<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1998
REGISTRATION NO. 333-38753
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 5
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------------
KING PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TENNESSEE 2834 54-1684963
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
501 FIFTH STREET, BRISTOL, TENNESSEE 37620, (423) 989-8000
(Address, including zip code, and telephone number, including area code of
registrant's principal executive offices)
JOHN M. GREGORY
KING PHARMACEUTICALS, INC.
501 FIFTH STREET
BRISTOL, TENNESSEE 37620
(423) 989-8001
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------------
COPIES TO:
<TABLE>
<C> <C> <C>
LINDA M. CROUCH, ESQ. JOHN A. A. BELLAMY, ESQ. DAVID J. BEVERIDGE, ESQ.
BAKER, DONELSON, BEARMAN & KING PHARMACEUTICALS, INC. SHEARMAN & STERLING
CALDWELL 501 FIFTH STREET 599 LEXINGTON AVENUE
2000 FIRST TENNESSEE BUILDING BRISTOL, TENNESSEE 37620 NEW YORK, NEW YORK 10022
165 MADISON AVENUE (423) 989-8010 (212) 848-4000
MEMPHIS, TENNESSEE 38103
(901) 577-2262
</TABLE>
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 8, 1998
PROSPECTUS
8,919,000 SHARES
[KING PHARMACEUTICALS LOGO]
Common Stock
------------------------
Of the 8,919,000 shares of common stock, no par value per share (the
"Common Stock"), offered hereby, 6,000,000 shares are being sold by King
Pharmaceuticals, Inc. (the "Company") and 2,919,000 shares are being sold by
certain shareholders of the Company (the "Selling Shareholders"). See "Principal
and Selling Shareholders." The Company will not receive any proceeds from the
sale of the shares by the Selling Shareholders.
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $16.50 and $19.50 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. The
Common Stock has been approved, subject to official notice of issuance, for
listing on the Nasdaq National Market under the symbol "KING."
------------------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3).............. $ $ $ $
==================================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,825,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,000,000 additional shares of Common Stock on the same terms and conditions
as set forth above solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc. in New York, New York, on or about , 1998.
------------------------
LEHMAN BROTHERS
CREDIT SUISSE FIRST BOSTON
HAMBRECHT & QUIST
, 1998
<PAGE> 3
[PICTURES?]
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus, including information under "Risk
Factors."
THE COMPANY
The Company is an integrated pharmaceutical company that manufactures,
markets and sells branded and generic prescription pharmaceutical products. The
Company seeks to capitalize on niche opportunities in the pharmaceutical
industry created by cost containment initiatives and consolidation among large
global pharmaceutical companies. The Company's strategy is to acquire branded
pharmaceutical products and increase their sales by focused promotion and
marketing, as well as by developing product line extensions and through product
life cycle management.
Since December 1994, the Company has acquired 15 branded pharmaceutical
products, developed one product internally, divested one product and introduced
seven product line extensions. On October 31, 1997, the Company entered into a
preliminary non-binding letter of intent with Warner-Lambert Company
("Warner-Lambert") for the acquisition of additional branded product lines, a
manufacturing facility and contracts for manufacturing products for third
parties (the "Sterile Products Acquisition"). See "Business -- Strategy."
The Company markets its branded pharmaceutical products through its
wholly-owned subsidiary, Monarch Pharmaceuticals, Inc. ("Monarch
Pharmaceuticals"). The goal of Monarch Pharmaceuticals is to aggressively
promote acquired branded pharmaceutical products in order to increase their
sales. Monarch Pharmaceuticals has 48 sales representatives who market primarily
in the southeastern and midwestern United States. This sales force is dedicated
to promoting and marketing branded pharmaceutical products and is supported by
telemarketers and customer service representatives who promote the Company's
products in territories not currently covered by field representatives. The
Company expects its sales and marketing staff to grow significantly as the
Company acquires additional branded pharmaceutical products.
The Company's current branded pharmaceutical products include, among
others, Cortisporin (the "Cortisporin Product Line"), acquired from Glaxo
Wellcome Inc. ("Glaxo Wellcome") in March 1997, Thalitone, acquired from Horus
Therapeutics, Inc. in December 1996 and Viroptic acquired from Glaxo Wellcome in
May 1997. In addition the Company acquired Septra, Proloprim, Mantadil and
Kemadrin, as well as the exclusive licenses, free of royalty obligations, to
manufacture and market prescription formulations of Neosporin and Polysporin
from Glaxo Wellcome in November 1997 (the "Glaxo Acquisition"). Branded
pharmaceutical products represented 79.8% of the net sales of the Company for
the first nine months ended September 30, 1997, with the Cortisporin Product
Line representing 60.7% of net sales. The Company acquired its first branded
product, Anexsia, and a related generic product line (the "Anexsia Product
Line") for $17.6 million in December 1994. During the 12 months following its
acquisition, the Company significantly increased annual sales of the Anexsia
Product Line through a combination of product development and marketing. In
December 1995, the Company sold the Anexsia Product Line to Mallinckrodt
Chemical, Inc. ("Mallinckrodt"), for $32.0 million in cash and recognized a
$13.1 million net gain (these transactions are hereinafter referred to
collectively as the "Anexsia Transaction").
The Company believes its integrated manufacturing capabilities and support
systems allow for higher margins and enhanced ability to acquire and develop
pharmaceutical products because it does not have to rely on third parties to
manufacture or develop products. However, currently ten of its product lines,
including Cortisporin and the six product lines acquired in the Glaxo
Acquisition, are manufactured in the same facilities in which they were
previously manufactured as the Company has not yet received regulatory approval
for their manufacture at its facilities. The Company intends to transfer
production of newly acquired branded pharmaceutical products and their product
line
3
<PAGE> 5
extensions to its manufacturing facilities as soon as practicable after
regulatory requirements are satisfied. The Company can produce a broad range of
dosage formulations, including sterile solutions, injectables, tablets and
capsules, liquids, creams and ointments, suppositories and powders, and is
licensed by the Drug Enforcement Agency ("DEA") to procure and produce
controlled substances. The Company's manufacturing capability is integrated with
its support services, including quality control, quality assurance, regulatory
compliance, packaging, distribution and inventory management and purchasing and
production planning. These integrated services enable the Company to maintain
high quality standards for its products as well as provide reliable and timely
service to its customers. The Company currently manufactures certain of its own
branded and generic products and uses its excess manufacturing capacity to
contract manufacture for other pharmaceutical companies.
The Company's product development efforts are currently focused on
developing product line extensions, which allow the Company to enhance product
differentiation, create market exclusivity and minimize sales lost to generic
substitution. To date, the Company has introduced seven line extensions for its
acquired products.
The Company also manufactures and markets a number of generic
pharmaceutical products as well as a comprehensive line of nutritional
supplements for companion animals. The Company markets its generic
pharmaceutical products under the King Pharmaceuticals label and its companion
animal health products under the Royal Vet and Show Winner tradenames.
THE OFFERING
Common Stock offered by the Company......... 6,000,000 shares
Common Stock offered by the Selling
Shareholders.............................. 2,919,000 shares
Common Stock to be outstanding after the
offering.................................. 34,000,000 shares(1)
Use of proceeds............................. Acquisition of additional
branded products, repayment of
$3.6 million of certain
indebtedness and for general
corporate purposes including
investments in facilities to
accommodate new products
acquired, development of branded
product line extensions and
generic products and expansion
of sales force. It is currently
anticipated that $90.0 million
of the net proceeds of the
offering will be used for the
Sterile Products Acquisition.
However, there can be no
assurance that the Sterile
Products Acquisition will occur,
or if it occurs, there can be no
assurance as to the assets that
may be acquired, the purchase
price of such assets or the
terms of their acquisition. See
"Use of Proceeds."
Nasdaq National Market symbol............... KING
- ------------------------------
(1) Excludes 3,500,000 shares of Common Stock available for future grants under
the Company's 1997 Incentive and Nonqualified Stock Option Plan for
Employees. No options are currently outstanding.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
FOR RECENT
ACQUISITIONS
PRO FORMA AND STERILE PRO FORMA
FISCAL YEAR ENDED FOR RECENT PRODUCTS NINE MONTHS ENDED FOR RECENT
DECEMBER 31, ACQUISITIONS ACQUISITION SEPTEMBER 30, ACQUISITIONS
--------------------------- ------------ ------------ --------------------- ------------
1994 1995 1996 1996(1) 1996(2)(3) 1996 1997 1997(1)
------- ------- ------- ------------ ------------ ----------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $13,311 $25,441 $15,457 $ 45,834 $ 136,527 $11,310 $33,817 $ 48,896
Development revenue(4)......... -- -- 5,000 5,000 5,000 2,500 -- --
------- ------- ------- ---------- ---------- ------- ------- ----------
Total revenue, net..... 13,311 25,441 20,457 50,834 141,527 13,810 33,817 48,896
Costs of sales................. 9,754 12,130 8,782 13,016 61,483 7,050 9,538 12,029
Selling, general and
administrative............... 1,987 8,605 12,106 16,350 30,591 8,441 13,734 16,144
Depreciation and
amortization................. 639 1,777 982 3,408 8,901 655 1,631 2,643
------- ------- ------- ---------- ---------- ------- ------- ----------
Total costs and
expenses............. 12,380 22,512 21,870 32,774 100,975 16,146 24,903 30,816
Gain on sale of product line,
net(5)....................... -- 13,102 -- -- -- -- -- --
------- ------- ------- ---------- ---------- ------- ------- ----------
Operating income (loss)........ 931 16,031 (1,413) 18,060 40,552 (2,336) 8,914 18,080
Total other (expenses)
income....................... (515) (1,639) 1,066 (2,893) (5,903) 1,317 (1,519) (3,418)
Income tax (benefit) expense... (501) 5,058 (107) 6,099 13,892 (316) 2,840 5,747
------- ------- ------- ---------- ---------- ------- ------- ----------
Net income (loss) before
extraordinary gain........... 917 9,334 (240) 9,068 20,757 (703) 4,555 8,915
Extraordinary gain(6).......... -- 528 -- -- -- -- -- --
------- ------- ------- ---------- ---------- ------- ------- ----------
Net income (loss).............. $ 917 $ 9,862 $ (240) $ 9,068 $ 20,757 $ (703) $ 4,555 $ 8,915
======= ======= ======= ========== ========== ======= ======= ==========
Net income (loss) per
share(7)..................... $ 0.05 $ 0.36 $ (0.01) $ 0.33 $ 0.62 $ (0.03) $ 0.16 $ 0.32
======= ======= ======= ========== ========== ======= ======= ==========
Weighted average number of
common and common stock
equivalents(8)............... 18,213 27,163 27,507 27,507 33,507 27,441 28,000 28,000
<CAPTION>
PRO FORMA
FOR RECENT
ACQUISITIONS
AND STERILE
PRODUCTS
ACQUISITION
------------
1997(2)(3)
------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales...................... $ 96,396
Development revenue(4)......... --
----------
Total revenue, net..... 96,396
Costs of sales................. 45,585
Selling, general and
administrative............... 23,767
Depreciation and
amortization................. 6,763
----------
Total costs and
expenses............. 76,115
Gain on sale of product line,
net(5)....................... --
----------
Operating income (loss)........ 20,281
Total other (expenses)
income....................... (5,674)
Income tax (benefit) expense... 5,725
----------
Net income (loss) before
extraordinary gain........... 8,882
Extraordinary gain(6).......... --
----------
Net income (loss).............. $ 8,882
==========
Net income (loss) per
share(7)..................... $ 0.26
==========
Weighted average number of
common and common stock
equivalents(8)............... 34,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------------
AS FURTHER
AS ADJUSTED AS FURTHER ADJUSTED FOR THE
FOR THE GLAXO ADJUSTED FOR STERILE PRODUCTS
DECEMBER 31, 1996 ACTUAL ACQUISITION(9) THE OFFERING(10) ACQUISITION(11)
----------------- ------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 1,392 $ 35 $ 35 $ 95,137 $ 5,137
Working capital............................ 7,749 83 83 96,360 6,360
Total assets............................... 39,279 74,253 97,253 192,355 227,355
Long-term debt (excluding current portion
and line of credit)...................... 13,980 22,913 43,913 41,575 76,575
Shareholders' equity....................... 15,693 27,809 27,809 126,424 126,424
</TABLE>
- ------------------------------
(1) The pro forma consolidated information gives effect to the recent
acquisitions of the Company which include (i) the Nucofed and Quibron
product lines on October 2, 1996, (ii) the Thalitone product line on
December 17, 1996, (iii) the Proctocort product line on January 22, 1997,
(iv) the Viroptic product line on May 15, 1997, (v) the Cortisporin Product
Line on March 21, 1997 and (vi) the Glaxo Acquisition on November 14, 1997
(collectively, the "Recent Acquisitions"), in each case as if the
acquisitions had occurred on January 1, 1996. See "Pro Forma Consolidated
Financial Statements."
(2) The pro forma consolidated information gives effect to the Recent
Acquisitions and to the Sterile Products Acquisition as if the acquisitions
had occurred on January 1, 1996. See "Pro Forma Consolidated Financial
Statements." There can be no assurance that the Sterile Products
5
<PAGE> 7
Acquisition will occur or, if it occurs, there can be no assurance as to
the assets that may be acquired, the purchase price of such assets or the
terms of their acquisition. See "Risk Factors -- Dependence on Acquisition
of Products."
(3) The Sterile Products Acquisition includes Fluogen which had gross sales of
$23.0 million and $22.3 million in 1995 and 1996, respectively, but which
was not sold in 1997. Fluogen was subject to a voluntary recall due to
shelf life potency concerns in 1996. Subsequent testing has established
Fluogen's shelf life potency and the Company intends to market Fluogen in
1998. As a result of Fluogen's being discontinued, cost of goods sold in
1997 included approximately $5.5 million of unabsorbed overhead and
approximately $4.3 million of obsolete inventory. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Strategy," "Business -- Products and Product Development" and
"Pro Forma Consolidated Financial Statements."
(4) In connection with the Anexsia Transaction, the Company agreed to develop
four Abbreviated New Drug Applications ("ANDAs") to be filed with the Food
and Drug Administration ("FDA") on Mallinckrodt's behalf for a maximum of
$2.5 million each due upon FDA approval. In 1996 the FDA approved two of
these ANDAs and as of September 30, 1997, the two additional ANDAs were on
file with the FDA.
(5) In December 1994, the Company acquired the Anexsia Product Line. The
Company sold the Anexsia Product Line to Mallinckrodt in December 1995 for
$32.0 million and recorded a $13.1 million net gain.
(6) Reflects gain from early extinguishment of debt in connection with the
disposition of the Anexsia Product Line.
(7) Because the Company does not have any dilutive securities, net income
(loss) per share on a fully diluted basis is the same as primary earnings
per share for all periods presented.
(8) Reflects retroactively the effects of (i) shares issued within a one year
period from the filing date of the Company's Form S-1 for an initial public
offering of common stock which includes 1,386,230 shares issued to
shareholders and members of management in October 1996 and 3,047,355 shares
issued to The United Company in March 1997, (ii) a 15.0% stock dividend
paid in 1996 and (iii) a 2.8 for 1 stock split.
(9) Gives effect to the Glaxo Acquisition as if it occurred on September 30,
1997.
(10) As adjusted to give effect to the sale of 6,000,000 shares of Common Stock
offered hereby, after deducting underwriting discounts and offering
expenses, at an assumed initial public offering price of $18.00 per share
and the application of the estimated net proceeds therefrom as set forth in
"Use of Proceeds."
(11) Gives effect to the Sterile Products Acquisition as if it occurred
subsequent to the sale of 6,000,000 shares of Common Stock noted in (10)
above.
------------------------------
Except as otherwise noted, all information in this Prospectus reflects a
2.8 for 1 stock split and assumes no exercise of the Underwriters'
over-allotment option. See "Description of Capital Stock," "Underwriting" and
Notes to Consolidated Financial Statements.
6
<PAGE> 8
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information in this Prospectus before purchasing the shares of Common
Stock offered hereby.
Dependence on Acquisition of Products. The Company has increased its sales
and net income in the first nine months of 1997 through a series of strategic
acquisitions of branded products and related internal growth initiatives
intended to develop marketing opportunities with respect to the acquired product
lines. The Company's strategy for growth is primarily dependent upon its
continued ability to acquire branded products that can be promoted through
existing marketing and distribution channels and, when appropriate, the
enhancement of such marketing and distribution channels. Because the Company is
not engaged in proprietary research activities leading to the introduction of
new products, it must rely upon the availability for purchase of product lines
of other manufacturers. Other companies, including those with substantially
greater financial, marketing and sales resources, are competing with the Company
for the right to acquire such products. There can be no assurance that the
Company will be able to acquire rights to additional products on acceptable
terms, if at all, or be able to obtain future financing for such acquisitions on
acceptable terms, if at all. On October 31, 1997, the Company entered into a
preliminary non-binding letter of intent for the Sterile Products Acquisition.
Although the Company has offered $125.0 million to Warner-Lambert for these
products and other assets, the Company has not completed due diligence and any
purchase price will be subject to the results of the Company's due diligence
process. In addition to due diligence, the proposed transaction is subject to
numerous conditions and contingencies, including internal approvals of both the
Company and Warner-Lambert, receipt of regulatory approvals, resolution of legal
and equitable matters relating to employees, supply and service agreements and
intellectual property rights and preparation and negotiation of documentation.
In addition, if the proposed transaction is consummated, the Company may incur
additional acquisition cost to purchase any related inventory, the cost of which
is subject to further negotiation. Accordingly, there can be no assurance that
this proposed transaction will occur or, if it occurs, there can be no assurance
as to the assets that may be acquired, the purchase price of such assets or the
terms of their acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Indebtedness and Other
Matters" and "Business -- Strategy." The inability to effect acquisitions of
additional branded products would have a material adverse effect on the
Company's future business, financial condition and results of operations.
Furthermore, there can be no assurance that the Company, once it has obtained
rights to a pharmaceutical product and committed to payment terms, will be able
to generate sales sufficient to create a profit or otherwise avoid a loss. Any
inability to generate such sufficient sales or any subsequent reduction of sales
may require a write-off of the intangible value allocated to acquired products
resulting in a charge to earnings. In addition, the Company's marketing
strategy, distribution channels and levels of competition with respect to
acquired products may be different than those of the Company's current products
and there can be no assurance that the Company will be able to compete favorably
in those product categories. See "Business."
Dependence on Cortisporin Sales and Other Key Products. The Company
acquired the Cortisporin product line from Glaxo Wellcome in March 1997 and
derives a substantial portion of its revenue from sales of the Cortisporin
product line. The Cortisporin product line accounted for 60.7% of net sales
during the nine months ended September 30, 1997. The Company believes that sales
of the Cortisporin product line will continue to constitute a significant
portion of net sales for the foreseeable future. Accordingly, any factor
adversely affecting the Cortisporin product line sales, including any
interruption in the supply of the Cortisporin product line, would have a
material adverse effect on the Company's business, financial condition and
results of operations. Three products proposed to be acquired in the Sterile
Products Acquisition, Procanbid, Anusol-HC and Coly-Mycin-M Parenteral,
accounted for approximately 46.0% of gross sales (including contract
manufacturing) of the products proposed to be acquired in the Sterile Products
Acquisition in the first nine months of 1997. Accordingly, if these products are
acquired, any factor adversely affecting sales of such products could also have
a material adverse effect on the Company's business, financial condition and
results of
7
<PAGE> 9
operations. See "-- Competition; Uncertainty of Technological Change"
"-- Reliance on Third Party Manufacturers" and "Business -- Products and Product
Development."
