects to all
applicable
Laws, ordinances, orders, regulations or governmental or contractual
requirements relating to their operations.
(p) Affiliate
Transactions.
Except
(i) for employment relationships between Company or its Subsidiary
and employees
of Company or its Subsidiary otherwise disclosed pursuant to this Agreement,
(ii) for remuneration by Company or its Subsidiary for services rendered
as a
director, officer or employee of Company or its Subsidiary otherwise
disclosed
pursuant to this Agreement, or (iii) as set forth in Section 2.3(p)
of the
Company Disclosure Schedule, (A) neither Company nor its Subsidiary
has, and has
not since its inception, in the ordinary course of business or otherwise,
directly or indirectly, purchased, leased or otherwise acquired any
property or
obtained any services from, or sold, leased or otherwise disposed of
any
property or furnished any services to any affiliate of Company or its
Subsidiary; (B) neither Company nor its Subsidiary owes any amount
to any
affiliate of Company or its Subsidiary; (C) no affiliate of Company
or its
Subsidiary owes any amount to any of Company or its Subsidiary; and
(D) no part
of the property or assets of any affiliate of Company or its Subsidiary
is used
by either of Company or its Subsidiary in the conduct or operation
of their
businesses. No affiliate of Company or its Subsidiary owns any business
which is
a significant competitor of Company or its Subsidiary.
(q) Health
Insurance Portability and Accountability Act of 1996. Company
is, and Company’s business is being conducted, in compliance in all material
respects with the Health Insurance Portability and Accountability Act
of
1996.
-34-
(r) Off-Balance
Sheet Arrangements. Section
2.3(r) of the Company Disclosure Schedule describes, and Company has
delivered
to Parent copies of the documentation creating or governing, all securitization
transactions and other “off-balance sheet arrangements” (as defined in Item
303(c) of Regulation S-K of the SEC) that existed or were effected
by Company
since January 1, 2004 in effect on the date hereof.
(s) Environmental
Matters.
Definitions. For
the
purposes of this Agreement, the following terms shall have the meanings
set
forth below:
“Environment”
shall
mean air, land, surface soil, subsurface soil, sediment, surface water,
groundwater, wetlands and all flora and fauna present therein or
thereon.
“Environmental
Conditions”
shall
mean any pollution or contamination or threatened pollution or contamination
of,
or the Release or threatened Release of Hazardous Materials into, the
Environment.
“Environmental
Laws”
means
all federal, regional, state, county or local Laws, statutes, ordinances,
decisional law, rules, regulations, codes, orders, decrees, directives
and
judgments relating to public health or safety, pollution, damage to
or
protection of the Environment, Environmental Conditions, Releases or
threatened
Releases of Hazardous Materials into the Environment or the use, manufacture,
processing, distribution, treatment, storage, generation, disposal,
transport or
handling of Hazardous Materials, including but not limited to, the
Federal Water
Pollution Control Act, 33 U.S.C. §§ 1231-1387; the Resource Conservation and
Recovery Act, 42 U.S.C. §§ 6901-6991 (“RCRA”);
the
Clean Air Act, 42 U.S.C. §§7401-7642; the Comprehensive Environmental Response
Compensation and Liability Act, 42 U.S.C. §§ 9601-9675 (“CERCLA”);
the
Toxic Substances Control Act, 15 U.S.C. §§ 2601-2629; the Federal Occupational
Safety and Health Act, 29 U.S.C. § 657 et seq.
(“OSHA”);
comparable state laws; and any and all rules and regulations promulgated
thereunder.
“Hazardous
Materials”
shall
mean any substances, materials or wastes, whether liquid, gaseous or
solid, or
any pollutant or contaminant, that is infectious, toxic, hazardous,
explosive,
corrosive, flammable or radioactive, including without limitation,
petroleum,
polychlorinated biphenyls, asbestos and asbestos containing materials
and urea
formaldehyde, or that is regulated under, defined, listed or included
in any
Environmental Laws, including without limitation, CERCLA, RCRA and
OSHA.
“Release”
shall
mean any intentional or unintentional release, discharge, burial, spill,
leaking, pumping, pouring, emitting, emptying, injection, disposal
or dumping
into the Environment.
Except
as
set forth in Section 2.3(s) of the Company Disclosure Schedule:
(i) The
respective businesses of Company and its Subsidiary, and the Company
Real
Properties, are, and at all times have been, in compliance with all
applicable
Environmental Laws, except for such non-compliance which, individually
or in the
aggregate, would not have a Material Adverse Effect.
-35-
(ii) Company
possesses all permits, authorizations, licenses, approvals and consents
required
under Environmental Laws (“Environmental
Permits”)
in
order to conduct its business as it is now being conducted. Company
is in
compliance with all requirements, terms and provisions of such Environmental
Permits, except for such non-compliance which, individually or in the
aggregate,
would not have a Material Adverse Effect.
(iii) Company
and its Subsidiary have filed on a timely basis (and updated as required)
all
reports, disclosures, notifications, applications, pollution prevention,
storm
water prevention or discharge prevention or response plans or other
emergency or
contingency plans required to be filed under Environmental Laws with
respect to
their business and the Company Real Properties.
(iv) Neither
Company nor, to Company’s Knowledge, its Subsidiary have received any notice
that Company, its Subsidiary or any of the Company Real Properties:
(1) is in
violation of the requirements of any Environmental Permit or Environmental
Laws;
(2) is the subject of any suit, claim, proceeding, demand, order, investigation
or request or demand for information arising under any Environmental
Permit or
Environmental Laws; or (3) has actual or potential liability under
any
Environmental Laws, including without limitation, CERCLA, RCRA or any
comparable
state or local Environmental Laws.
(v) To
Company’s Knowledge, there are no Environmental Conditions or other facts,
circumstances or activities arising out of or relating to the business
of
Company or its Subsidiary or the use, operation or occupancy by Company
or its
Subsidiary of any of the Company Real Properties that result or reasonably
could
be expected to result in (1) any obligation of Company or its Subsidiary
to file
any report or notice, to conduct any investigation, sampling or monitoring
or to
effect any environmental cleanup or remediation, whether on-site or
offsite; or
(2) liability, either to governmental agencies or third parties, for
damages
(whether to person, property or natural resources), cleanup costs or
remedial
costs of any kind or nature whatsoever.
(vi) Neither
Company nor, to Company’s Knowledge, its Subsidiary has transported for storage,
treatment or disposal, by contract, agreement or otherwise, or arranged
for the
transportation, storage, treatment or disposal, of any Hazardous Material
at or
to any location including, without limitation, any location used for
the
treatment, storage or disposal of Hazardous Materials.
(t) Intellectual
Property.
(i) As
used
in this Agreement, the term “Intellectual
Property Rights”
means
all: (i) patents, patent applications, foreign patents and foreign
patent
applications, inventions and designs, and any registrations thereof
with any
agency or authority, (ii) trademarks, service marks, trade names, domain
names,
copyrights and mask works and all registrations and applications to
register any
of the foregoing with any agency or authority; (iii) trade secrets
and
confidential business information, whether patentable or unpatentable
and
whether or not reduced to practice, including all formulae, processes,
know-how,
technical and clinical data, shop rights, financial, marketing and
business
data, pricing and cost information, business and marketing plans and
customer
and supplier lists and information and any media or other tangible
embodiment
thereof and all descriptions thereof; (iv) all other technology and
intangible
property, including without limitation computer software and programs
in object
code or source code form, databases, and documentation and flow charts;
and (v)
all licenses, grants or other rights running to or from a person relating
to any
of the foregoing, including material transfer agreements.
-36-
(ii) Set
forth
on Section 2.3(t) of the Company Disclosure Schedule is a true, accurate
and
complete list of all Intellectual Property Rights owned, licensed or
used by
Company or its Subsidiary and that are material to the business of
Company as
presently conducted or as contemplated to be conducted (hereinafter
referred to
as the “Company
Intellectual Property Rights”),
specifying whether such Intellectual Property Rights are exclusive
or
non-exclusive to Company or its Subsidiary and including identifying
information
of all federal, state and foreign registrations of such Intellectual
Property
Rights or applications for registration thereof (but excluding software
licenses
that are generally commercially available).
(iii) Company
or its Subsidiary owns, is licensed to use, or otherwise has the full
legal
right to use all of the Company Intellectual Property Rights, free
and clear of
any Lien. To Company’s Knowledge, such Company Intellectual Property Rights are
sufficient for the conduct of Company’s business as presently conducted and to
Company’s Knowledge, as contemplated to be conducted, and constitute all of
the
Intellectual Property Rights owned, licensed or used by Company. Except
for the
licenses disclosed in Section 2.3(t) of the Company Disclosure Schedule
(hereinafter referred to as the “Company
Licenses”),
(A)
Company is not bound by or a party to any rights or options (whether
or not
currently exercisable), licenses or agreements of any kind (other than
software
licenses that are generally commercially available) with respect to
the Company
Intellectual Property Rights and (B) to Company’s Knowledge, there are no other
outstanding rights or options (whether or not currently exercisable),
licenses
or agreements of any kind relating to Company Intellectual Property
Rights.
Except under the Company Licenses identified in Section 2.3(t) of the
Company
Disclosure Schedule, Company is not obligated to pay any royalties
or other
compensation or expenses (other than fees for software licenses that
are
generally commercially available), to any third party in respect of
its
ownership, use or license of any of the Company Intellectual Property
Rights.
There has been no breach or violation by Company, and to Company’s Knowledge
there is no breach or violation by any other party to, any Company
License that
is reasonably likely to give rise to any termination or any loss of
rights
thereunder.
-37-
(iv) Except
as
set forth in Section 2.3(t) of the Company Disclosure Schedule, to
the Company’s
Knowledge, neither Company’s business, as presently conducted or as contemplated
to be conducted, nor the current and contemplated products or services
of
Company infringe, constitute the misappropriation of, or conflict with,
any
Intellectual Property Rights of any third party. Company is not aware
of any
claim, and has not received any notice or other communication (in writing
or
otherwise) of any claim from, any person asserting that Company’s business, as
presently conducted or as contemplated to be conducted, or any of the
current or
contemplated products or services of Company infringe or may infringe,
constitute the misappropriation of, or conflict with, any Intellectual
Property
Rights of another person. Company is not aware of any existing or threatened
infringement, misappropriation, or competing claim by any third party
on the
right to use or own any of, the Company Intellectual Property
Rights.
(v) Company
has taken commercially reasonable measures and precautions to establish
and
preserve the confidentiality, secrecy and ownership of all Company
Intellectual
Property Rights with respect to its products and services. Without
limiting the
generality of the foregoing employees who have had access to confidential
or
proprietary information of Company have executed and delivered to Company
confidentiality agreements in a form customary in the industry in which
Company
operates. Copies of such agreements have been delivered to Parent,
and all of
such agreements are in full force and effect. Company is not aware
of any
violation of the confidentiality of any non-public Company Intellectual
Property
Rights. Company is not making unlawful use of any confidential information
or
trade secrets of any third party. To Company’s Knowledge, the activities of
Company’s employees, consultants, or independent contractors on behalf of
Company’s business, as presently conducted and contemplated to be conducted,
do
not violate any agreements or arrangements which such employees have
with former
employers or any other third person. To Company’s Knowledge, no current or
former employee, officer, director, stockholder, consultant or independent
contractor has any right, claim or interest in or with respect to any
of the
Company Intellectual Property Rights.
(vi) Except
as
set forth in Section 2.3(t) of the Company Disclosure Schedule, to
Company’s
Knowledge, no third party has infringed, misappropriated or otherwise
conflicted
with any of the Company Intellectual Property Rights. To Company’s Knowledge,
there are no third party challenges to the Company Intellectual Property
Rights
including interferences, reexaminations, oppositions and appeals.
-38-
(vii) Except
as
set forth in Section 2.3(t) of the Company Disclosure Schedule, (i)
there is no
action, suit, order, claim, or to Company’s Knowledge, governmental
investigation pending, or, to Company’s Knowledge, threatened in writing against
Company or affecting Company, relating to the Company Intellectual
Property
Rights and reasonably likely so as to cause a Material Adverse Effect
(or to
Company’s Knowledge, pending or threatened in writing against any of the
officers, directors or employees of Company with respect to Company’s business
or proposed business activities) at law or in equity, or before or
by any
governmental department, commission, board, bureau, agency or instrumentality
(including, without limitation, any actions, suits, proceedings or
investigations with respect to the transactions contemplated by this
Agreement);
(ii) nor has there been any such actions, suits, orders, claims, or
to Company’s
Knowledge, governmental investigations or claims pending against Company
at any
time; (iii) to Company’s Knowledge, there is no valid basis for any of the
foregoing; (v) Company is not subject to any judgment, order or decree
of any
court or other governmental agency; and (vi) there is no action, suit,
proceeding, or investigation by Company currently pending or which
Company
presently intends to initiate with respect to the transactions contemplated
by
the Agreement.
(u) Certain
Agreements. Section
2.3(u) of the Company Disclosure Schedule lists, as of the date hereof,
each of
the following contracts, agreements or arrangements, whether written
or oral, to
which Company is a party or by which it is bound (collectively, the
“Company
Material Contracts”):
(i) any
“material contract” (as such term is defined in Item 601(b)(10) of Regulation
S-K of the SEC);
(ii) all
healthcare and clinical testing contracts measured in terms of payments
received;
(iii) all
Government Contracts;
(iv) promissory
notes, loans, agreements, indentures, evidences of indebtedness or
other
instruments providing for the lending of money, whether as borrower,
lender or
guarantor, in amounts greater than $100,000 (it being understood that
trade
payables, ordinary course business funding mechanisms between Company
and its
customers and providers shall not be considered indebtedness for purposes
of
this provision);
(v) any
contract or other agreement expressly restricting the payment of dividends
or
the repurchase of stock or other equity;
(vi) collective
bargaining contracts;
(vii) material
joint venture, partnership agreements or other similar agreements;
(viii) any
contract for the pending acquisition, directly or indirectly (by merger
or
otherwise), of any entity or business;
(ix) any
contract, agreement or policy for reinsurance involving ceded insurance
premiums
of greater than $100,000;
(x) leases
for real or personal property involving annual expense in excess of
$500,000 and
not cancelable by Company (without premium or penalty) within twelve
(12)
months;
-39-
(xi) all
contracts to which Company is a party granting any license to intellectual
property (other than trade and service marks) and any other license
(other than
real estate or computer software) having an aggregate value per license,
or
involving payments to Company, of more than $100,000 on an annual
basis;
(xii) all
confidentiality agreements (other than in the ordinary course of business),
agreements by Company not to acquire assets or securities of a third
party or
agreements by a third party not to acquire assets or securities of
Company;
(xiii) any
contract, other than any insured customer contracts or equipment lease,
having
an aggregate value per contract, or involving payments by or to Company,
of more
than $100,000 on an annual basis that requires consent of a third party
in the
event of or with respect to the Merger, including in order to avoid
termination
or loss of benefits under any such contract;
(xiv) any
non-competition agreement or any other agreement or arrangement that
by its
terms (A) limits or otherwise restricts Company or any successor thereto
or (B)
would, after the Effective Time, limit or otherwise restrict Company
or Parent
including the Surviving Corporation or any successor thereto, from
engaging or
competing in any line of business or in any geographic area;
(xv) any
contract or order with or from a Governmental Entity; and
(xvi) all
employment contracts, consulting agreements, representative agreements
and
service contracts to which Company is a party.
Company
has previously made available to Parent complete and accurate copies
of each
Company Material Contract listed, or required to be listed, in Section
2.3(u) of
the Company Disclosure Schedule (including all amendments, modifications,
extensions, renewals, guarantees or other contracts with respect thereto,
but
excluding certain names, terms and conditions that have been redacted
in
compliance with applicable laws governing the sharing of information
or
otherwise). All of the Company Material Contracts are valid and binding
and in
full force and effect (except those which are cancelled, rescinded
or terminated
after the date hereof in accordance with their terms), except where
the failure
to be in full force and effect, individually or in the aggregate would
not
reasonably be expected to have a Material Adverse Effect on Company.
To
Company’s Knowledge, no Person is challenging the validity or enforceability
of
any Company Material Contract, except such challenges which, individually
or in
the aggregate, would not reasonably be expected to have a Material
Adverse
Effect on Company. Company has not, and to Company’s Knowledge, as of the date
hereof, none of the other parties thereto, have violated any provision
of, or
committed or failed to perform any act which (with or without notice,
lapse of
time or both) would constitute a default under the provisions of, any
Company
Material Contract, except for those violations and defaults which,
individually
or in the aggregate, would not reasonably be expected to have a Material
Adverse
Effect on Company.
-40-
(v) FDA
Matters.
(i) For
purposes of this Agreement: (i)”FDA”
means
the United States Food and Drug Administration and corresponding regulatory
agencies in other countries and in states of the United States, (ii)
“FDA
Clearance and Approval”
means
any pre-market notification or pre-market approval application, consent,
certificate, registration, permit, license or other authorization,
and the
filing of any notification, application, report or information, required
by the
FDA or any other government entity pursuant to any FDA Law, (iii) “FDA
Company Contractor”
means
any person with which Company or its Subsidiary formerly or presently
had or has
any agreement or arrangement (whether oral or written) under which
that person
has or had physical possession of, or was or is obligated to develop,
test,
process, investigate, manufacture or produce, any FDA Regulated Product
on
behalf of Company, (iv) “FDA
Law”
means
any statute, regulation, judicial or administrative interpretation,
guideline,
point-to-consider, recommendation or standard international guidance
relating to
any FDA Regulated Product, including, without limitation, the Federal
Food,
Drug, and Cosmetic Act, 21 U.S.C. sec. 301 et seq., the FDA Modernization
Act of
1997, Stand Alone Provisions, Pub. L. No. 105-115, 111 Stat. 2295 (1997),
and
equivalent statutes, regulations and guidance’s adopted by countries,
international bodies and other jurisdictions, in addition to the United
States,
where Company has facilities, does business, or directly or through
others sells
or offers for sale any FDA Regulated Product, and (v) “FDA
Regulated Product”
means
any product or component including, without limitation, any medical
device, that
is studied, used, held or offered for sale for human research or investigation
or clinical use.
(ii) Company
has not obtained any clearances or approvals from the FDA to conduct
its current
businesses, to manufacture, hold or sell FDA Regulated Products, and
to use and
occupy the Company Real Properties.
(iii) Company
has no obligations to submit reports and filings to the FDA.
(iv) Except
as
set forth in Section 2.3(v) to the Company Disclosure Schedule, there
is no
civil, criminal or administrative action, suit, demand, claim, complaint,
hearing, notice of violation, investigation, notice, demand letter,
proceeding
or request for information pending or any liability (whether actual
or
contingent) to comply with any FDA Laws. There is no act, omission,
event or
circumstance of which Company has Knowledge that may give rise to any
such
action, suit, demand, claim, complaint, hearing, notice of violation,
investigations, notice, demand letter, proceeding or request, or any
such
liability:
-41-
against,
involving or of Company, or
against,
involving or of any other person (including, without limitation, any
FDA Company
Contractor) that could be imputed or attributed to Company.
(v) There
has
not been any violation of any FDA Laws by Company in their prior product
developmental efforts, or any other Governmental Entity (or any failure
to make
any such submission or report) that could reasonably be expected to
require
investigation, corrective action or enforcement action.
(w) Employee Benefit Plans.
(i) Except
as
set forth on Section
2.3(w) of the Company Disclosure Schedule, neither Company nor its
Subsidiary
maintains, sponsors, contributes to, is required to contribute to,
is a party
to, or otherwise has or is reasonably expected to have any liability
(contingent
or otherwise) with respect to (1) any “employee
welfare benefit plan,”
as
defined in Section 3(1) of the Employee Retirement Income Security
Act of 1974,
as amended (“ERISA”),
(2)
any “employee
pension benefit plan,”
as
defined in Section 3(2) of ERISA, (3) any plan or
agreement providing for bonuses, stock options, stock appreciation
rights, stock
purchase plans or other forms of equity-based compensation, (4) any
other plan
or agreement involving direct or indirect compensation (including any
deferred
compensation) other than workers’ compensation, unemployment compensation and
other government programs, (5) any employment, severance, separation,
change of
control or other similar contract, arrangement or policy providing
for insurance
coverage,
salary continuation,
non-statutory workers’ compensation, disability benefits, supplemental
unemployment benefits, vacation benefits, retirement benefits, pension,
supplemental pension, savings, retirement savings,
fringe
benefits, deferred compensation, profit-sharing, bonuses, other forms
of
incentive compensation or post-retirement insurance, compensation or
benefits,
(6) any other
employee benefit plan, arrangement, program, agreement, policy or practice,
formal or informal, funded or unfunded, insured or self-insured, that
covers any
current or former employee of Company or its Subsidiary,
or (7)
any multiemployer plan (within the meaning of Section 3(37) of ERISA)
(hereinafter “Multiemployer
Plan”).
Each
plan or agreement required to be set forth on Section 2.3(w) of the
Company
Disclosure Schedule, other than a Multiemployer Plan, pursuant to the
foregoing
is referred to herein as a “Company
Benefit Plan.”
(ii) Company
has delivered or made available to Parent the following documents with
respect
to each Company Benefit Plan: (1) correct and complete copies of all
documents
embodying such Company Benefit Plan, including (without limitation)
all
amendments thereto and all related trust documents, (2) a written description
of
any Company Benefit Plan that is not set forth in a written document,
(3) the
most recent summary plan description, summary of material modifications
and
other similar descriptive materials distributed to plan participants
and
beneficiaries, (4) the most recent Internal Revenue Service (“IRS”)
determination letter or similar forms of any applicable foreign jurisdiction,
if
any, (5) the three most recent annual reports (Form Series 5500 and
all
schedules and financial statements attached thereto), if any, and (6)
all
material written agreements and contracts currently in effect, including
(without limitation) administrative service agreements, group annuity
contracts
and group insurance contracts.
-42-
(iii) Each
Company Benefit Plan materially complies, and has been maintained and
administered in all material respects in compliance with, its terms
and with the
requirements prescribed by any and all applicable law, including (without
limitation) ERISA and the Code. All material contributions, reserves
or premium
payments required to be made or accrued as of the date hereof to the
Company
Benefit Plans have been timely made or accrued. Neither Company nor
its
Subsidiary has taken or failed to take any action with respect to any
Company
Benefit Plan which might create any material liability on the part
of Company or
its Subsidiary.