Generic Substitution. The Company's branded pharmaceutical products are
subject to competition from generic equivalents and alternate therapies. There
is no proprietary protection for most of the branded pharmaceutical products
sold by the Company and generic and other substitutes for most of its branded
pharmaceutical products are sold by other pharmaceutical companies. In addition,
governmental and other pressure toward the dispensing of generic equivalents
will likely result in generic substitution and competition generally for the
Company's branded pharmaceutical products. Increased competition in the sale of
generic pharmaceutical products may cause a decrease in revenue from the
Company's branded products. Any reduction of revenues may require a write-off of
the intangible value allocated to acquired products resulting in a charge to
earnings. While the Company will seek to mitigate the effect of this
substitution through, among other things, creation of strong brand name
recognition and product line extensions for its branded pharmaceutical products,
there can be no assurance that the Company will be successful in these efforts.
See "-- Competition; Uncertainty of Technological Change" and
"Business -- Competition."
Managing Growth of Business; Integration of Acquisitions. Due to the
Company's business strategy to acquire branded pharmaceutical products, the
Company anticipates that the integration of newly-acquired products, as well as
other assets, will require significant management attention and expansion of its
sales force. The Company's ability to manage its acquisitions will require it to
continue to implement and improve its operational, financial and management
information systems and to motivate and effectively manage an increasing number
of employees. On October 31, 1997, the Company entered into a preliminary
non-binding letter of intent for the Sterile Products Acquisition, which, if
consummated, could significantly expand the Company's product offerings and
operations. To date, the Company has not made an acquisition of this size, and
if this acquisition is consummated as currently anticipated, the Company will
acquire an additional manufacturing facility. If this facility is acquired, the
Company's future success will depend in part on its ability to retain or hire
qualified employees to operate this facility and to operate such facility
efficiently in accordance with applicable regulatory standards. If the Company's
management is unable to manage such changes effectively and integrate its future
acquisitions successfully, such changes and acquisitions could materially
adversely affect the Company's business, financial condition and results of
operations. See "-- Attraction and Retention of Key Personnel" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Quarterly Fluctuation of Results; Uncertainty of Profitability. The
Company's results of operations may vary from quarter to quarter due to a
variety of factors including acquisitions and sales of branded pharmaceutical
products, expenditures incurred to acquire and promote additional pharmaceutical
products, changing customer base, the availability and cost of raw materials,
interruptions in supply by third-party manufacturers, the introduction of new
products by the Company or its competitors, the mix of products sold by the
Company, seasonality of certain product sales, changes in sales and marketing
expenditures, competitive pricing pressures and general economic and industry
conditions which affect customer demand. These factors could also affect annual
results of operations. The Company experienced an operating loss in the year
ended December 31, 1996. There can be no assurance that the Company will be
successful in maintaining or improving its profitability or avoiding losses in
any future period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Reliance on Third-Party Manufacturers. Currently ten of the Company's
product lines, including Cortisporin and all six of the branded pharmaceutical
products acquired in the Glaxo Wellcome Acquisition, are presently manufactured
by third parties until such products can be moved to the Company's manufacturing
facilities. Until such time, the Company's dependence upon third parties for the
manufacture of its products may adversely affect the Company's profit margins
and its ability to develop and deliver its products on a timely and competitive
basis. The Cortisporin Product Line accounted for 60.7% of net sales during the
nine months ended September 30, 1997. The Company's
8
<PAGE> 10
contract for the manufacture of Cortisporin expires December 31, 2002 but may be
renewed with the consent of both parties for one-year periods thereafter. If for
any reason the Company is unable to obtain or retain third-party manufacturers
on commercially acceptable terms, it may not be able to distribute its products
as planned. If the Company should encounter delays or difficulties with contract
manufacturers in producing or packaging its products, the distribution,
marketing and subsequent sales of such products would be adversely affected and
the Company may have to seek alternative sources of supply or abandon or sell a
product line on unsatisfactory terms. No assurance can be made that the Company
will be able to enter into alternative supply arrangements at commercially
acceptable rates, if at all. No assurance can be made that the manufacturers
utilized by the Company will be able to provide the Company with sufficient
quantities of its products or that the products supplied to the Company will
meet the Company's specifications.
Uncertainties Related to Third-Party Reimbursement; Pricing Pressures. The
Company's commercial success in producing, marketing and selling generic
products will depend, in part, on the availability of adequate reimbursement
from third-party health care payers, such as government and private health
insurers and managed care organizations. Third-party payers are increasingly
challenging the pricing of medical products and services. There can be no
assurance that reimbursement will be available to enable the Company to achieve
market acceptance of its products or to maintain price levels sufficient to
realize an appropriate return on the Company's investment in product acquisition
and development. If adequate reimbursement levels are not provided, the
Company's business, financial condition and results of operations could be
materially adversely effected. The market for the Company's products may be
limited by actions of third-party payers. For example, many managed health care
organizations are now controlling the pharmaceutical products that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has created a trend of downward
pricing pressure in the industry. In addition, many managed care organizations
are pursuing various ways to reduce pharmaceutical costs and are considering
formulary contracts primarily with those pharmaceutical companies that can offer
a full line of products for a given therapy sector or disease state. There can
be no assurance that the Company's products will be included on the formulary
lists of managed care organizations or that downward pricing pressures in the
industry generally will not negatively impact the Company's operations. Further,
a number of legislative and regulatory proposals aimed at changing the health
care system have been proposed. While the Company cannot predict whether any
such proposals will be adopted or the effect such proposals may have on its
business, the pending nature of such proposals, as well as the adoption of any
proposal, may exacerbate industry-wide pricing pressures and could have a
material adverse effect on the Company. See "Business -- Government Regulation."
Customer Concentration; Consolidation of Distribution Network. The Company
is currently dependent upon a small number of customers. In the first nine
months ended September 30, 1997, approximately 56.9% of the Company's sales were
to McKesson Corporation (19.5%), Cardinal/ Whitmire (13.4%), Bergen Brunswig
Corporation (13.1%), and Amerisource Health Corporation (10.9%) and for the year
ended December 31, 1996, approximately 69.7% of the Company's sales were to
SmithKline Beecham Corporation ("SmithKline Beecham") (18.1%), Mallinckrodt
(36.7%) and Novartis Animal Health US, Inc. ("Novartis") (14.9%). These
customers are primarily wholesale drug distributors through which the Company
distributes its products. The products that the Company is considering acquiring
in the Sterile Products Acquisition are sold by Warner-Lambert to many of the
same wholesale drug distributors to whom the Company currently sells its
products. The loss of any one of these customers could result in a material
adverse effect on the Company's business, financial condition or results of
operations. Additionally, the distribution network for pharmaceutical products
has in recent years been subject to increasing consolidation. As a result, a few
large wholesale distributors control a significant share of the market. In
addition, the number of independent drug stores and small chains has decreased
as retail consolidation has occurred. Further consolidation among, or any
financial difficulties of, distributors or retailers could result in the
combination or elimination of warehouses thereby stimulating product returns to
the Company. Further consolidation or financial difficulties could also cause
customers to reduce their inventory levels, or otherwise reduce
9
<PAGE> 11
purchases of the Company's products which could result in a material adverse
effect on the Company's business, financial condition and results of operations.
See "-- Product Liability; Product Recall; Product Returns" and
"Business -- Sales and Marketing."
Government Regulation. Virtually all aspects of the Company's activities
are regulated by federal and state statutes and government agencies. The
manufacturing, processing, formulation, packaging, labeling, distribution and
advertising of the Company's products, and disposal of waste products arising
from such activities, are subject to regulation by one or more federal agencies,
including the FDA, the DEA, the Federal Trade Commission ("FTC"), the Consumer
Product Safety Commission, the U. S. Department of Agriculture, the Occupational
Safety and Health Administration ("OSHA") and the U. S. Environmental Protection
Agency ("EPA") as well as by foreign governments. These activities are also
regulated by various agencies of the states and localities in which the
Company's products are sold. The Company believes that its facilities are in
substantial compliance with all provisions of federal and state laws concerning
the environment and does not believe that future compliance with such provisions
will have a material adverse effect on its financial condition or results of
operations.
All pharmaceutical manufacturers, including the Company, are subject to
regulation by the FDA under the authority of the Federal Food, Drug, and
Cosmetic Act ("FDC Act"). All "new drugs" must be the subject of an FDA approved
new drug application ("NDA") before they may be marketed in the United States.
Certain prescription drugs are not currently required to be the subject of an
approved NDA but, rather, may be marketed pursuant to an FDA regulatory
enforcement policy permitting continued marketing of those drugs until the FDA
determines whether they are safe and effective. The FDA has the authority to
withdraw existing NDA approvals and to review the regulatory status of products
marketed under the enforcement policy. The FDA may require an approved NDA for
any drug product marketed under the enforcement policy if new information
reveals questions about the drug's safety or effectiveness. All drugs must be
manufactured in conformity with current good manufacturing practices ("cGMP"),
and drug products subject to an approved NDA must be manufactured, processed,
packaged, held, and labeled in accordance with information contained in the NDA.
The Company and its third-party manufacturers are subject to periodic inspection
by the FDA to assure such compliance. Pharmaceutical products must be
distributed, sampled and promoted in accordance with FDA requirements. The FDA
also regulates the advertising of prescription drugs.
Under the FDC Act, the federal government has extensive enforcement powers
over the activities of pharmaceutical manufacturers to ensure compliance with
FDA regulations. Those powers include, but are not limited to, the authority to
initiate court action to seize unapproved or non-complying products, to enjoin
non-complying activities, to halt manufacturing operations that are not in
compliance with cGMP and to seek civil monetary and criminal penalties. The
initiation of any of these enforcement activities, including the restriction or
prohibition on sales of products marketed by the Company, could materially
adversely affect the Company's business, financial condition and results of
operations.
While the Company believes that all of its current pharmaceuticals are
lawfully marketed in the United States under current FDA enforcement policies or
have received the requisite agency approvals for manufacture and sale, such
marketing authority is subject to withdrawal by the FDA. In addition,
modifications or enhancements of approved products are in many circumstances
subject to additional FDA approvals which may or may not be received and which
may be subject to a lengthy application process. The Company's and the
third-party manufacturers' manufacturing facilities are continually subject to
inspection by such governmental agencies and manufacturing operations could be
interrupted or halted in any such facilities if such inspections prove
unsatisfactory. Any change in the FDA's enforcement policy or any decision by
the FDA to require an approved NDA for a Company product not currently subject
to the approved NDA requirements could have a material adverse effect on the
Company's business, financial condition and results of operations.
10
<PAGE> 12
The Company also manufactures and sells drugs which are "controlled
substances" as defined in the Controlled Substances Act, which establishes,
among other things, certain security and record keeping requirements
administered by the DEA. The Company has not experienced restrictions or fines
for non-compliance with the foregoing regulations but no assurance can be given
that restrictions or fines which could have a material adverse effect upon the
Company's business, financial condition, and results of operations will not be
imposed upon the Company in the future.
The Company may also be subject to fees under The Prescription Drug User
Fee Act of 1992 ("PDUFA"). PDUFA authorizes the FDA to collect three types of
user fees for: (i) certain types of applications and supplements for approval of
drug and biologic products, (ii) certain establishments where such products are
made, and (iii) certain marketed products. Fees for applications,
establishments, and products are determined by the FDA using criteria delineated
in the statute. When certain conditions are met, the FDA may waive or reduce
fees. To date, the Company has not been obligated to pay any such fee. There can
be no assurance, however, that the FDA will not impose such a fee in the future.
The Company cannot determine what effect changes in regulations or statutes
or legal interpretation, when and if promulgated or enacted, may have on its
business in the future. Changes could, among other things, require changes to
manufacturing methods, expanded or different labeling, the recall, replacement
or discontinuance of certain products, additional record keeping and expanded
documentation of the properties of certain products and scientific
substantiation. Such changes, or new legislation, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Government Regulation" and "Business -- Environmental Matters."
Competition; Uncertainty of Technological Change. The Company competes
with other pharmaceutical companies, including large global pharmaceutical
companies with financial resources substantially greater than those of the
Company, for products and product line acquisitions. There can be no assurance
(i) that the Company will be able to acquire commercially attractive
pharmaceutical products, (ii) that additional competitors will not enter the
market, or (iii) that competition for products and product line acquisitions
will not have a material adverse effect on the Company's business, financial
condition and results of operations. The Company also competes with
pharmaceutical companies in developing, marketing and selling pharmaceutical
products. The selling prices of pharmaceutical products typically decline as
competition increases. Further, other products now in use, under development or
acquired by other pharmaceutical companies, may be more effective or offered at
lower prices than the Company's current or future products. The industry is
characterized by rapid technological change which may render the Company's
products obsolete, and competitors may develop their products more rapidly than
the Company. Competitors may also be able to complete the regulatory process
sooner, and therefore, may begin to market their products in advance of the
Company's products. The Company believes that competition in sales of its
products will be based on, among other things, product efficacy, safety,
reliability, availability and price. See "-- Generic Substitution," and
"Business -- Competition."
Product Liability; Product Recall; Product Returns. The Company faces an
inherent business risk of exposure to product liability claims in the event that
the use of its technologies or products is alleged to have resulted in adverse
effects. Such risks will exist even with respect to those products that receive
regulatory approval for commercial sale. While the Company has taken, and will
continue to take, what it believes are appropriate precautions, there can be no
assurance that it will avoid significant product liability exposure. The Company
currently has product liability insurance in the amount of $25.0 million for
aggregate annual claims with a $50,000 deductible per incident and a $500,000
aggregate annual deductible; however, there can be no assurance that the level
or breadth of any insurance coverage will be sufficient to fully cover potential
claims. There can be no assurance that adequate insurance coverage will be
available in the future at acceptable costs, if at all, or that a product
liability claim would not materially adversely affect the Company's business,
financial condition and results of operations of the Company. Product recalls
may be issued at the discretion of
11
<PAGE> 13
the Company, the FDA or other government agencies having regulatory authority
for pharmaceutical product sales. Recalls may occur due to disputed labeling
claims, manufacturing issues, quality defects or other reasons. No assurance can
be given that product recalls will not occur in the future. Any product recall
could materially adversely affect the Company's business, financial condition
and results of operations. The Company permits customers to return unused
pharmaceutical products under certain conditions. Although product returns were
less than 4.0% of revenues for the nine months ended September 30, 1997, there
can be no assurance that actual levels of returns will not increase or
significantly exceed the amounts anticipated by the Company. See "-- Customer
Concentration; Consolidation of Distribution Network," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and
"Business -- Litigation."
Early Termination of Certain Licenses. The Company has exclusive licenses
expiring June 2036 for the recently acquired prescription formulations of
Neosporin and Polysporin. Such licenses are subject to early termination in the
event the Company breaches its obligations under the license agreement related
to these branded pharmaceutical products. Such early termination could have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, the licenses would be subject to early
termination if the Company fails to meet specified quality control standards,
including cGMP with respect to the products, or commits a material breach of
other terms and conditions of the licenses which would have a significant
adverse effect on the uses of the licensed products retained by the licensor,
which would include among other things, marketing products under these trade
names outside the prescription field. See "Business -- Patents, Trademarks and
Proprietary Property."
Risks Related to Amortization of Intangible Assets. The Company's pro
forma total assets reflect substantial intangible assets. At September 30, 1997,
pro forma net intangible assets including the Recent Acquisitions and the
Sterile Products Acquisition represent approximately 47.0% of total assets and
84.6% of total shareholders' equity. The intangible asset value represents the
excess of cost over the fair value of the separate assets acquired by the
Company since it began operation in 1994. There can be no assurance that the
value of such assets will ever be realized by the Company. These intangible
assets are amortized on a straight-line method over 10 to 25 years for certain
assets and 25 years for the Glaxo and Sterile Products Acquisitions. The Company
evaluates on a regular basis whether events and circumstances have occurred that
indicate that all or a portion of the carrying amount of the asset may no longer
be recoverable, in which case a charge to earnings could become necessary. Any
determination requiring the write-off of a significant portion of unamortized
intangible assets would adversely affect the Company's results of operations.
See "Pro Forma Consolidated Financial Statements."
Attraction and Retention of Key Personnel. The Company is highly dependent
on the principal members of its management staff, the loss of whose services
might impede the achievement of acquisition and development objectives. Although
the Company believes that it is adequately staffed in key positions and that it
will be successful in retaining skilled and experienced management, operational
and scientific personnel, there can be no assurance that the Company will be
able to attract and retain such personnel on acceptable terms. The loss of the
services of key scientific, technical and management personnel could have a
material adverse effect on the Company, especially in light of the Company's
recent growth. The Company does not maintain key-person life insurance on any of
its employees. In addition, the Company does not currently have employment
agreements with any of its employees. See "Business -- Employees" and
"Management."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Common Stock of the Company,
and there can be no assurance that an active trading market will develop or be
sustained after this offering. The initial public offering price has been
determined by negotiations between the Company and the representatives of the
Underwriters and may not be indicative of the market price after the offering.
See "Underwriting" for the factors considered in determining the initial public
offering price. The stock prices of emerging growth companies, such as the
Company, have historically been volatile. Factors such as the announcements
12
<PAGE> 14
of technological innovations or new products by the Company, its competitors and
other third parties, as well as variations in the Company's results of
operations, perceptions about market conditions in the pharmaceutical industry,
the impact of various regulatory proposals and general market conditions, many
of which are unrelated to the Company's operating performance, may cause the
market price of the Company's Common Stock to fluctuate significantly.
Market Risk of Shares Eligible for Future Sale. Sales of a substantial
number of shares of the Company's Common Stock in the public market following
this offering, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. Upon completion of this offering,
there will be 34,000,000 shares of Common Stock outstanding (35,000,000 shares
if the Underwriters' over-allotment option is exercised in full). Other than the
8,919,000 shares offered hereby, all shares of Common Stock held by the
Company's current shareholders are "restricted securities" within the meaning of
Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"),
and may only be sold subject to the provisions of Rule 144 under the Securities
Act.
Of the 34,000,000 shares of Common Stock to be outstanding after the
offering, approximately 22,000,000, or approximately 64.7%, of the outstanding
shares of Common Stock will be subject to lock-up agreements entered into by
certain officers, directors and other shareholders of the Company (the "Lock-up
Agreements"). The Company and its directors, officers and certain other
shareholders have, among other things, agreed not to, directly or indirectly,
offer for sale, sell, pledge or otherwise dispose of (or, during the term of the
Lock-up Agreement, enter into any transaction or device that is designed to, or
could be expected to, result in the disposition by any person at any time in the
future of), any Common Stock or securities convertible into or exchangeable for
Common Stock, with certain limited exceptions, or sell or grant options, rights
or warrants with respect to any shares of Common Stock or securities convertible
into or exchangeable for Common Stock, with certain limited exceptions, or enter
into any swap or other derivatives transaction that transfers to another, in
whole or in part, any of the economic benefits or risks of ownership of such
shares of Common Stock, for a period of 180 days after the date of this
Prospectus without the prior written consent of Lehman Brothers Inc. on behalf
of the Representatives (defined hereinafter). Of the approximately 12,000,000
shares of Common Stock to be outstanding after the offering that are not subject
to the Lock-up Agreements, other than the 8,919,000 shares of Common Stock sold
in the offering, (i) approximately 1.1 million shares will be immediately
eligible for resale in the public market without restriction in reliance on Rule
144(k) under the Securities Act, (ii) approximately 800,000 shares may be sold
subject to the volume and manner of sales restrictions of Rule 144 and (iii) the
remaining approximately 1.2 million shares may not be sold pursuant to Rule 144
prior to the expiration of their one-year holding period.
Beginning 180 days after the date of this Prospectus, after the Lock-up
Agreements have expired, (i) approximately 10.0 million additional shares of
Common Stock will become eligible for resale into the public market in reliance
on Rule 144(k) and (ii) approximately 12.0 million additional shares may be sold
subject to the volume and manner of sales restrictions of Rule 144. See "Shares
Eligible for Future Sale" and "Underwriting."
Substantial Dilution; Absence of Dividends. Investors purchasing shares of
Common Stock in this offering will incur immediate substantial dilution of
$15.41 per share in the net tangible book value of the Common Stock from the
initial public offering price. The Company has never paid cash dividends on its
Common Stock. The Company currently anticipates that it will retain all
available funds for use in its business and does not expect to pay cash
dividends in the foreseeable future. Furthermore, the payment of cash dividends
from earnings is currently restricted by the Company's credit arrangements with
a commercial lender. See "Dilution" and "Dividend Policy."
Broad Discretion in Application of Proceeds. The Company intends to use
approximately $3.6 million of the net proceeds from the offering to repay
certain outstanding indebtedness. In addition, it is currently anticipated that
$90.0 million of the net proceeds of the offering will be used for the Sterile
Products Acquisition. However, there can be no assurance that the Sterile
Products Acquisition will occur or, if it occurs, there can be no assurance as
to the assets that may be acquired, the purchase
13
<PAGE> 15
price of such assets or the terms of the acquisition. The Company intends to
utilize the remaining $5.0 million of proceeds for general corporate purposes,
and the Company has not yet finally identified more specific uses for such
proceeds. Should the Sterile Products Acquisition not be consummated or should
other suitable acquisition opportunities not be available, the Company may apply
the proceeds for general corporate purposes, including investments in
facilities, development of branded product line extensions and internally
developed generic products and expansion of the sales force. Accordingly, the
specific uses for the net proceeds will be at the complete discretion of
management of the Company and the Board of Directors and may be allocated based
upon circumstances arising from time to time in the future. See "Use of
Proceeds."
Concentration of Ownership; Lack of Independent Directors. Following this
offering, the present officers and directors of the Company and their affiliates
will beneficially own approximately 40.3% of the outstanding shares of Common
Stock. Accordingly, they will have the ability to exercise significant influence
over the management and policies of the Company. Following completion of the
offering, independent directors will not constitute a majority of the Board of
Directors and the Company's Board of Directors may not have a majority of
independent directors in the future. In the absence of a majority of independent
directors, the Company's executive officers, who also are principal shareholders
and directors, could establish policies and enter into transactions without
independent review and approval thereof. Transactions without an independent
review could present the potential for a conflict of interest between the
Company and its shareholders generally and the executive officers, shareholders
or directors. The Company does not intend to implement any formal procedures to
address any such potential conflicts of interest. For a description of the
ownership interests of the Company's directors, officers and their affiliates,
see "Principal and Selling Shareholders."
Antitakeover Effect of Certain Charter, Bylaws and Statutory Provisions;
Rights Agreement. The Company's Second Amended and Restated Charter (the
"Charter") and Amended and Restated Bylaws (the "Bylaws") provide for a
classified Board of Directors, restrict the ability of shareholders to call
special meetings and contain advance notice requirements for shareholder
proposals and nominations and special voting requirements for the amendment of
the Company's Charter and Bylaws. These provisions could delay or hinder the
removal of incumbent directors and could discourage or make more difficult a
proposed merger, tender offer or proxy contest involving the Company or may
otherwise have an adverse effect on the market price of the Common Stock. The
Company also is subject to provisions of Tennessee corporate law that provides
that a party owning 10.0% or more of stock in a "resident domestic corporation"
(such party is called an "interested shareholder") cannot engage in a business
combination with the resident domestic corporation unless the combination (i)
takes place at least five years after the interested shareholder first acquired
10.0% or more of the resident domestic corporation, and (ii) either (A) is
approved by at least two-thirds of the non-interested voting shares of the
resident domestic corporation or (B) satisfies certain fairness conditions
specified in the specific provisions. There are certain other Tennessee statutes
which provide antitakeover protection for Tennessee corporations. See
"Description of Capital Stock -- Certain Provisions of the Charter and Bylaws
and Statutory Provisions."
The Company's Board of Directors has declared a dividend of one preferred
share purchase right (a "Right") for each share of Common Stock outstanding. A
Right will also be attached to each share of Common Stock subsequently issued.
The Rights will have certain anti-takeover effects. If triggered, the Rights
would cause substantial dilution to a person or group of persons (other than
certain exempt persons) that acquires more than 15.0% of the Common Stock on
terms not approved by the Company's Board of Directors. The Rights could
discourage or make more difficult a merger, tender offer or other similar
transaction. See "Description of Capital Stock -- Rights Agreement."
Pursuant to the Charter, shares of preferred stock may be issued in the
future without shareholder approval and upon such terms and conditions, and
having such rights, privileges and preferences, as the Board of Directors may
determine in the exercise of its business judgment. The rights of the holders of
Common Stock are subject to, and may be adversely affected by, any preferred
stock that may be issued in the future. The issuance of preferred stock, while
providing desirable flexibility in
14
<PAGE> 16
connection with possible acquisitions, financings and other corporate
transactions, could have the effect of discouraging, or making more difficult, a
third party's acquisition of a majority of the Company's outstanding voting
stock. The Company has no present plans to issue any shares of preferred stock.
See "Description of Capital Stock -- Preferred Stock."
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere, including statements regarding the
anticipated development and expansion of the Company's business; the products
which the Company expects to offer; anticipated development expenditures and
regulatory reform; the intent, belief or current expectations of the Company,
its directors or its officers, primarily with respect to the future operating
performance of the Company; and other statements contained herein regarding
matters that are not historical facts, are "forward-looking" statements (as such
term is defined in the Private Securities Litigation Reform Act of 1995). In
addition, when used in this Prospectus, the words "believe," "anticipate,"
"expect," "intend" and similar expressions are intended to identify
forward-looking statements. Because such statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the factors set
forth in "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." The safe harbor provisions
of the Private Securities Litigation Reform Act of 1995 do not apply to initial
public offerings.
THE COMPANY
The Company was incorporated in the State of Tennessee in 1993. The
Company's executive offices are located at 501 Fifth Street, Bristol, Tennessee
37620. Its telephone number is (423) 989-8000.
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of Common
Stock in this offering are estimated to be $98.6 million ($115.3 million if the
Underwriters' over-allotment option is exercised in full), after deducting the
underwriting discounts and estimated offering expenses payable by the Company,
assuming an estimated initial public offering price of $18.00 per share. The net
proceeds of this offering, together with the Company's existing cash and cash
equivalents, will be used for: (i) acquisition of additional branded products,
(ii) repayment of $3.6 million of certain indebtedness, and (iii) general
corporate purposes, including investments in facilities to accommodate any newly
acquired products, development of branded product line extensions and internally
developed generic products and expansion of the sales force. The Company is
actively pursuing the acquisition of rights to several products which may
require the use of substantial capital resources. There are no present
agreements or commitments with respect to any such acquisition. However, on
October 31, 1997, the Company entered into a preliminary non-binding letter of
intent for the Sterile Products Acquisition. It is currently anticipated that
$90.0 million of the net proceeds of this offering will be used for the Sterile
Products Acquisition. However, there can be no assurance that the Sterile
Products Acquisition will occur or, if it occurs, there can be no assurance as
to the assets that may be acquired, the purchase price of such assets or the
terms of the acquisition. See "Risk Factors -- Dependence on Acquisition of
Products" and "Business -- Strategy."
A portion of the proceeds will be used to repay the outstanding principal
balance and accrued interest of a promissory note in the aggregate amount of
$1.8 million payable to General Injectables and Vaccines, Inc. ("GIV"). This
note bears interest at the rate of 8.0% and matures on December 31, 1998. In
addition, a portion of the proceeds will be used to repay the outstanding
principal balance and
15
<PAGE> 17
accrued interest of a promissory note in the aggregate amount of $1.8 million
payable to The United Company. This note bears interest at the rate of 10.0% and
matures on April 1, 1999. Proceeds of the loan from The United Company were used
to fund, in part, the acquisition of the Cortisporin Product Line from Glaxo
Wellcome. See "Certain Transactions."
The cost, timing and amount of funds required for all specific uses by the
Company cannot be precisely determined by the Company at this time and is at
management's discretion. The rate of the Company's progress in acquiring new
branded products or acquiring companies with such products, the timing and
nature of regulatory action and the availability of alternative methods of
financing, will also determine the allocation and timing of the Company's use of
the proceeds from this offering. Pending application of the proceeds as
described above, the Company plans to invest the net proceeds of the offering in
short-term marketable securities. See "Risk Factors -- Broad Discretion in
Application of Proceeds."
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. Furthermore,
the payment of any dividend or other distribution on any shares of the Company's
capital stock (other than dividends payable solely in shares of its capital
stock) is prohibited by the Company's credit arrangements with a commercial
lender. Assuming removal of this prohibition, the payment of cash dividends is
subject to the discretion of the Board of Directors and will be dependent upon
many factors, including the Company's earnings, its capital needs, and its
general financial condition. The Company anticipates that for the foreseeable
future, it will retain its earnings, if any, in order to finance the expansion
and development of its business. See "Risk Factors -- Substantial Dilution;
Absence of Dividends" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1997, as adjusted to give effect to the Glaxo Acquisition as if
this transaction occurred on September 30, 1997, as further adjusted to reflect
the sale of 6,000,000 shares of Common Stock offered hereby at the assumed
public offering price of $18.00 per share and the application of the estimated
net proceeds of such sale (after deducting the underwriting discounts and
estimated offering expenses payable by the Company) and as further adjusted to
give effect to the Sterile Products Acquisition as if this transaction occurred
on September 30, 1997 and to the offering. See "Use of Proceeds." This table
should be read in conjunction with "Pro Forma Consolidated Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and the Consolidated Financial Statements of the Company
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------------------
AS FURTHER
ADJUSTED
AS ADJUSTED AS FURTHER FOR THE
FOR THE ADJUSTED STERILE
GLAXO FOR PRODUCTS
ACTUAL ACQUISITION THE OFFERING ACQUISITION
------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.......................... $ 35 $ 35 $ 95,137 $ 5,137
======= ======== ======== ========
Current portion of long-term obligations and short
term debt(1)..................................... $ 9,090 $ 9,090 $ 7,915 $ 7,915
Long-term obligations (excluding current portion of
long-term obligations)(1)........................ 22,913 43,913 41,575 76,575
Line of credit(1).................................. 2,282 4,282 4,282 4,282
Shareholders' equity:
Common Stock, no par value; 150,000,000 shares
authorized; 28,000,000 issued and outstanding
(actual); 34,000,000 shares outstanding (as
adjusted)(2)(3)(4)............................ 16,455 16,455 115,070 115,070
Due from related party........................... (1,139) (1,139) (1,139) (1,139)
Retained earnings................................ 12,493 12,493 12,493 12,493
------- -------- -------- --------
Total shareholders' equity............... 27,809 27,809 126,424 126,424
------- -------- -------- --------
Total capitalization..................... $62,094 $ 85,094 $180,196 $215,196
======= ======== ======== ========
</TABLE>
- ------------------------------
(1) For additional information relating to long-term obligations, see Notes 9
and 10 to the Consolidated Financial Statements.
(2) In November 1997, shareholders of the Company approved an increase in the
number of authorized shares of Common Stock of the Company from 10,000,000
to 150,000,000 shares.
(3) Reflects a 2.8 for 1 stock split.
(4) Excludes 3,500,000 shares of Common Stock available for future grants under
the Company's 1997 Incentive and Nonqualified Stock Option Plan for
Employees. No options are currently outstanding.
17
<PAGE> 19
DILUTION
The net tangible book value of the Company as of September 30, 1997, was
approximately $(10.4) million, or $(0.37) per share. "Net tangible book value"
equals total tangible assets less total liabilities of the Company. The
calculation of net tangible book value on a per share basis is equal to net
tangible book value divided by the aggregate number of shares of Common Stock
outstanding. The calculation of aggregate shares outstanding gives effect to a
2.8 for 1 stock split. After giving effect to the sale of the 6,000,000 shares
of Common Stock offered by the Company hereby at an assumed Price to Public of
$18.00 per share, the pro forma net tangible book value of the Company as of
September 30, 1997 would have been $88.2 million, or $2.59 per share. This
represents an effective net increase in net tangible book value of $2.96 per
share to existing shareholders and an immediate dilution of $15.41 per share to
new investors purchasing shares at the initial public offering price. The
following table illustrates this per share dilution, after deduction of
underwriting discounts and offering expenses:
<TABLE>
<S> <C> <C>
Price to Public per share................................... $18.00
Net tangible book value per share before offering(1)...... $(0.37)
Increase per share attributable to price paid by
purchasers in this offering............................ 2.96
------
Pro forma net tangible book value per share after
offering(1)............................................... 2.59
------
Dilution in pro forma net book value per share to new
investors................................................. $15.41
======
</TABLE>
The following table sets forth, on a pro forma as adjusted basis as of
September 30, 1997, the differences between the existing shareholders and the
new investors with respect to the number of shares purchased from the Company,
the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ----------------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 28,000,000 82% $ 14,613,000 12% $ 0.52
New investors(1)............... 6,000,000 18% 108,000,000 88% 18.00
---------- --- ------------ ---
Total................ 34,000,000 100% $122,613,000 100%
========== === ============ ===
</TABLE>
- ------------------------------
(1) Sales by the Selling Shareholders in the offering will reduce the number of
shares held by the existing shareholders prior to the offering to
25,081,000, or 74% (or 72% if the over-allotment option is exercised in
full), and will increase the number of shares held by new investors of
Common Stock in the offering to 8,919,000, or 26% (9,919,000, or 29% if the
over-allotment option is exercised in full) of the total number of shares of
Common Stock outstanding after the offering. See "Principal and Selling
Shareholders."
The calculations in the tables set forth above do not reflect an aggregate
of 3,500,000 shares of Common Stock available for future grants under the
Company's 1997 Incentive and Nonqualified Stock Option Plan for Employees. No
options are currently outstanding.
18
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Pro Forma Consolidated Financial Statements" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. The results of operations for the nine months ended September 30,
1997 are not necessarily indicative of results to be expected for the entire
year ending December 31, 1997 or any future period.
The pro forma consolidated financial statements of operations for the year
ended December 31, 1996 and for the nine months ended September 30, 1997 give
effect to the Recent Acquisitions of the Company which includes the Cortisporin
Product Line on March 21, 1997, the Glaxo Acquisition on November 14, 1997, the
Viroptic product line on May 15, 1997, the Proctocort product line on January
22, 1997, the Thalitone product line on December 17, 1996 and the Nucofed and
Quibron product lines on October 2, 1996 (collectively, the "Recent
Acquisitions") and the Sterile Products Acquisition, in all cases, as if these
acquisitions had occurred on January 1, 1996. The pro forma consolidated
financial statements are provided for informational purposes only and do not
purport to be indicative of the results which would have actually been obtained
had the acquisitions been completed on the date indicated or may be expected to
occur in the future. The Sterile Products acquisition has not occurred and there
can be no assurance that the Sterile Products Acquisition will occur or, if it
occurs, there can be no assurance as to the assets that may be acquired, the
purchase price of such assets or the terms of their acquisition.