(iv) Neither
Company nor its Subsidiary maintains, participates in or contributes
to, nor
have they ever maintained, participated in, or contributed to, any
Multiemployer
Plan, a plan described in Section 413 of the Code, or any plan subject
to Title
IV of ERISA or Section 302 of ERISA. Neither Company nor its Subsidiary
has any
outstanding or contingent obligations or liabilities (including, without
limitation, any withdrawal liability) with respect to a Multiemployer
Plan
providing pension or other benefits, a plan described in Section 413
of the
Code, or any plan subject to Title IV of ERISA or Section 302 of
ERISA.
(v) Neither
Company nor its Subsidiary is subject to any material liability or
penalty under
Sections 4975 through 4980B of the Code or Title I of ERISA. With respect
to
each Benefit Plan which is a “group
health plan”
as
defined in Section 5000(b)(1) of the Code and Section 607(l) of ERISA,
Company
and its Subsidiary have complied in all material respects with the
applicable
health care continuation requirements in Section 4980B of the Code
and in ERISA.
Company, and its Subsidiary, and each Company Benefit Plan which is
a group
health plan has, as of the date hereof, complied in all material respects
with
the Family and Medical Leave Act of 1993, the Health Insurance Portability
and
Accountability Act of 1996, the Women’s Health and Cancer Rights Act of 1998,
the Newborns’ and Mothers’ Health Protection Act of 1996, and any similar
provisions of state law applicable to employees of Company and its
Subsidiary.
No “prohibited
transaction,”
within
the meaning of Section 4975(c) of the Code or Sections 406 or 407 of
ERISA and
not otherwise exempt under Section 408 of ERISA, has occurred with
respect to
any Company Benefit Plan.
(vi) Except
as
set forth on Section 2.3(w) of the Company Disclosure Schedule, there
is no
contract, plan or arrangement covering any employee or former employee
of
Company or its Subsidiary that, individually or collectively, would
give rise to
the payment as a result of the transactions contemplated by this Agreement
of
any amount that would not be deductible by Company or its Subsidiary
by reason
of Section 280G or 162(m) of the Code.
-43-
(vii) No
material action, suit or claim (excluding claims for benefits incurred
in the
ordinary course) has been brought or is pending or, to Company’s Knowledge,
threatened against or with respect to any Company Benefit Plan, or
the assets or
any fiduciary thereof (in that person’s capacity as a fiduciary of such Company
Benefit Plan) and to Company’s Knowledge, there are no facts likely to give rise
to any such action, suit or claim. There are no audits, inquiries or
proceedings
pending or, to Company’s Knowledge, threatened by the IRS or the United States
Department of Labor or corresponding authority in Canada with respect
to any
Company Benefit Plan, and no Company Benefit Plan has been the subject
of any
application for relief under the Internal Revenue Service Employee
Plans
Compliance Resolution System or the Closing Agreement Program, nor
has any
Company Benefit Plan been the subject of any application for relief
under the
United States Department of Labor Voluntary Fiduciary Correction Program
or
Delinquent Filer Voluntary Compliance Program.
(viii) All
Company Benefit Plans that are intended to be qualified and exempt
from United
States federal income taxes under Section 401(a) and Section 501(a),
respectively, of the Code, have been the subject of favorable determination
letters or in the case of prototype plans, opinion letters, from the
IRS which
consider the effect of the series of laws commonly known as GUST, and
no such
determination letter has been revoked nor has revocation been
threatened.
(ix) Except
for Company Benefit Plans for employees working in Canada, each “fiduciary”
(within
the meaning of Section 3(21)(A) of ERISA) as to each Company Benefit
Plan has
complied in all material respects with the requirements of ERISA and
all other
applicable law in respect of each such Company Benefit Plan.
(x) Except
as
set forth in Section 2.3(w) of the Company Disclosure Schedule, all
required
employer and employee contributions and premiums under the Company
Benefit Plans
to the date hereof have been paid or duly accrued, the respective fund
or funds
established under the Company Benefit Plans are, in all material respects,
funded in accordance with all applicable law and such plans, and no
material
past service funding liabilities exist thereunder.
(xi) Other
than any pension benefits payable under the Company Benefit Plans,
neither
Company nor its Subsidiary is under any obligation to provide benefits
or
coverage under a Company Benefit Plan to retirees of Company or its
Subsidiary
or other former employees of Company or its Subsidiary (or the beneficiaries
of
such retirees or former employees), including, but not limited to,
retiree
health care coverage (except to the extent mandated by the Consolidated
Omnibus
Budget Reconciliation Act of 1985).
-44-
(xii) Neither
Company nor its Subsidiary maintains any voluntary employees’ beneficiary
association within the meaning of Sections 501(c)(9) and 505 of the
Code (a
VEBA) with respect to any Company Benefit Plan.
(xiii) No
commitments have been made by Company or its Subsidiary to amend any
Company
Benefit Plan, to provide increased benefits thereunder or to establish
any new
benefit plan, except as required by applicable laws or as disclosed
in Section
2.3(w) of the Company Disclosure Schedule. None of the Company Benefit
Plans
require or permit retroactive increases or assessments in premiums
or payments.
Except as set forth in Section 2.3(w) of the Company Disclosure Schedule,
all
Company Benefit Plans can be amended or terminated without any restrictions
and
Company or its Subsidiary has the unrestricted power to amend or terminate
any
of the Company Benefit Plans.
(x) Labor
Matters. There
are
no disputes pending or to Company’s Knowledge, threatened between Company or its
Subsidiary on the one hand and any of their respective employees on
the other,
and, to Company’s Knowledge, there are no organizational efforts currently being
made or threatened involving any of such employees. Company has materially
complied with all laws relating to the employment of labor, including
without
limitation, any provisions thereof relating to wages, hours, collective
bargaining and the payment of social security and similar taxes, and
is not
liable for any material arrearage of wages or any taxes or penalties
for failure
to comply with any of the foregoing.
(y) Insurance.
As
of the
date of this Agreement, Company and its Subsidiary maintain insurance
policies,
and bonding arrangements, covering all of their respective assets and
properties, and in each case the various occurrences which may arise
in
connection with the operation of their respective businesses. Section
2.3(y) of
the Company Disclosure Schedule attached hereto sets forth all such
policies and
bonding arrangements. Such policies and bonding arrangements are in
full force
and effect, all premiums and other amounts due thereon have been paid,
and
Company and its Subsidiary have complied with the provisions of such
policies
and bonding arrangements. There are no notices of any pending or threatened
terminations or premium increases with respect to any such policies
or bonding
arrangements, and such policies and bonding arrangements will not be
modified as
a result of or terminate or lapse by reason of, the transactions contemplated
by
this Agreement.
(z) Absence
of Sensitive Payments.
Neither
Company nor its Subsidiary, nor any of their respective directors or
officers,
nor, to Company’s Knowledge, any of the employees or agents of Company or its
Subsidiary, has directly or indirectly (a) made any contribution or
gift which
contribution or gift is in violation of any applicable Law, (b) made
any bribe,
rebate, payoff, influence payment, kickback or other payment to any
Person,
private or public, regardless of form, whether in money, property or
services
(i) to obtain favorable treatment in securing business, (ii) to pay
for
favorable treatment for business secured, (iii) to obtain special concessions
or
for special concessions already obtained for or in respect of Company
or its
Subsidiary, or any affiliate of Company or its Subsidiary, or (iv)
in violation
of any Law or legal requirement, or (c) established or maintained any
fund or
asset of Company or its Subsidiary, that has not been recorded in the
books and
records of Company or its Subsidiary. For purposes of this Agreement,
the term
“Person”
shall
mean an individual, partnership, venture, unincorporated association,
organization, syndicate, corporation, limited liability company, or
other
entity, trust, trustee, executor, administrator or other legal or personal
representative or any government or any agency or political subdivision
thereto,
and the term “Law”
shall
mean any law in any jurisdiction (including common law), statute, code,
ordinance, rule, regulation, permit, order, decree or other requirement
or
guideline.
-45-
(aa) Books
and Records.
The
books
and records of Company and its Subsidiary with respect to Company and
its
Subsidiary, their operations, employees and properties have been maintained
in
the usual, regular and ordinary manner, all entries with respect thereto
have
been accurately made, and all transactions involving Company and its
Subsidiary,
have been accurately accounted for.
(bb) Compensation.
Except
as
disclosed in Section 2.3(cc) of the Company Disclosure Schedule attached
hereto,
neither Company nor its Subsidiary has any agreement with any employee
with
regard to compensation, whether individually or collectively, that,
with respect
to employees located in Canada can be terminated by providing the notice
or
indemnity required by applicable Canadian federal or provincial law,
and set
forth in Section 2.3(bb) of the Company Disclosure Schedule attached
hereto is a
list of all employees of Company and its Subsidiary entitled to receive
annual
compensation in excess of $100,000 and their respective positions and
salaries.
No union or other collective bargaining unit has been certified or
recognized by
Company or its Subsidiary as representing any of their respective employees.
Neither Company nor Parent will incur any liability with respect to
any payment
due or damage suffered by any employee of Company or its Subsidiary,
including,
but not limited to, any claims for severance, termination benefits
or similar
claims, by virtue of the operation of the transactions contemplated
hereby.
ARTICLE
III
COVENANTS
RELATING TO CONDUCT OF BUSINESS
3.1. Conduct
of Business of Company Pending the Merger.
Company
covenants and agrees that, during the period from the date hereof to
the
Effective Time and except as otherwise agreed to in writing by Parent
or as
expressly contemplated by this Agreement, the business of Company shall
be
conducted only in, and Company shall not take any action except in,
the ordinary
course of business and in a manner consistent with past practice and
in
compliance with applicable laws; and Company, except as expressly contemplated
by this Agreement, shall use its commercially reasonable efforts to
preserve
substantially intact the business organization of Company, to keep
available the
services of the present officers and employees and to preserve the
present
relationships of Company with such of the customers, suppliers, licensors,
licensees, or distributors with which Company has significant business
relations. By way of amplification and not limitation, without the
prior written
consent of Parent (which shall not be unreasonably withheld or delayed),
Company
shall not, between the date of this Agreement and the Effective Time,
except as
set forth in Section 3.1 of the Company Disclosure Schedule, directly
or
indirectly do, or propose or commit to do, any of the following:
-46-
(a) Amend
its
certificate of incorporation or bylaws or equivalent organizational
documents;
(b) Except
for (i) a Company Subsequent Issuance, (ii) the issuance of stock options
under
the Option Plan to employees and consultants of Company and (iii) the
issuance
of warrants in connection with certain contemplated financing as described
in
Section 3.1 of the Company Disclosure Schedule, issue, deliver, sell,
pledge,
dispose of or encumber, or authorize or commit to the issuance, sale,
pledge,
disposition or encumbrance of, any shares of capital stock of any class,
or any
options, warrants, convertible securities or other rights of any kind
to acquire
any shares of capital stock, or any other ownership interest (including,
but not
limited to, stock appreciation rights or phantom stock), of
Company;
(c) Declare,
set aside, make or pay any dividend or other distribution, payable
in cash,
stock, property or otherwise, with respect to any of the Company Capital
Stock;
(d) Acquire
(by merger, consolidation or acquisition of stock or assets) any corporation,
partnership or other business organization or division or line of
business;
(e) Modify
its current investment policies or investment practices in any material
respect
except to accommodate changes in applicable Law;
(f) Transfer,
sell, lease, mortgage, or otherwise dispose of or subject to any Lien
any of its
assets, including the Company Capital Stock (except (i) by incurring
Permitted
Liens (as defined in Article X); and (ii) equipment and property no
longer used
in the operation of Company’s business) other than in the ordinary course of
business consistent with past practice;
(g) Except
as
may be required as a result of a change in Law or in generally accepted
accounting or actuarial principles, make any change to the accounting
practices
or principles or reserving or underwriting practices or principles
used by
it;
(h) Settle
or
compromise any pending or threatened suit, action or claim (other than
the
payment of health benefit claims on behalf of customers of Company)
involving a
payment by Company in excess of $100,000;
(i) Adopt
a
plan of complete or partial liquidation, dissolution, restructuring,
recapitalization or other reorganization of Company;
(j) Fail
to
use commercially reasonable efforts to maintain in full force and effect
the
existing insurance policies covering Company or its properties, assets
and
businesses or comparable replacement policies;
(k) Authorize
or make capital expenditures in excess of $250,000;
-47-
(l) (i)
Make
any material Tax election or settle or compromise any material federal,
state,
local or foreign Tax liability, change any annual tax accounting period,
change
any material method of Tax accounting, enter into any closing agreement
relating
to any Tax, or surrender any right to claim a Tax refund or (ii) consent,
without providing advance notice to Parent, to any extension or waiver
of the
limitations period applicable to any Tax claim or assessment;
(m) Reclassify,
combine, split, subdivide or redeem, purchase or otherwise acquire,
directly or
indirectly, any of the Company Capital Stock or its stock options or
debt
securities;
(n) (i)
Repay
or retire any indebtedness for borrowed money or repurchase or redeem
any debt
securities; (ii) except as set forth in Section 3.1 of the Company
Disclosure
Schedule incur any indebtedness for borrowed money (including pursuant
to any
commercial paper program or credit facility of Company) or issue any
debt
securities; or (iii) assume, guarantee or endorse, or otherwise as
an
accommodation become responsible for, the obligations of any Person,
or make any
loans, advances or capital contributions to, or investments in, any
other
Person, other than providers of Company in the ordinary course of business
consistent with past practice;
(o) Except
as
set forth in Section 3.1 of the Company Disclosure Schedule, enter
into or
renew, extend, materially amend or otherwise materially modify (i)
any Company
Material Contract, or (ii) any other contract or agreement (with “other contract
or agreement” being defined for the purposes of this subsection as a contract or
agreement which involves Company incurring a liability in excess of
$250,000 and
which is not terminable by Company without penalty upon one year or
less
notice);
(p) Except
as
set forth in Section 3.1 of the Company Disclosure Schedule and except
to the
extent required under this Agreement or pursuant to applicable law,
increase the
compensation or fringe benefits of any of its directors, officers or
employees,
except for increases in salary or wages of officers and employees of
Company in
the ordinary course of business in accordance with past practice, or
grant any
severance or termination pay not currently required to be paid under
existing
severance plans or enter into, or amend, any employment, consulting
or severance
agreement or arrangement with any present or former director, officer
or other
employee of Company, or establish, adopt, enter into or amend or terminate
any
collective bargaining, bonus, profit sharing, thrift, compensation,
stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, welfare, severance or other plan, agreement,
trust,
fund, policy or arrangement for the benefit of any directors, officers
or
employees, except for any plan amendments to comply with Section 409A
of the
Code (provided that any such amendments shall not materially increase
the cost
of such plan to Company);
(q) Grant
any
license with respect to Intellectual Property Rights other than non-exclusive
licenses granted in the ordinary course of business;
-48-
(r) Take
any
action or omit to take any action that would reasonably be expected
to cause any
Intellectual Property Rights used or held for use in its business to
become
invalidated, abandoned or dedicated to the public domain;
(s) Take
or
fail to take any action that would prevent the Merger from qualifying
as
reorganization within the meaning of Section 368(a) of the Code;
(t) Except
as
set forth in Section 3.1 of the Company Disclosure Schedule, effectuate
a “plant
closing” or “mass layoff” as those terms are defined in the Worker Adjustment
and Retraining Notification Act (WARN), affecting in whole or in part
any site
of employment, facility, operating unit or employee of Company;
(u) Pay,
discharge or satisfy any claims, liabilities or obligations (absolute
accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business and consistent
with past practice, of liabilities reflected or reserved against in
the
financial statements of Company or incurred in the ordinary course
of business
and consistent with past practice;
(v) Enter
into any transaction with, or enter into any agreement, arrangement,
or
understanding with any of Company’s affiliates that would be required to be
disclosed pursuant to Item 404 of SEC Regulation S-K; or
(w) Take,
or
offer or propose to take, or agree to take in writing or otherwise,
any of the
actions described in Sections 3.1(a) through 3.1(v) or any action which
would
result in any of the conditions set forth in Article VI not being satisfied
or
would materially delay the Closing.
3.2. Conduct
of Business of Parent Pending the Merger.
Parent
covenants and agrees that, during the period from the date hereof to
the
Effective Time and except as otherwise agreed to in writing by Company,
Parent
shall not:
(a) Amend
the
Parent Charter or bylaws or equivalent organizational documents;
(b) Issue,
deliver, sell, pledge, dispose of or encumber, or authorize or commit
to the
issuance, sale, pledge, disposition or encumbrance of, any shares of
capital
stock of any class, or any options, warrants, convertible securities
or other
rights of any kind to acquire any shares of capital stock, or any other
ownership interest (including, but not limited to, stock appreciation
rights or
phantom stock), of Parent;
(c) Declare,
set aside, make or pay any dividend or other distribution, payable
in cash,
stock, property or otherwise, with respect to any of its capital
stock;
(d) Acquire
(by merger, consolidation or acquisition of stock or assets) any corporation,
partnership or other business organization or division or line of
business;
(e) Modify
its current investment policies or investment practices in any material
respect
except to accommodate changes in applicable Law;
-49-
(f) Transfer,
sell, lease, mortgage, or otherwise dispose of or subject to any Lien
any of its
assets, including capital stock other than in the ordinary course of
business
consistent with past practice;
(g) Except
as
may be required as a result of a change in Law or in generally accepted
accounting or actuarial principles, make any change to the accounting
practices
or principles or reserving or underwriting practices or principles
used by
it;
(h) Settle
or
compromise any pending or threatened suit, action or claim involving
a payment
by Parent in excess of $100,000;
(i) Adopt
a
plan of complete or partial liquidation, dissolution, restructuring,
recapitalization or other reorganization of Parent;
(j) Fail
to
use commercially reasonable efforts to maintain in full force and effect
the
existing insurance policies covering Parent or its properties, assets
and
businesses or comparable replacement policies;
(k) Authorize
or make capital expenditures;
(l) (i)
Make
any material Tax election or settle or compromise any material federal,
state,
local or foreign Tax liability, change any annual tax accounting period,
change
any material method of Tax accounting, enter into any closing agreement
relating
to any Tax, or surrender any right to claim a Tax refund or (ii) consent,
without providing advance notice to Company, to any extension or waiver
of the
limitations period applicable to any Tax claim or assessment;
(m) Reclassify,
combine, split, subdivide or redeem, purchase or otherwise acquire,
directly or
indirectly, any of its capital stock, stock options or debt
securities;
(n) (i)
Repay
or retire any indebtedness for borrowed money or repurchase or redeem
any debt
securities; (ii) incur any indebtedness for borrowed money or issue
any debt
securities; or (iii) assume, guarantee or endorse, or otherwise as
an
accommodation become responsible for, the obligations of any Person,
or make any
loans, advances or capital contributions to, or investments in, any
other
Person, other than providers of Parent in the ordinary course of business
consistent with past practice;
(o) Except
as
set forth in Section 3.2 of the Parent Disclosure Schedule, enter into
or renew,
extend, materially amend or otherwise materially modify (i) any material
contract, or (ii) any other contract or agreement (with “other
contract or agreement”
being
defined for the purposes of this subsection as a contract or agreement
which
involves Parent incurring a liability in excess of $250,000 and which
is not
terminable by Parent without penalty upon one year or less notice);
-50-
(p) Except
as
set forth in Section 3.2 of the Parent Disclosure Schedule and except
to the
extent required under this Agreement or pursuant to applicable law,
increase the
compensation or fringe benefits of any of its directors, officers or
employees,
except for increases in salary or wages of officers and employees of
Parent in
the ordinary course of business in accordance with past practice, or
grant any
severance or termination pay not currently required to be paid under
existing
severance plans or enter into, or amend, any employment, consulting
or severance
agreement or arrangement with any present or former director, officer
or other
employee of Parent, or establish, adopt, enter into or amend or terminate
any
collective bargaining, bonus, profit sharing, thrift, compensation,
stock
option, restricted stock, pension, retirement, deferred compensation,
employment, termination, welfare, severance or other plan, agreement,
trust,
fund, policy or arrangement for the benefit of any directors, officers
or
employees, except for any plan amendments to comply with Section 409A
of the
Code (provided that any such amendments shall not materially increase
the cost
of such plan to Parent);
(q) Take
or
fail to take any action that would prevent the Merger from qualifying
as
reorganization within the meaning of Section 368(a) of the Code;
(r) Pay,
discharge or satisfy any claims, liabilities or obligations (absolute
accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business and consistent
with past practice, of liabilities reflected or reserved against in
the
financial statements of Parent or incurred in the ordinary course of
business
and consistent with past practice;
(s) Enter
into any transaction with, or enter into any agreement, arrangement,
or
understanding with any of Parent’s affiliates that would be required to be
disclosed pursuant to Item 404 of SEC Regulation S-K; or
(t) Take,
or
offer or propose to take, or agree to take in writing or otherwise,
any of the
actions described in Sections 3.1(a) through 3.1(s) or any action which
would
result in any of the conditions set forth in Article VI not being satisfied
or
would materially delay the Closing.
3.3. Operational
Matters.
From
the date of this Agreement until the Effective Time, at the request
of Parent,
senior management of Company shall (a) confer on a regular and frequent
basis
with Parent and (b) report (to the extent permitted by law or regulation
or any
applicable confidentiality agreement) to Parent on operational matters.
Company
shall file or furnish all reports, communications, announcements, publications
and other documents required to be filed or furnished by it with all
Governmental Entities between the date of this Agreement and the Effective
Time
and Company shall (to the extent any report, communication, announcement,
publication or other document contains any statement relating to this
Agreement
or the Merger, and to the extent permitted by law or regulation or
applicable
confidentiality agreement) consult with Parent for a reasonable time
before
filing or furnishing any such report, communication, announcement,
publication
or other document and mutually agree upon any such statement and deliver
to
Parent copies of all such reports, communications, announcements, publications
and other documents promptly after the same are filed or furnished.
Nothing
contained in this Agreement shall give Parent, directly or indirectly,
the right
to control or direct the operations of Company prior to the Effective
Time.
Prior to the Effective Time, each of Company and Parent shall exercise,
consistent with the terms and conditions of this Agreement, complete
control and
supervision over respective businesses and operations.
-51-
ARTICLE
IV
ADDITIONAL
AGREEMENTS
4.1. Preparation
of Proxy Statement.