<TABLE>
<CAPTION>
PREDECESSOR
COMPANY(1) THE COMPANY(1)
----------------- -----------------------------------------------------------------------------
PRO FORMA
FOR RECENT
ACQUISITIONS NINE MONTHS
PRO FORMA AND STERILE ENDED
FISCAL YEAR ENDED DECEMBER 31, FOR RECENT PRODUCTS SEPTEMBER 30,
----------------------------------------------- ACQUISITIONS ACQUISITIONS -----------------
1992 1993 1994 1995 1996 1996 1996(2) 1996 1997
------- ------- ------- ------- ------- ------------ ------------ ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales(3)............... $23,108 $24,637 $13,311 $25,441 $15,457 $45,834 $136,527 $11,310 $33,817
Development revenue(4)..... -- -- -- -- 5,000 5,000 5,000 2,500 --
------- ------- ------- ------- ------- ------- -------- ------- -------
Total revenue, net.. 23,108 24,637 13,311 25,441 20,457 50,834 141,527 13,810 33,817
Costs of sales............. 17,913 19,373 9,754 12,130 8,782 13,016 61,483 7,050 9,538
Selling, general and
administrative............ 3,542 7,963 1,987 8,605 12,106 16,350 30,591 8,441 13,734
Depreciation and
amortization.............. 469 489 639 1,777 982 3,408 8,901 655 1,631
------- ------- ------- ------- ------- ------- -------- ------- -------
Total costs and
expenses........... 21,924 27,825 12,380 22,512 21,870 32,774 100,975 16,146 24,903
Gain on disposition of net
assets(5)................. -- 347 -- -- -- -- -- -- --
Sale of product line(3).... -- -- -- 13,102 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------- ------- -------
Operating income (loss).... 1,184 (2,841) 931 16,031 (1,413) 18,060 40,552 (2,336) 8,914
Gain on sale of investment
in affiliate(6)........... -- -- -- -- 1,760 1,760 1,760 1,760 --
Interest expense........... (116) (96) (1,069) (2,006) (1,272) (5,231) (8,241) (850) (1,730)
Other (expenses) income.... 60 (152) 554 367 578 578 578 407 211
Net income (loss) before
income taxes and
extraordinary gain........ 1,128 (3,089) 416 14,392 (347) 15,167 34,649 (1,019) 7,395
Income tax (benefit)
expense................... 91 (186) (501) 5,058 (107) 6,099 13,892 (316) 2,840
------- ------- ------- ------- ------- ------- -------- ------- -------
Net income (loss) before
extraordinary gain........ 1,037 (2,903) 917 9,334 (240) 9,068 20,757 (703) 4,555
Extraordinary gain on early
extinguishment of long-
term debt, net of income
taxes of $272(7).......... -- -- -- 528 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------- ------- -------
Net income (loss).......... $ 1,037 $(2,903) $ 917 $ 9,862 $ (240) $ 9,068 $ 20,757 $ (703) $ 4,555
======= ======= ======= ======= ======= ======= ======== ======= =======
Net income (loss) per
share(8).................. N/A N/A $ 0.05 $ 0.36 $ (0.01) $ 0.33 $ 0.62 $ (0.03) $ 0.16
======= ======= ======= ======= ======== ======= =======
Weighted average number of
common and common stock
equivalents(9)............ N/A N/A 18,213 27,163 27,507 27,507 33,507 27,441 28,000
<CAPTION>
THE COMPANY(1)
---------------------------
PRO FORMA
FOR RECENT
ACQUISITIONS
PRO FORMA AND STERILE
FOR RECENT PRODUCTS
ACQUISITIONS ACQUISITION
1997 1997(2)
------------ ------------
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales(3)............... $48,896 $96,396
Development revenue(4)..... -- --
------- -------
Total revenue, net.. 48,896 96,396
Costs of sales............. 12,029 45,585
Selling, general and
administrative............ 16,144 23,767
Depreciation and
amortization.............. 2,643 6,763
------- -------
Total costs and
expenses........... 30,816 76,115
Gain on disposition of net
assets(5)................. -- --
Sale of product line(3).... -- --
------- -------
Operating income (loss).... 18,080 20,281
Gain on sale of investment
in affiliate(6)........... -- --
Interest expense........... (3,629) (5,885)
Other (expenses) income.... 211 211
Net income (loss) before
income taxes and
extraordinary gain........ 14,662 14,607
Income tax (benefit)
expense................... 5,747 5,725
------- -------
Net income (loss) before
extraordinary gain........ 8,915 8,882
Extraordinary gain on early
extinguishment of long-
term debt, net of income
taxes of $272(7).......... -- --
------- -------
Net income (loss).......... $ 8,915 $ 8,882
======= =======
Net income (loss) per
share(8).................. $ 0.32 $ 0.26
======= =======
Weighted average number of
common and common stock
equivalents(9)............ 28,000 34,000
</TABLE>
19
<PAGE> 21
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................. $ 417 $ 501 $ 1,028 $10,568 $ 1,392 $ 5,543 $ 35
Working capital....................................... 1,582 (714) (2,408) 7,599 7,749 7,563 83
Total assets.......................................... 7,756 3,306 38,447 33,942 39,279 34,244 74,253
Long-term debt (excluding current portion)............ 630 750 27,065 9,497 13,980 11,029 22,913
Shareholders' equity.................................. 3,473 571 1,935 11,011 15,693 11,176 27,809
</TABLE>
- ------------------------------
(1) Effective December 31, 1993, the Company acquired certain assets and
assumed certain liabilities of RSR Laboratories, Inc. (the "Predecessor
Company"). The 1992 and 1993 financial data of the Predecessor Company is
not comparable to the Company's financial data for 1994 through 1997
because the 1992 and 1993 financial data of the Predecessor Company
includes the gross up of customer supplied materials in net sales and cost
of sales. Such costs were not paid by the Company or billed to the customer
and the Company's accounting practice does not include these costs in net
sales or cost of sales. The Company believes it is not possible to estimate
accurately the gross up of customer supplied materials in net sales and
cost of sales in 1992 and 1993 because the amount of customer supplied
materials included in both sales and cost of sales is not known.
The consolidated statement of operations data for each of the years ended
December 31, 1994, 1995 and 1996, and the nine months ended September 30,
1997, and the consolidated balance sheet data as of December 31, 1995 and
1996 and September 30, 1997, have been derived from the consolidated
financial statements of the Company that have been audited by Coopers &
Lybrand L.L.P. and included elsewhere in this Prospectus. The consolidated
balance sheet data as of December 31, 1994 have been derived from the
consolidated financial statements of the Company that have been audited by
Coopers & Lybrand L.L.P. but not included in this Prospectus. The
consolidated statements of operations for the nine months ended September
30, 1996 and the consolidated balance sheet data as of September 30, 1996
have been derived from unaudited consolidated financial statements prepared
on the same basis as the audited consolidated financial statements. The
statement of operations data for the fiscal years ended December 31, 1992
and 1993 and the balance sheet data as of December 31, 1992 and 1993, are
derived from unaudited financial statements of the Predecessor Company.
(2) The Sterile Products Acquisition includes Fluogen which had gross sales of
$20.5 million and $19.0 million in 1995 and 1996, respectively, but which
was not sold in 1997. Fluogen was subject to a voluntary recall due to
shelf life potency concerns in 1996. Subsequent testing has established
Fluogen's shelf life potency and the Company intends to market Fluogen in
1998. As a result of Fluogen's being discontinued, cost of goods sold in
1997 included approximately $5.5 million of unabsorbed overhead and
approximately $4.3 million of obsolete inventory. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Strategy," "Business -- Products and Product Development" and
"Pro Forma Consolidated Financial Statements."
(3) In December 1994, the Company acquired the Anexsia Product Line. The
Company sold the Anexsia Product Line to Mallinckrodt in December 1995 for
$32.0 million and recorded a $13.1 million net gain.
(4) In connection with the Anexsia Transaction, the Company agreed to develop
four ANDAs to be filed with the FDA on Mallinckrodt's behalf for a maximum
of $2.5 million each due upon FDA approval. In 1996 the FDA approved two of
these ANDAs and as of September 30, 1997, the two additional ANDAs were on
file with the FDA.
(5) The Predecessor Company sold the net assets of its over-the-counter human
and animal pharmaceutical and health products business to the Company in
December 1993 and early January 1994. The net assets sold had a recorded
book value of $4.2 million.
20
<PAGE> 22
(6) In September 1996, the Company sold its entire 6.0% interest in an
affiliated, privately held pharmaceutical company. See Note 15 to the
Consolidated Financial Statements.
(7) Reflects gain from early extinguishment of debt in connection with the
disposition of the Anexsia Product Line.
(8) Because the Company does not have any dilutive securities, net income
(loss) per share on a fully diluted basis is the same as primary earnings
per share for all periods presented.
(9) Reflects retroactively the effects of (i) shares issued within a one year
period from the filing date of the Company's Form S-1 for an initial public
offering of common stock which includes 1,386,330 shares issued to
shareholders and members of management in October 1996 and 3,047,355 shares
issued to The United Company in March 1997, (ii) a 15.0% stock dividend
paid in 1996 and (iii) a 2.8 for 1 stock split.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. See "Risk Factors" for trends and uncertainties known to the Company
that could cause reported financial information to differ materially from future
results.
OVERVIEW
The Company is an integrated pharmaceutical company that manufactures,
markets and sells branded and generic prescription pharmaceutical products. The
Company seeks to capitalize on niche opportunities in the pharmaceutical
industry created by cost containment initiatives and consolidation among large
global pharmaceutical companies. The Company's strategy is to acquire branded
pharmaceutical products and increase their sales by focused promotion and
marketing, as well as by developing product line extensions and through product
life cycle management.
The Company began operations in January 1994 after acquiring its
manufacturing facility and assuming contracts to manufacture pharmaceutical
products and companion animal health products for pharmaceutical companies.
Initially, contract manufacturing made up a significant portion of the Company's
net sales. In December 1994, the Company acquired its first branded
pharmaceutical product line, the Anexsia Product Line, for $17.6 million. The
acquisition was funded by a note payable to the seller (the "Anexsia Note
Payable"). During the 12 months following its acquisition, the Company
significantly increased annual sales of Anexsia through a combination of product
development and marketing. In December 1995, the Company sold the Anexsia
Product Line to Mallinckrodt for $32.0 million in cash and recognized a $13.1
million net gain. In connection with the sale, the Company entered into a
manufacture and supply agreement with Mallinckrodt, with guaranteed minimum
revenues of $4.8 million through 1999, and an agreement to develop four ANDAs on
Mallinckrodt's behalf for a maximum of $2.5 million each due upon FDA approval.
In 1996 the FDA approved two of these ANDAs and, as of September 30, 1997, the
additional two ANDAs were on file.
The Company has used the proceeds from the sale of the Anexsia Product Line
to acquire additional branded pharmaceutical products. Since December 1994, the
Company has acquired 15 branded pharmaceutical products, developed one product
internally, divested one product and introduced seven product line extensions.
The Company has improved the sales of most of its acquired products. Branded
pharmaceutical products represented approximately 79.8% of the net sales of the
Company for the first nine months ended September 30, 1997, with the Cortisporin
Product Line representing 60.7% of net sales. On a pro-forma basis, after giving
effect to the Recent Acquisitions and the Sterile Products Acquisition in each
case as if the acquisition had occurred on January 1, 1996, branded products
would have represented approximately 78.4% ($75.6 million) of net sales of the
Company for the nine months ended September 30, 1997. As part of its business
strategy, the Company intends to continue to acquire branded pharmaceutical
products and to create value by leveraging its marketing, manufacturing and
product development capabilities.
The Company expects that its strategy of acquiring branded pharmaceutical
products will increase its revenues as a result of sales of such products and
will increase gross margins. In general, margins are higher on the Company's
branded pharmaceutical products than on the Company's other products, making
branded products attractive to the Company. In addition, as soon as practicable
after regulatory requirements are satisfied, the Company expects that using its
manufacturing capability to ultimately produce these acquired pharmaceutical
products will increase the Company's margins because the cost of producing
pharmaceutical products on its own is lower than the cost of having these
products manufactured by third parties.
The Company's strategy is also expected to increase its selling, general
and administrative expenses due to the hiring of additional sales
representatives and increased sampling, advertising and other marketing costs as
a result of more focused marketing efforts. In accordance with its focus on
22
<PAGE> 24
branded pharmaceutical products, the Company expects that, over time, its
contract manufacturing and generic pharmaceutical and companion animal health
product lines will become a smaller percentage of revenues. The majority of the
Company's manufacturing contracts have historically been for the manufacture of
branded ethical pharmaceutical products for human consumption, although the
Company has maintained one contract for the manufacture of branded prescription
products for consumption by companion animals.
The Company has not accepted or renewed manufacturing contracts for third
parties where the Company perceived insignificant volumes or revenues. Prior to
the Company's acquisition of Nucofed in October 1996 from Roberts Pharmaceutical
Corporation ("Roberts"), the Company had a manufacturing contract for that
product for Roberts. In addition, a contract with SmithKline Beecham has
declined as SmithKline Beecham has moved a significant portion of the production
of its product to its own facility in Puerto Rico.
The Company has four primary manufacturing contracts remaining. A contract
with Novartis for two branded prescription companion animal products expires in
December 1999. The Company's manufacturing contract with Mallinckrodt expires in
December 2000 with an optional renewal at Mallinckrodt's discretion for three
years. Another contract with Roberts expires in December 2000 with automatic
renewals of two year periods on the parties' mutual consent. The Company's
manufacturing contract with SmithKline Beecham expires in December 1999, with
automatic renewals of one year upon agreement of the parties. The Company cannot
predict which, if any, of these contracts will be renewed or extended since the
consent of both parties is required in all instances.
Contract manufacturing related to the Sterile Products Acquisition
represented approximately 25% ($22.2 million) and 29% ($14.0 million) of net
sales of the Sterile Products Acquisition for the year ended December 31, 1996
and for the nine months ended September 30, 1997, respectively. The Company
anticipates that it may enter into additional manufacturing contracts with
Warner-Lambert in connection with the Sterile Products Acquisition, which would
increase revenue from contract manufacturing. The Sterile Products Acquisition
has not occurred and there can be no assurance that it will occur or, if it
occurs, there can be no assurance as to the assets that may be acquired, the
purchase price of such assets or the terms of their acquisition.
The following summarizes approximate net revenues by product categories.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- -------------
1994 1995 1996 1997
------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Branded pharmaceuticals............................... $ 305 $ 5,921 $ 2,938 $26,972
Generic pharmaceuticals............................... 1,711 7,492 1,572 1,039
Contract manufacturing................................ 11,295 12,028 10,890 5,090
Companion animal health............................... -- -- 57 716
Development revenues.................................. -- -- 5,000 --
------- ------- ------- -------
Total revenues.............................. $13,311 $25,441 $20,457 $33,817
======= ======= ======= =======
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues
Net revenues increased $20.0 million, or 144%, to $33.8 million in the nine
months ended September 30, 1997 from $13.8 million in the nine months ended
September 30, 1996. This increase was due primarily to the acquisition of seven
branded products since October 1996. Of these acquired products, the Cortisporin
product line contributed $20.5 million in 1997, or 60.7% of total net sales,
while the Company's additional branded products contributed an additional $6.5
million, or 19.2%. Although there are two additional ANDAs on file with the FDA
in connection with the Anexsia Transaction in 1997, the Company did not
recognize any income in the first nine months ended
23
<PAGE> 25
September 30, 1997 related to this contract, compared to $2.5 million recognized
in the nine months ended September 30, 1996. Revenues from contract
manufacturing decreased $4.4 million, or 46.3%, to $5.1 million in the nine
months ended September 30, 1997 from $9.5 million in the nine months ended
September 30, 1996, due primarily to the expiration of a manufacturing contract.
Operating Costs and Expenses
Total operating costs and expenses increased $8.8 million, or 54.7%, to
$24.9 million in the nine months ended September 30, 1997 from $16.1 million in
the nine months ended September 30, 1996. The increase was due to increases in
the costs of sales, selling, general and administrative expenses and
depreciation and amortization expenses.
Cost of sales increased $2.4 million, or 33.8%, to $9.5 million in the nine
months ended September 30, 1997 from $7.1 million in the nine months ended
September 30, 1996. The increase was due primarily to the costs associated with
the new branded product lines. Cost of sales increased more slowly than sales
because acquired branded product lines generally had higher margins than the
Company's other product lines. The Cortisporin Product Line contributed $18.7
million of gross profit in the nine months ended September 30, 1997,
representing a gross margin for the Cortisporin Product Line of 91.3%. Cost
associated with the development revenues in 1996, consisting of an allocation of
labor costs associated with personnel involved in the development and filing of
ANDAs was estimated by management to be between $70,000 and $130,000.
Selling, general and administrative expenses increased $5.3 million, or
63.1%, to $13.7 million in the nine months ended September 30, 1997 from $8.4
million in the nine months ended September 30, 1996. This increase was primarily
attributable to the hiring of additional field sales representatives during late
1996 and early 1997, other additional personnel costs and marketing, promotion
and sampling costs associated with the new branded product lines.
Depreciation and amortization expense increased $976,000, or 149%, to $1.6
million in the nine months ended September 30, 1997 from $655,000 in the nine
months ended September 30, 1996. This increase was primarily attributable to the
amortization of the purchase price of the new branded product lines.
Operating Income
Operating income increased $11.2 million to $8.9 million in the nine months
ended September 30, 1997 from an operating loss of $2.3 million in the nine
months ended September 30, 1996. As a percentage of net revenues operating
income was 26.3% in the nine months ended September 30, 1997. This increase was
primarily due to increased revenues from the acquisition of additional branded
products.
Gain on Sale of Investment in Affiliate
In September 1996, the Company sold its entire 6.0% interest in an
affiliated, privately-held pharmaceutical company, which had been co-founded by
the Company's Chief Executive Officer, for $2.0 million, resulting in a gain of
$1.8 million.
Interest Expense
Interest expense increased $880,000, or 104%, to $1.7 million in the nine
months ended September 30, 1997 from $850,000 in the nine months ended September
30, 1996, as a result of additional term loans used to finance, in part, the
acquisitions of branded product lines.
Income Tax (Benefit) Expense
The effective tax rate in 1997 of 38.4% was higher than the federal
statutory rate of 34.0% due to state income taxes.
24
<PAGE> 26
Net Income
Due to the factors set forth above, net income increased $5.3 million to
$4.6 million in the nine months ended September 30, 1997 from a net loss of
$703,000 in the nine months ended September 30, 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues
Net revenues decreased $4.9 million, or 19.3%, to $20.5 million in 1996
from $25.4 million in 1995 due primarily to the disposition of the Anexsia
Product Line, which had generated net revenues of $9.6 million in 1995. In
addition, the Company experienced a general decline in revenues from generic
pharmaceutical products as a result of erosion of generic pricing due to
competition as well as a decline in revenues from contract manufacturing as a
result of the expiration of a significant contract offset, in part, by the
addition of new contracts. These revenue decreases were offset by the
recognition of $5.0 million in developmental revenues from the Anexsia
Transaction and revenues from three branded pharmaceutical products acquired in
the fourth quarter of 1996. In 1996, the Company did not have any branded
pharmaceutical products that accounted for more than 15% of net revenues.
Operating Costs and Expenses
Total operating costs and expenses decreased $642,000, or 2.9%, to $21.9
million in 1996 from $22.5 million in 1995. The decrease was due to decreases in
both costs of sales and depreciation and amortization expenses, offset by an
increase in selling, general and administrative expenses.
Cost of sales decreased $3.3 million, or 27.3%, to $8.8 million in 1996
from $12.1 million in 1995. The decrease was due primarily to the sale of the
Anexsia Product Line, offset by the acquisition of a number of smaller product
lines in the fourth quarter of 1996. Cost associated with the development
revenues in 1996, consisting of an allocation of labor costs associated with
personnel involved in the development and filing of ANDAs was estimated by
management to be between $70,000 and $130,000.
Selling, general and administrative expenses increased $3.5 million, or
40.7%, to $12.1 million in 1996 from $8.6 million in 1995. This increase was
primarily attributable to the hiring of additional employees during 1996 and
late 1995 to support the Company's expansion, and increased costs associated
with marketing efforts relating to three branded pharmaceutical products
acquired by the Company in the fourth quarter of 1996 and additional product
development expenses incurred in developing branded and generic pharmaceutical
product reformulations in 1996.
Depreciation and amortization expense decreased $795,000, or 44.2%, to
$982,000 in 1996 from $1.8 million in 1995. This decrease was primarily
attributable to reduced amortization expense as a result of the disposition of
the Anexsia Product Line.
Operating Income
Operating income decreased $17.4 million to a loss of $1.4 million in 1996
from operating income of $16.0 million in 1995 and decreased as a percentage of
net revenues to (6.9%) from 63.0% in 1995. This decrease was primarily as a
result of greater selling, general and administrative expenses and lost revenues
and a 1995 nonrecurring gain due to the disposition of the Anexsia Product Line,
offset, in part, by an increase in development revenues.
Gain on Sale of Investment in Affiliate
In September 1996, the Company sold its entire 6.0% interest in an
affiliated, privately-held pharmaceutical company, which had been co-founded by
the Company's Chief Executive Officer, for $2.0 million, resulting in a gain of
$1.8 million.
25
<PAGE> 27
Interest Expense
Interest expense decreased $734,000, or 36.7%, to $1.3 million in 1996 from
$2.0 million in 1995, primarily due to the repayment of the Anexsia Note Payable
in December 1995.
Income Tax (Benefit) Expense
The effective tax rate was (30.8%) in 1996. In 1995, the effective tax rate
of 35.1% does not differ significantly from the federal statutory rate of 34.0%.