(a) As
soon
as practicable following the date of this Agreement, Parent shall,
with the
cooperation of Company and the PA Management Team (as defined in Article
X),
prepare and file with the SEC under the Exchange Act, and with all
other
applicable regulatory bodies, a proxy statement (the “Proxy
Statement”)
in
preliminary form. The Proxy Statement shall:
(i) request
approval from Parent’s stockholders of the Merger and this Agreement upon the
terms set forth herein;
(ii) request
approval for the amendment of the Parent Charter to, among other things,
(A)
effect the change of the name of the Parent from its current name to
PharmAthene, Inc., (B) delete the preamble and SPAC-specific portions
of the
Parent Charter from and after the Closing and (C) provide that, for
so long as
at least 30% of the 8% Convertible Notes remain outstanding, the number
of
directors constituting the Board of Directors of Parent shall not exceed
7, the
number of directors constituting each committee of the Board of Directors
of
Parent shall not exceed 3, and the holders of the 8% Convertible Notes
shall
have the right, as a separate class (and notwithstanding the existence
of less
than three such holders at any given time), to (x) elect 3 members
to the Board
of Directors of Parent and, (y) to the extent they elect to fill such
committee
positions, appoint 2 of the 3 members of each Committee of the Board
of
Directors (including the nominating and corporate governance committee
and the
compensation committee and committees performing similar functions);
and
(iii) request
approval from the Parent’s stockholders for an incentive stock option plan in
form and substance acceptable to the PA Management Team, Parent and
Company
(“Stock
Option Plan”)
to
provide for, among other things, the reservation of a sufficient number
of
shares of Parent Common Stock for issuance thereunder for all outstanding
Company Options plus 3,000,000; and (v) such other approvals as the
parties may
determine are necessary or desirable. Parent shall also take any action
required
to be taken under any applicable state securities laws in connection
with the
issuance of Parent Common Stock in the Merger.
The
Proxy
Statement shall be filed in preliminary form in accordance with the
Exchange
Act, and each of Company and Parent shall use its commercially reasonable
efforts to respond as promptly as practicable to any comments of the
SEC with
respect thereto. Parent shall use its reasonable best efforts to (1)
prepare and
file with the SEC the definitive Proxy Statement, (2) cause the Proxy
Statement,
including any amendment or supplement thereto to be approved by the
SEC, and (3)
to cause the definitive Proxy Statement to be mailed to Parent’s stockholders
and holders of Parent Warrants as promptly as practicable after the
SEC has
approved them. Parent shall notify Company promptly of the receipt
of any
comments from the SEC or its staff and of any request by the SEC or
its staff
for amendments or supplements to the Proxy Statement or for additional
information and each of Parent and Company shall supply each other
with copies
of all correspondence between such or any of its representatives, on
the one
hand, and the SEC or its staff, on the other hand, with respect to
the Proxy
Statement or the Merger.
-52-
(b) The
parties hereto shall use all reasonable efforts to have the Proxy Statement
approved by the SEC as promptly as practicable after such filing. Parent
and its
counsel shall obtain from Company and the PA Management Team such information
required to be included in the Proxy Statement and, after consultation
with
Company and its counsel, respond promptly to any comments made by the
SEC with
respect to the Proxy Statement. Parent shall allow Company’s full participation
in the preparation of the Proxy Statement and any amendment or supplement
thereto and shall consult with Company and its advisors concerning
any comments
from the SEC with respect thereto. The PA Management Team and Company’s
independent accountants shall assist Parent and its counsel in preparing
the
Proxy Statement and acknowledge that a substantial portion of the Proxy
Statement shall include disclosure regarding Company, its management,
operations
and financial condition. Company shall furnish consolidated audited
financial
statements for the fiscal years ended December 31, 2006 as soon as
they become
available and in no event later that February 14, 2007, for inclusion
in the
Proxy Statement. The PA Management Team shall make itself available
to Parent
and its counsel in connection with the drafting of the Proxy Statement
and
responding in a timely manner to comments from the SEC and shall cause
to be
delivered opinions of counsel related to FDA and Intellectual Property
Rights
matters as described in the Proxy Statement with respect to Company’s business
as Parent may reasonably request opining on such matters as are usual
and
customary for underwritten public offerings. All information regarding
Company,
its management, operations and financial condition, including any material
contracts required to be filed as part of the Proxy Statement (for
purposes
hereof referred to collectively as “Company
Information”)
shall
be true and correct in all material respects and shall not contain
any
misstatements of any material information or omit any material information
regarding Company. Prior to the filing of the Proxy Statement with
the SEC and
each amendment thereto, the PA Management shall confirm in writing
to Parent and
its counsel that it has reviewed the Proxy Statement (and each amendment
thereto) and approved the Company Information contained therein.
(c) If,
prior
to the Effective Time, any event occurs with respect to Company, or
any change
occurs with respect to other information supplied by Company for inclusion
in
the Proxy Statement, which is required to be described in an amendment
of, or a
supplement to, the Proxy Statement, Company shall promptly notify Parent
of such
event, and Company and Parent shall cooperate in the prompt filing
with the SEC
of any necessary amendment or supplement to the Proxy Statement and,
as required
by Law, in disseminating the information contained in such amendment
or
supplement to Parent’s stockholders.
(d) If,
prior
to the Effective Time, any event occurs with respect to Parent or Merger
Sub, or
any change occurs with respect to other information supplied by Parent
for
inclusion in the Proxy Statement, which is required to be described
in an
amendment of, or a supplement to, the Proxy Statement, Parent shall
promptly
notify Company of such event, and Parent and Company shall cooperate
in the
prompt filing with the SEC of any necessary amendment or supplement
to the Proxy
Statement and, as required by Law, in disseminating the information
contained in
such amendment or supplement to Parent’s stockholders.
-53-
(e) Parent
shall, promptly after the date hereof, take all action necessary to
duly call,
give notice of, convene and hold a meeting of its stockholders (the
“Parent
Stockholders Meeting”)
as
soon as practicable after the Proxy Statement is approved by the SEC.
Parent
shall consult with Company on the date for Parent Stockholders Meeting.
Parent
shall use its commercially reasonable efforts to cause the Proxy Statement
to be
mailed to Parent’s stockholders as soon as practicable after the Proxy Statement
is approved. Parent shall, through Parent’s Board of Directors, recommend to its
stockholders that they give the Parent Stockholder Approval, except
to the
extent that Parent’s Board of Directors shall have withdrawn its approval or
recommendation of this Agreement and the Merger, which withdrawal may
be made
only if deemed by Parent’s Board of Directors to be necessary in order to comply
with its fiduciary duties. Notwithstanding any other provision thereof,
Parent
shall not be restricted from complying with any of its obligations
under the
Exchange Act.
(f) During
the term of this Agreement, Company shall not take any actions to exempt
any
Person other than Parent and Merger Sub from the threshold restrictions
on
Company Common Stock ownership or any other anti-takeover provision
in Company’s
certificate of incorporation, or make any state takeover statute (including
any
Delaware state takeover statute) or similar statute inapplicable to
any
Alternative Transaction (as defined in Article X).
(g) Parent
shall comply with all applicable federal and state securities laws
in all
material respects.
4.2. Access
to Information.
Upon
reasonable notice, Company shall afford to the officers, employees,
accountants,
counsel, financial advisors and other representatives of Parent reasonable
access during normal business hours, during the period prior to the
Effective
Time, to such of its properties, books, contracts, commitments, records,
officers and employees as Parent may reasonably request and, during
such period,
Company shall furnish promptly to Parent (a) a copy of each report,
schedule and
other document filed, published, announced or received by it during
such period
pursuant to the requirements of Federal or state laws, as applicable
(other than
documents which Company is not permitted to disclose under applicable
Law), and
(b) consistent with its legal obligations, all other information concerning
it
and its business, properties and personnel as Parent may reasonably
request;
provided, however,
that
Company may restrict the foregoing access to the extent that any Law,
treaty,
rule or regulation of any Governmental Entity applicable to Company
requires
Company to restrict access to any properties or information. Parent
will hold
any such information that is non-public in confidence. Any investigation
by
Parent shall not affect the representations and warranties of
Company.
-54-
4.3. Commercially
Reasonable Efforts.
(a) Subject
to the terms and conditions of this Agreement, each party will use
its
commercially reasonable efforts to prepare and file as promptly as
practicable
all documentation to effect all necessary applications, notices, petitions,
filings, and other documents and to obtain as promptly as practicable
all
consents, waivers, licenses, orders, registrations, approvals, permits,
tax
rulings and authorizations necessary or advisable to be obtained from
any third
party and/or any Governmental Entity in order to consummate the Merger
and the
other transactions contemplated by this Agreement. Upon the terms and
subject to
the conditions hereof, each party will use its commercially reasonable
efforts
to take, or cause to be taken, all actions, to do, or cause to be done,
all
things reasonably necessary to satisfy the conditions to Closing set
forth
herein and to consummate the Merger and the other transactions contemplated
by
this Agreement. Company shall provide Parent with the opportunity to
participate
in any meeting or substantive telephone call with any Governmental
Entity in
respect of any filings, investigations or other inquiry in connection
with the
transactions contemplated hereby.
(b) Nothing
contained in this Section 4.3 or in any other provision of this Agreement
shall
be construed as requiring Parent to agree to any terms or conditions
as a
condition to, or in connection with, obtaining any Necessary Consents
or any
required approval of the health care or other applicable special license
requirements that would:
(i) impose
any limitations on Parent’s ownership or operation of all or any portion of its
or Company’s businesses or assets, or compel Parent or any of its Subsidiaries
to dispose of or hold separate all or any portion of its or Company’s, or any of
their respective Subsidiaries’, businesses or assets,
(ii) impose
any limitations on the ability of Parent to acquire or hold or to exercise
full
rights of ownership of the Company Common Stock,
(iii) impose
any obligations on Parent or Company in respect of or relating to Parent’s or
Company’s facilities, operations, places of business, employment levels,
products or businesses,
(iv) require
Parent or Company to make any payments, or
(v) impose
any other obligation, restriction, limitation, qualification or other
condition
on Parent or Company (other than, with respect to clauses (iii), (iv)
and (v),
such terms or conditions as are reasonable and relate to the ordinary
course of
business of Company and that are imposed by a Governmental Entity with
power and
authority to grant the Necessary Consents, and which individually or
in the
aggregate (A) could have been imposed on Company as of January 1, 2006
by such
Governmental Entity in the ordinary course of regulating the business
of Company
and (B) do not competitively disadvantage Parent or Company) (any such
term or
condition in (i) through (v) being referred to herein as a “Burdensome
Term or Condition”).
-55-
4.4. No
Solicitation of Transactions.
Each of
Parent and Company agrees that neither Parent nor Company nor any of
their
respective officers and directors shall, and that they shall use their
respective commercially reasonable efforts to cause their respective
employees,
agents and representatives (including any investment banker, attorney
or
accountant retained by it) not to, directly or indirectly, except as
set forth
in Section 3.1 of the Company Disclosure Schedule, (A) initiate, solicit,
encourage or knowingly facilitate any inquiries or the making of any
proposal or
offer with respect to, or a transaction to effect, a merger, reorganization,
share exchange, consolidation, business combination, recapitalization,
liquidation, dissolution or similar transaction involving it or any
purchase,
transfer or sale of the assets of it, or any purchase or sale of, or
tender or
exchange offer for, its voting securities (any such proposal, offer
or
transaction (other than a proposal or offer made by one party to this
Agreement
to the other party to this Agreement or an affiliate thereof) being
hereinafter
referred to as an “Acquisition
Proposal”),
(B)
have any discussions with or provide any confidential information or
data to any
person relating to an Acquisition Proposal, or engage in any negotiations
concerning an Acquisition Proposal, or knowingly facilitate any effort
or
attempt to make or implement an Acquisition Proposal, (C) approve or
recommend,
or propose publicly to approve or recommend, any Acquisition Proposal
or (D)
approve or recommend, or propose to approve or recommend, or execute
or enter
into, any letter of intent, agreement in principle, merger agreement,
asset
purchase or share exchange agreement, option agreement or other similar
agreement related to any Acquisition Proposal or propose or agree to
do any of
the foregoing.
4.5. Employee
Benefits Matters.
From
the date hereof until the Effective Time, Company shall provide compensation
and
benefits to the current and former employees of Company (other than
those
current and former employees whose terms and conditions of employment
are
subject to a collective bargaining agreement) upon the same terms as
have been
provided to such employees prior to the date of this Agreement, subject
to
termination of such compensation or benefits in accordance with their
terms and
any adjustment required by applicable law, the terms and conditions
of any
contract or agreement or the provisions of any Company Benefit
Plan.
4.6. Notification
of Certain Matters.
Company
shall use commercially reasonable efforts to give prompt notice to
Parent, and
Parent shall use commercially reasonable efforts to give prompt notice
to
Company, to the extent that either acquires actual knowledge of (a)
the
occurrence or non-occurrence of any event the occurrence or non-occurrence
of
which would be reasonably likely to cause any representation or warranty
contained in this Agreement to be untrue or inaccurate and (b) any
failure of
Parent, Merger Sub or Company, as the case may be, to comply with or
satisfy any
covenant, condition or agreement to be complied with or satisfied by
it
hereunder;
provided, however,
that the
delivery of any notice pursuant to this Section 4.6 shall not limit
or otherwise
affect the remedies available hereunder to the party receiving such
notice.
-56-
4.7. Public
Announcements.
Parent
and Company shall develop a joint communications plan and each party
shall (a)
ensure that all press releases and other public statements and communications
(including any communications that would require a filing under Rule
425, Rule
165 and Rule 166 of the Securities Act or Rule 14a-12 of the Exchange
Act) with
respect to this Agreement and the transactions contemplated hereby
shall be
consistent with such joint communications plan and (b) unless otherwise
required
by applicable law or by obligations pursuant to any listing agreement
with or
rules of any securities exchange, Company shall consult with Parent
for a
reasonable time before issuing any press release or otherwise making
any public
statement or communication (including any communication that would
require a
filing under Rule 425, Rule 165 and Rule 166 of the Securities Act
or Rule
14a-12 of the Exchange Act), and Parent and Company shall mutually
agree upon
any such press release of Company or any such public statement or communication
by Company, with respect to this Agreement or the transactions contemplated
hereby. In addition to the foregoing, except to the extent required
by
applicable Law, neither Parent nor Company shall issue any press release
or
otherwise make any public statement or disclosure concerning the other
party or
the other party’s business, financial condition or results of operations without
the consent of the other party.
4.8. Affiliates.
Promptly after execution and delivery of this Agreement, Company shall
deliver
to Parent a letter identifying all persons who, to the best of Company’s
Knowledge, may be deemed as of the date hereof “affiliates” of Company for
purposes of Rule 145 under the Securities Act, and such list shall
be updated as
necessary to reflect changes from the date thereof until the Effective
Time.
4.9. [reserved]
4.10. Takeover
Statutes.
Company
and its Board of Directors shall, if any takeover statute or similar
statute or
regulation of any state becomes or may become applicable to this Agreement,
the
Merger or any other transactions contemplated by this Agreement, grant
such
approvals and take such actions as are necessary to ensure that the
Merger and
the other transactions contemplated by this Agreement may be consummated
as
promptly as practicable on the terms contemplated hereby and otherwise
to
minimize the effect of such statute or regulation on this Agreement,
the Merger
and the other transactions contemplated by this Agreement.
4.11. Transfer
Taxes.
Each of
Parent, Merger Sub and Company shall pay any sales, use, ad valorem,
property,
transfer (including real property transfer) and similar Taxes imposed
on such
Person as a result of or in connection with the Merger and the other
transactions contemplated hereby.
4.12. AMEX
Listing; Symbol.
Parent
shall cause the shares of Stock Consideration and the Note Conversion
Shares to
be issued in the Merger to be approved for listing on the AMEX, subject
to
official notice of issuance, prior to the Effective Time. After the
Effective
Time, Parent shall cause the symbol under which the Parent Common Stock
and
Parent Warrants are traded on the AMEX to change to a symbol that,
if available,
is reasonably representative of the corporate name or business of the
Surviving
Corporation.
4.13. Trust
Fund Closing Confirmation.
(a) Promptly
after the date hereof, Parent shall give to the Trustee the notice
attached as
Exhibit A to the Trust Agreement.
(b) Not
later
than 48 hours prior to the Effective Time, Parent shall (i) give the
Trustee
advance notice of the Effective Time, and (ii) cause the Trustee to
provide a
written confirmation to Parent confirming the dollar amount of the
Trust Fund
balance held by the Trustee in the Trust Account that will be released
to Parent
upon consummation of the Merger.
-57-
4.14. Directors
and Officers of Parent After the Merger.
Prior
to the Effective Time, Parent shall take all necessary action so that,
effective
at the Closing, the Board of Directors of Parent shall be reconstituted
and
pursuant to the Parent Charter and bylaws, shall be fixed at a total
of seven
(7) persons, and be comprised as follows: (A) the holders of the 8%
Convertible
Notes shall designate three (3) persons (the “Noteholder
Designees”),
(B) Company shall designate one (1) person who shall be the current
Chief
Executive Officer of Company; (C) Parent shall designate two (2) persons;
and
(D) Company and Parent shall designate one (1) person mutually acceptable
to
both of them. At least fifteen (15) days prior to the filing of the
Proxy
Statement, the parties shall notify each other of the names and backgrounds
of
the persons nominated by them to serve on the Board of Directors of
Parent. All
such directors, once appointed as of the Effective Time, shall continue
to serve
in accordance with the Parent Charter and bylaws until their successors
are duly
elected and qualified; provided, however, that as to the Noteholder
Designees,
such persons shall continue to serve on the Board of Directors for
so long as at
least 30% of the principal amount of the 8% Convertible Notes issued
as a part
of the Merger Consideration remain outstanding (and
notwithstanding the existence of less than three such holders at any
given
time)
and provided further, that two (2) of such designees shall be appointed
as two
(2) of the three (3) members of each committee of the Board of Directors
of
Parent including the nominating and corporate governance committee
and
compensation committee of Parent assuming such composition is in compliance
with
applicable regulations of the AMEX. In the event that any nominee of
the holders
of the 8% Convertible Notes, Company or Parent, as the case may be,
is unable or
determines not to complete his initial term, then a replacement nominee
of the
holders of the 8% Convertible Notes, Company or Parent, as the case
may be,
shall fill such vacancy, subject to approval of the Board of Directors
nominating and governance committee, which approval shall not be unreasonably
withheld or delayed. Notwithstanding anything to the contrary contained
herein,
as of the Closing Date, the Board shall include such number of directors
deemed
“independent” within the rules of the AMEX as such rules may require, but in no
event shall the Board include less than two (2) such “independent”
directors.
ARTICLE
V
Post
Closing Covenants
5.1. General.
In case
at any time after the Closing any further action is necessary to carry
out the
purposes of this Agreement, each of the parties will take such further
action
(including the execution and delivery of such further instruments and
documents)
as any other party reasonably may request, all at the sole cost and
expense of
the requesting party (unless the requesting party is entitled to indemnification
therefor under section 5.6 below). Company acknowledges and agrees
that from and
after the Closing, Parent will be entitled to possession of all documents,
books, records (including tax records), agreements, and financial data
of any
sort relating to Company; provided, however, that after Closing, Parent
shall
provide to Company stockholders reasonable access to and the right
to copy such
documents, books, records (including tax records), agreements, and
financia1
data where Company stockholders have a legitimate purpose, including
without
limitation, in the event of an internal revenue service audit.
-58-
5.2. Litigation
Support.
In the
event and for so long as any party actively is contesting or defending
against
any action, suit, proceeding, hearing, investigation, charge, complaint,
claim,
or demand in connection with (a) any transaction contemplated under
this
agreement or (b) any fact, situation, circumstance, status, condition,
activity,
practice, plan, occurrence, event, incident, action, failure to act,
or
transaction on or prior to the Closing Date involving Company, each
of the other
parties will cooperate with him or it and his or its counsel in the
contest or
defense, make available their personnel, and provide such testimony
and access
to their books and records as shall be necessary in connection with
the contest
or defense, all at the sole cost and expense of the contesting or defending
party (unless the contesting or defending party is entitled to indemnification
therefor under Article VIII below).
5.3. Transition.
Company
will exercise reasonable commercial efforts to assure that none of
Company
stockholders will take any action that is designed or intended to have
the
effect of discouraging any lessor, licensor, customer, supplier, or
other
business associate of Company from maintaining the same business relationships
with Company after the Closing as it maintained with Company prior
to the
Closing. Company will refer all customer inquiries relating to the
businesses of
Company to Parent or the Surviving Corporation from and after the
Closing.
5.4. Tax-Free
Reorganization Treatment.
The
parties hereto shall use their commercially reasonable efforts to cause
the
Merger to be treated as a reorganization within the meaning of Section
368(a) of
the Code and shall not knowingly take or fail to take any action which
action or
failure to act would jeopardize the qualification of the Merger as
a
reorganization within the meaning of Section 368(a) of the Code. Unless
required
by law each of Parent, Merger Sub and Company shall not file any Tax
Return or
take any position inconsistent with the treatment of the Merger as
a
reorganization described in Section 368(a) of the Code.
5.5. Headquarters
of Surviving Corporation.
Following the Effective Time, the headquarters and the principal executive
offices of the Surviving Corporation shall be in Annapolis,
Maryland.
5.6. Indemnification
of Directors and Officers of Company.
From
and after the Effective Time, Parent will cause the Surviving Corporation
to
fulfill and honor in all respects the obligations of Company pursuant
to any
indemnification agreements between Company and its directors and officers
as of
the Effective Time (the “Indemnified
Directors and Officers”)
and any
indemnification or expense advancement provisions under Company’s certificate of
incorporation or bylaws as in effect on the date hereof. The certificate
of
incorporation and bylaws of the Surviving Corporation will contain
provisions
with respect to exculpation and indemnification and expense advancement
that are
at least as favorable to the Indemnified Directors and Officers as
those
contained in the certificate of incorporation and bylaws of Company
as in effect
on the date hereof, which provisions will not be amended, repealed
or otherwise
modified for a period of six years from the Effective Time in any manner
that
would adversely affect the rights thereunder of individuals who, immediately
prior to the Effective Time, were directors, officers, employees or
agents of
Company, unless such modification is required by Law.
-59-
5.7. Continuity
of Business Enterprise.
Parent
will continue at least one significant historic business line of Company,
or use
at least a significant portion of Company’s historic business assets in a
business, in each case within the meaning of Reg. §1.368-1(d), except that
Parent may transfer Company’s historic business assets (i) to a corporation that
is a member of Parent’s “qualified group,” within the meaning of Reg.
§1.368-1(d)(4)(ii), or (ii) to a partnership if (A) one or more members
of
Parent’s “qualified group” have active and substantial management functions as a
partner with respect to Company’s historic business or (B) members of Parent’s
“qualified group” in the aggregate own an interest in the partnership
representing a significant interest in Company’s historic business, in each case
within the meaning of Reg. §1.368-1(d)(r)(ii).
5.8. Substantially
All Requirement.
Following the Merger, to the Knowledge of Parent, Surviving Corporation
will
hold at least 90% of the fair market value of the net assets and at
least 70% of
the fair market value of the gross assets that were held by Company
immediately
prior to the Effective Time, and at least 90% of the fair market value
of the
net assets and at least 70% of the fair market value of the gross assets
that
were held by Merger Sub immediately prior to the Effective Time. Insofar
as this
representation is dependent upon actions of Company prior to the Merger,
Parent
and Merger Sub have assumed that Company will take no action prior
to the Merger
that will cause Company not to hold at least 90% of the fair market
value of its
net assets and at least 70% of the fair market value of its gross assets
immediately prior to the Effective Time. For purposes of this Section
5.8, cash
or other property paid by Company or Merger Sub to stockholders, or
used by
Company or Merger Sub to pay reorganization expenses, or distributed
by Company
or Merger Sub with respect to or in redemption of its outstanding stock,
other
than regular dividends paid in the ordinary course and other than cash
or other
property transferred by Parent to Merger Sub in pursuance of the plan
of Merger
immediately preceding, or in contemplation of, the Merger are included
as assets
held by Company and Merger Sub immediately prior to the Effective Time.
Additionally, Parent has not participated in any plan of Company to
effect (i)
any distribution with respect to any Company stock (other than regular
dividend
distributions made in the ordinary course), or (ii) any redemption
or
acquisition of any Company stock (other than in the Merger).
5.9. Composition
of the Board of Directors of Parent.
Notwithstanding anything to the contrary contained herein, for so long
as at
least 30% of the principal amount of 8% Convertible Notes issued as
part of the
Merger Consideration remains outstanding, the number of directors constituting
the Board of Directors of Parent shall be fixed at seven (7) and the
holders of
the 8% Convertible Notes shall have the right, as a separate class
(and
notwithstanding the existence of less than three (3) such holders at
any given
time), to elect three (3) members to the Board of Directors of Parent
and, to
the extent that the holders elect to fill committee positions, they
shall have
the right, subject to applicable Law and the regulations of the AMEX,
to appoint
two (2) of the three (3) members of each committee of the Board of
Directors
including the nominating and corporate governance committee and the
compensation
committee of Parent. The Parent Charter shall reflect such right of
the holders
of the 8% Convertible Notes. Parent and its Board of Directors shall
include the
names of the three (3) nominees of the holders of the 8% Convertible
Notes in
every proxy statement delivered to stockholders of Parent for any special
or
annual meeting of Parent’s stockholders at which directors are to be elected
during the period commencing on the Closing Date and ending upon the
date that
less than 30% of the principal amount of the 8% Convertible Notes issued
as
Merger Consideration remains outstanding, at which time the rights
of such
holders under this Section 5.9 shall terminate.
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ARTICLE
VI
CONDITIONS
PRECEDENT
6.1. Conditions
to Each Party’s Obligation to Effect the Merger.
The
respective obligations of Parent, Merger Sub and Company to effect
the Merger
are subject to the satisfaction or waiver on or prior to the Closing
Date of the
following conditions:
(a) No
Injunctions or Restraints, Illegality. (i)
No
Governmental Entity or federal or state court of competent jurisdiction
shall
have enacted, issued, promulgated, enforced or entered any statute,
rule,
regulation, executive order, decree, judgment, injunction or other
order
(whether temporary, preliminary or permanent), in any case which is
in effect
and which prevents or prohibits consummation of the Merger or any of
the other
transactions contemplated in this Agreement and (ii) no Governmental
Entity
shall have instituted any action or proceeding (which remains pending
at what
would otherwise be the Closing Date) before any United States court
or other
Governmental Entity of competent jurisdiction seeking to enjoin, restrain
or
otherwise prohibit consummation of the transactions contemplated by
this
Agreement.
(b) Parent
Stockholder Approval.
The
Parent shall have obtained from its stockholders in accordance with
the DGCL,
(i) approval of this Agreement, the Merger and the transactions contemplated
hereby; provided, however, that stockholders of Parent holding not
more than
19.99% of the IPO Shares shall have voted against the Merger and exercised
their
conversion rights under the Parent Charter to convert their shares
of Common
Stock into a cash payment from the Trust Fund (iii) approval of the
amendment of
the Parent Charter as set forth in Section 4.1(ii) and (iii) approval
of the
Stock Option Plan (together, the “Parent Stockholder Approval”).
(c) Company
Stockholder Approval. This
Agreement and the transactions contemplated hereby shall have been
adopted by
the Requisite Majority of the Company Capital Stock. At least the Requisite
Majority of the holders of the Company Capital Stock and all of the
holders of
then outstanding PharmAthene Notes shall have executed and delivered
the
Allocation Agreement and the Note Exchange Agreement, as applicable,
and such
agreements shall be in full force and effect.
6.2. Additional
Conditions to Obligations of Parent and Merger Sub.
The
obligations of Parent and Merger Sub to effect the Merger are subject
to the
satisfaction or waiver by Parent, on or prior to the Closing Date,
of the
following conditions:
(a) Representations
and Warranties. The
representations and warranties of Company shall be true and correct
as of the
date of this Agreement and as of the Closing Date as though made on
and as of
the Closing Date (except to the extent that such representations and
warranties
speak as of another date), other than such failures to be true and
correct that
would not reasonably be expected to have, individually or in the aggregate,
a
Material Adverse Effect on Company. Parent shall have received a certificate
of
the chief executive officer and the chief financial officer of Company
to such
effect.
-61-
(b) Performance
of Obligations of Company. Company
shall have performed or complied in all respects with all agreements
and
covenants required to be performed by it under this Agreement at or
prior to the
Closing Date. Parent shall have received a certificate of the chief
executive
officer and the chief financial officer of Company to such effect.
(c) Required
Governmental Consents. The
Necessary Consents shall have been obtained and shall be in full force
and
effect, and the Necessary Consents shall not, individually or in the
aggregate,
impose any Burdensome Term or Condition.
(d) No
Proceedings. There
shall not be pending or threatened any suit, litigation, action or
other
proceeding relating to the transactions contemplated by this Agreement
except as
disclosed to Parent.
(e) No
Material Adverse Change.
At any
time on or after the date of this Agreement there shall not have occurred
any
change, circumstance or event that, individually or in the aggregate,
has had or
would reasonably be expected to have a Material Adverse Effect on
Company.
(f) Termination
of Side Agreements related to Company Preferred Stock and Subsidiary
Capital
Stock.
Company
shall have delivered to Parent executed termination agreements in form
and
substance reasonably satisfactory to Parent from the holders of the
Company
Preferred Stock whereby the holders of such securities terminate all
rights
under any agreements entered into by Company in connection with the
issuance and
sale of the Company Series A Preferred Stock, Company Series B Preferred
Stock
and Company Series C Preferred Stock, including, without limitation,
all
registration rights agreements, management or stockholder agreements
and tag
along agreements. Company shall have delivered to Parent executed termination
agreements in form and substance reasonably satisfactory to Parent
from the
signatories to the Amended and Restated Put and Support Agreement,
dated July
24, 2006, by and among Company, Canadian Medical Discoveries Fund Inc.
and
Subsidiary and the Amended and Restated Shareholders’ Agreement, dated July 24,
2006, by and among Company, Canadian Medical Discoveries Fund Inc.
and
Subsidiary, in each case relating to the Subsidiary Capital Stock.
(g) Deliverables.
(i) Company
Officer’s Certificate.
Parent
shall have been provided with a certificate executed on behalf of Company
by an
authorized officer to the effect set forth in Sections 6.2(a) and
6.2(b).
(ii) Company
Secretary Certificate.
Parent
shall have received a duly executed certificate from the Secretary
of Company
with respect to: (A) the certificate of incorporation, as certified
by the
Secretary of State of Delaware as of a recent date, and bylaws of Company,
(B)
resolutions of the board of directors of Company with respect to the
authorizations of this Agreement and the other agreements contemplated
hereby,
(C) a certificate of existence and good standing as of a recent date
from the
Secretary of State of the State of Delaware and (iv) the incumbency
of the
executing officers of Company.
-62-
(iii) Legal
Opinion.
Parent
shall have been furnished with the favorable opinion of McCarter & English,
LLP, dated as of the Closing Date, counsel to Company, in form and
substance
reasonably acceptable to Parent.
(iv) Company
Stockholders Lock-Up Agreement. Each
of
the Company stockholders and holders of PharmAthene Notes and the holders
of
Company Options and Company Warrants to purchase not less than 100,000
shares of
Company Common Stock and all officers and directors of the Company
shall have
executed a Lockup Agreement in substantially the form attached hereto
as Exhibit
C (the “Lockup
Agreement”),
that
such person shall not sell, pledge, transfer, assign or engage in any
hedging
transaction with respect to Parent Common Stock issued to such stockholders
as
part of the Merger Consideration except in accordance with the following
schedule: 50% of the Stock Consideration shall be released from the
Lock-Up
Agreement commencing six (6) months following the Effective Time, and
all Stock
Consideration shall be released from the Lock-Up Agreement twelve (12)
months
following the Effective Time.
(v) Employment
Agreements. (a)
David
Wright shall have duly executed and delivered to Parent an employment
agreement
in form and substance mutually acceptable to such parties and (b) all
other
Company employment agreements currently in effect shall have been assumed
by
Parent or otherwise continued by Company.
(vi) Escrow
Agreement. The
Stockholders’ Representative and Parent Representative (as defined in Article
VIII) shall have duly executed and delivered to Parent the Escrow
Agreement.
(vii) Resignations.
All
current officers and directors of Company shall have executed and delivered
to
Parent their resignations unless it is contemplated pursuant to the
terms of
this Agreement that such officer or director shall continued in office
following
the Closing.
(viii) FIRPTA.
Company
shall have delivered to Parent a properly executed FIRPTA Notification
Letter,
in form and substance reasonably acceptable to Parent, which states
that shares
of Company Capital Stock do not constitute “United States real property
interests” under Section 897(c) of the Code, for purposes of satisfying Parent’s
obligations under Treasury Regulation Section 1.1445-2(c)(3). In addition,
simultaneously with delivery of such Notification Letter, Company shall
have
provided to Parent, as agent for Company, a form of notice to the Internal
Revenue Service in accordance with the requirements of Treasury Regulation
Section 1.897-2(h)(2) and in form and substance reasonably acceptable
to Parent,
along with written authorization for Parent to deliver such notice
form to the
Internal Revenue Service on behalf of Company upon the Closing.
-63-
(ix) Third
Party Consents.
Company
shall have obtained all necessary consents from third parties, including,
without limitation, the Necessary Consents.
(x) Instruments
and Possessions.
In
order to effect the Merger, Company shall have executed and/or delivered
to
Parent:
(A) all
Books
and Records of Company;
(B) such
keys, lock and safe combinations and other similar items as Parent
shall
require, to obtain, full occupation, possession and control of Company’s
facilities;
(C) such
changes relating to the bank accounts and safe deposit boxes of Company
as are
being transferred to the Surviving Corporation;
(D) such
other certificates, documents, instruments and agreements as Parent
shall deem
necessary in its reasonable discretion in order to effectuate the Merger
and the
other transactions contemplated herein, in form and substance reasonably
satisfactory to Parent.
6.3. Additional
Conditions to Obligations of Company.
The
obligations of Company to effect the Merger are subject to the satisfaction
or
waiver by Company, on or prior to the Closing Date, of the following
additional
conditions:
(a) Representations
and Warranties. The
representations and warranties of Parent and Merger Sub shall be true
and
correct as of the date of this Agreement and as of the Closing Date
as though
made on and as of the Closing Date (except to the extent that such
representations and warranties speak as of another date), other than
such
failures to be true and correct that would not reasonably be expected
to have,
individually or in the aggregate, a Material Adverse Effect on Parent
or Merger
Sub. Company shall have received a certificate of the chief executive
officer
and the chief financial officer of Parent to such effect.
(b) Performance
of Obligations of Parent and Merger Sub. Parent
and Merger Sub shall have performed or complied in all material respects
with
all agreements and covenants required to be performed by them under
this
Agreement at or prior to the Closing Date. Company shall have received
a
certificate of the chief executive officer and the chief financial
officer of
Parent to such effect.
(c) Required
Governmental Consents. The
Necessary Consents shall have been obtained and shall be in full force
and
effect, and the Necessary Consents shall not, individually or in the
aggregate,
impose any Burdensome Term or Condition.
-64-
(d) No
Proceedings. There
shall not be pending or threatened any suit, litigation, action or
other
proceeding relating to the transactions contemplated by this Agreement
except as
disclosed to Company.
(e) No
Material Adverse Change.
At any
time on or after the date of this Agreement there shall not have occurred
any
change, circumstance or event that, individually or in the aggregate,
has had or
would reasonably be expected to have a Material Adverse Effect on
Parent.
(f) Third
Party Consents.
Parent
shall have obtained all necessary consents from third parties including,
without
limitation, the Necessary Consents.
(g) Parent
Charter Amendment; Board of Directors. The
Parent Charter shall have been amended to provide for the structure
and election
of the Board of Directors as provided herein (including as set forth
in Section
4.1(ii)) and all necessary actions on the part of Parent shall have
been taken
to elect the new slate of directors to the Board of Directors of Parent
as of
the Effective Time.
(h) AMEX
Listing. Parent
shall have caused the shares of Stock Consideration to be issued in
the Merger
to be approved for listing on the AMEX, subject to official notice
of issuance,
prior to the Effective Time.
(i) Tax
Consequences. For
U.S.
federal income tax purposes, the Merger shall be treated as a reorganization
within the meaning of Sections 368(a)(1)(A) and 368(a)(2)(E) of the
Code.
(j) Deliverables.
(i) Parent
Officer’s Certificate.
At the
Closing, Company shall have received a duly executed certificate on
behalf of
Parent by an authorized officer to the effect set forth in Sections
6.3(a) and
6.3(b).
(ii) Parent
Secretary Certificate.
At the
Closing, Company shall have received a duly executed certificate from
the
Secretary of Parent and Merger Sub with respect to: (a) the certificate
of
incorporation, as certified by the Secretary of State of Delaware as
of a recent
date, and bylaws of such entities, (b) resolutions of the board of
directors of
such entities with respect to the authorizations of this Agreement
and the other
agreements contemplated hereby, (c) a certificate of existence and
good standing
of such entities as of a recent date from the Secretary of State of
Delaware and
(d) the incumbency of the executing officers of such entities.
(iii) Employment
Agreements.
Parent
shall have (a) duly executed and delivered to David Wright an employment
agreement in form and substance mutually acceptable to such parties
and (b) all
other Company employment agreements currently in effect shall have
been assumed
by Parent or otherwise continued by Company.
-65-
(iv) Note
Exchange Agreement. Parent
shall have entered into a Note Exchange Agreement in substantially
the form of
Exhibit E (the“Note
Exchange Agreement”)
with
each of the holders of PharmAthene Notes or with the Stockholders’
Representative on their behalf.
(v) 8%
Convertible Notes.
The 8%
Convertible Notes, in substantially the form attached hereto as Exhibit
A, shall
have been duly executed and delivered to the holders of the PharmAthene
Notes
pursuant to such Note Exchange Agreement.
(vi) Legal
Opinion.
Company
and its stockholders shall have been furnished with the favorable opinion
of
Ellenoff Grossman & Schole LLP, counsel to the Parent, dated as of the
Closing Date, in form and substance reasonably acceptable to
Company.
(vii) Registration
Rights Agreement with respect to Parent Common Stock.
Parent
shall have entered into a Registration Rights Agreement in substantially
the
form of Exhibit D (the“Registration
Rights Agreement”)
with
each of Company’s stockholders receiving Parent Common Stock and the holders of
the 8% Convertible Notes or the Stockholders’ Representative on their
behalf.
(viii) Instruments
and Possessions.
In
order to effect the Merger, Parent and Merger Sub shall have executed
and/or
delivered to Company such other certificates, documents, instruments
and
agreements as Parent shall deem necessary in its reasonable discretion
in order
to effectuate the Merger and the other transactions contemplated herein,
in form
and substance reasonably satisfactory to Company.
ARTICLE
VII
TERMINATION
AND AMENDMENT
7.1. Termination.
This
Agreement may be terminated and the Merger contemplated hereby may
be abandoned
at any time prior to the Effective Time:
(a) By
mutual
written consent of Parent, Merger Sub and Company;
(b) By
Parent
or Company, if (i) the Merger shall not have been consummated on or
before
August 3, 2007;
provided, however,
that the
right to terminate this Agreement pursuant to this Section 7.1(b)(i)
shall not
be available to any party if such party’s action or failure to act has been the
principal cause of or resulted in the failure of the Merger to be consummated
on
or before such date; if (ii) any permanent injunction or other order
of a court
or other competent authority preventing the consummation of the Merger
shall
have become final and nonappealable; or, (iii) during any 15-day trading
period
following the execution of this Agreement and before the Effective
Time, the
average trading price of the publicly-traded warrants of the Parent
is below
$0.20 per warrant.
-66-
(c) By
Company, if (i) prior to the Closing Date there shall have been a material
breach of any representation, warranty, covenant or agreement on the
part of
Parent or Merger Sub contained in this Agreement or any representation
or
warranty of Parent or Merger Sub shall have become untrue after the
date of this
Agreement, which breach or untrue representation or warranty (A) would,
individually or in the aggregate with all other such breaches and untrue
representations and warranties, give rise to the failure of a condition
and (B)
is incapable of being cured prior to the Closing Date by Parent or
is not cured
within thirty (30) days of notice of such breach, (ii) any of the conditions
set
forth in Sections 6.1 (other than 6.1(c) which shall not be grounds
for
termination by Company) or 6.3 shall have become incapable of fulfillment;
(iii)
Parent has not filed its preliminary Proxy Statement with the SEC by
February
14, 2007 through no fault of Company or such Proxy Statement has not
been
approved by the SEC by July 10, 2007; (iv) Parent has not held its
Parent
Stockholders Meeting to approve the Merger within thirty-five (35)
days of
approval of the Proxy Statement by the SEC; (v) Parent’s Board of Directors has
withdrawn or changed its recommendation to its stockholders regarding
the
Merger; or (vi) more than 19.99% of the holders of the IPO Shares entitled
to
vote on the Merger elect to convert their IPO Shares into cash from
the Trust
Fund.
(d) By
Parent, if (i) prior to the Closing Date there shall have been a material
breach
of any representation, warranty, covenant or agreement on the part
of Company
contained in this Agreement or any representation or warranty of Company
shall
have become untrue after the date of this Agreement, which breach or
untrue
representation or warranty (A) would, individually or in the aggregate
with all
other such breaches and untrue representations and warranties, give
rise to the
failure of a condition and (B) is incapable of being cured prior to
the Closing
Date by Company or is not cured within thirty (30) days of notice of
such
breach; (ii) any of the conditions set forth in Sections 6.1 (other
than 6.1(c)
which shall not be grounds for termination by Parent) or 6.2 shall
have become
incapable of fulfillment; (iii) the Necessary Consents, individually
or in the
aggregate contain any Burdensome Terms or Conditions which have a Material
Adverse Effect on Company or Parent.
7.2. Effect
of Termination.
(a) In
the
event of the termination of this Agreement pursuant to Section 7.1,
the
obligations of the parties under this Agreement shall terminate and
there shall
be no liability on the part of any party hereto, except for the obligations
in
the confidentiality provisions hereof, and all of the provisions of
this Section
7.2, Section 7.3, Section 7.4 and Section 9.11;
provided, however,
that no
party hereto shall be relieved or released from any liabilities or
damages
arising out of its willful breach of any provision of this
Agreement.
(b) In
the
event that this Agreement is terminated by Parent pursuant to Section
7.1(d)(i)
and 7.1(d)(ii)(and, in the case of the failure to fulfill conditions,
such
failure is within Company’s control which shall be deemed to include a failure
of the Company, its stockholders or holders of PharmAthene Notes to
agree upon
the terms of any re-allocation of the Merger Consideration which may
be made
necessary as a result of a Company Subsequent Issuance or an issuance
in
connection with any financing transaction with General Electric Capital
Corp.),
then Company shall be obligated to pay to Parent, within five (5) business
days
of such termination, the sum of $250,000 (the “Termination
Fee”)
in
cash.
-67-
(c) In
the
event that this Agreement is terminated by Company pursuant to Section
7.1(c)(i)
through (v)(and, in the case of the failure to fulfill conditions,
such failure
is within Parent’s control), then Parent shall be obligated to pay to Company,
within five (5) business days of such termination, the Termination
Fee, in cash,
or such lesser amount (in the event that Parent does not have $250,000
in
available funds outside of the Trust Fund) as shall equal all remaining
available funds of Parent which are not a part of the Trust Fund.
7.3. Trust
Fund Waiver.
Reference is made to the final prospectus of Parent, dated July 28,
2005 (the
“Prospectus”),
Company understands that, except for a portion of the interest earned
on the
amounts held in the Trust Fund, Parent may disburse monies from the
Trust Fund
only: (a) to its public stockholders in the event of the redemption
of their
shares or the dissolution and liquidation of Parent, (b) to Parent
and Maxim
Group LLC (with respect to Maxim Group LLC’s deferred underwriting compensation
only) after Parent consummates a business combination (as described
in the
Prospectus) or (c) as consideration to the sellers of a target business
with
which Parent completes a business combination.
Company
agrees that, notwithstanding any other provision contained in this
Agreement
(including the termination provisions of this Article VII), Company
does not now
have, and shall not at any time prior to the Closing have, any claim
to, or make
any claim against, the Trust Fund, regardless of whether such claim
arises as a
result of, in connection with or relating in any way to, the business
relationship between Company, on the one hand, and Parent, on the other
hand,
this Agreement, or any other agreement or any other matter, and regardless
of
whether such claim arises based on contract, tort, equity or any other
theory of
legal liability (any and all such claims are collectively referred
to in this
Section 7.3 as the “Claims”).