Net Income
Due to the factors set forth above, net income decreased $10.1 million, to
a net loss of $240,000 in 1996 from net income of $9.9 million in 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues
Net revenues increased $12.1 million, or 91.0%, to $25.4 million in 1995
from $13.3 million in 1994 due primarily to the acquisition of the Anexsia
Product Line as well as an increase in revenues from generic pharmaceutical
products. The Company also increased revenues from contract manufacturing due to
the renewal of contracts that had expired during 1995 under more favorable
terms. In 1995 the Anexsia Product Line and Bactroban, a product manufactured
under contract for a third party, accounted for 37.7% and 20.3% of net sales,
respectively. In 1994, Bactroban accounted for 37.4% of net sales.
Operating Costs and Expenses
Total operating costs and expenses increased $10.1 million, or 81.5%, to
$22.5 million in 1995 from $12.4 million in 1994. The increase was due to
increases in the costs of sales, selling, general and administrative expenses
and depreciation and amortization expense.
Cost of sales increased $2.3 million, or 23.5%, to $12.1 million in 1995
from $9.8 million in 1994. The increase was due primarily to costs associated
with the acquisition of the Anexsia Product Line prior to its disposition in
December 1995. The Anexsia Product Line and Bactroban contributed $7.4 million
and $3.3 million, respectively, of gross profit in 1995, representing gross
margins for the Anexsia Product Line and Bactroban of 77.1% and 64.6%,
respectively. Bactroban contributed $3.3 million of gross profit in 1994,
representing a gross margin for Bactroban of 66.8%.
Selling, general and administrative expenses increased $6.6 million, or
330%, to $8.6 million in 1995 from $2.0 million in 1994. This increase primarily
resulted from increased promotional costs attributable to marketing efforts
relating to branded pharmaceutical products acquired by the Company during 1995,
variable costs commensurate with increased sales volumes, and an increase in
personnel costs attributable to the hiring of additional employees during 1995.
Depreciation and amortization expense increased $1.1 million, or 172%, to
$1.8 million in 1995 from $639,000 in 1994. This increase was primarily
attributable to the amortization of the purchase price of the Anexsia Product
Line.
Operating Income
Operating income increased $15.1 million, or 1,622%, to $16.0 million in
1995 from $931,000 in 1994 and increased as a percentage of net revenues to
63.0% from 7.0% in 1994. This increase was due primarily to the gain on the sale
of the Anexsia Product Line.
26
<PAGE> 28
Interest Expense
Interest expense increased $937,000, or 85.2%, to $2.0 million in 1995 from
$1.1 million in 1994, as a result of the Anexsia Note Payable issued in
connection with the purchase of the Anexsia Product Line.
Income Tax (Benefit) Expense
The effective tax rate in 1995 approximated the federal statutory rate. In
1994 the rate was substantially lower than the statutory rate due to the basis
differences on certain assets purchased and the lower level of taxable income.
Net Income
Due to the factors set forth above, as well as the gain of $13.1 million
recognized by the Company as a result of the disposition of the Anexsia Product
Line, net income increased $8.9 million, or 971%, to $9.9 million in 1995 from
$917,000 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's liquidity requirements arise from net cash used in
operations, payments on outstanding indebtedness and funding of acquisitions of
branded products. The Company has met its cash requirements through 1996
primarily through bank borrowings and the proceeds from the disposition of the
Anexsia Product Line.
The Company's recent cash requirements arose primarily in connection with
the acquisition of branded pharmaceutical products. In 1995 the Anexsia Product
Line was acquired and financed with the Anexsia Note Payable. The Anexsia Note
Payable was repaid upon the completion of the disposition of the Anexsia Product
Line in December 1995. In 1996 the acquisition of two branded pharmaceutical
products for $7.0 million was financed with a combination of cash and seller
financing. In March 1997, the Company raised $23.0 million through a combination
of equity ($8.0 million) and notes payable with banks and borrowing under its
revolving line of credit to finance the acquisition of the Cortisporin product
line. Other product acquisitions in 1997, which totalled $6.6 million, were
financed primarily with notes payable from banks and internally generated funds.
As of September 30, 1997, the Company had available up to $6.2 million
under its revolving line of credit which allows for total borrowing of up to
$8.5 million.
Nine Months Ended September 30, 1997
Net cash provided by operating activities was $5.3 million for the nine
months ended September 30, 1997, which was primarily attributable to increased
operating income. Increases of receivables and inventory of $5.1 million and
$2.5 million, respectively, were offset by $1.6 million of depreciation and
amortization expenses, increases in accounts payable, accrued expenses and
income taxes payable of $2.7 million, $2.8 million and $1.7 million,
respectively.
Net cash used in investing activities was $32.5 million for the nine months
ended September 30, 1997, which consisted primarily of the purchase of the
Cortisporin Product Line for $23.7 million, two additional branded products at a
combined cost of $6.7 million, and the purchase of additional property and
equipment for $957,000 and deposit on equipment of $1.3 million.
Net cash provided by financing activities was $25.8 million for the nine
months ended September 30, 1997, which consisted of $13.2 million, $1.3 million
and $15.9 million in proceeds from the revolving line of credit, and additional
short-term and long-term debt to finance branded product acquisitions,
respectively, offset by payments of $10.9 million and $3.3 million on the
revolving line of credit and long-term debt, respectively. Further, the Company
received net proceeds of $8.0 million
27
<PAGE> 29
from the issuance of common shares and received $2.1 million in payments from
shareholders and members of management of the Company on shareholder notes
receivable.
As a result of the factors discussed above, cash and cash equivalents
decreased to $35,000 from $1.4 million as of December 31, 1996.
Year ended December 31, 1996
Net cash used in operating activities was $6.0 million for the year ended
December 31, 1996. The Company's net use of operating cash in 1996 was primarily
a result of a $1.4 million operating loss, excluding the $1.8 million gain on
sale of investment in affiliate, offset by $1.0 million of depreciation and
amortization, an increase in income taxes receivable of approximately $3.6
million resulting from federal and state tax payments made by the Company in
1996, as well as an increase in inventory of $1.9 million due to the acquisition
of three branded pharmaceutical products and the internal development of a
complete generic product line in the fourth quarter of 1996.
Net cash used in investing activities for the year ended December 31, 1996
was $2.4 million and was primarily the result of cash paid of $3.3 million and
$1.0 million for the acquisition of three new branded product lines and costs
associated with generic pharmaceutical products as well as property and
equipment purchases, respectively. Additionally, the Company received $2.1
million from the sale of its 6.0% investment in an affiliated, privately-held
pharmaceutical company.
Net cash used in financing activities was $781,000 for the year ended
December 31, 1996, which was comprised of payments on the revolving line of
credit and other term loans of $3.4 million and $2.8 million, respectively,
offset by proceeds from a $2.5 million term loan used to finance, in part, the
acquisition of certain branded pharmaceutical products and $2.8 million raised
in an employee stock purchase plan and from shareholders and members of
management.
As a result of the factors discussed above, cash and cash equivalents
decreased from $10.6 million as of December 31, 1995, to $1.4 million as of
December 31, 1996.
Year ended December 31, 1995
Net cash used in operating activities was $2.6 million for the year ended
December 31, 1995 consisting primarily of net income of $9.9 million offset by
the gain on sale of product line of $15.6 million. The Company's net use of
operating cash in 1995 was also impacted by an increase in inventory and
receivables of $1.3 million and $876,000, respectively, due to increased
revenues during 1995. Additionally, the Company decreased its accounts payable
and accrued expenses by $288,000 and $220,000, respectively.
Net cash provided by investing activities was $30.3 million for the year
ended December 31, 1995 which consisted primarily of the $32.0 million in
proceeds received from the disposition of the Anexsia Product Line, offset by
the costs of improvements to the Company's manufacturing facility.
Net cash used in financing activities was $18.1 million for the year ended
December 31, 1995, which primarily was the repayment of the $17.5 million
Anexsia Note Payable. Additionally, the Company had proceeds from its revolving
line of credit and other term loans of $200.8 million and $329,000, and made
payments on such indebtedness of $198.4 million and $20.1 million, respectively.
Further, the Company paid $100,000 to retire preferred stock and paid $8,000
dividends on such stock.
As a result of the factors discussed above, cash and cash equivalents
increased from $1.0 million at December 31, 1994 to $10.6 million at December
31, 1995.
Year ended December 31, 1994
Net cash provided by operating activities was $672,000 for the year ended
December 31, 1994. Net cash provided by operating activities in 1994 was
primarily a result of net income plus depreciation and amortization of $639,000,
deferred tax expense of $629,000, offset by changes in working capital of
$706,000. Net cash used in investing activities was $890,000, consisting
primarily of purchases of property and equipment.
28
<PAGE> 30
Net cash provided by financing activities was $927,000 for the year ended
December 31, 1994, which was primarily a result of borrowings on the Company's
revolving line of credit of $12.0 million offset by payments of $11.0 million.
Additionally, the Company received payments from the issuance of $800,000 in
preferred stock, and repaid $346,000 in indebtedness, and received an advance
from an affiliate of $520,000. In December 1994, the Company purchased the
Anexsia Product Line in exchange for the $17.5 million Anexsia Note Payable,
with no cash down.
As a result of the factors discussed above, cash and cash equivalents
increased to $1.0 million as of December 31, 1994 from $319,000 as of December
31, 1993.
Certain Indebtedness and Other Matters
As of September 30, 1997, the Company had outstanding approximately $30.7
million of long-term debt, $1.3 million of short-term debt and $2.3 million in
borrowings under its revolving lines of credit agreements and term loans. Of
these amounts, approximately $12.2 million were at variable rates based on LIBOR
and the remainder at fixed rates. The Company does not believe its exposure to
changes in interest rates under these variable rate agreements will have a
material effect on its financial condition or results of operations. Certain
financing arrangements require the Company to maintain certain minimum net
worth, debt to equity, cash flow and current ratio requirements. The Company has
obtained waivers from its commercial lenders for violations of cash flow and
current ratio covenants.
On November 14, 1997, the Company acquired from Glaxo Wellcome certain
branded pharmaceutical product lines for $23.0 million. The Company used a new
credit facility to finance this acquisition. It also used the credit facility to
pay off approximately $19.0 million of long-term debt which had been outstanding
at September 30, 1997. This credit facility includes a five-year revolving line
of credit and term loan in the aggregate amount of $52.0 million with customary
covenants and with a floating interest rate based on either LIBOR, the prime
rate, or the fed funds rate, plus an applicable margin selected at the
discretion of the Company. As of December 1, 1997, after drawing down on the new
line of credit for working capital purposes, the Company had approximately $5.2
million of available borrowing capacity under the new credit facility.
The Company plans to use the proceeds from this offering primarily to fund
future acquisitions of branded pharmaceutical products and to repay certain
borrowings. On October 31, 1997, the Company entered into a preliminary
non-binding letter of intent for the Sterile Products Acquisition. Although the
Company has offered $125.0 million for these products and other assets and
Warner-Lambert has indicated that it is willing to finance up to $35.0 million
of the purchase price, the Company has not completed due diligence and any
purchase price will be subject to the results of the Company's due diligence
process. In addition to due diligence, the proposed transaction is subject to
numerous conditions and contingencies, including internal approvals of both the
Company and Warner-Lambert, receipt of regulatory approvals, resolution of legal
and equitable matters relating to employees, supply and service agreements and
intellectual property rights and preparation and negotiation of documentation.
In addition, if the proposed transaction is consummated, the Company may incur
additional acquisition cost to purchase any related inventory, the cost of which
is subject to further negotiation. Accordingly, there can be no assurance that
this proposed transaction will occur or, if it occurs, there can be no assurance
as to the assets that may be acquired, the purchase price of such assets or the
terms of their acquisition. See "Use of Proceeds," and "Business -- Strategy,"
and "Business -- Products and Product Development."
The Company believes that existing credit facilities and cash expected to
be generated from operations are sufficient to finance its current operations
and working capital requirements. However, in the event the Company makes
significant future acquisitions, it may be required to raise funds in addition
to those being raised in this offering, through additional borrowings or the
issuance of additional debt or equity securities. At present, the Company is
actively pursuing the acquisition of additional branded pharmaceutical products
which may require the use of substantial capital resources. There are, however,
no present agreements or commitments with respect to any such acquisitions
except for those described elsewhere in this Prospectus.
29
<PAGE> 31
Capital Expenditures
Capital expenditures, including capital lease obligations, were $1.0
million for the nine months ended September 30, 1997 and $2.2 million, $1.7
million and $1.1 million in 1996, 1995 and 1994, respectively. The principal
capital expenditures included property and equipment purchases and building
improvements. The Company is anticipating total capital expenditures in the
final three months of 1997 to be approximately $500,000 and total capital
expenditures in 1998 to be approximately $3.0 million primarily to fund
additional equipment purchases and building improvements. The Company expects,
if the Sterile Products Acquisition is consummated, that it may need to incur
additional capital expenditures over the next few years in connection with the
maintenance and operation of the manufacturing facility it may acquire as part
of such acquisition. While the Company currently is not able to estimate the
amount of such capital expenditures, any such amounts could be material. In
addition, the Company expects to increase its capital expenditures over the next
few years as a part of its acquisition and growth strategy.
IMPACT OF INFLATION
The Company has experienced only moderate raw material and labor price
increases in recent years. While the Company has passed some price increases
along to its customers, the Company has primarily benefited from rapid sales
growth negating most inflationary pressures.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, effective
for fiscal periods ending after December 15, 1997. The new standard simplifies
the computation of earnings (loss) per share by replacing primary earnings
(loss) per share with basic earnings (loss) per share. Basic earnings (loss) per
share will not include the effect of any potentially dilutive securities, as
under the current accounting standard, and will be computed by dividing reported
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Fully diluted earnings (loss) per share
will now be called diluted earnings (loss) per share and will reflect the
dilution of all potentially dilutive securities. The adoption of this standard
by the Company will have no impact on the historical reported earnings (loss)
per share amounts since the Company did not have any potentially dilutive
securities. In October 1997, the Board of Directors approved the 1997 Incentive
and NonQualified Stock Option Plan for Employees for which there are currently
no outstanding options.
Statement of Financial Accounting Standards (SFAS) No. 129 ("Statement
129") establishes standards for disclosing information about an entity's capital
structure and is effective for periods ending after December 15, 1997.
Management of the Company does not expect Statement 129 to have a significant
impact, if any, on the Company's Consolidated Financial Statements.
Statement of Financial Accounting Standards (SFAS) No. 130 ("Statement
130") establishes standards for reporting and display of comprehensive income
and its components (revenues, gains, expenses, losses) in a full set of general
purpose financial statements and is effective for fiscal years beginning after
December 15, 1997. Management of the Company does not expect Statement 130 to
have a significant impact, if any, on the Company's Consolidated Financial
Statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information ("Statement
131"). Statement 131 requires public business enterprises to adopt its
provisions for periods beginning after December 15, 1997, and to report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. The Company is evaluating the provisions of Statement 131, but
has not yet determined if additional disclosures will be required.
30
<PAGE> 32
YEAR 2000 COMPLIANCE
The Company is currently in the process of converting its computer systems
to year 2000 compliant software. The Company does not expect that the cost of
converting such systems will be material to its financial condition or results
of operations. The Company believes it will be able to achieve year 2000
compliance by the end of 1999, and does not currently anticipate any material
disruption in its operations as the result of any failure by the Company to be
in compliance. The Company does not currently have any information concerning
the year 2000 compliance status of its suppliers and customers.
31
<PAGE> 33
BUSINESS
COMPANY OVERVIEW
The Company is an integrated pharmaceutical company that manufactures,
markets and sells branded and generic prescription pharmaceutical products. The
Company seeks to capitalize on niche opportunities in the pharmaceutical
industry created by cost containment initiatives and consolidation among large
global pharmaceutical companies. The Company's strategy is to acquire branded
pharmaceutical products and increase their sales by focused promotion and
marketing, as well as by developing product line extensions and through product
life cycle management. Product life cycle management includes competitive
marketing efforts through pricing, placement, promotion and product positioning;
all product development strategies; manipulation of product packaging;
permutations to known or discovered formulations; extensions to product lines
through acquisitions or development; utilization of intellectual property to
maximize pharmaceutical product exclusivity; identification of new therapeutic
indications; and evaluation of competitors and possible sources for competition.
Since December 1994, the Company has acquired 15 branded pharmaceutical
products, developed one product internally, divested one product and introduced
seven product line extensions. On October 31, 1997, the Company entered into a
preliminary non-binding letter of intent for the Sterile Products Acquisition.
See "-- Business Strategy."
The Company markets its branded pharmaceutical products through its
wholly-owned subsidiary, Monarch Pharmaceuticals. The goal of Monarch
Pharmaceuticals is to aggressively promote acquired branded pharmaceutical
products in order to increase their sales. Monarch Pharmaceuticals has 48 sales
representatives who market primarily in the southeastern and midwestern United
States. This sales force is dedicated to promoting and marketing branded
pharmaceutical products and is supported by telemarketers and customer service
representatives who promote the Company's products in territories not currently
covered by field representatives. The Company expects its sales and marketing
staff to grow significantly as the Company acquires additional branded
pharmaceutical products.
The Company's current branded pharmaceutical products include, among
others, Cortisporin, acquired from Glaxo Wellcome in March 1997, Thalitone,
acquired from Horus Therapeutics, Inc. in December 1996 and Viroptic acquired
from Glaxo Wellcome in May 1997. In addition, the Company acquired Septra,
Proloprim, Mantadil and Kemadrin, as well as the exclusive licenses, free of
royalty obligations, to manufacture and market prescription formulations of
Neosporin and Polysporin from Glaxo Wellcome in November 1997. Branded
pharmaceutical products represented 79.8% of the net sales of the Company for
the first nine months ended September 30, 1997, with the Cortisporin Product
Line representing 60.7% of net sales. The Company acquired its first branded
product, the Anexsia Product Line for $17.6 million in December 1994. During the
12 months following its acquisition, the Company significantly increased annual
sales of the Anexsia Product Line through a combination of product development
and marketing. In December 1995, the Company sold the Anexsia Product Line to
Mallinckrodt for $32.0 million in cash and recognized a $13.1 million net gain.
The Company believes its integrated manufacturing capabilities and support
systems allow for higher margins and enhanced ability to acquire and develop
pharmaceutical products because it does not have to rely on third parties to
manufacture or develop products. The Company can produce a broad range of dosage
formulations, including sterile solutions, injectables, tablets and capsules,
liquids, creams and ointments, suppositories and powders, and is licensed by the
DEA to procure and produce controlled substances. The Company's manufacturing
capability is integrated with its support services, including quality control,
quality assurance, regulatory compliance, packaging, distribution and inventory
management and purchasing and production planning. These integrated services
enable the Company to maintain high quality standards for its products as well
as provide reliable and timely service to its customers. The Company currently
manufactures certain of its own branded and generic products and uses its excess
manufacturing capacity to contract manufacture for other pharmaceutical
companies.
32
<PAGE> 34
The Company's product development efforts are currently focused on
developing product line extensions, which allow the Company to enhance product
differentiation, create market exclusivity and minimize sales lost to generic
substitution. To date, the Company has introduced seven line extensions for its
acquired products.
The Company also manufactures and markets a number of generic
pharmaceutical products as well as a comprehensive line of nutritional
supplements for companion animals. The Company markets its generic
pharmaceutical products under the King Pharmaceuticals label and its companion
animal health products under the Royal Vet and Show Winner tradenames.