Notwithstanding any other provision contained in this Agreement, Company
hereby
irrevocably waives any Claim they may have, now or in the future (in
each case,
however, prior to the consummation of a business combination), and
will not seek
recourse against, the Trust Fund for any reason whatsoever in respect
thereof.
In the event that Company commences any action or proceeding based
upon, in
connection with, relating to or arising out of any matter relating
to Parent,
which proceeding seeks, in whole or in part, relief against the Trust
Fund or
the public stockholders of Parent, whether in the form of money damages
or
injunctive relief, Parent shall be entitled to recover from Company
the
associated legal fees and costs in connection with any such action,
in the event
Parent prevails in such action or proceeding.
7.4. Fees
and Expenses.
Each
party shall bear its own expenses in connection with this Agreement
and the
transactions contemplated hereby, including any expenses incurred with
regard to
the Engagement Letter in the event that this Agreement is terminated;
in the
event that the Merger is consummated, all liabilities of Company shall
continue
as liabilities of Company as the Surviving Corporation and as a direct,
wholly-owned subsidiary of Parent.
-68-
ARTICLE
VIII
REMEDIES
FOR BREACH OF AGREEMENT
8.1. Survival
of Representations and Warranties.
All of
the representations and warranties of the parties contained in this
Agreement
shall survive the Closing hereunder (unless the non-breaching party
had received
from the breaching party written notice of any misrepresentation or
breach of
warranty prior to the time of Closing and expressly waived in writing
such
breach or misrepresentation) and continue in full force and effect
until a
period of twelve (12) months from the Closing Date (“Survival
Period”).
8.2. Indemnification
Provisions for Benefit of Parent.
In the
event that Company violates, misrepresents or breaches (or in the event
any
third party alleges facts that are ultimately proven or conceded to
represent a
Company violation, misrepresentation or breach) any of its representations,
warranties, and covenants contained herein including, without limitation,
the
covenants and agreements of Company and PA Management Team to provide
Company
Information contained in Section 4.1(b) hereof and, if there is an
applicable
Survival Period pursuant to Section 8.1 above, provided that the Parent
Representative makes a written claim for indemnification against Company
pursuant to Section 8.6 below within the Survival Period, then the
Indemnifying
Stockholders (as defined in Article X) agree to indemnify Parent from
and
against the entirety of any Adverse Consequences (as defined in Article
X) that
Parent may suffer through and after the date of the claim for indemnification
(including any Adverse Consequences Parent may suffer after the end
of any
applicable Survival Period) resulting from, arising out of, relating
to, in the
nature of, or caused by the violation, misrepresentation or breach.
Any
liability incurred by the Indemnifying Stockholders pursuant to the
terms of
this Article VIII shall be limited to, and paid by, the Indemnifying
Stockholders to Parent by return for cancellation of the Escrow Shares
in
accordance with Section 8.6 hereof which shall represent the sole and
exclusive
source for payment of any indemnification obligations of the Indemnifying
Stockholders. All determinations relating to the submission of claims
for the
benefit of Parent hereunder shall be determined, in good faith, solely
by the
nominees of Parent to the Board of Directors.
Notwithstanding Company’s disclosure in Item 2 of Section 2.3(h)(i) of the
Company Disclosure Schedule (the “Section
2.3(h) disclosure”),
Parent
shall have the right to indemnification under this Article VIII, subject
to all
of the terms and conditions of this Article VIII (including, without
limitation,
meeting the indemnification threshold set forth in Section 8.7 and
the
limitations set forth in Section 8.5), with respect to any Adverse
Consequences
suffered by Parent as a result of any claims relating to such Section
2.3(h)
disclosure which claims are not resolved prior to Closing. For the
avoidance of
doubt, the parties expressly acknowledge and agree that the resolution
of any
claims relating to the Section 2.3(h) disclosure occurring prior to
Closing
shall be within the sole discretion of Company and shall in no way
effect the
Merger Consideration or be applicable towards the indemnification threshold
or
otherwise be subject to indemnification.
8.3. Matters
Involving Third Parties.
(a) If
any
third party shall notify any party (the “Indemnified
Party”)
with
respect to any matter (a “Third
Party Claim”)
which
may give rise to a claim for indemnification against any other party
(the
“Indemnifying
Party”)
under
this Article VIII, then the Indemnified Party shall promptly (and in
any event
within ten (10) business days after receiving notice of the Third Party
Claim)
notify each Indemnifying Party and the Escrow Agent thereof in writing
(an
“Indemnification
Notice”);
provided, however, that no delay on the part of the Indemnified Party
in
notifying any Indemnifying Party shall relieve the Indemnifying Party
from any
obligation hereunder unless (and then solely to the extent) the Indemnifying
Party thereby is prejudiced.
-69-
(b) Any
Indemnifying Party will have the right to defend the Indemnified Party
against
the Third Party Claim with counsel of its choice reasonably satisfactory
to the
Indemnified Party so long as (i) the Indemnifying Party notifies the
Indemnified
Party in writing within thirty (30) business days (or earlier in the
event the
underlying Third Party claim requires action) after the Indemnified
Party has
given notice of the Third Party Claim that the Indemnifying Party will
indemnify
the Indemnified Party from and against the entirety of any Adverse
Consequences
the Indemnified Party may suffer resulting from, arising out of, relating
to, in
the nature of, or caused by the Third Party Claim, (ii) the Indemnifying
Party
provides the Indemnified Party with evidence reasonably acceptable
to the
Indemnified Party that the Indemnifying Party will have the financial
resources
to defend against the Third Party Claim and fulfill its indemnification
obligations hereunder, (iii) the Third Party Claim involves only money
damages
and does not seek an injunction or other equitable relief, (iv) settlement
of,
or an adverse judgment with respect to, the Third Party Claim is not,
in the
good faith judgment of the Indemnified Party, likely to establish a
precedent or
practice materially adverse to the continuing business interests of
the
Indemnified Party, and (v) the Indemnifying Party conducts the defense
of the
Third Party Claim actively and diligently.
(c) So
long
as the Indemnifying Party is conducting the defense of the Third Party
Claim in
accordance with Section 8.3(b) above, (i) the Indemnified Party may
retain
separate co-counsel at its sole cost and expense and participate in
the defense
of the Third Party Claim, (ii) the Indemnified Party will not consent
to the
entry of any judgment or enter into any settlement with respect to
the Third
Party Claim without the prior written consent of the Indemnifying Party
(not to
be withheld unreasonably) and (iii) the Indemnifying Party will not
consent to
the entry of any judgment or enter into any settlement with respect
to the Third
Party Claim without the prior written consent of the Indemnified Party
(not to
be withheld unreasonably).
(d) In
the
event that any of the conditions in Section 8.3(b) above fail to be
complied
with, however, (i) the Indemnified Party may defend against, and consent
to the
entry of any judgment or enter into any settlement with respect to,
the Third
Party Claim in any manner it reasonably may deem appropriate (and the
Indemnified Party need not consult with, or obtain any consent from,
any
Indemnifying Party in connection therewith), (ii) the Indemnifying
Parties will
reimburse the Indemnified Party promptly and periodically for the costs
of
defending against the Third Party Claim (including reasonable attorneys’ fees
and expenses), and (iii) the Indemnifying Parties will remain responsible
for
any Adverse Consequences the Indemnified Party may suffer resulting
from,
arising out of, relating to, in the nature of, or caused by the Third
Party
Claim to the fullest extent provided in this Article VIII.
-70-
(e) Notwithstanding
anything to the contrary contained in this Article VIII, Parent, Company
and
Merger Sub shall not settle and pay any Third Party Claim unless and
until
Parent shall have obtained the prior written consent of the Stockholders’
Representative to such settlement which consent the Stockholders’ Representative
shall not unreasonably withhold or delay.
8.4. Determination
of Adverse Consequences.
All
claims for indemnification payments under this Article VIII shall be
made in
good faith and although a claim may be made hereunder, no payments
shall be made
for the benefit of the Indemnified Party until the Indemnified Party
has
incurred actual out-of pocket expenses. In the event that Parent has
made a
claim for indemnification prior to the termination of any applicable
Survival
Period, no Escrow Shares held in escrow pursuant to this Article VIII
and the
Escrow Agreement shall be released from the escrow until such time
as the claim
has been resolved unless the Survival Period shall have expired after
the making
of such claim but before such claim is fully resolved, in which case
the Escrow
Shares in excess of the Fair Market Value of the amount of Adverse
Consequence
shall be released from Escrow.
8.5. Escrow
of Shares by Indemnifying Stockholders.
As the
sole and exclusive source for the payment of the indemnification obligations
of
the Indemnifying Stockholders under this Article VIII, Company and
the
Indemnifying Stockholders hereby authorize Parent to withhold, from
the delivery
of the Stock Consideration otherwise deliverable to the Indemnifying
Stockholders as part of the Merger Consideration, for delivery into
escrow,
pursuant to the Escrow Agreement, 1,375,000 shares of Parent Common
Stock which
shall be allocated among the Indemnifying Stockholders in accordance
with the
relative proportions established by the Allocation Agreement as provided
to
Parent in a certificate executed and delivered by Company at Closing
(the
“Company
Closing Certificate”).
(a) Escrow
Shares.
The
Escrow Shares shall be withheld from delivery to the Indemnifying Stockholders
and segregated from shares issuable upon the exercise of Company Options
and
Company Warrants at Closing and placed in escrow pursuant to the terms
of the
Escrow Agreement. The Escrow Shares shall be registered in the name of each
Indemnifying Stockholder in the amounts set forth on the Company Closing
Certificate, and shall be held by Continental Stock Transfer & Trust Company
(the “Escrow
Agent”),
and
shall constitute the escrow fund (the “Escrow
Fund”)
governed by the terms of the Escrow Agreement. In the event that Parent
issues
any additional shares of Parent Common Stock to the Indemnifying Stockholders
for any reason, such additional shares shall be issued in the name
of such
Indemnifying Stockholders as applicable and shall not be subject to
escrow. Once
released from the Escrow Fund, shares of Parent Common Stock shall
cease to be
Escrow Shares.
(b) Payment
of Dividends; Voting. Any
cash
dividends, dividends payable in securities, or other distributions
of any kind
made in respect of the Escrow Shares will be delivered promptly to
the
Indemnifying Stockholders. The Indemnifying Stockholders (other than
the holders
of Company Options and Company Warrants) shall be entitled to vote
the Escrow
Shares on any matters to come before the stockholders of Parent, with
each
Indemnifying Stockholder being entitled to direct the voting of its
or his
Escrow Shares listed on the Company Closing Certificate.
-71-
(c) Distribution
of Escrow Shares. At
the
times provided for in Section 8.5(e), the Escrow Shares shall be released
to the
Indemnifying Stockholders (and to Parent on behalf of holders of Company
Options
and Company Warrants) in accordance with the Company Closing Certificate
unless
the Stockholders’ Representative shall have instructed the Escrow Agent
otherwise in writing, in which case the Escrow Agent and the Parent
shall be
entitled to rely upon such instructions. Parent will take such action
as may be
necessary to cause such certificates to be issued in the names of the
appropriate persons. Certificates representing Escrow Shares so issued
that are
subject to resale restrictions under applicable securities laws will
bear a
legend to that effect. No fractional shares shall be released and delivered
from
the Escrow Fund to the Indemnifying Stockholders and all fractional
shares shall
be rounded to the nearest whole share.
(d) Assignability.
No
Escrow Shares or any beneficial interest therein may be pledged, sold,
assigned
or transferred, including by operation of law, by any Indemnifying
Stockholders
or be taken or reached by any legal or equitable process in satisfaction
of any
debt or other liability of any such stockholder, prior to the delivery
to such
Indemnifying Stockholders of its or his pro rata portion of the Escrow
Fund by
the Escrow Agent as provided herein.
(e) Release
from Escrow Fund.
Within
five (5) business days following expiration of the Survival Period
(the
“Release
Date”),
the
Escrow Shares will be released from the Escrow Fund to the Indemnifying
Stockholders less
the
number of Escrow Shares, if any, with a Fair Market Value equal to
the amount of
Adverse Consequences set forth in any Indemnification Notice from Parent
with
respect to any pending but unresolved claim for indemnification. Prior
to the
Release Date, the Parent Representative and the Stockholder Representative
shall
issue to the Escrow Agent a certificate executed by each of them instructing
the
Escrow Agent to release such number of Escrow Shares determined in
accordance
with this Section 8.5(e). Any Escrow Shares retained in the Escrow
Fund as a
result of the immediately preceding sentence shall be released to the
Indemnifying Stockholders or Parent, as appropriate, promptly upon
resolution of
the related claim for indemnification in accordance with the provisions
of this
Article VIII. For purposes of this Article VIII, the “Fair
Market Value”
shall
be the average reported last sales price for the ten (10) trading days
ending on
the last day prior to the date that the claim for indemnification is
publicly
disclosed (or if there is no public disclosure, the date on which the
Indemnification Notice is received) and the ten (10) trading days after
such
date; provided, however, the Stockholders’ Representative and the Parent
Representative acting together shall have the right to assign a different
value
to the Escrow Shares in order to settle or pay any Third Party Claim
in the
event the third party claimant is willing to accept the Escrow Shares
in full or
partial settlement therefor.
(f) Stockholders’
Representative and Parent Representative.
(i) MPM
BioVentures III-QP, L.P. is hereby constituted and appointed jointly
as the
Stockholders’ Representative for and on behalf of the Indemnifying Stockholders
to give and receive notices and communications, to authorize delivery
to Parent
of shares of Parent Common Stock from the Escrow Fund in satisfaction
of
indemnification claims by Parent, to object to such deliveries, negotiate,
enter
into settlements and compromises of, and comply with orders of courts
with
respect to such claims (including Third Party Claims), and to take
all actions
necessary or appropriate in the judgment of the Stockholders’ Representative for
the accomplishment of the foregoing. Such agency may be changed by
from time to
time upon not less than ten (10) days’ prior written notice, executed by the
Stockholders’ Representative, to the Parent Representative. No bond shall be
required of the Stockholders’ Representative, and the Stockholders’
Representative shall receive no compensation for his services. Notices
or
communications to or from the Stockholders’ Representative shall constitute
notice to or from Company and each of the Indemnifying
Stockholders.
-72-
(ii) The
Stockholders’ Representative shall not be liable for any act done or omitted
hereunder as Stockholders’ Representative while acting in good faith and any act
done or omitted pursuant to the advice of counsel shall be conclusive
evidence
of such good faith. The Indemnifying Stockholders shall severally indemnify
the
Stockholders’ Representative and hold him harmless against any loss, liability,
or expense (including legal and accounting fees) incurred without gross
negligence or bad faith on the part of the Stockholders’ Representative and
arising out of or in connection with the acceptance or administration
of his
duties hereunder.
(iii) A
decision, act, consent or instruction of the Stockholders’ Representative shall
constitute a decision of all Indemnifying Stockholders for whom Escrow
Shares
otherwise issuable to them are deposited in escrow and shall be final,
binding,
and conclusive upon each such Indemnifying Stockholder, and Parent
may rely upon
any decision, act, consent, or instruction of the Stockholders’ Representative
as being the decision, act, consent or instruction of each and every
such
Indemnifying Stockholder. The Stockholders’ Representative shall have the right
to consent to the use of the Escrow Shares to settle any claims made
hereunder.
For purposes of clarification, in connection with the settlement or
payment of
any claims for indemnification hereunder, the “Fair
Market Value”
of
the
Escrow Shares as defined under this Article VIII, shall not be binding
upon the
Parent or Stockholders’ Representative if they mutually agree upon any value
other than Fair Market Value and shall also have the discretion to
mutually
agree to use the Escrow Shares to settle or pay any Third Party
Claims.
(iv) John
Pappajohn is hereby constituted and appointed jointly as the Parent
Representative for and on behalf of the Parent to give and receive
notices and
communications, to negotiate, enter into settlements and compromises
of, and
comply with orders of courts with respect to such claims (including
Third Party
Claims), and to take all actions necessary or appropriate in the judgment
of the
Parent Representative for the accomplishment of the foregoing. Such
agency may
be changed by from time to time upon not less than ten (10) days’ prior written
notice, executed by the Parent Representative, to the Stockholders’
Representative. No bond shall be required of the Parent Representative,
and the
Parent Representative shall receive no compensation for his services.
Notices or
communications to or from the Parent Representative shall constitute
notice to
or from Parent.
-73-
(v) The
Parent Representative shall not be liable for any act done or omitted
hereunder
while acting in good faith and any act done or omitted pursuant to
the advice of
counsel shall be conclusive evidence of such good faith. The Parent
shall
indemnify the Parent Representative and hold him harmless against any
loss,
liability, or expense incurred without gross negligence or bad faith
on the part
of the Parent Representative and arising out of or in connection with
the
acceptance or administration of his duties hereunder.
(vi) A
decision, act, consent or instruction of the Parent Representative
shall
constitute a decision of Parent under this Article VIII and shall be
final,
binding, and conclusive upon Parent. The Stockholders’ Representative and the
Indemnifying Stockholders may rely upon any decision, act, consent,
or
instruction of the Parent Representative as being the decision, act,
consent or
instruction of the Parent. The Parent Representative shall have the
right to
consent to the use of the Escrow Shares to settle any claim for which
Parent is
entitled to indemnification under this Article VIII. For purposes of
clarification, in connection with the settlement or payment of any
claims for
indemnification hereunder, the “Fair
Market Value”
of
the
Escrow Shares as defined under this Article VIII, shall not be binding
upon the
Parent Representative or Stockholders’ Representative if they mutually agree
upon any value other than Fair Market Value and shall also have the
discretion
to mutually agree to use the Escrow Shares to settle or pay any Third
Party
Claims.
8.6. Determination/Resolution
of Claims.
(a) If
an
Indemnified Party wishes to make a claim for indemnification against
an
Indemnifying Party, such Indemnified Party shall deliver the Indemnification
Notice to the Indemnifying Party and to the Escrow Agent on or before
the
expiration of the Survival Period. Such Indemnification Notice shall
contain the
amount of Adverse Consequences for which the Indemnified Party is seeking
indemnification and shall set forth the reasons therefore in reasonable
detail.
(b) If
Parent
asserts a claim upon the Escrow Fund by delivering an Indemnification
Notice to
the Stockholders’ Representative and the Escrow Agent on or before the end of
the Survival Period, the Escrow Agent shall retain in the Escrow Fund
such
number of shares of Parent Common Stock as shall be determined in accordance
with Section 8.5(e) above.
-74-
(c) Unless
the Stockholders’ Representative shall notify Parent in writing within thirty
(30) days after receipt of an Indemnification Notice that the Stockholders’
Representative objects to any claim for indemnification set forth therein,
which
notice shall include a reasonable explanation of the basis for such
objection,
then such indemnification claim shall be deemed to be accepted by the
Stockholders’ Representative and the parties shall issue to the Escrow Agent a
certificate executed by the Parent Representative and the Stockholders’
Representative indicating what number of Escrow Shares are to be released
to
Parent. If the Stockholders’ Representative shall timely notify Parent in
writing that it objects to any claim for indemnification made in such
an
Indemnification Notice, Parent shall have fifteen (15) days from receipt
of such
notice to respond in a written statement to such objection. If after
thirty (30)
days following receipt of Parent’s written statement, there remains a dispute as
to any indemnification claims set forth in the Indemnification Notice,
the
Stockholders’ Representative and the Parent Representative shall attempt in good
faith for sixty (60) days to agree upon the rights of the respective
parties
with respect to each of such claims. If the Stockholders’ Representative and the
Parent Representative should so agree, a memorandum setting forth such
agreement
shall be prepared and signed by both parties. Based upon the memorandum,
the
parties shall issue to the Escrow Agent a certificate executed by the
Parent
Representative and the Stockholders’ Representative indicating what number of
Escrow Shares are to be released to Parent. The Escrow Agent shall
be entitled
to rely on any such certificate and disburse Escrow Shares from the
Escrow Fund
in accordance with the terms thereof.
(d) If
the
Stockholders’ Representative and the Parent Representative cannot resolve a
dispute during the sixty-day period (or such longer period as the parties
may
agree to in writing), then such dispute shall be submitted (and either
party may
submit such dispute) for arbitration before a single arbitrator in
Wilmington,
Delaware, in accordance with the commercial arbitration rules of the
American
Arbitration Association then in effect. The Stockholders’ Representative and the
Parent Representative shall attempt to agree upon an arbitrator. In
the event
that the Stockholders’ Representative and the Parent Representative are unable
to agree upon an arbitrator within ten (10) days after the date on
which the
disputed matter may, under this Agreement, be submitted to arbitration,
then
either the Stockholders’ Representative or the Parent Representative, upon
written notice to the other, may apply for appointment of such arbitrator
by the
American Arbitration Association. Each party shall pay the fees and
expenses of
counsel used by it and 50% of the fees and expenses of the arbitrator
and of the
other expenses associated with the arbitration. The arbitrator shall
render his
decision within ninety (90) days after his appointment, such decision
shall be
in writing and shall be final and conclusive on the parties. The decision
shall
be submitted to the Escrow Agent which shall act in accordance
therewith.
8.7. Indemnification
Threshold.
Notwithstanding anything to the contrary contained herein, no Person
or Party
shall have any obligation to indemnify Parent or Company, as the case
may be,
from and against any Adverse Consequences caused proximately by the
breach of
any representation or warranty of Parent or Company hereunder, as the
case may
be, until Parent or Company, as the case may be, has suffered Adverse
Consequences by reason of all such breaches (or alleged breaches) in
excess of
$500,000 in the aggregate, with no single Adverse Consequence being
valued at
less than $50,000.
-75-
8.8. Other
Indemnification Provisions.
(a) Any
Indemnified Party seeking indemnification under this Article VIII shall
be
required to take all reasonable actions to mitigate the damages associated
with
the Adverse Consequences.
(b) Notwithstanding
any provision contained in this Agreement, no indemnification claim
shall be
maintained by any party for breach of representations or warranties
of the other
party if such claiming party had knowledge of the breach of the representations
and warranties on or before the Closing.
(c) No
recovery for indemnification shall include recovery for special, incidental,
punitive or consequential damages. All claims for indemnification shall
be
subject to reduction or offset for any tax benefits associated with
or insurance
proceeds applicable to the claim.
ARTICLE
IX
GENERAL
PROVISIONS
9.1. Survival.
The
agreements and covenants contained in this Agreement shall survive
the Closing
Date without limitation. The representations and warranties contained
in this
Agreement shall survive the Closing Date for a period of twelve (12)
months.
9.2. Notices.
All
notices and other communications hereunder shall be in writing and
shall be
deemed duly given (a) on the date of delivery if delivered personally,
or by
telecopy upon confirmation of receipt; (b) on the first Business Day
following
the date of dispatch if delivered by a recognized next-day courier
service; or
(c) on the third Business Day following the date of mailing if delivered
by
registered or certified mail, return receipt requested, postage prepaid.
All
notices hereunder shall be delivered as set forth below, or pursuant
to such
other instructions as may be designated in writing by the party to
receive such
notice:
if
to
Parent or Merger Sub, to:
Healthcare
Acquisition Corp.
666
Walnut Street, Suite 2116
Des
Moines, Iowa 50309
Attn:
Matthew P. Kinley
Phone:
(515) 244-5746
Fax:
with
a
copy to:
Ellenoff
Grossman & Schole LLP
370
Lexington Ave.
New
York,
New York 10017
Attn:
Barry I. Grossman, Esq.
Phone:
(212) 370-1300
Fax:
(212) 370-7889
-76-
if
to
Company or Stockholders, to
PharmAthene,
Inc.
175
Admiral Cochrane Drive, Suite #101
Annapolis,
MD 21401
Attn:
David P. Wright
President
& Chief Executive Officer
Phone:
(410) 571-8920
Fax:
(410) 571-8927
with
a
copy to:
McCarter
& English, LLP
Four
Gateway Center
100
Mulberry Street
Newark,
New Jersey 07102
Attn:
Jeffrey A. Baumel, Esq.
Phone:
(973) 639-5904
Fax:
(973) 624-7070
If
to
Stockholders’ Representative:
MPM
BioVentures
III-QP, LP
The
John
Hancock Tower
200
Clarendon Street
54th
Floor
Boston,
MA 02116
Attn:
Steven St. Peter, M.D.
Phone:
(617) 425-9200
Fax:
(617) 425-9201
If
to
Parent Representative:
John
Pappajohn
2116
Financial Center
Des
Moines, Iowa 50309
Phone:
Fax:
(515) 244-2346
9.3. Interpretation.
When a
reference is made in this Agreement to Sections, Exhibits or Schedules,
such
reference shall be to a Section of or Exhibit or Schedule to this Agreement
unless otherwise indicated. The headings contained in this Agreement
are for
reference purposes only and shall not affect in any way the meaning
or
interpretation of this Agreement. Whenever the words “include,” “includes” or
“including” are used in this Agreement, they shall be deemed to be followed by
the words “without limitation.” The parties have participated jointly in the
negotiating and drafting of this Agreement. In the event that an ambiguity
or a
question of intent or interpretation arises, this Agreement shall be
construed
as if drafted jointly by the parties, and no presumption or burden
of proof
shall arise favoring or disfavoring any party by virtue of the authorship
of any
provisions of this Agreement.
-77-
9.4. Counterparts.
This
Agreement may be executed in one or more counterparts, all of which
shall be
considered one and the same agreement and shall become effective when
one or
more counterparts have been signed by each of the parties and delivered
to the
other party, it being understood that both parties need not sign the
same
counterpart.
9.5. Entire
Agreement; No Third-Party Beneficiaries.
(a) This
Agreement, including the schedules hereto, and the Confidentiality
Agreement,
dated January 12, 2007 between Company and Parent, constitute the entire
agreement and supersede all prior agreements and understandings, both
written
and oral, among the parties with respect to the subject matter hereof
and
thereof.
(b) This
Agreement shall be binding upon and inure solely to the benefit of
each party
hereto, and nothing in this Agreement, express or implied, is intended
to or
shall confer upon any other Person any right, benefit or remedy of
any nature
whatsoever under or by reason of this Agreement.
9.6. Governing
Law; Waiver of Jury Trial.
(a) This
Agreement and the transactions contemplated hereby, and all disputes
between the
parties under or related to this Agreement or the facts and circumstances
leading to its execution, whether in contract, tort or otherwise, shall
be
governed by and construed in accordance with the internal laws of the
State of
Delaware, applicable to contracts executed in and to be performed entirely
within the State of Delaware.
(b) EACH
PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS
AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE
EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT
SUCH
PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY
OR
INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE TRANSACTIONS
CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES
THAT (i)
NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED,
EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT
OF
LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS
AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY
MAKES THIS
WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO
THIS
AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS
IN THIS
SECTION 9.6.
-78-
9.7. Severability.
The
provisions of this Agreement shall be deemed severable and the invalidity
or
unenforceability of any provision shall not affect the validity or
enforceability or the other provisions hereof. If any provision of
this
Agreement, or the application thereof to any person or any circumstance,
is
invalid or unenforceable, (a) a suitable and equitable provision shall
be
substituted therefor in order to carry out, so far as may be valid
and
enforceable, the intent and purpose of such invalid or unenforceable
provision
and (b) the remainder of this Agreement and the application of such
provision to
other persons or circumstances shall not be affected by such invalidity
or
unenforceability, nor shall such invalidity or unenforceability affect
the
validity or enforceability of such provision, or the application thereof,
in any
other jurisdiction.
9.8. Amendment.
This
Agreement may not be amended except by an instrument in writing signed
on behalf
of each of the parties hereto.
9.9. Extension;
Waiver.
At any
time prior to the Effective Time, the parties hereto, by action taken
or
authorized by their respective Boards of Directors, may, to the extent
legally
allowed, (i) extend the time for the performance of any of the obligations
or
other acts of the other parties hereto, (ii) waive any inaccuracies
in the
representations and warranties contained herein or in any document
delivered
pursuant hereto or (iii) waive compliance with any of the agreements
or
conditions contained herein. Any agreement on the part of a party hereto
to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of the party against which such waiver
or extension
is to be enforced. The failure of any party to this Agreement to assert
any of
its rights under this Agreement or otherwise shall not constitute a
waiver of
those rights.
9.10. Assignment.
Neither
this Agreement nor any of the rights, interests or obligations hereunder
shall
be assigned by any of the parties hereto, in whole or in part (whether
by
operation of law or otherwise), without the prior written consent of
the other
parties, and any attempt to make any such assignment without such consent
shall
be null and void. This Agreement will be binding upon, inure to the
benefit of
and be enforceable by the parties and their respective successors and
assigns.
-79-
9.11. Submission
to Jurisdiction; Waivers.
(a) Each
of
Company, Parent and Merger Sub hereby irrevocably agrees that any legal
action
or proceeding with respect to this Agreement or for recognition and
enforcement
of any judgment in respect hereof brought by another party hereto or
its
successors or assigns shall be brought and determined exclusively in
any federal
or state court of competent jurisdiction located in the State of Delaware
and in
the courts hearing appeals therefrom. Each party hereto hereby irrevocably
waives, and agrees not to assert, by way of motion, as a defense, counterclaim
or otherwise, in any action or proceeding with respect to this Agreement,
any
claim that it is not personally subject to the jurisdiction of the
above-named
courts for any reason other than the failure to serve process in accordance
with
Section (b) below, that its property is exempt or immune from jurisdiction
of
any such court or from any legal process commenced in such courts (whether
through service of notice, attachment prior to judgment, attachment
in aid of
execution of judgment, execution of judgment or otherwise), and to
the fullest
extent permitted by applicable law, that the suit, action or proceeding
in any
such court is brought in an inconvenient forum, or that this Agreement,
or the
subject matter hereof, may not be enforced in or by such courts and
further
irrevocably waives, to the fullest extent permitted by applicable law,
the
benefit of any defense that would hinder, fetter or delay the levy,
execution or
collection of any amount to which the party is entitled pursuant to
the final
judgment of any court having jurisdiction. Each party irrevocably consents
to
the service of process out of any of the aforementioned courts in any
such
action or proceeding by the mailing of copies thereof by registered
airmail,
postage prepaid, to such party at its address set forth in this Agreement,
such
service of process to be effective upon acknowledgement of receipt
of such
registered mail. Nothing herein shall affect the right of any party
to serve
process in any other manner permitted by law or to commence legal proceedings
or
otherwise proceed against the other party in any other jurisdiction
in which the
other party in any other jurisdiction in which the other party may
be subject to
suit.
(b) Each
of
Company, Parent and Merger Sub hereby agrees that mailing of process
or other
papers in connection with any such action or proceeding in the manner
provided
in Section 9.2 or in such other manner as may be permitted by applicable
law
shall be valid and sufficient service thereof.
9.12. Enforcement;
Specific Performance.
The
parties agree that irreparable damage would occur in the event that
any of the
provisions of this Agreement were not performed in accordance with
their
specific terms. It is accordingly agreed that the parties shall be
entitled to
an injunction or injunctions to prevent breaches of this Agreement
and to
specific performance of the terms hereof, this being in addition to
any other
remedy to which they are entitled at law or in equity.
ARTICLE
X
DEFINITIONS
As
used
in this Agreement terms not otherwise defined herein:
(a) “8%
Convertible Notes”
means
the unsecured notes to be issued to certain noteholders of Company
as Note
Consideration in accordance with the Note Exchange Agreement which
shall mature
twenty four (24) months from the Effective Time, accrue interest at
8.00% per
annum, and be convertible into shares of Parent Common Stock at $10.00
per share
and be in substantially the form of Exhibit A attached hereto.
(b) “Adverse
Consequences”
means
all actions, suits, proceedings, hearings, investigations, charges,
complaints,
claims, demands, injunctions, judgments, orders, decrees, rulings,
damages,
dues, penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, Taxes, Liens, losses, expenses, and fees, including court
costs and
attorneys’ fees and expenses.
-80-
(c) “Alternative
Transaction”
means
any of the following events: (i) any tender or exchange offer, merger,
consolidation, share exchange, business combination, reorganization,
recapitalization, liquidation, dissolution or other similar transaction
involving Company (any of the above, a “Business
Combination Transaction”),
with
any Person other than Parent, Merger Sub or any affiliate (as such
term is
defined in Rule 12b-2 promulgated under the Exchange Act) thereof (a
“Third
Party”)
or
(ii) the acquisition by a Third Party of 10% or more of the outstanding
shares
of Company Common Stock, or of 10% or more of the assets or operations
of
Company, taken as a whole, in a single transaction or a series of related
transactions, provided,
however,
that
the following shall not be deemed Alternative Transactions: (x) the
issuance by
the Company of equity securities valued in the aggregate at no more
than $5
million (subject to the limitation that the securities of the Company
issued to
the purchasers thereof will not convert into more than 625,000 shares
of Parent
Common Stock in the Merger); and, (y) licensing transactions or other
strategic
alliances.
(d) “Board
of Directors”
means
the Board of Directors of any specified Person and any committees
thereof.
(e) “Business
Day”
means
any day on which banks are not required or authorized to close in the
City of
New York.
(f) “Code”
mans the U.S. Internal Revenue Code of 1986, as amended.
(g) “good
standing”
means,
when used with respect to the status of any entity domiciled or doing
business
in a particular state, that such entity has filed its most recent required
annual report and (i) if a domestic entity, has not filed articles
of
dissolution, and (ii) if a foreign entity, has not applied for a certificate
of
withdrawal and is not the subject of a proceeding to revoke its certificate
of
authority.
(h) “Indemnifying
Stockholders”
means
those holders of Company Capital Stock and outstanding Company Options
and
Company Warrants.
(i) “Knowledge”
or
any
phrase of similar import shall mean the actual knowledge after reasonable
investigation of any person holding the office or position, or fulfilling
the
function of a director or officer of Company.
(j) “Liability”
means
any liability (whether known or unknown, whether asserted or unasserted,
whether
absolute or contingent, whether accrued or unaccrued, whether liquidated
or
unliquidated, and whether due or to become due), including any liability
for
Taxes.
(k) “Liens”
means any
mortgage, deed of trust, security interest, pledge, lien, or other
charge or
encumbrance of any nature whatsoever except: (a) liens disclosed in
the Company
Financial Statements; (b) liens for taxes, assessments, or governmental
charges
or levies not yet due and delinquent; and (c) liens consisting of zoning
or
planning restrictions, easements, permits, any other restrictions or
limitations
on the use of real property or irregularities in title thereto which
do not
materially detract from the value of, or impair the use of, such property
by
Company, Parent or any of their respective subsidiaries).
-81-
(l) “Material
Adverse Effect”
with
respect to a party shall mean any change, effect, event, occurrence
or state of
facts which is, or is reasonably expected to be, materially adverse
to the
business, financial condition, results of operations or prospects of
such party
and its subsidiaries, taken as a whole, other than any change, effect,
event or
occurrence relating to (i) the economy or securities markets of the
United
States or any other region in general or (ii) this Agreement or the
transactions
contemplated hereby or the announcement thereof or otherwise as contemplated
by
this Agreement or disclosed hereunder.
(m) “Milestone
Payment” means
payments made to the stockholders of Company as part of the Merger
Consideration
equal to 10% of the actual collections on gross sales of Valortim to
the United
States federal government (or a department thereof) until the earlier
of (A)
December 31, 2009, or (B) total aggregate milestone payments to the
Stockholders
equal $10 million. These payments shall be conditioned upon receipt
by Company
of an award, procurement or other contract (x) on or before December
31, 2007;
(y) which provides for a procurement by the U.S. government (or a department
thereof) of doses or treatments equal to or greater than 60,000; and
(z) with a
total contract value of $150 million or more, and otherwise no Milestone
Payments shall be paid or due. Any Milestone Payments owed shall be
determined,
in arrears, by Parent within forty-five (45) days of the end of each
fiscal
quarter based on actual collections from the U.S. government (or a
department
thereof) of gross sales, and shall be paid within three (3) business
days of
such determination. Subject to the limitations set forth above, the
Stockholders
shall be entitled to Milestone Payments related to collections prior
to and
including December 31, 2009.
(n) “Note
Conversion Shares” means
the
shares of Parent Common Stock issuable upon conversion of the 8% Convertible
Notes.
(o) “the
other party”
means,
with respect to Company, Parent and means, with respect to Parent,
Company
(p) “PA
Management Team”
means
and refers to those persons identified on Schedule X(o).
(q) “Parent
Representative” means
John Pappajohn.
(r) “Permitted
Liens”
means
(i) any liens for Taxes not yet due or which are being contested in
good faith
by appropriate proceedings; (ii) carriers’, warehousemen’s, mechanics’,
materialmen’s, repairmen’s or other similar liens; (iii) pledges or deposits in
connection with workers’ compensation, unemployment insurance, and other social
security legislation; and (iv) easements, rights-of-way, restrictions
and other
similar encumbrances incurred in the ordinary course of business which,
in the
aggregate, are not substantial in amount and which do not in any case
materially
detract from the value of the property subject thereto.
-82-
(s) “Requisite
Majority”
means
(i) with respect to the Company Common Stock, the vote of the holders
of 80% of
the issued and outstanding shares of Common Stock and (ii) with respect
to the
Company Preferred Stock, the vote of holders of at least 66.66% of
each
outstanding series acting separately.
(t) “SEC”
means
the Securities and Exchange Commission.
(u) “Valortim”
means a high affinity, fully
human monoclonal antibody to bacillus
anthracis
protective antigen (PA) which fights the invading organism. It is designed
to
target and bind to PA cells and protect healthy human cells from infiltration
by
the certain toxins produced by the anthrax bacteria.
-83-
IN
WITNESS WHEREOF, Parent, Merger Sub and Company have caused this Agreement
to be
signed by their respective officers thereunto duly authorized, all
as of the
date first written above.
|
HEALTHCARE
ACQUISITION CORP.
|
||
|
By:
|
/s/ John Pappajohn | |
|
Name:
|
John Pappajohn | |
|
Title:
|
Chairman | |
|
PAI
ACQUISITION CORP.
|
||
|
By:
|
/s/ John Pappajohn | |
|
Name:
|
John Pappajohn | |
|
Title:
|
Chairman | |
|
PHARMATHENE,
INC.
|
||
|
By:
|
/s/ David P. Wright | |
|
|
Name:
David P. Wright
|
|
|
|
Title:
President and Chief Executive Officer
|
|
|
Soley
as to Article VIII and Article IX:
|
||
|
John
Pappajohn, as Parent Representative
|
||
| /s/ John Pappajohn | ||
|
Soley
as to Article VIII and Article IX:
|
||
|
MPM
BioVentures III-QP, L.P., as Stockholder
Representative
|
||
|
By:
|
/s/ Ansbert Gadicke | |
|
Name:
|
Ansbert Gadicke | |
|
Title:
|
Stockholder Representative | |
-84-
ANNEX
B
AMENDED
AND RESTATED
CERTIFICATE
OF INCORPORATION
OF
HEALTHCARE
ACQUISITION CORP.
ADOPTED
IN ACCORDANCE WITH SECTION 242 AND 245
OF
THE DELAWARE GENERAL CORPORATION LAW
*
* * * *
* * * * * * * * * *
Healthcare
Acquisition Corp., a Delaware corporation (the “Corporation”) does hereby
certify that:
FIRST:
The name of the corporation is Healthcare Acquisition Corp. The date
of filing
of the original Certificate of Incorporation with the Delaware Secretary
of
State was April 25, 2005; an Amended and Restated Certificate of
Incorporation
with the Delaware Secretary of State was filed on April 28, 2005;
a further
Amended and Restated Certificate of Incorporation with the Delaware
Secretary of
State was filed on July 26, 2005. The name under which the Corporation
was
originally incorporated was Healthcare Acquisition Corp.
SECOND:
This Amended and Restated Certificate of Incorporation (the “Certificate”)
amends, restates and integrates the provisions of the Amended and
Restated
Certificate of Incorporation of the Corporation and has been duly
adopted in
accordance with the provisions of Section 242 and 245 of the General
Corporation
Law of the State of Delaware (the “GCL”) in a special meeting of the holders of
the outstanding stock entitled to vote thereon in accordance with
the provisions
of Section 228 of the GCL.
THIRD:
This Certificate shall become effective immediately upon its filing
with the
Secretary of State of the State of Delaware.
FOURTH:
Upon the filing with the Secretary of State of the State of Delaware
of this
Certificate, the Certificate of Incorporation shall be amended and
restated in
its entirety to be and read as set forth on Exhibit A attached
hereto.
IN
WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by a
duly authorized officer __________, 2007.
|
HEALTHCARE
ACQUISITION CORP.
|
|
|
By:
/s/
Matthew P. Kinley
|
|
|
Name: Matthew P. Kinley
|
|
|
Title: President
|
EXHIBIT
A
AMENDED
AND RESTATED
CERTIFICATE
OF INCORPORATION
OF
PHARMATHENE,
INC.
FIRST:
The name of the corporation is PharmAthene, Inc. (hereinafter sometimes
referred
to as the “Corporation”).
SECOND:
The address of the Corporation’s registered office in the State of Delaware is
National Registered Agents, Inc., 160 Greentree Drive, Suite 101, Dover,
Delaware 19904, County of Kent. The name of the Corporation’s registered agent
at such address is National Registered Agents, Inc.
THIRD:
The purpose of the Corporation shall be to engage in any lawful act
or activity
for which corporations may be organized under the General Corporation
Law
(“GCL”).
FOURTH:
The total number of shares of all classes of capital stock which the
Corporation
shall have authority to issue is 101,000,000 of which 100,000,000 shares
shall
be Common Stock of the par value of $.0001 per share and 1,000,000
shares shall
be Preferred Stock of the par value of $.0001 per share.
A.
Preferred Stock. The Board of Directors is expressly granted authority
to issue
shares of the Preferred Stock, in one or more series, and to fix for
each such
series such voting powers, full or limited, and such designations,
preferences
and relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof as shall be stated
and
expressed in the resolution or resolutions adopted by the Board of
Directors
providing for the issue of such series (a “Preferred Stock Designation”) and as
may be permitted by the GCL. The number of authorized shares of Preferred
Stock
may be increased or decreased (but not below the number of shares thereof
then
outstanding) by the affirmative vote of the holders of a majority of
the voting
power of all of the then outstanding shares of the capital stock of
the
Corporation entitled to vote generally in the election of directors,
voting
together as a single class, without a separate vote of the holders
of the
Preferred Stock, or any series thereof, unless a vote of any such holders
is
required pursuant to any Preferred Stock Designation.
B.
Common
Stock. Except as otherwise required by law or as otherwise provided
in any
Preferred Stock Designation, the holders of the Common Stock shall
exclusively
possess all voting power and each share of Common Stock shall have
one
vote.
FIFTH:
The name and mailing address of the sole incorporator of the Corporation
are as
follows:
| Name: |
Matthew P. Kinley
|
| Address: |
c/o Equity Dynamics, Inc.
|
2116 Financial Center
Des Moines, Iowa, 50309
Des Moines, Iowa, 50309
SIXTH:
For so long as at least 30% of the aggregate principal amount of the
8%
convertible notes (the “Notes”) issued on ____________,
2007
in the original aggregate principal amount of $12,500,000) remains
outstanding (and notwithstanding the existence of less than three (3)
note
holders at any given time), the following provisions shall apply:
A.
the
Corporation shall maintain a Board of Directors consisting of no more
than seven
(7) individuals and the Compensation Committee and Nominating Committee
(or
other committees serving similar functions) all shall have no more
than three
(3) members;
B.
three (3) members of the Corporation’s Board of Directors (the “Noteholder
Directors”) shall be elected by the holders of Notes representing two-thirds
of
the then outstanding principal amount of all Notes, voting as a separate
class;
C.
two
(2) Noteholder Directors (in each case chosen by a majority vote of all the
Noteholder Directors) shall have the right, but not the obligation,
to serve as members of each of the committees of the Corporation’s
Board of Directors;
D.
The
Board of Directors of the Corporation shall nominate as Noteholder
Directors only the persons designated as director pursuant to the Note
Exchange
Agreement, dated _________, 2007, by and among the Corporation and
the holders
of the Notes and recommend that the holders vote to elect
such nominees as directors of the Corporation and shall fill any vacancies
that may arise upon the resignation of any of the Noteholder Directors
with a
new Noteholder Director designated in accordance with the foregoing.
A
Noteholder Director elected to fill a vacancy resulting from the death,
resignation or removal of a Noteholder Director shall serve for the
remainder of
the full term of the Noteholder Director whose death, resignation or
removal
shall have created such vacancy and until his successor shall have
been elected
and qualified; and
E.