INDUSTRY BACKGROUND
Sales of pharmaceutical products in the United States were estimated to be
in excess of $98 billion in 1996. During the past decade, the pharmaceutical
industry has been faced with cost containment initiatives from government and
managed care organizations and has begun to consolidate. Consolidation is being
driven by a desire among pharmaceutical companies to reduce costs through
economies of scale and synergies, to add previously lacking U. S. or European
sales strength or to add promising product pipelines or manufacturing
capabilities in key therapeutic categories.
Industry consolidation and cost containment pressures have increased the
level of sales necessary for an individual product to justify active marketing
and promotion from large pharmaceutical companies. This has led large
pharmaceutical companies to focus their marketing efforts on drugs with high
sales and on newer drugs which have the potential for high sales. In addition,
in certain cases pharmaceutical companies may choose not to market or promote
products actively if such products do not fit with the Company's therapeutic or
marketing priorities. As a result of these factors, sales of certain
pharmaceutical products have stagnated or declined, which has caused large
pharmaceutical companies to consider divesting product lines that are not
strategically important. Because these product lines are generally small and may
not be cost-effective for large pharmaceutical companies, they can be profitable
for smaller companies to manufacture and market.
STRATEGY
The Company's strategy is to identify product opportunities that large
global pharmaceutical companies neglect and create value by leveraging its
marketing, manufacturing and product development capabilities. In order to
execute this strategy, the Company seeks to acquire branded pharmaceutical
products and increase their sales by focused promotion and marketing, as well as
by developing product line extensions and through product life cycle management.
The Company believes that there are substantial opportunities to acquire
branded pharmaceutical products at attractive prices from large global
pharmaceutical companies. The Company generally seeks branded pharmaceutical
products that (i) can benefit from focused marketing efforts in addition to
product development, (ii) complement the Company's existing product lines, and
(iii) have some patent protection or potential for market exclusivity or product
differentiation, such as through a delivery mechanism, as part of a combination
therapy or lack of a therapeutic substitute. Since December 1994, the Company
has acquired 15 branded pharmaceutical products. On October 31, 1997, the
Company entered into a preliminary non-binding letter of intent for the Sterile
Products Acquisition. To date, the Company has not made an acquisition of this
size, and if this acquisition is consummated as currently anticipated, the
Company will acquire an additional manufacturing facility. If this facility is
acquired, the Company's future success will depend in part on its ability to
retain or hire qualified employees to operate this facility and to operate such
facility efficiently in accordance with applicable regulatory standards. See
"Risk Factors -- Managing Growth of Business." Although the Company has offered
$125.0 million to Warner-Lambert for these products and other assets, the
Company has not completed due diligence and any purchase price will be subject
to the results of the Company's due diligence process. In addition to due
diligence, the proposed transaction is subject to numerous conditions and
contingencies, including internal approvals of both the Company and
33
<PAGE> 35
Warner-Lambert, receipt of regulatory approvals, resolution of legal and
equitable matters relating to employees, supply and service agreements and
intellectual property rights and preparation and negotiation of documentation.
In addition, if the proposed transaction is consummated, the Company may incur
additional acquisition cost to purchase any related inventory, the cost of which
is subject to further negotiation. Accordingly, there can be no assurance that
this proposed transaction will occur or, if it occurs, there can be no assurance
as to the assets that may be acquired, the purchase price of such assets or the
terms of their acquisition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "-- Products and Product
Development."
The Company believes that it can increase the sales of its branded
pharmaceutical products through focused promotion and marketing efforts. The
Company's wholly-owned subsidiary, Monarch Pharmaceuticals, has an established
sales force of 48 field representatives. This sales force is dedicated to
promoting and marketing branded pharmaceutical products. These efforts are
supported by telemarketers and customer service representatives who also promote
the Company's products in territories not currently covered by field
representatives by distributing samples to physicians selected using a computer
sampling system developed by the Company. The sales and marketing staff is
expected to grow significantly as the Company continues to acquire more branded
products.
A key component of the Company's strategy is its integrated manufacturing
capabilities and support systems. The Company's ability to manufacture products
enables the Company to capture higher margins and enhances the Company's ability
to acquire and develop products. The Company's plant manufactures a broad range
of dosage forms, including sterile solutions, injectables, tablets and capsules,
liquids and suspensions, creams and ointments, suppositories and powders. The
Company's support systems include quality assurance, quality control, regulatory
compliance, inventory control and packaging which are coordinated by the
Company's management information services. When the Company acquires a product,
it transfers production of such product to its manufacturing facilities as soon
as practicable after regulatory requirements are satisfied.
The Company also believes it can create value by utilizing its product
development capabilities to enhance product differentiation and to create market
exclusivity for its products. In particular, the Company seeks to develop new
combination therapies in order to broaden product lines and minimize generic
substitution. To date, the Company has introduced seven line extensions for its
acquired products.
PRODUCTS AND PRODUCT DEVELOPMENT
The Company develops, manufactures, packages, markets and distributes
branded and generic pharmaceutical products and companion animal health
products. It also manufactures certain pharmaceutical products for other
pharmaceutical companies.
The Company is focused primarily on the acquisition and development of
branded pharmaceuticals which are marketed through its wholly-owned subsidiary,
Monarch Pharmaceuticals. Since December 1994, the Company has acquired 15
branded pharmaceutical products, developed one product internally and divested
one product. The Company's current line of branded pharmaceutical products
include:
CORTISPORIN, acquired from Glaxo Wellcome in March 1997, includes
combination antibiotic and anti-inflammatory ophthalmic, otic and topical
formulations indicated for eye, ear and skin infections. The Cortisporin
Product Line represented 60.7% of the Company's net sales in the nine
months ended September 30, 1997.
NEOSPORIN, acquired under a license agreement from Glaxo Wellcome in
November 1997, includes prescription strength ophthalmic ointment and
solution indicated for the topical treatment of eye infections and the
prescription strength genitourinary irrigant sterile formulation of
Neosporin indicated for short-term use as a continuous irrigant or rinse to
help prevent infections associated with the use of indwelling catheters.
34
<PAGE> 36
POLYSPORIN, acquired under a license agreement from Glaxo Wellcome in
November 1997, is a prescription strength antibacterial ointment indicated
for the topical treatment of superficial eye infections.
SEPTRA, acquired from Glaxo Wellcome in November 1997, is available in
both oral and parenteral dosage forms and strengths and is an antibiotic
indicated for the treatment of infectious diseases, including urinary tract
infections, pneumonia, enteritis and ear infections in adults and children.
PROLOPRIM, acquired from Glaxo Wellcome in November 1997, is an
antibiotic indicated for the treatment of uncomplicated urinary tract
infections.
PEDIOTIC, which is part of the Cortisporin product line, is an ear
infection preparation specially formulated for children.
THALITONE is a hypertension-diuretic produced in tablet form,
indicated for the management of hypertension and edema associated with
congestive heart failure and renal dysfunction.
VIROPTIC is a sterile solution indicated for the treatment of ocular
herpes simplex virus, idoxuridine-resistant herpes and vidarabine-resistant
herpes. In November 1997, the FDA approved the expanded use of Viroptic to
include pediatric patients, ages six and above.
QUIBRON is a respiratory preparation containing theophylline which is
produced in capsule, tablet and sustained release tablet forms indicated
for the relief and/or prevention of asthma, chronic bronchitis and
emphysema.
PROCTOCORT is a hemorrhoidal preparation which is produced in cream
and an internally developed suppository form.
TUSSEND is an internally developed cough/cold preparation containing
hydrocodone which is produced in syrup, tablet and elixir forms indicated
in the relief of cough and congestion due to colds, acute respiratory
infections, bronchitis and hay fever.
NUCOFED is a dye-free cough/cold preparation containing codeine which
is produced in syrup and capsule forms indicated in the treatment of
coughing and congestion associated with upper respiratory infections,
common cold, bronchitis, influenza and sinusitis.
MONAFED is an internally developed non-narcotic cough/cold preparation
in a sustained release tablet form.
KEMADRIN, acquired from Glaxo Wellcome in November 1997, is an
anti-parkinsonian medication.
MANTADIL, acquired from Glaxo Wellcome in November 1997, is an
antihistimine cream indicated in the treatment of pruritic skin eruptions,
such as eczema, and contact dermatitis, including poison ivy and poison
sumac.
In December 1994, the Company acquired its first branded product line, the
Anexsia Product Line for $17.6 million. Anexsia is a prescription branded
narcotic analgesic for mild to moderate skeletal muscular pain. The acquisition
was funded by the Anexsia Note Payable. During the 12 months following its
acquisition, the Company significantly increased annual sales of Anexsia through
a combination of product development and aggressive marketing. In December 1995,
the Company sold the Anexsia Product Line to Mallinckrodt for $32.0 million in
cash and recognized a $13.1 million net gain. In connection with the sale, the
Company entered into a manufacture and supply agreement with Mallinckrodt that
provided for guaranteed minimum revenues of $4.8 million through 1999 and an
agreement to develop four ANDAs on Mallinckrodt's behalf for a maximum of $2.5
million each due upon FDA approval. In 1996, the FDA approved two of these ANDAs
and, as of September 30, 1997, the additional two ANDAs were on file.
35
<PAGE> 37
On October 31, 1997, the Company entered into a preliminary non-binding
letter of intent for the Sterile Products Acquisition. The Company is
considering acquiring 15 branded prescription pharmaceutical products from
Warner-Lambert (the "Warner-Lambert Products") which consist primarily of
biological products used to elicit immune responses and anti-infective drug
products. Set forth below is a description of the Warner-Lambert Products.
ADRENALIN Chloride is the active principal of the adrenal medulla that
is used to relieve respiratory distress, provide rapid relief of
hypersensitivity reactions, and restore cardiac rhythm in cardiac arrest.
ANUSOL-HC Cream is a water-washable cream indicated for the relief of
the inflammatory and pruritic manifestations of corticosteriod-responsive
dermatoses.
ANUSOL-HC 25mg Suppositories are used to relieve inflammation
accompanying hemorrhoids (piles), proctitis, cryptitis, fissures,
incomplete fistules and pruritus ani.
APLISOL is a diagnostic skin test used as an aid in the detection of
tuberculosis.
CHLOROMYCETIN is a broad-spectrum antibiotic which is provided in
several product forms for use in serious bacterial infections that are not
responsive to other antibiotics and when other antibiotics are
contraindicated.
COLY-MYCIN-M PARENTERAL is a parenteral antibiotic that is used in
infections due to susceptible gram-negative bacteria.
COLY-MYCIN-S OTIC is a suspension used in treatment of ear infections
and provides relief from redness, irritation and discomfort of certain ear
problems.
FLUOGEN is a trivalent vaccine for immunization against influenza
(flu); composition of vaccine is determined each year by the Centers for
Disease Control and Biologics Evaluation and Research.
HISTOPLASMIN is an agent for the diagnosis of histoplasmosis (a
respiratory infection due to a fungus) and is used to differentiate
possible histoplasmosis from other myotic or bacterial respiratory
infections.
HUMATIN is a broad-spectrum antibiotic used for intestinal anebiasis
and adjunctive in the management of hepatic coma.
KETALAR is a parenteral nonbarbiturate anesthetic used for diagnostic
and surgical procedures that do not require skeletal muscle relaxation.
PITOCIN is a hormone for initiation and improvement of uterine
contractions during labor and to control bleeding or hemorrhage in the
mother after childbirth.
PITRESSIN is an anti-diuretic hormone principally used for water
diabetes.
PROCAN is for the treatment of documented ventricular arrhythmias such
as sustained ventricular tachycardia, that, in the judgment of the
physician, are life-threatening.
PROCAN SR is for the treatment of documented ventricular arrhythmias
such as sustained ventricular tachycardia, that, in the judgment of the
physician, are life-threatening.
PROCANBID is for the treatment of documented ventricular arrhythmias
such as sustained ventricular tachycardia, that, in the judgment of the
physician, are life-threatening.
VIRA-A Injection is an antiviral drug indicated for infections of the
eye caused by the Herpes Simplex Virus.
VIRA-A Ophthalmic Ointment is an antiviral drug indicated for
infections of the eye.
36
<PAGE> 38
Three of these products, Procanbid, Anusol-HC and Coly-Mycin-M Parenteral,
accounted for 59% ($31.7 million) of the total gross sales (excluding contract
manufacturing) of the Warner-Lambert Products in the first nine months of 1997
and 47% ($31.7 million) of the total gross sales (including contract
manufacturing) of the Sterile Products Acquisition. Procanbid, Anusol-HC and
Coly-Mycin-M Parenteral had gross sales of $12.2 million, $11.8 million and $7.8
million in the first nine months of 1997, respectively. The remaining twelve
Warner-Lambert Products accounted for $21.8 million of the total gross sales of
the Warner-Lambert Products in the first nine months of 1997. The Sterile
Products Acquisition includes Fluogen which had gross sales of $23.0 million and
$22.3 million in 1995 and 1996, respectively, but which was not sold in 1997.
Fluogen was subject to a voluntary recall due to shelf life potency concerns in
1996. Subsequent testing has established Fluogen's shelf life potency and the
Company intends to market Fluogen in 1998. As a result of Fluogen's being
discontinued, cost of goods sold in 1997 included approximately $5.5 million of
unabsorbed overhead and approximately $4.3 million of obsolete inventory.
One of the Warner-Lambert Products, Procanbid, is protected by a patent,
while the other products compete with generic substitutes that are manufactured
and sold by other pharmaceutical companies. The Warner-Lambert Products are
produced in a variety of dosage formulations including, among others, tablets
and capsules, injectables, and creams and ointments. The Warner-Lambert Products
are sold primarily to pharmaceutical wholesalers for use by family and general
practitioners.
Contract manufacturing related to the Sterile Products Acquisition
represented approximately 25% ($22.2 million) and 29% ($14.0 million) of net
sales of the Sterile Products Acquisition for the year ended December 31, 1996
and for the nine months ended September 30, 1997, respectively. The Company
anticipates that it may enter into additional manufacturing contracts with
Warner-Lambert in connection with the Sterile Products Acquisition, which would
increase revenue from contract manufacturing. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "-- Strategy."
For the year ended December 31, 1996 and the nine months ended September
30, 1997, branded pharmaceutical products accounted for 19.0% and 79.8%,
respectively, of net sales of the Company. On a pro-forma basis, after giving
effect to the Recent Acquisitions and the Sterile Products Acquisition in each
case as if the acquisition had occurred on January 1, 1996, branded
pharmaceutical products would have represented approximately 74.6% ($101.8
million) and 78.4% ($75.6 million) of net sales of the Company for the year
ended December 31, 1996, and the nine months ended September 30, 1997,
respectively.
The Company is engaged in the development, manufacturing, packaging,
marketing, distribution and sale of generic pharmaceutical products sold as
prescription drugs. The Company currently has two generic products on the market
and has five ANDAs on file. The Company will continue to add new development
projects as more pharmaceutical products lose their patent protection. For the
year ended December 31, 1996 and the nine months ended September 30, 1997,
generic products accounted for 10.2% and 3.1%, respectively, of net sales of the
Company.
King Pharmaceuticals Animal Health, a division of the Company, manufactures
and markets a comprehensive line of nutritional supplements for companion
animals which are marketed under the Royal Vet and Show Winner tradenames. The
Company is also developing a comprehensive line of over-the-counter companion
animal health pharmaceutical products. For the year ended December 31, 1996 and
the nine months ended September 30, 1997, companion animal health products
accounted for 0.4% and 2.1%, respectively, of net sales of the Company.
SALES AND MARKETING
The Company's principal marketing focus is on the sales of branded
pharmaceutical products through Monarch Pharmaceuticals. Monarch Pharmaceuticals
has 48 sales representatives who market primarily to the southeastern and
midwestern United States. The Company distributes its branded pharmaceutical
products primarily through wholesale drug distributors. These products are
ordinarily
37
<PAGE> 39
dispensed to the public through pharmacies on the prescription of a physician.
For branded pharmaceutical products, the Company's marketing and sales
promotions principally target physicians through detailing and sampling to
encourage physicians to prescribe more of the Company's products. The Company
markets its products to pharmacists to encourage them to fill prescriptions
using the Company's products. The Company also contacts wholesalers to promote
the Company's products. The sales force is supported and supplemented by
telemarketing and direct mail, as well as through advertising in trade
publications and representations at regional and national medical conventions.
The Company's telemarketing and direct mailing efforts are performed primarily
by using a computer sampling system which the Company developed to distribute
samples to physicians. The Company intends to seek new markets in which to
promote its product lines and will continue expansion of its field sales force
as product acquisitions warrant.
The Company also markets and sells generic pharmaceutical products as well
as companion animal health products. The Company markets and sells its generic
pharmaceutical products primarily to major hospitals and hospital buying groups.
These products are marketed and sold primarily through six additional full-time
sales representatives, telemarketing and by direct mail.
The Company's companion animal health care products are sold to retailers
such as pet store chains, grocery stores and mass merchandisers. The promotion
of its companion animal health care products is focused on obtaining shelf space
in retail outlets through sales representatives and direct mail advertising.
PETsMart, Inc., an international operator of pet care superstores, is the
principal purchaser of the Company's companion animal health care products under
the Show Winner label.
The Company is currently dependent upon a small number of customers. In the
nine months ended September 30, 1997, approximately 56.9% of the Company's sales
were attributable to four customers and for the year ended December 31, 1996,
approximately 69.7% of the Company's sales were attributable to three customers.
These customers are wholesale drug distributors through which the Company
distributes its products. The products that the Company is considering acquiring
in the Sterile Products Acquisition are sold by Warner-Lambert to many of the
same wholesale drug distributors to whom the Company currently sells it
products. The loss of any one of these customers could result in a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, the distribution network for pharmaceutical products
has in recent years been subject to increasing consolidation. As a result, a few
large wholesale distributors control a significant share of the market. In
addition, the number of independent drug stores and small chains has decreased
as retail consolidation has occurred. Further consolidation among, or any
financial difficulties of, distributors or retailers could result in the
combination or elimination of warehouses, thereby stimulating product returns to
the Company. Further consolidation or financial difficulties could also cause
customers to reduce their inventory levels, or otherwise reduce purchases of the
Company's products which could result in a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Customer Concentration; Consolidation of Distribution Network."
MANUFACTURING
The Company's approximately 500,000 square foot facility includes
manufacturing, packaging, laboratory, office and warehouse space. The Company
manufactures its products in accordance with cGMP requirements and is licensed
by the DEA to procure and produce controlled substances. The Company
manufactures certain of its own branded and generic pharmaceutical products and
companion animal health products as well as products owned by other
pharmaceutical companies under manufacture and supply contracts which expire
over periods ranging from one to three years.
The Company can produce a broad range of dosage formulations, including
sterile solutions, injectables, tablets and capsules, liquids, creams and
ointments, suppositories and powders. The Company believes its manufacturing
capability allows it to capture higher margins and pursue product line
extensions more efficiently. The Company, however, cannot immediately begin
manufacturing the
38
<PAGE> 40
products it acquires. Currently ten of its product lines, including Cortisporin
and the six product lines acquired in the Glaxo Acquisition, are manufactured in
the same facilities in which they were previously manufactured as the Company
has not yet received regulatory approval for their manufacture at its
facilities. The Company intends to transfer production of newly acquired branded
pharmaceutical products and their product line extensions to its manufacturing
facilities as soon as practicable after regulatory requirements are satisfied.