The
provisions contained in this Article Sixth shall terminate immediately
and without further action when less than 30% of the aggregate principal
original amount of the Notes as of the date of this Amendment remains
outstanding.
SEVENTH:
The following provisions are inserted for the management of the business
and for
the conduct of the affairs of the Corporation, and for further definition,
limitation and regulation of the powers of the Corporation and of its
directors
and stockholders:
A.
Election of directors need not be by ballot unless the by-laws of the
Corporation so provide.
B.
The
Board of Directors shall have the power, without the assent or vote
of the
stockholders, to make, alter, amend, change, add to or repeal the by-laws
of the
Corporation as provided in the by-laws of the Corporation.
C.
The
directors in their discretion may submit any contract or act for approval
or
ratification at any annual meeting of the stockholders or at any meeting
of the
stockholders called for the purpose of considering any such act or
contract, and
any contract or act that shall be approved or be ratified by the vote
of the
holders of a majority of the stock of the Corporation which is represented
in
person or by proxy at such meeting and entitled to vote thereat (provided
that a
lawful quorum of stockholders be there represented in person or by
proxy) shall
be as valid and binding upon the Corporation and upon all the stockholders
as
though it had been approved or ratified by every stockholder of the
Corporation,
whether or not the contract or act would otherwise be open to legal
attack
because of directors’ interests, or for any other reason.
D.
In
addition to the powers and authorities hereinbefore or by statute expressly
conferred upon them, the directors are hereby empowered to exercise
all such
powers and do all such acts and things as may be exercised or done
by the
Corporation; subject, nevertheless, to the provisions of the statutes
of
Delaware, of this Certificate of Incorporation, and to any by-laws
from time to
time made by the stockholders; provided, however, that no by-law so
made shall
invalidate any prior act of the directors which would have been valid
if such
by-law had not been made.
EIGHTH:
A. A director of the Corporation shall not be personally liable to
the
Corporation or its stockholders for monetary damages for any breach
of fiduciary
duty by such director as a director, except for liability (i) for any
breach of
the director’s duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct
or a
knowing violation of law, (iii) under Section 174 of the GCL, or (iv)
for any
transaction from which the director derived an improper personal benefit.
If the
GCL is amended to authorize corporate action further eliminating or
limiting the
personal liability of directors, then the liability of a director of
the
Corporation shall be eliminated or limited to the fullest extent permitted
by
the GCL, as so amended. Any repeal or modification of this paragraph
A by the
stockholders of the Corporation shall not adversely affect any right
or
protection of a director of the Corporation with respect to events
occurring
prior to the time of such repeal or modification.
B.
The
Corporation, to the full extent permitted by Section 145 of the GCL,
as amended
from time to time, shall indemnify all persons whom it may indemnify
pursuant
thereto. Expenses (including attorneys’ fees) incurred by an officer or director
in defending any civil, criminal, administrative, or investigative
action, suit
or proceeding for which such officer or director may be entitled to
indemnification hereunder shall be paid by the Corporation in advance
of the
final disposition of such action, suit or proceeding upon receipt of
an
undertaking by or on behalf of such director or officer to repay such
amount if
it shall ultimately be determined that he is not entitled to be indemnified
by
the Corporation as authorized hereby.
NINTH:
Whenever a compromise or arrangement is proposed between this Corporation
and
its creditors or any class of them and/or between this Corporation
and its
stockholders or any class of them, any court of equitable jurisdiction
within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application
of
any receiver or receivers appointed for this Corporation under Section
291 of
Title 8 of the Delaware Code or on the application of trustees in dissolution
or
of any receiver or receivers appointed for this Corporation under Section
279 of
Title 8 of the Delaware Code order a meeting of the creditors or class
of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the
said court
directs. If a majority in number representing three fourths in value
of the
creditors or class of creditors, and/or of the stockholders or class
of
stockholders of this Corporation, as the case may be, agree to any
compromise or
arrangement and to any reorganization of this Corporation as a consequence
of
such compromise or arrangement, the said compromise or arrangement
and the said
reorganization shall, if sanctioned by the court to which the said
application
has been made, be binding on all the creditors or class of creditors,
and/or on
all the stockholders or class of stockholders, of this Corporation,
as the case
may be, and also on this Corporation.
TENTH:
The Corporation hereby elects not to be governed by Section 203 of
the
GCL.
ANNEX
C
HEALTHCARE
ACQUISITION CORP.
2007
LONG-TERM INCENTIVE COMPENSATION PLAN
ARTICLE
I
PURPOSE
Section
1.1 Purpose.
This
2007 Long-Term Incentive Compensation Plan (the “Plan”) is established by
Healthcare Acquisition Corp., a Delaware corporation (the “Company”), to create
incentives which are designed to motivate Participants to put forth
maximum
effort toward the success and growth of the Company and to enable
the Company to
attract and retain experienced individuals who by their position,
ability and
diligence are able to make important contributions to the Company’s success.
Toward these objectives, the Plan provides for the grant of Options,
Restricted
Stock Awards, Stock Appreciation Rights (“SARs”), Performance Units and
Performance Bonuses to Eligible Employees and the grant of Nonqualified
Stock
Options, Restricted Stock Awards, SARs and Performance Units to Consultants
and
Eligible Directors, subject to the conditions set forth in the
Plan.
Section
1.2 Establishment.
The Plan
is effective as of [___________], 2007 and for a period of ten years
thereafter.
The Plan shall continue in effect until all matters relating to the
payment of
Awards and administration of the Plan have been settled. The Plan
is subject to
approval by the Company’s stockholders in accordance with applicable law which
approval must occur within the period ending twelve months after
the date the
Plan is adopted by the Board. Pending such approval by the stockholders,
Awards
under the Plan may be granted, but no such Awards may be exercised
prior to
receipt of stockholder approval. In the event stockholder approval
is not
obtained within a twelve-month period, all Awards granted shall be
void.
Section
1.3 Shares Subject to the Plan.
Subject
to the limitations set forth in the Plan, Awards may be made under
this Plan for
a total of 3,500,000 shares of the Company’s common stock, par value $.0001 per
share (the “Common Stock”).
ARTICLE
II
DEFINITIONS
Section
2.1 “Account”
means
the recordkeeping account established by the Company to which will
be credited
an Award of Performance Units to a Participant.
Section
2.2 “Affiliated Entity”
means
any corporation, partnership, limited liability company or other
form of legal
entity in which a majority of the partnership or other similar interest
thereof
is owned or controlled, directly or indirectly, by the Company or
one or more of
its Subsidiaries or Affiliated Entities or a combination thereof.
For purposes
hereof, the Company, a Subsidiary or an Affiliated Entity shall be
deemed to
have a majority ownership interest in a partnership or limited liability
company
if the Company, such Subsidiary or Affiliated Entity shall be allocated
a
majority of partnership or limited liability company gains or losses
or shall be
or control a managing director or a general partner of such partnership
or
limited liability company.
Section
2.3 “Award”
means,
individually or collectively, any Option, Restricted Stock Award,
SAR,
Performance Unit or Performance Bonus granted under the Plan to an
Eligible
Employee by the Board or any Nonqualified Stock Option, Performance
Unit SAR or
Restricted Stock Award granted under the Plan to a Consultant or
an Eligible
Director by the Board pursuant to such terms, conditions, restrictions,
and/or
limitations, if any, as the Board may establish by the Award Agreement
or
otherwise.
Section
2.4 “Award Agreement”
means
any written instrument that establishes the terms, conditions, restrictions,
and/or limitations applicable to an Award in addition to those established
by
this Plan and by the Board’s exercise of its administrative powers.
Section
2.5 “Board”
means
the Board of Directors of the Company and, if the Board has appointed
a
Committee as provided in Section 3.1, the term “Board” shall include such
Committee.
Section
2.6 “Change of Control Event” means
each of the following:
(i)
Any
transaction in which shares of voting securities of the Company representing
more than 50% of the total combined voting power of all outstanding
voting
securities of the Company are issued by the Company, or sold or transferred
by
the stockholders of the Company as a result of which those persons
and entities
who beneficially owned voting securities of the Company representing
more than
50% of the total combined voting power of all outstanding voting
securities of
the Company immediately prior to such transaction cease to beneficially
own
voting securities of the Company representing more than 50% of the
total
combined voting power of all outstanding voting securities of the
Company
immediately after such transaction;
(ii)
The
merger or consolidation of the Company with or into another entity
as a result
of which those persons and entities who beneficially owned voting
securities of
the Company representing more than 50% of the total combined voting
power of all
outstanding voting securities of the Company immediately prior to
such merger or
consolidation cease to beneficially own voting securities of the
Company
representing more than 50% of the total combined voting power of
all outstanding
voting securities of the surviving corporation or resulting entity
immediately
after such merger of consolidation; or
(iii)
The
sale of all or substantially all of the Company’s assets to an entity of which
those persons and entities who beneficially owned voting securities
of the
Company representing more than 50% of the total combined voting power
of all
outstanding voting securities of the Company immediately prior to
such asset
sale do not beneficially own voting securities of the purchasing
entity
representing more than 50% of the total combined voting power of
all outstanding
voting securities of the purchasing entity immediately after such
asset
sale.
Section
2.7 “Code”
means
the Internal Revenue Code of 1986, as amended. References in the
Plan to any
section of the Code shall be deemed to include any amendments or
successor
provisions to such section and any regulations under such section.
Section
2.8 “Committee”
means
the Committee appointed by the Board as provided in Section 3.1.
Section
2.9 “Common Stock”
means
the common stock, par value $.0001 per share, of the Company, and
after
substitution, such other stock as shall be substituted therefore
as provided in
Article X.
Section
2.10 “Consultant”
means
any person who is engaged by the Company, a Subsidiary or an Affiliated
Entity
to render consulting or advisory services.
Section
2.11 “Date of Grant”
means
the date on which the grant of an Award is authorized by the Board
or such later
date as may be specified by the Board in such authorization.
Section
2.12 “Disability”
means
the Participant is unable to continue employment by reason of any
medically
determinable physical or mental impairment which can be expected
to result in
death or can be expected to last for a continuous period of not less
than 12
months. For purposes of this Plan, the determination of Disability
shall be made
in the sole and absolute discretion of the Board.
Section
2.13 “Eligible Employee”
means
any employee of the Company, a Subsidiary, or an Affiliated Entity
as approved
by the Board.
Section
2.14 “Eligible Director”
means
any member of the Board who is not an employee of the Company, a
Subsidiary or
an Affiliated Entity.
Section
2.15 “Exchange Act”
means
the Securities Exchange Act of 1934, as amended.
Section
2.16 “Fair Market Value”
means
(A) during such time as the Common Stock is registered under Section
12 of the
Exchange Act, the closing price of the Common Stock as reported by
an
established stock exchange or automated quotation system on the day
for which
such value is to be determined, or, if no sale of the Common Stock
shall have
been made on any such stock exchange or automated quotation system
that day, on
the next preceding day on which there was a sale of such Common Stock,
or (B)
during any such time as the Common Stock is not listed upon an established
stock
exchange or automated quotation system, the mean between dealer “bid” and “ask”
prices of the Common Stock in the over-the-counter market on the
day for which
such value is to be determined, as reported by the National Association
of
Securities Dealers, Inc., or (C) during any such time as the Common
Stock cannot
be valued pursuant to (A) or (B) above, the fair market value shall
be as
determined by the Board considering all relevant information including,
by
example and not by limitation, the services of an independent
appraiser.
Section
2.17 “Incentive Stock Option”
means an
Option within the meaning of Section 422 of the Code.
Section
2.18 “Nonqualified Stock Option”
means an
Option which is not an Incentive Stock Option.
Section
2.19 “Option”
means an
Award granted under Article V of the Plan and includes both Nonqualified
Stock
Options and Incentive Stock Options to purchase shares of Common
Stock.
Section
2.20 “Participant”
means an
Eligible Employee, a Consultant or an Eligible Director to whom an
Award has
been granted by the Board under the Plan.
Section
2.21 “Performance Bonus”
means
the cash bonus which may be granted to Eligible Employees under Article
IX of
the Plan.
Section
2.22 “Performance Units”
means
those monetary units that may be granted to Eligible Employees, Consultants
or
Eligible Directors pursuant to Article VIII hereof.
Section
2.23 “Plan”
means
this Healthcare Acquisition Corp. 2007 Long-Term Incentive Compensation
Plan.
Section
2.24 “Restricted Stock Award”
means an
Award granted to an Eligible Employee, Consultant or Eligible Director
under
Article VI of the Plan.
Section
2.25 “Retirement”
means
the termination of an Eligible Employee’s employment with the Company, a
Subsidiary or an Affiliated Entity on or after attaining age __.
Section
2.26 “SAR”
means a
stock appreciation right granted to an Eligible Employee, Consultant
or Eligible
Director under Article VII of the Plan.
Section
2.27 “Subsidiary”
shall
have the same meaning set forth in Section 424 of the Code.
ARTICLE
III
ADMINISTRATION
Section
3.1 Administration of the Plan by the Board.
The
Board shall administer the Plan. The Board may, by resolution, appoint
the
Compensation Committee to administer the Plan and delegate its powers
described
under this Section 3.1 and otherwise under the Plan for purposes
of Awards
granted to Eligible Employees and Consultants.
Subject
to the provisions of the Plan, the Board shall have exclusive power
to:
(a)
Select Eligible Employees and Consultants to participate in the
Plan.
(b)
Determine the time or times when Awards will be made to Eligible
Employees or
Consultants.
(c)
Determine the form of an Award, whether an Incentive Stock Option,
Nonqualified
Stock Option, Restricted Stock Award, SAR, Performance Unit, or Performance
Bonus, the number of shares of Common Stock or Performance Units
subject to the
Award, the amount and all the terms, conditions (including performance
requirements), restrictions and/or limitations, if any, of an Award,
including
the time and conditions of exercise or vesting, and the terms of
any Award
Agreement, which may include the waiver or amendment of prior terms
and
conditions or acceleration or early vesting or payment of an Award
under certain
circumstances determined by the Board.
(d)
Determine whether Awards will be granted singly or in combination.
(e)
Accelerate the vesting, exercise or payment of an Award or the performance
period of an Award.
(f)
Determine whether and to what extent a Performance Bonus may be deferred,
either
automatically or at the election of the Participant or the Board.
(g)
Take
any and all other action it deems necessary or advisable for the
proper
operation or administration of the Plan.
Section
3.2 Administration of Grants to Eligible Directors.
The
Board shall have the exclusive power to select Eligible Directors
to participate
in the Plan and to determine the number of Nonqualified Stock Options,
Performance Units, SARs or shares of Restricted Stock awarded to
Eligible
Directors selected for participation. If the Board appoints a committee
to
administer the Plan, it may delegate to the committee administration
of all
other aspects of the Awards made to Eligible Directors.
Section
3.3 Board to Make Rules and Interpret Plan.
The
Board in its sole discretion shall have the authority, subject to
the provisions
of the Plan, to establish, adopt, or revise such rules and regulations
and to
make all such determinations relating to the Plan, as it may deem
necessary or
advisable for the administration of the Plan. The Board’s interpretation of the
Plan or any Awards and all decisions and determinations by the Board
with
respect to the Plan shall be final, binding, and conclusive on all
parties.
Section
3.4 Section 162(m) Provisions.
The
Company intends for the Plan and the Awards made there under to qualify
for the
exception from Section 162(m) of the Code for “qualified performance based
compensation” if it is determined by the Board that such qualification is
necessary for an Award. Accordingly, the Board shall make determinations
as to
performance targets and all other applicable provisions of the Plan
as necessary
in order for the Plan and Awards made there under to satisfy the
requirements of
Section 162(m) of the Code.
ARTICLE
IV
GRANT
OF AWARDS
Section
4.1 Grant of Awards.
Awards
granted under this Plan shall be subject to the following
conditions:
(a)
Any
shares of Common Stock related to Awards which terminate by expiration,
forfeiture, cancellation or otherwise without the issuance of shares
of Common
Stock or are exchanged in the Board’s discretion for Awards not involving Common
Stock, shall be available again for grant under the Plan and shall
not be
counted against the shares authorized under Section 1.3.
(b)
Common Stock delivered by the Company in payment of an Award authorized
under
Articles V and VI of the Plan may be authorized and unissued Common
Stock or
Common Stock held in the treasury of the Company.
(c)
The
Board shall, in its sole discretion, determine the manner in which
fractional
shares arising under this Plan shall be treated.
(d)
Separate certificates or a book-entry registration representing Common
Stock
shall be delivered to a Participant upon the exercise of any
Option.
(e)
The
Board shall be prohibited from canceling, reissuing or modifying
Awards if such
action will have the effect of repricing the Participant’s Award.
(f)
Eligible Directors may only be granted Nonqualified Stock Options,
Restricted
Stock Awards, SARs or Performance Units under this Plan.
(g)
The
maximum term of any Award shall be ten years.
ARTICLE
V
STOCK
OPTIONS
Section
5.1 Grant of Options.
The
Board may, from time to time, subject to the provisions of the Plan
and such
other terms and conditions as it may determine, grant Options to
Eligible
Employees. These Options may be Incentive Stock Options or Nonqualified
Stock
Options, or a combination of both. The Board may, subject to the
provisions of
the Plan and such other terms and conditions as it may determine,
grant
Nonqualified Stock Options to Eligible Directors and Consultants.
Each grant of
an Option shall be evidenced by an Award Agreement executed by the
Company and
the Participant, and shall contain such terms and conditions and
be in such form
as the Board may from time to time approve, subject to the requirements
of
Section 5.2.
Section
5.2 Conditions of Options.
Each
Option so granted shall be subject to the following conditions:
(a)
Exercise Price. As limited by Section 5.2(e) below, each Option shall
state the
exercise price which shall be set by the Board at the Date of Grant;
provided,
however, no Option shall be granted at an exercise price which is
less than the
Fair Market Value of the Common Stock on the Date of Grant.
(b)
Form
of Payment. The exercise price of an Option may be paid (i) in cash or by check,
bank draft or money order payable to the order of the Company; (ii)
by
delivering shares of Common Stock having a Fair Market Value on the
date of
payment equal to the amount of the exercise price, but only to the
extent such
exercise of an Option would not result in an adverse accounting charge
to the
Company for financial accounting purposes with respect to the shares
used to pay
the exercise price unless otherwise determined by the Board; or (iii)
a
combination of the foregoing. In addition to the foregoing, the Board
may permit
an Option granted under the Plan to be exercised by a broker-dealer
acting on
behalf of a Participant through procedures approved by the Board.
(c)
Exercise of Options. Options granted under the Plan shall be exercisable,
in
whole or in such installments and at such times, and shall expire
at such time,
as shall be provided by the Board in the Award Agreement. Exercise
of an Option
shall be by written notice to the Secretary of the Company at least
two business
days in advance of such exercise stating the election to exercise
in the form
and manner determined by the Board. Every share of Common Stock acquired
through
the exercise of an Option shall be deemed to be fully paid at the
time of
exercise and payment of the exercise price.
(d)
Other
Terms and Conditions. Among other conditions that may be imposed
by the Board,
if deemed appropriate, are those relating to (i) the period or periods
and the
conditions of exercisability of any Option; (ii) the minimum periods
during
which Participants must be employed by the Company, its Subsidiaries,
or an
Affiliated Entity, or must hold Options before they may be exercised;
(iii) the
minimum periods during which shares acquired upon exercise must be
held before
sale or transfer shall be permitted; (iv) conditions under which
such Options or
shares may be subject to forfeiture; (v) the frequency of exercise
or the
minimum or maximum number of shares that may be acquired at any one
time; (vi)
the achievement by the Company of specified performance criteria;
and (vii)
non-compete and protection of business matters.
(e)
Special Restrictions Relating to Incentive Stock Options. Options
issued in the
form of Incentive Stock Options shall only be granted to Eligible
Employees of
the Company or a Subsidiary, and not to Eligible Employees of an
Affiliated
Entity unless such entity shall be considered as a “disregarded entity” under
the Code and shall not be distinguished for federal tax purposes
from the
Company or the applicable Subsidiary.
(f)
Application of Funds. The proceeds received by the Company from the
sale of
Common Stock pursuant to Options will be used for general corporate
purposes.
(g)
Stockholder Rights. No Participant shall have a right as a stockholder
with
respect to any share of Common Stock subject to an Option prior to
purchase of
such shares of Common Stock by exercise of the Option.
ARTICLE
VI
RESTRICTED
STOCK AWARDS
Section
6.1 Grant of Restricted Stock Awards.
The
Board may, from time to time, subject to the provisions of the Plan
and such
other terms and conditions as it may determine, grant a Restricted
Stock Award
to Eligible Employees, Consultants or Eligible Directors. Restricted
Stock
Awards shall be awarded in such number and at such times during the
term of the
Plan as the Board shall determine. Each Restricted Stock Award shall
be subject
to an Award Agreement setting forth the terms of such Restricted
Stock Award and
may be evidenced in such manner as the Board deems appropriate, including,
without limitation, a book-entry registration or issuance of a stock
certificate
or certificates.
Section
6.2 Conditions of Restricted Stock Awards.
The
grant of a Restricted Stock Award shall be subject to the
following:
(a)
Restriction Period. Restricted Stock Awards granted to an Eligible
Employee
shall require the holder to remain in the employment of the Company,
a
Subsidiary, or an Affiliated Entity for a prescribed period. Restricted
Stock
Awards granted to Consultants or Eligible Directors shall require
the holder to
provide continued services to the Company for a period of time. These
employment
and service requirements are collectively referred to as a “Restriction Period”.
The Board or the Committee, as the case may be, shall determine the
Restriction
Period or Periods which shall apply to the shares of Common Stock
covered by
each Restricted Stock Award or portion thereof. In addition to any
time vesting
conditions determined by the Board or the Committee, as the case
may be,
Restricted Stock Awards may be subject to the achievement by the
Company of
specified performance criteria based upon the Company’s achievement of all or
any of the operational, financial or stock performance criteria set
forth on
Exhibit A annexed hereto, as may from time to time be established
by the Board
or the Committee, as the case may be. At the end of the Restriction
Period,
assuming the fulfillment of any other specified vesting conditions,
the
restrictions imposed by the Board or the Committee, as the case may
be shall
lapse with respect to the shares of Common Stock covered by the Restricted
Stock
Award or portion thereof. In addition to acceleration of vesting
upon the
occurrence of a Change of Control Event as provided in Section 11.5,
the Board
or the Committee, as the case may be, may, in its discretion, accelerate
the
vesting of a Restricted Stock Award in the case of the death, Disability
or
Retirement of the Participant who is an Eligible Employee or resignation
of a
Participant who is a Consultants or an Eligible Director.