In addition to manufacturing, the Company has fully integrated
manufacturing support systems including quality assurance, quality control
regulatory compliance, inventory control and packaging. These support systems
enable the Company to maintain high standards of quality for its products and
simultaneously deliver reliable services and goods to its customers on a timely
basis. Companies that do not have such support systems in-house must out source
these services.
The Company currently has manufacturing contracts with, among others,
Mallinckrodt, Roberts, SmithKline Beecham, Novartis and Milex Products, Inc.
These contracts represented in the aggregate approximately 70.5% and 15.1% of
the total revenues of the Company for the year ended December 31, 1996, and the
nine months ended September 30, 1997, respectively. In 1995, in conjunction with
the Anexsia Transaction, the Company entered into a manufacture and supply
contract with Mallinckrodt for the manufacture of the Anexsia Product Line,
which provides for a guaranteed minimum manufacturing fee of $4.8 million
through 1999 and renewals thereafter at the option of Mallinckrodt for up to an
additional three years. The Company anticipates that it may enter into
additional manufacturing contracts with Warner-Lambert in connection with the
Sterile Products Acquisition, which would increase revenue from contract
manufacturing. On a pro-forma basis, after giving effect to the Recent
Acquisitions and the Sterile Products Acquisition in each case as if the
acquisition had occurred on January 1, 1996, contract manufacturing would have
represented approximately 22.3% ($30.4 million) and 19.8% ($19.1 million) of net
sales of the Company for the year ended December 31, 1996, and the nine months
ended September 30, 1997, respectively. The Sterile Products Acquisition has not
occurred and there can be no assurance that it will occur or, if it occurs,
there can be no assurance as to the assets that may be acquired, the purchase
price of such assets or the terms of their acquisition. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
The Company requires a supply of quality raw materials and components to
manufacture and package drug products for itself and for third parties with
which it has contracted. While the Company generally has not had difficulty
obtaining raw materials and components from suppliers in the past, there can be
no assurance that such raw materials and components will continue to be
available on commercially acceptable terms in the future. Currently, the Company
relies on approximately 100 suppliers to deliver the necessary raw materials and
components. The loss of any one of these suppliers is not expected to have a
material adverse effect on the Company's ability to acquire raw materials and
components. Although the Company has no reason to believe it will be unable to
procure adequate supplies of raw materials and components on a timely basis, if
for any reason the Company is unable to obtain sufficient quantities of any of
the raw materials or components required to produce and package its products, it
may not be able to distribute its products as planned, which could have a
materially adverse effect on the Company's business, financial condition and
results of operations.
BACKLOG
As of September 30, 1997, the Company had no material backlog.
RESEARCH AND DEVELOPMENT
At the present time, the Company is not engaged in substantial clinical
research activities. The Company, however, is involved in product development
and continually seeks to develop extensions to its product lines and to improve
the quality, efficiency and cost-effectiveness of its manufacturing processes.
The Company's laboratories and product development scientists have produced
several
39
<PAGE> 41
product line extensions to existing branded pharmaceutical products and secured
several ANDA approvals from the FDA. The Company currently has five ANDA
applications pending with the FDA.
GOVERNMENT REGULATION
The manufacture, testing, packaging, labeling, distribution and marketing
of the Company's products and its ongoing product development activities are
subject to extensive and rigorous regulation at both the federal and state
levels. At the federal level, the Company is principally regulated by the FDA as
well as by the DEA, the Consumer Product Safety Commission, the FTC, the U.S.
Department of Agriculture, OSHA and the EPA. The FDC Act, the regulations
promulgated thereunder, and other federal and state statutes and regulations,
govern, among other things, the development, testing, manufacture, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of the Company's products and those manufactured by and for third
parties. Product development and approval within this regulatory framework
requires a number of years and involves the expenditure of substantial
resources.
The Company believes that it or its contract customers have the proper FDA
approvals or other marketing authority for the drugs that the Company currently
produces. When the Company acquires the right to market an existing approved new
drug, both it and the former application holder are required to submit certain
information to the FDA. The former application holder must submit a letter
stating that all rights to the application have been transferred to the Company.
Simultaneously, the Company submits a form acknowledging the transfer of the
application under which the drug product is manufactured and packaged, and
committing to honor the agreements, promises and conditions made by the former
application holder as contained in the application. The Company is also required
to advise the FDA about any changes in certain conditions in the approved
application as set forth in the FDA's regulations. The Company's strategy
focuses on acquiring branded pharmaceutical products and transferring their
manufacturing into the Company's manufacturing facilities as soon as practicable
after regulatory requirements are satisfied. In order to transfer manufacturing
of the acquired branded products, the Company must demonstrate, by filing
information with the FDA, that it can manufacture the product in accordance with
the specifications and conditions of the approved NDA. With the recent FDA
guidelines on Scale-Up and Post-Approval Changes ("SUPAC") guidelines, the
regulatory filing and approval timelines on transfer of products from the former
application holder's facilities into the Company's facilities have been
shortened. The FDA has published SUPAC guidelines for immediate release and
modified release, solid oral dosage forms and semi-solid products. Guidelines
for sterile aqueous dosage forms exist only in draft format. These guidances
provide recommendations to holders of drug applications who intend, during the
post-approval period, to change: (i) the components or composition of a drug
product under an approved application; (ii) the site of manufacture; (iii) the
scale-up or scale-down of manufacture; and/or (iv) the manufacturing processes
or equipment used in an approved application. Federal regulations permit the
Company to make changes to an approved application in accordance with a
guideline, notice, or regulation published in the Federal Register that provides
for a less burdensome notification of the change.
The FDA regulatory regime applicable to the Company's generic
pharmaceutical products depends, on whether the branded drug is the subject of
an approved NDA or is marketed pursuant to the FDA's enforcement policy. If the
pharmaceutical product to be offered as a generic version of a branded product
is the subject of an approved NDA, the generic product must be the subject of an
ANDA and must be approved by the FDA prior to marketing. Pharmaceutical products
produced by any manufacturer and marketed in accordance with the FDA's
enforcement policy are not subject to ANDA filings and approval prior to
replication and introduction to the market.
The FDA also mandates that drugs be manufactured, packaged and labeled in
conformity with cGMP. In complying with cGMP regulations, manufacturers must
continue to expend time, money and effort in production, record keeping and
quality control to ensure that the product meets applicable specifications and
other requirements to ensure product safety and efficacy. The FDA periodically
inspects drug manufacturing facilities to ensure compliance with applicable cGMP
requirements.
40
<PAGE> 42
Failure to comply with the statutory and regulatory requirements subjects the
manufacturer to possible legal or regulatory action, such as suspension of
manufacturing, seizure of product or voluntary recall of a product. Adverse
experiences with the product must be reported to the FDA and could result in the
imposition of market restrictions through labeling changes or in product
removal. Product approvals may be withdrawn if compliance with regulatory
requirements is not maintained or if problems concerning safety or efficacy of
the product occur following approval.
The federal government has extensive enforcement powers over the activities
of pharmaceutical manufacturers, including authority to withdraw product
approvals, commence actions to seize and prohibit the sale of unapproved or
non-complying products, to halt manufacturing operations that are not in
compliance with cGMP, and to impose civil monetary penalties and seek criminal
penalties. Such a restriction or prohibition on sales or withdrawal of approval
of products marketed by the Company could materially adversely affect the
Company's business, financial condition and results of operation.
While the Company believes that all of its current pharmaceuticals are
legally marketed under applicable FDA enforcement policies or have received
requisite government approvals for manufacture and sale, such marketing
authority is subject to revocation by the applicable government agencies. In
addition, modifications or enhancements of approved products are in many
circumstances subject to additional FDA approvals which may or may not be
received and which may be subject to a lengthy application process. The
Company's manufacturing facilities are continually subject to inspection by such
governmental agencies and manufacturing operations could be interrupted or
halted in any such facilities if such inspections prove unsatisfactory.
The Company also manufactures and sells drug products which are "controlled
substances" as defined in the Controlled Substances Act, which establishes
certain security and record keeping requirements administered by the DEA, a
division of the Department of Justice. The DEA has a dual mission -- law
enforcement and regulation. The former deals with the illicit aspects of the
control of abusable substances and the equipment and raw materials used in
making them. The DEA shares enforcement authority with the Federal Bureau of
Investigation, another division of the Department of Justice. The DEA's
regulatory responsibilities are concerned with the control of licensed handlers
of controlled substances, and with the substances themselves, equipment and raw
materials used in their manufacture and packaging, in order to prevent such
articles from being diverted into illicit channels of commerce. The Company has
not experienced restrictions or fines for non-compliance with the foregoing
regulations but no assurance can be given that restrictions or fines which could
have a material adverse effect upon the Company's business, financial condition
and results of operations will not be imposed upon the Company in the future.
State law generally controls the determination of who will be entitled to
registration under the Controlled Substances Act. In most cases, the DEA is
required by the Controlled Substances Act to register an entity to handle
controlled substances if the entity is licensed by a state to practice a
profession involving the possession or manufacture of controlled substances. The
Company maintains a State of Tennessee Board of Pharmacy License in order to
engage in pharmaceutical development, manufacturing and distribution.
The Company is licensed by the DEA to manufacture and distribute controlled
substances in Schedules II-V. The Schedules are used to classify substances by
various criteria. The Controlled Substances Act lists the following criteria for
Schedule II substances; (i) a high potential for abuse; (ii) a currently
accepted medical use in treatment in the United States or a currently accepted
medical use with severe restrictions; and (iii) abuse of the drug may lead to
severe psychological or physical dependence. Schedule III substances are
characterized by: (i) a potential for abuse less than substances in Schedules I
and II; (ii) currently accepted medical use for treatment in the United States;
and (iii) abuse of the drug may lead to moderate or low physical dependence or
high psychological dependence. Schedules IV, and V continue to use the same
criteria in decreasing order of potential for abuse or misuse.
41
<PAGE> 43
In connection with the use of sampling of pharmaceutical products to
prescribing physicians, the Company's activities are subject to the Prescription
Drug Marketing Act ("PDMA") which permits regulation of such activities at both
the federal and state level. Under PDMA and its implementing regulations, states
are permitted to require registration of manufacturers and distributors who
provide sample pharmaceuticals even if such manufacturers or distributors have
no place of business within the state and states are also permitted to adopt
regulations limiting the distribution of sample products to licensed
practitioners. PDMA also imposes extensive licensing, personnel record keeping,
packaging, quantity, labeling product handling and facility storage and security
requirements intended to prevent sale of sampled pharmaceutical products or
other diversions from their intended use.
The Company may also be subject to fees under PDUFA. PDUFA authorizes the
FDA to collect three types of user fees for: (i) certain types of applications
and supplements for approval of drug and biologic products, (ii) certain
establishments where such products are made, and (iii) certain marketed
products. Fees for applications, establishments, and products are determined by
the FDA using criteria delineated in the statute. When certain conditions are
met, the FDA may waive or reduce fees. The Company currently owes approximately
$139,000 of such fees.
The Company cannot determine what effect changes in regulations or legal
interpretations, when and if promulgated, may have on its business in the
future. Changes could, among other things, require expanded or different
labeling, the recall or discontinuance of certain products, additional record
keeping and expanded documentation of the properties of certain products and
scientific substantiation. Such changes, or new legislation, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Government Regulation."
ENVIRONMENTAL MATTERS
The Company's operations are subject to substantial and evolving federal,
state and local environmental laws and regulations concerning, among other
things, the generation, handling, storage, transportation, treatment and
disposal of toxic and hazardous substances. The Company believes that its
facilities are in substantial compliance with all provisions of federal, state
and local laws concerning the environment and does not believe that future
compliance with such provisions will have a material adverse effect on its
financial condition or results of operations. In response to change in
environmental laws, the Company's environmental capital expenditures and costs
for environmental compliance may increase in the future.
Under the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), the EPA has the authority to impose joint and several liability
for the remediation of contaminated properties upon generators of waste, current
and former site owners and operators, transporters and other potentially
responsible parties, regardless of fault or the legality of the original
disposal activity. Many states, including Tennessee, have statutes and
regulatory authorities similar to CERCLA and to the EPA. The Company has a
hazardous waste hauling agreement with licensed third parties to properly
dispose of its hazardous substances. There can be no assurance, however, that
the Company will not be found to be potentially responsible under CERCLA for the
costs of undertaking a clean up at a site to which its waste products were
transported. See "Risk Factors -- Government Regulation."
COMPETITION
The Company competes with other pharmaceutical companies for product and
product line acquisitions. These competitors include Jones Medical Industries,
Inc., Dura Pharmaceuticals, Inc., Medicis Pharmaceutical Corporation, Forest
Laboratories, Inc., Watson Pharmaceuticals, Inc. and other companies which also
acquire branded pharmaceutical product lines from other pharmaceutical
companies. Additionally, since the Company's products are generally established
and commonly sold, they are subject to competition from products with similar
qualities. The Company's branded pharmaceutical products may be subject to
competition from alternate therapies during the period of
42
<PAGE> 44
patent protection and thereafter from generic equivalents. The manufacturers of
generic products typically do not bear the related research and development
costs and consequently are able to offer such products at considerably lower
prices than the branded equivalents. There are, however, a number of factors
which enable products to remain profitable once patent protection has ceased.
These include the establishment of a strong brand image with the prescriber or
the consumer, supported by the development of a broader range of alternative
formulations than the manufacturers of generic products typically supply. As is
the case for the pharmaceutical industry in general, the introduction of new
products and processes by competitors may affect pricing levels or result in
product replacement for existing products, and there can be no assurance that
any of the Company's products may not become outmoded, notwithstanding patent or
trademark protection. In addition, increasing governmental and other pressure
towards the dispensing of generic pharmaceutical products in substitution for
branded pharmaceutical products may increase competition for products no longer
covered by patents. The Company's branded pharmaceutical products compete
primarily with products of other pharmaceutical companies, including large
global pharmaceutical companies. These competitors have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than the Company.
Moreover, such competitors may offer broader product lines and have greater name
recognition than the Company. There can be no assurance that the Company's
competitors will not acquire branded pharmaceutical products which the Company
desires or will not develop or market products that are more effective or
commercially attractive than the Company's current or future products or that
would render the Company's products obsolete. There can be no assurance that the
Company will have the financial resources, technical expertise or marketing,
distribution or support capabilities to compete successfully. See "Risk
Factors -- Competition; Uncertainty of Technological Change."
PATENTS, TRADEMARKS AND PROPRIETARY PROPERTY
The Company considers the protection of discoveries in connection with its
development activities important to its business. The Company intends to seek
patent protection in the United States and selected foreign countries where
deemed appropriate. The Company owns a U.S. Patent for Novel Chlorthalidone
Process and Product which expires in 2007, covering the raw materials used in
the manufacture of Thalitone. Monarch also has a paid-up and non-exclusive
license to certain other patent rights owned or controlled by Bristol-Myers
Squibb which is used in the manufacture of Quibron. The Company has also applied
for patents for an analysis test and a certain manufacturing process for
products other than Quibron. There can be no assurance that the issued patent or
subsequent patents, if issued, will adequately protect the Company's design or
that such patents will provide protection against infringement claims by
competitors. There can be no assurance that additional patents will be obtained
covering the Company's products or that, if issued or licensed to the Company,
the patents covering the Company's products will provide substantial protection
or be of commercial benefit to the Company. The Company also relies upon trade
secrets, unpatented proprietary know-how and continuing technological
innovation, where patent protection is not believed to be appropriate or
attainable, to develop its competitive position. The Company enters into
confidentiality agreements with certain of its employees pursuant to which such
employees agree to assign to the Company any inventions relating to the
Company's business made by them while employed by the Company, as well as
certain confidentiality agreements related to the acquisition of its product
lines. There can be no assurance, however, that any confidentiality agreement
entered into by the Company with employees or third parties will not be
breached, that the Company will have adequate remedies for any breach, that
others may not acquire or independently develop similar technology or, if
patents are not issued with respect to products arising from research, that the
Company will be able to maintain information pertinent to such research as
proprietary technology or trade secrets.
There can be no assurance that the Company's technology does not infringe
upon any valid claims of patents owned by others. If the Company were found to
be infringing on a patent held by another, the Company might have to seek a
license to use the patented technology. There can be no assurance
43
<PAGE> 45
that, if required, the Company would be able to obtain such a license on terms
acceptable to the Company, if at all. If a legal action were to be brought
against the Company, or its licensors, the Company could incur substantial costs
in defending itself, and there can be no assurance that such action would be
resolved in the Company's favor. If such a dispute were to be resolved against
the Company, the Company would be subject to significant damages and the
testing, manufacturing or sale of one or more of the Company's products or
proposed products, if developed, could be enjoined.
No assurance can be given as to the degree of protection any patents will
afford, whether patents will be issued or whether the Company will be able to
avoid violating or infringing upon patents issued to others. Despite the use of
confidentiality agreements, which themselves may be of limited effectiveness, if
may be difficult for the Company to protect its trade secrets.
The Company has exclusive licenses expiring June 2036 for the prescription
formulations of Neosporin(R) and Polysporin(R). Such licenses are subject to
early termination in the event the Company breaches its obligations under the
license agreement related to these branded pharmaceutical products. For example,
the licenses would be subject to early termination if the Company fails to meet
specified quality control standards, including cGMP with respect to the
products, or commits a material breach of other terms and conditions of the
licenses which would have a significant adverse effect on the uses of the
licensed products retained by the licensor, which would include among other
things, marketing products under these trade names outside the prescription
field.
The branded products sold by the Company are sold under a variety of
trademarks. While the Company believes that it or its wholly-owned subsidiary,
Monarch Pharmaceuticals, has valid proprietary interests in all currently used
trademarks, only certain of the trademarks are registered with the U.S.
government, including Cortisporin(R), Neosporin(R), Polysporin(R), Septra(R),
Proloprim(R), Kemadrin(R), Mantadil(R), Thalitone(R), Tussend(R), Nucofed(R),
Quibron(R), Pediotic(R), Vita Care(R), Royal Vet(R), Accudose(R) and
Viroptic(R). Additionally, trademark applications for Proctocort(TM),
Monarchpharm(TM), Show Winner(TM) and Monafed(TM) are pending. The Company
intends to market products under the following trademarks: Arthose Chews(TM),
Vetrin(TM), Monahist(TM) and Virtopic(TM). The Company also owns or has pending
the Pro-Kemadrin(R) and Petrin(TM) trademarks and owns the registered service
mark Secure-A-Sample(R).
EMPLOYEES
As of September 30, 1997, the Company employed 312 full-time and 8
part-time persons, including 86 in sales and marketing, 68 in manufacturing, 33
in Quality Assurance and 25 in finance and administration. None of the Company's
employees is covered by a collective bargaining agreement, and the Company
believes its employee relations are good. On October 31, 1997, the Company
entered into a preliminary non-binding letter of intent for the Sterile Products
Acquisition, which, if consummated, could substantially increase the number of
employees of the Company. In addition, a collective bargaining agreement is
currently in effect at Warner-Lambert's manufacturing facility. The Company
employs a full-time Chaplain and offers as part of its employee benefits package
access to additional counseling services.