(b)
Restrictions. The holder of a Restricted Stock Award may not sell,
transfer,
pledge, exchange, hypothecate, or otherwise dispose of the shares
of Common
Stock represented by the Restricted Stock Award during the applicable
Restriction Period. The Board shall impose such other restrictions
and
conditions on any shares of Common Stock covered by a Restricted
Stock Award as
it may deem advisable including, without limitation, restrictions
under
applicable Federal or state securities laws, and may legend the certificates
representing Restricted Stock to give appropriate notice of such
restrictions.
(c)
Rights as Stockholders. During any Restriction Period, the Board
may, in its
discretion, grant to the holder of a Restricted Stock Award all or
any of the
rights of a stockholder with respect to the shares, including, but
not by way of
limitation, the right to vote such shares and to receive dividends.
If any
dividends or other distributions are paid in shares of Common Stock,
all such
shares shall be subject to the same restrictions on transferability
as the
shares of Restricted Stock with respect to which they were paid.
ARTICLE
VII
STOCK
APPRECIATION RIGHTS
Section
7.1 Grant of SARs.
The
Board may from time to time, in its sole discretion, subject to the
provisions
of the Plan and subject to other terms and conditions as the Board
may
determine, grant a SAR to any Eligible Employee, Consultant or Eligible
Director. SARs may be granted in tandem with an Option, in which
event, the
Participant has the right to elect to exercise either the SAR or
the Option.
Upon the Participant’s election to exercise one of these Awards, the other
tandem Award is automatically terminated. SARs may also be granted
as an
independent Award separate from an Option. Each grant of a SAR shall
be
evidenced by an Award Agreement executed by the Company and the Participant
and
shall contain such terms and conditions and be in such form as the
Board may
from time to time approve, subject to the requirements of the Plan.
The exercise
price of the SAR shall not be less than the Fair Market Value of
a share of
Common Stock on the Date of Grant of the SAR.
Section
7.2 Exercise and Payment.
SARs
granted under the Plan shall be exercisable in whole or in installments
and at
such times as shall be provided by the Board in the Award Agreement.
Exercise of
a SAR shall be by written notice to the Secretary of the Company
at least two
business days in advance of such exercise. The amount payable with
respect to
each SAR shall be equal in value to the excess, if any, of the Fair
Market Value
of a share of Common Stock on the exercise date over the exercise
price of the
SAR. Payment of amounts attributable to a SAR shall be made in shares
of Common
Stock.
Section
7.3 Restrictions.
In the
event a SAR is granted in tandem with an Incentive Stock Option,
the Board shall
subject the SAR to restrictions necessary to ensure satisfaction
of the
requirements under Section 422 of the Code. In the case of a SAR
granted in
tandem with an Incentive Stock Option to an Eligible Employee who
owns more than
10% of the combined voting power of the Company or its Subsidiaries
on the date
of such grant, the amount payable with respect to each SAR shall
be equal in
value to the applicable percentage of the excess, if any, of the
Fair Market
Value of a share of Common Stock on the Exercise date over the exercise
price of
the SAR, which exercise price shall not be less than 110% of the
Fair Market
Value of a share of Common Stock on the date the SAR is granted.
ARTICLE
VIII
PERFORMANCE
UNITS
Section
8.1 Grant of Awards.
The
Board may, from time to time, subject to the provisions of the Plan
and such
other terms and conditions as it may determine, grant Performance
Units to
Eligible Employees, Consultants and Eligible Directors. Each Award
of
Performance Units shall be evidenced by an Award Agreement executed
by the
Company and the Participant, and shall contain such terms and conditions
and be
in such form as the Board may from time to time approve, subject
to the
requirements of Section 8.2.
Section
8.2 Conditions of Awards.
Each
Award of Performance Units shall be subject to the following
conditions:
(a)
Establishment of Award Terms. Each Award shall state the target,
maximum and
minimum value of each Performance Unit payable upon the achievement
of
performance goals.
(b)
Achievement of Performance Goals. The Board shall establish performance
targets
for each Award for a period of no less than a year based upon some
or all of the
operational, financial or performance criteria listed in Exhibit
A attached. The
Board shall also establish such other terms and conditions as it
deems
appropriate to such Award. The Award may be paid out in cash or Common
Stock as
determined in the sole discretion of the Board.
ARTICLE
IX
PERFORMANCE
BONUS
Section
9.1 Grant of Performance Bonus.
The
Board may from time to time, subject to the provisions of the Plan
and such
other terms and conditions as the Board may determine, grant a Performance
Bonus
to certain Eligible Employees selected for participation. The Board
will
determine the amount that may be earned as a Performance Bonus in
any period of
one year or more upon the achievement of a performance target established
by the
Board. The Board shall select the applicable performance target(s)
for each
period in which a Performance Bonus is awarded. The performance target
shall be
based upon all or some of the operational, financial or performance
criteria
more specifically listed in Exhibit A attached.
Section
9.2 Payment of Performance Bonus.
In order
for any Participant to be entitled to payment of a Performance Bonus,
the
applicable performance target(s) established by the Board must first
be obtained
or exceeded. Payment of a Performance Bonus shall be made within
60 days of the
Board’s certification that the performance target(s) has been achieved
unless
the Participant has previously elected to defer payment pursuant
to a
nonqualified deferred compensation plan adopted by the Company. Payment
of a
Performance Bonus may be made in either cash or Common Stock as determined
in
the sole discretion of the Board.
ARTICLE
X
STOCK
ADJUSTMENTS
In
the
event that the shares of Common Stock, as constituted on the effective
date of
the Plan, shall be changed into or exchanged for a different number
or kind of
shares of stock or other securities of the Company or of another
corporation
(whether by reason of merger, consolidation, recapitalization, reclassification,
stock split, spin-off, combination of shares or otherwise), or if
the number of
such shares of Common Stock shall be increased through the payment
of a stock
dividend, or a dividend on the shares of Common Stock, or if rights
or warrants
to purchase securities of the Company shall be issued to holders
of all
outstanding Common Stock, then there shall be substituted for or
added to each
share available under and subject to the Plan, and each share theretofore
appropriated under the Plan, the number and kind of shares of stock
or other
securities into which each outstanding share of Common Stock shall
be so changed
or for which each such share shall be exchanged or to which each
such share
shall be entitled, as the case may be, on a fair and equivalent basis
in
accordance with the applicable provisions of Section 424 of the Code;
provided,
however, with respect to Options, in no such event will such adjustment
result
in a modification of any Option as defined in Section 424(h) of the
Code. In the
event there shall be any other change in the number or kind of the
outstanding
shares of Common Stock, or any stock or other securities into which
the Common
Stock shall have been changed or for which it shall have been exchanged,
then if
the Board shall, in its sole discretion, determine that such change
equitably
requires an adjustment in the shares available under and subject
to the Plan, or
in any Award, theretofore granted, such adjustments shall be made
in accordance
with such determination, except that no adjustment of the number
of shares of
Common Stock available under the Plan or to which any Award relates
that would
otherwise be required shall be made unless and until such adjustment
either by
itself or with other adjustments not previously made would require
an increase
or decrease of at least 1% in the number of shares of Common Stock
available
under the Plan or to which any Award relates immediately prior to
the making of
such adjustment (the “Minimum Adjustment”). Any adjustment representing a change
of less than such minimum amount shall be carried forward and made
as soon as
such adjustment together with other adjustments required by this
Article X and
not previously made would result in a Minimum Adjustment. Notwithstanding
the
foregoing, any adjustment required by this Article X which otherwise
would not
result in a Minimum Adjustment shall be made with respect to shares
of Common
Stock relating to any Award immediately prior to exercise, payment
or settlement
of such Award. No fractional shares of Common Stock or units of other
securities
shall be issued pursuant to any such adjustment, and any fractions
resulting
from any such adjustment shall be eliminated in each case by rounding
downward
to the nearest whole share.
ARTICLE
XI
GENERAL
Section
11.1 Amendment or Termination of Plan.
The
Board may alter, suspend or terminate the Plan at any time provided,
however,
that it may not, without stockholder approval, adopt any amendment
which would
(i) increase the aggregate number of shares of Common Stock available
under the
Plan (except by operation of Article X), (ii) materially modify the
requirements
as to eligibility for participation in the Plan, or (iii) materially
increase
the benefits to Participants provided by the Plan.
Section
11.2 Termination of Employment; Termination of Service.
If an
Eligible Employee’s employment with the Company, a Subsidiary or an Affiliated
Entity terminates as a result of death, Disability or Retirement,
the Eligible
Employee (or personal representative in the case of death) shall
be entitled to
purchase all or any part of the shares subject to any (i) vested
Incentive Stock
Option for a period of up to three months from such date of termination
(one
year in the case of death or Disability (as defined above) in lieu
of the
three-month period), and (ii) vested Nonqualified Stock Option during
the
remaining term of the Option. If an Eligible Employee’s employment terminates
for any other reason, the Eligible Employee shall be entitled to
purchase all or
any part of the shares subject to any vested Option for a period
of up to three
months from such date of termination. In no event shall any Option
be
exercisable past the term of the Option. The Board may, in its sole
discretion,
accelerate the vesting of unvested Options in the event of termination
of
employment of any Participant.
In
the
event a Consultant ceases to provide services to the Company or an
Eligible
Director terminates service as a director of the Company, the unvested
portion
of any Award shall be forfeited unless otherwise accelerated pursuant
to the
terms of the Eligible Director’s Award Agreement or by the Board. The Consultant
or Eligible Director shall have a period of three years following
the date he
ceases to provide consulting services or ceases to be a director,
as applicable,
to exercise any Nonqualified Stock Options which are otherwise exercisable
on
his date of termination of service.
Section
11.3 Limited Transferability - Options.
The
Board may, in its discretion, authorize all or a portion of the Nonqualified
Stock Options granted under this Plan to be on terms which permit
transfer by
the Participant to (i) the ex-spouse of the Participant pursuant
to the terms of
a domestic relations order, (ii) the spouse, children or grandchildren
of the
Participant (“Immediate Family Members”), (iii) a trust or trusts for the
exclusive benefit of such Immediate Family Members, or (iv) a partnership
or
limited liability company in which such Immediate Family Members
are the only
partners or members. In addition, there may be no consideration for
any such
transfer. The Award Agreement pursuant to which such Nonqualified
Stock Options
are granted expressly provide for transferability in a manner consistent
with
this paragraph. Subsequent transfers of transferred Nonqualified
Stock Options
shall be prohibited except as set forth below in this Section 11.3.
Following
transfer, any such Nonqualified Stock Options shall continue to be
subject to
the same terms and conditions as were applicable immediately prior
to transfer,
provided that for purposes of Section 11.2 hereof the term “Participant” shall
be deemed to refer to the transferee. The events of termination of
employment of
Section 11.2 hereof shall continue to be applied with respect to
the original
Participant, following which the Nonqualified Stock Options shall
be exercisable
by the transferee only to the extent, and for the periods specified
in Section
11.2 hereof. No transfer pursuant to this Section 11.3 shall be effective
to
bind the Company unless the Company shall have been furnished with
written
notice of such transfer together with such other documents regarding
the
transfer as the Board shall request. With the exception of a transfer
in
compliance with the foregoing provisions of this Section 11.3, all
other types
of Awards authorized under this Plan shall be transferable only by
will or the
laws of descent and distribution; however, no such transfer shall
be effective
to bind the Company unless the Board has been furnished with written
notice of
such transfer and an authenticated copy of the will and/or such other
evidence
as the Board may deem necessary to establish the validity of the
transfer and
the acceptance by the transferee of the terms and conditions of such
Award.
Section
11.4 Withholding Taxes.
Unless
otherwise paid by the Participant, the Company, its Subsidiaries
or any of its
Affiliated Entities shall be entitled to deduct from any payment
under the Plan,
regardless of the form of such payment, the amount of all applicable
income and
employment taxes required by law to be withheld with respect to such
payment or
may require the Participant to pay to it such tax prior to and as
a condition of
the making of such payment. In accordance with any applicable administrative
guidelines it establishes, the Board may allow a Participant to pay
the amount
of taxes required by law to be withheld from an Award by (i) directing
the
Company to withhold from any payment of the Award a number of shares
of Common
Stock having a Fair Market Value on the date of payment equal to
the amount of
the required withholding taxes or (ii) delivering to the Company
previously
owned shares of Common Stock having a Fair Market Value on the date
of payment
equal to the amount of the required withholding taxes. However, any
payment made
by the Participant pursuant to either of the foregoing clauses (i)
or (ii) shall
not be permitted if it would result in an adverse accounting charge
with respect
to such shares used to pay such taxes unless otherwise approved by
the Board.
Section
11.5 Change of Control.
Notwithstanding any other provision in this Plan to the contrary,
Awards granted
under the Plan to any Eligible Employee, Consultant or Eligible Director
shall
be immediately vested, fully earned and exercisable upon the occurrence
of a
Change of Control Event unless the terms of the Award state otherwise.
Section
11.6 Amendments to Awards.
Subject
to the limitations of Article IV, such as the prohibition on repricing
of
Options, the Board may at any time unilaterally amend the terms of
any Award
Agreement, whether or not presently exercisable or vested, to the
extent it
deems appropriate. However, amendments which are adverse to the Participant
shall require the Participant’s consent.
Section
11.7 Registration; Regulatory Approval.
Following approval of the Plan by the stockholders of the Company
as provided in
Section 1.2 of the Plan, the Board, in its sole discretion, may determine
to
file with the Securities and Exchange Commission and keep continuously
effective, a Registration Statement on Form S-8 with respect to shares
of Common
Stock subject to Awards hereunder. Notwithstanding anything contained
in this
Plan to the contrary, the Company shall have no obligation to issue
shares of
Common Stock under this Plan prior to the obtaining of any approval
from, or
satisfaction of any waiting period or other condition imposed by,
any
governmental agency which the Board shall, in its sole discretion,
determine to
be necessary or advisable.
Section
11.8 Right to Continued Employment.
Participation in the Plan shall not give any Eligible Employee any
right to
remain in the employ of the Company, any Subsidiary, or any Affiliated
Entity.
The Company or, in the case of employment with a Subsidiary or an
Affiliated
Entity, the Subsidiary or Affiliated Entity reserves the right to
terminate any
Eligible Employee at any time. Further, the adoption of this Plan
shall not be
deemed to give any Eligible Employee or any other individual any
right to be
selected as a Participant or to be granted an Award.
Section
11.9 Reliance on Reports.
Each
member of the Board and each member of the Board shall be fully justified
in
relying or acting in good faith upon any report made by the independent
public
accountants of the Company and its Subsidiaries and upon any other
information
furnished in connection with the Plan by any person or persons other
than
himself or herself. In no event shall any person who is or shall
have been a
member of the Board be liable for any determination made or other
action taken
or any omission to act in reliance upon any such report or information
or for
any action taken, including the furnishing of information, or failure
to act, if
in good faith.
Section
11.10 Construction.
Masculine pronouns and other words of masculine gender shall refer
to both men
and women. The titles and headings of the sections in the Plan are
for the
convenience of reference only, and in the event of any conflict,
the text of the
Plan, rather than such titles or headings, shall control.
Section
11.11 Governing Law.
The Plan
shall be governed by and construed in accordance with the laws of
the State of
Delaware except as superseded by applicable Federal law.
Section
11.12 Other Laws.
The
Board may refuse to issue or transfer any shares of Common Stock
or other
consideration under an Award if, acting in its sole discretion, it
determines
that the issuance or transfer of such shares or such other consideration
might
violate any applicable law or regulation or entitle the Company to
recover the
same under Section 16(b) of the Exchange Act, and any payment tendered
to the
Company by a Participant, other holder or beneficiary in connection
with the
exercise of such Award shall be promptly refunded to the relevant
Participant,
holder or beneficiary.
Section
11.13 No Trust or Fund Created.
Neither
the Plan nor an Award shall create or be construed to create a trust
or separate
fund of any kind or a fiduciary relationship between the Company
and a
Participant or any other person. To the extent that a Participant
acquires the
right to receive payments from the Company pursuant to an Award,
such right
shall be no greater than the right of any general unsecured creditor
of the
Company.
Section
11.14 Conformance to Section 409A of the Code To
the
extent that the Committee determines that any Award granted under
the Plan is
subject to Section 409A of the Code, the Award Agreement evidencing
such Award
shall incorporate the terms and conditions required by Section 409A
of the Code.
To the extent applicable, the Plan and Award Agreements shall be
interpreted in
accordance with Section 409A of the Code and Department of Treasury
regulations
and other interpretive guidance issued thereunder, including without
limitation
any such regulations or other guidance that may be issued after the
Effective
Date. Notwithstanding any provision of the Plan to the contrary,
in the event
that the Committee determines that any Award may be subject to Section
409A of
the Code and related Department of Treasury guidance, the Committee
may adopt
such amendments to the Plan and the applicable Award Agreement or
adopt other
policies and procedures (including amendments, policies and procedures
with
retroactive effect), or take any other actions, that the Committee
determines
are necessary or appropriate to (i) exempt the Award from Section
409A of the
Code or (ii) comply with the requirements of Section 409A of the
Code and
related Department of Treasury guidance.
Preliminary
Copy
HEALTHCARE
ACQUISITION CORP.
THIS
PROXY IS BEING SOLICITED ON BEHALF OF OUR BOARD OF DIRECTORS
The
undersigned hereby appoints John Pappajohn and Matthew Kinley, together as
proxies and each with full power of substitution, to represent and to vote
all
shares of common stock of Healthcare Acquisition Corp. at the special meeting
of
stockholders of HAQ to be held on July 26, 2007, at 10:00 a.m. Eastern Time,
and
at any adjournment or postponement thereof, hereby revoking any and all proxies
heretofore given.
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|
1.
|
Proposal
1:
to
approve the Merger Proposal- the proposed merger with PharmAthene,
Inc.
(the “Merger”), a Delaware corporation, pursuant to the Agreement and Plan
of Merger, dated as of January 19, 2007, by and among HAQ, Merger
Sub and
PharmAthene, and the transactions contemplated thereby, whereby
PharmAthene will become a wholly-owned subsidiary of HAQ and the
stockholders, optionholders, warrantholders and noteholders of PharmAthene
shall receive the following consideration:
i. an
aggregate of 12,500,000 shares of HAQ common stock;
ii. $12,500,000
in 8% convertible notes issued by HAQ; and
iii. up
to $10,000,000 in milestone payments (if certain conditions are
met).
:
|
¨ FOR
¨ AGAINST
¨ ABSTAIN
|
Only
if you vote “AGAINST” Proposal 1 and you hold shares of our common stock
issued in our initial public offering, you may exercise your conversion
rights and demand that we convert your shares of common stock into
cash
equal to a pro rata portion of the funds in the trust account by
marking
the “Exercise Conversion Rights” box below. If you exercise your
conversion rights, then you will be exchanging your shares of our
common
stock for cash and you will no longer own these shares. You will
only be
entitled to receive cash for these shares if the Merger is completed
and
you continue to hold these shares until the date the Merger is
completed.
¨ EXERCISE
CONVERSION RIGHTS
|
|
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2.
|
Proposal
2:
to
approve the Amendment Proposal - the amendment to HAQ's amended and
restated certificate of incorporation (the “Certificate of Incorporation
Amendment”), to: (i) change HAQ's name from “Healthcare Acquisition
Corp.” to “PharmAthene, Inc.”, (ii) remove certain provisions containing
procedural and approval requirements applicable to HAQ prior to the
consummation of the business combination that will no longer be operative
after the consummation of the Merger and (iii) grant to holders of 8%
convertible notes issued in the Merger the right to designate three
members to the Board of Directors of HAQ for so long as at least
30% of
the original face value of such notes remain outstanding.
|
¨
FOR ¨ AGAINST ¨ ABSTAIN
|
|
3.
|
Proposal
3:
to
approve the Incentive Plan Proposal- the adoption of the 2007 Long-Term
Incentive Plan pursuant to which HAQ will reserve 3,500,000 shares
of
common stock for issuance pursuant to the Plan.
|
¨
FOR ¨ AGAINST ¨ ABSTAIN
163
|
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4.
|
Proposal
4: to
approve the Adjournment Proposal - to adjourn the special meeting
to a
later date or dates, if necessary, to permit further solicitation
and vote
of proxies in the event that, based upon the tabulated vote at the
time of
the special meeting, HAQ would not have been authorized to consummate
the
acquisition (“Proposal 4” or the “Adjournment
Proposal”).
|
¨
FOR ¨ AGAINST ¨ ABSTAIN
THIS
PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
“FOR” PROPOSALS 1, 2, 3 AND 4.
Our
Board of Directors believes that the Merger Proposal is fair to, and in the
best
interests of, all of our stockholders, including those who acquired shares
in
our initial public offering. Accordingly, our Board of Directors unanimously
recommends that you vote “FOR” Proposals 1,2, 3 and 4.
In
their
discretion, the proxies are authorized to vote upon such other matters as may
properly come before the special meeting or any adjournments thereof. If you
wish to vote in accordance with our Board of Directors’ recommendations, just
sign below. You need not mark any boxes.
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Dated
|
|
|
2007
|
|||||
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Signature of Stockholder
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|||||||
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Signature of Stockholder (if held jointly)
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NOTES:
1.
Please
sign your name exactly as your name appears hereon. If the shares are owned
by
more than one person, all owners should sign. Persons signing as executors,
administrators, trustees or in similar capacities should so indicate. If a
corporation, please sign the full corporate name by the president or other
authorized officer. If a partnership, please sign in the partnership name by
an
authorized person.
2.
To be
valid, the enclosed form of proxy for the special meeting, together with the
power of attorney or other authority, if any, under which it is signed,
must be received by 9:00 a.m., Eastern Time, on July 26, 2007 at the
offices of our transfer agent, Continental Stock Transfer & Trust
Company, 17 Battery Place, New York, New York 10004.
3.
Returning the enclosed form of proxy will not prevent you from attending and
voting in person at the special meeting or any adjournment or postponement
thereof.
PLEASE
COMPLETE, SIGN, DATE AND RETURN THIS PROXY CARD
PROMPTLY
TO CONTINENTAL STOCK TRANSFER & TRUST COMPANY
164