LITIGATION
Except as described below, the Company has not been a party to litigation
or other legal proceedings. On October 16, 1997, the Company was named one of
many co-defendants in a purported class action filed in the Superior Court of
the State of Washington in connection with the Company's manufacture of
phentermine, an anorexigenic, under contract for SmithKline Beecham and its use
in combination with other drugs. The suit does not demand monetary damages but
seeks court-supervised, defendant-funded, medical monitoring to detect the
existence of cardiac valvular disease alleged to have arisen from the ingestion
of the combination of drugs by residents of the State of Washington. While the
Company cannot predict the outcome of this suit, the Company believes that the
claims against it are without merit and intends to vigorously pursue all
defenses available to it. The Company is being indemnified in this suit by
SmithKline Beecham for which it manufactures such product, provided that neither
the lawsuit nor the associated liabilities are based upon the indepen-
44
<PAGE> 46
dent negligence or intentional acts of the Company, and intends to submit a
claim for all unreimbursed costs to its product liability insurance carrier. See
"Risk Factors -- Product Liability; Product Recall; Product Returns."
PROPERTIES
The Company owns its approximately 500,000 square foot facility in Bristol,
Tennessee. This facility includes space for manufacturing, packaging,
laboratories, offices and warehouse. The Company believes such facility is
adequate for the conduct of its operations.
45
<PAGE> 47
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- --- -------------
<S> <C> <C>
John M. Gregory(2).......... 44 Chairman of the Board of Directors and Chief Executive
Officer
Jefferson J. Gregory........ 42 President and Chief Operating Officer of King
Pharmaceuticals, Inc. and Director
Joseph R. Gregory(1)........ 43 Vice Chairman of the Board of Directors of the Company,
President and Chief Operating Officer of Monarch
Pharmaceuticals
Brian G. Shrader............ 29 Chief Financial Officer
James E. Gregory............ 46 Executive Vice President, Production/Administration
R. Henry Richards, M.D. .... 52 Executive Vice President, Medical Affairs
J. Fred Pruden.............. 51 Executive Vice President, Manufacturing
John P. McCoy............... 49 Executive Vice President, Quality
Terri D. White-Gregory...... 34 Executive Vice President, Business Development
John A. A. Bellamy.......... 35 Executive Vice President, Legal Affairs and General
Counsel
Ronald C. Siegfried......... 55 Executive Vice President, Development
Michael R. Hilton........... 50 Vice President, Sales and Marketing
Thomas K. Rogers, III....... 44 Senior Director, Regulatory Affairs (Applications)
Norman T. Miller............ 64 Senior Director, Regulatory Affairs (Compliance)
Ernest C. Bourne............ 56 Director
Lois A. Clarke(3)........... 52 Director
Frank W. De Friece,
Jr.(1)(2)(3).............. 76 Director
D. Greg Rooker(1)(2)(3)..... 50 Director
Ted G. Wood................. 59 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Committee.
John M. Gregory has served as Chairman of the Board of Directors since the
Company's inception in 1993 and Chief Executive Officer since 1994. He
previously co-founded GIV and served as President of GIV from 1984 through 1994.
Prior to co-founding GIV, he was the owner and registered pharmacist of a
pharmacy located in Bastian, Virginia. He graduated from the University of
Maryland School of Pharmacy with a B.S. in Pharmacy in 1976.
Jefferson J. Gregory has served as President and Chief Operating Officer of
King Pharmaceuticals, Inc., since 1993, and has served as a Director since 1995.
He was formerly the Director of Regulatory Affairs and Product Information for
GIV from 1991 to 1993 and was a consultant to the pharmaceutical industry from
1989 to 1991. He formerly served as a registered pharmacist in retail pharmacies
in the Washington D.C. and Baltimore, Maryland metropolitan areas. He graduated
from the University of Maryland School of Law with a Juris Doctor in 1985,
University of Maryland School of Pharmacy with a B.S. in Pharmacy in 1979, and
Montgomery College with an Associate of Arts in 1976.
Joseph R. Gregory has served as President and Chief Operating Officer of
Monarch Pharmaceuticals since 1994, has served as a Director since 1993 and as
Vice Chairman of the Board of Directors of the Company since December 1997.
Prior to joining the Company, he was the Chief Operating Officer of GIV from
1987 to 1994 and also served as the President of Insource/Williams, Inc., a GIV
subsidiary, from 1989 to 1994. He previously served as President of The Buying
Group Network/A Service of
46
<PAGE> 48
Pharmacist Shared Services. He graduated from the University of Maryland School
of Business with a B.S. in Business Administration in 1977.
Brian G. Shrader, CPA, has served as Chief Financial Officer since 1993. He
was formerly the Manager of Accounting for GIV from 1990 to 1993. He is a
current member of the Virginia Society of CPA's. He graduated from the Virginia
Polytechnic Institute and State University with a B.S. in Accounting in 1990 and
a Masters of Accountancy in 1991.
James E. Gregory has served as Executive Vice President of
Production/Administration since February 1995. Previously, he was the Deputy
Executive Officer of the Washington D.C. Court system from 1990 through 1995 and
a senior administrator with that court from 1987 to 1990. He was responsible for
managing all business affairs for another major urban court system in Phoenix,
Arizona from 1982 to 1985 and was the Deputy County Recorder for Maricopa County
(Phoenix) from 1985 to 1987. Through management consulting firms, he provided
administrative systems consulting services to various state court systems from
1973 to 1982. He graduated from American University with a Masters of Public
Administration in 1979 and the University of Maryland with a B.A. in History in
1973.
R. Henry Richards, M.D. has served as Executive Vice President of Medical
Affairs since 1994. He also was the Medical Director/Director of Managed Care
for GIV during 1993. He served as the Vice President Medical Director for
Medical Dimensions, Inc. from 1991 to 1993, after having served as a M.D. in
private practice (Internal Medicine, Hypertension and Nephrology) since 1976. He
was also the Medical Director for the Hypertension Medical Clinic of San Jose
and Review Services Inc., Resource Consultant for Health Strategies in San Jose,
was associated with Samaritan Kidney Medical Associates, San Jose and Medical
Director, Hospital Private Review in Campbell, California. Dr. Richards
graduated from the University of Maryland with a M.D. in 1971, the Atlantic
Christian College with a B.S. in Biology in 1966, and Montgomery College with an
Associate of Arts in 1963.
J. Fred Pruden has served as Executive Vice President of Manufacturing
since 1995. He previously served as General Manager for Novo Nordisk
Pharmaceuticals, Inc., from 1988 to 1995, Vice President Operations for Fujisawa
U.S.A. from 1983 to 1988, Plant Manager for Sterling Drug from 1979 to 1983, and
served as Production Manager, Materials Manager and Process Engineering for
Abbott Laboratories for 8 years. During this time, he helped Abbott Laboratories
build a new manufacturing facility in Puerto Rico. He graduated from the
University of North Carolina in 1969 with a B.A. in Mathematics.
John P. McCoy has served as Executive Vice President of Quality since 1994.
He previously served as the Director of Total Quality
Management/Marketing/Logistics, Material Management and Planning for Connaught
Laboratories in Swiftwater, Pennsylvania from 1986 to 1993. He was the Group
Manager, Logistics Services Manager and Manufacturing Planner for McNeil
Pharmaceuticals from 1982 to 1986; Distribution Planning Manager from 1979 to
1982; and Manager, Marketing/Sales Systems, Distribution Center Manager and
Traffic Manager from 1971 to 1979. He graduated from Pennsylvania State
University with a B.S. in Business in 1970, and he also completed graduate work
at the University of Pennsylvania from 1983 to 1986.
Terri D. White-Gregory, CPA, has served as Executive Vice President of
Business Development since 1996. She served as a financial analyst for
Westinghouse Electric in 1995 and as a consultant and sole proprietor in public
accounting from 1993 to 1996. From 1988 to 1993, she was an audit manager and
supervisor in the Emerging Business Services Group of Coopers & Lybrand L.L.P.,
in Washington D.C. and Roanoke, Virginia and was a senior associate on the audit
staff of Ernst & Young LLP in Columbia, South Carolina from 1985 to 1988. She
graduated from The Ohio State University with a B.S. in Business Administration
in 1985.
John A. A. Bellamy has served as Executive Vice President of Legal Affairs
and General Counsel since February 1995. He was formerly a corporate attorney
with the law firm of Hunter, Smith & Davis in Kingsport, Tennessee from 1990 to
1995. He graduated from the University of Tennessee College of Law with a J.D.
with Honors in 1990, and graduated Summa Cum Laude with Honors in Independent
47
<PAGE> 49
Study from King College in 1984 with a B. A. degree in Classics and English. He
is a member of the Licensing Executives Society.
Ronald C. Siegfried has served as Executive Vice President of Development,
Vice President of Development, Technical Services and Manufacturing since
December 1993. He previously served as Director of Manufacturing for RSR
Laboratories, Inc. ("RSR Laboratories"), from 1990 to 1993, was the Manager of
Manufacturing and a Product Development Chemist for Beecham Laboratories from
1972 to 1990, and was a Product Development Chemist for Bristol Laboratories, a
division of Bristol-Myers Squibb from 1964 to 1972. He graduated from the
Rochester Institute of Technology with a B.S. in Chemistry in 1964.
Michael R. Hilton has served as Vice President of Sales and Marketing and
Director of Marketing since July 1995. From 1991 to 1995, he served in the
capacity of Vice President -- Marketing and Business Development and marketing
director for Richwood Pharmaceuticals, KV Pharmaceuticals and RSR Laboratories.
From 1973 to 1990 he served in various sales and marketing and public relations
positions with Beecham Laboratories. He graduated from Ferris State University
with a B.S. in Marketing in 1970.
Thomas K. Rogers, III has served as Senior Director, Regulatory Affairs
(Applications), since April 1997. He previously served as Director of Regulatory
Affairs from 1995 to 1997 and as Manager of Regulatory Affairs from 1994 to
1995. Prior to joining the Company, he served RSR Laboratories as Manager of
Scientific Development from 1991 to 1993, and Manager of Quality Assurance from
1990 to 1991. He served Beecham Laboratories as Manager of Quality Assurance
from 1988 to 1990 and as Microbiologist from 1979 to 1988. He graduated from
East Tennessee State University with a M.S. in Microbiology in 1977 and from
Milligan College with a B.S. in Biology in 1975.
Norman T. Miller has served as Senior Director, Regulatory Affairs
(Compliance), since December 1993. He previously served as a Research Compliance
Specialist and as acting Director of Compliance for Beecham Laboratories from
1988 to 1990. From 1990 to 1993 he served as Manager of Regulatory Affairs for
RSR Laboratories. Prior to 1988, he served as Resident-in-Charge, Senior
Investigator and Inspector for the FDA for 28 years. He graduated from South
Dakota State University with a M.S. in Animal Science-Biochemistry minor in 1960
and a B.S. in Animal Husbandry in 1958.
Ernest C. Bourne has served as a Director since October 1997. He has been
employed since 1968 with Bourne & Co., Inc., an investment banking firm, where
he currently serves as President.
Lois A. Clarke has served as a Director of the Company since April 1997.
Presently she is Executive Vice President and Chief Financial Officer of The
United Company in Bristol, Virginia, one of the Company's principal
shareholders. She also serves as President of United Investment Corporation, a
registered investment advisor, and an affiliate of The United Company. Ms.
Clarke has been with The United Company since 1971 and has been responsible for
financial matters of the Company. She is a graduate of McClains College with a
degree in Accounting.
Frank W. De Friece, Jr. has served as a Director of the Company since
October 1997. He has served as President, Vice President, Fund Administrator and
Board member of the Massengill De Friece Foundation, Inc. since 1950. Since 1946
he served in various capacities with the S.E. Massengill Company. He served as
President of the S.E. Massengill Company from 1960 to 1971 when the company was
purchased by Beecham, Inc. From 1971 to 1973, he served as Board Member Vice
Chairman of Beecham, Inc. He graduated from Roanoke College with a B.S. in
Chemistry in 1946.
D. Greg Rooker has served as a Director of the Company since October 1997.
Mr. Rooker is the owner and President of Family Community Newspapers of
Southwest Virginia, Inc., Wytheville, Virginia ("FCN"). FCN consists of five
community newspapers and a national monthly motor sports magazine. Mr. Rooker is
a graduate of Northwestern University with a degree in Journalism.
Ted G. Wood has been a Director of the Company since April 1997. Presently,
he is affiliated with The United Company in Bristol, Virginia, one of the
Company's principal shareholders. From 1992 to
48
<PAGE> 50
1993, he was President of Boehringer Mannheim Pharmaceutical Corporation in
Rockville, Maryland. From 1993 to 1994 he was President of KV Pharmaceuticals in
St. Louis, Missouri. From 1975 to 1991, he was employed by SmithKline Beecham
where he served as President of Beecham Laboratories from 1988 to 1989 and
Executive Vice President of SmithKline Beecham from 1990 to 1991. He served as
account supervisor at Frank J. Corbett, Inc. in Chicago, Illinois from 1972 to
1974. From 1962 to 1971, he held various sales and marketing management
positions with The Dow Chemical Company. He graduated from the University of
Kentucky with a B.S. in Commerce in 1960. In 1986 he completed the Advanced
Management Program at Harvard University.
Messrs. John, Joseph, Jefferson, and James Gregory, and R. Henry Richards,
M.D., are brothers. Ms. Terri D. White-Gregory is the spouse of Jefferson
Gregory.
COMPENSATION OF DIRECTORS
Directors of the Company do not currently receive any fees for serving in
such capacity.
CLASSIFICATION OF BOARD OF DIRECTORS
Pursuant to the Company's Bylaws, the Board of Directors is divided into
three classes of directors each containing, as nearly as possible, an equal
number of directors. Directors within each class are elected to serve three-year
terms and approximately one-third of the directors sit for election at each
annual meeting of the Company's shareholders. A classified board of directors
may have the effect of deterring or delaying any attempt by any group to obtain
control of the Company by a proxy contest since such third party would be
required to have its nominees elected at two separate meetings of the Board of
Directors in order to elect a majority of the member of the Board of Directors.
See "Risk Factors -- Certain Charter, Bylaws and Statutory Provisions; Rights
Agreement."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has appointed an Audit Committee, a Compensation
Committee and a Stock Option Committee.
Audit Committee. The Audit Committee, which currently consists of Joseph
R. Gregory, D. Greg Rooker and Frank W. DeFriece, Jr., has the authority and
responsibility to hire one or more independent public accountants to audit the
Company's books, records and financial statements and to review the Company's
systems of accounting (including its systems of internal control); to discuss
with such independent accountants the results of such audit and review; to
conduct periodic independent reviews of the systems of accounting (including
systems of internal control); and to make reports periodically to the Board of
Directors with respect to its findings.
Compensation Committee. The Compensation Committee, which currently
consists of John M. Gregory, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for reviewing and approving compensation for the executive officers.
Stock Option Committee. The Stock Option Committee, which currently
consists of Lois A. Clarke, Frank W. DeFriece, Jr. and D. Greg Rooker, is
responsible for administering, and determining awards under, the Company's 1997
Incentive and Nonqualified Stock Option Plan for Employees.
DIRECTORS AND OFFICERS' INSURANCE
The Company maintains liability insurance for its directors and officers in
the aggregate amount of $8.0 million, subject to a $25,000 deductible loss per
occurrence payable by the Company. Upon the consummation of this offering, the
Company intends to increase its liability insurance for its directors and
officers up to an aggregate amount of $20.0 million.
49
<PAGE> 51
EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by the Company's
Chief Executive Officer and by each of the Company's four other most highly
compensated executive officers whose total annual salary and bonus exceeded
$100,000 for services rendered in all capacities to the Company during the year
ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($)(1)
- --------------------------- ---- ---------- --------- ------------------
<S> <C> <C> <C> <C>
John M. Gregory................................... 1996 360,000 -0- 4,500
Chairman of the Board and Chief Executive
Officer
Jefferson J. Gregory.............................. 1996 240,001 -0- 4,500
President and Chief Operating Officer,
King Pharmaceuticals, Inc.
Joseph R. Gregory................................. 1996 240,001 -0- 4,500
President and Chief Operating Officer,
Monarch Pharmaceuticals
James E. Gregory.................................. 1996 200,005 -0- 4,500
Executive Vice President
Production/Administration
R. Henry Richards, M.D............................ 1996 200,004 -0- 4,500
Executive Vice President
Medical Affairs
</TABLE>
- ------------------------------
(1) All Other Compensation reflects the Company's matching contributions to the
Company's 401(k) plan.
INCENTIVE STOCK OPTION PLAN
In October 1997, the Company adopted the 1997 Incentive and Nonqualified
Stock Option Plan for Employees (the "Plan") pursuant to which a committee of
the Board of Directors ("Stock Option Committee") may grant incentive stock
options (within the meaning of the Internal Revenue Code of 1986, as amended
(the "Code")) and nonqualified options (collectively, the "Options") to
employees of the Company for the purchase of Common Stock. The Plan is intended
to provide incentives to, and rewards for employees of the Company who have
contributed and will continue to contribute to the success of the Company. The
option prices are determined by the Stock Option Committee, but option prices
may not be less than 100% of the fair market value of the Common Stock on the
date the option is granted. An aggregate of 3,500,000 shares of Common Stock has
been reserved for issuance under the Plan subject to appropriate adjustments for
stock splits, dividends and other transactions or events as described in the
Plan. All options may be exercised at such times and in such amounts as may be
determined at the time of the granting of the options by the Stock Option
Committee; provided, however, that no options may be exercised later than ten
years after the date upon which they were granted.
Options may be exercised within 30 days, or such longer period as the Stock
Option Committee may determine, after retirement, resignation, or termination of
the option holder's employment or service with the Company, but only to the
extent that they had become exercisable at retirement, resignation or
termination. Any unexercised options shall expire in the event of an option
holder's retirement or dismissal or otherwise as described above. Under certain
circumstances involving change of control of the Company, the Board of Directors
may accelerate the exercisability and termination of the option. No awards can
be made under the Plan after October 2007.
50
<PAGE> 52
The Board of Directors may, at any time, amend, modify, suspend or
terminate the Plan; provided however, that no amendment, suspension or
termination of the Plan may alter or impair any rights or obligations under any
Option already granted except with the consent of the holder of the Option, and
no action of the Stock Option Committee or the Board of Directors may increase
the limit on the maximum number of shares which may be issued upon exercise of
Options, reduce the minimum option price requirements or extend the limit on the
period during which Options may be granted, without approval by the Company's
shareholders given within 12 months before or after such action by the Board of
Directors or the Stock Option Committee.
An employee to whom an incentive stock option ("ISO") which qualifies under
Section 422 of the Code is granted will not recognize income at the time of
grant or exercise of such Option. However, upon the exercise of an ISO, any
excess in the fair market price of the Common Stock over the option price
constitutes a tax preference item which may have alternative minimum tax
consequences for the employee. If the employee sells such shares more than one
year after the date of transfer of such shares and more than two years after the
date of grant of such ISO, the employee will generally recognize a long-term
capital gain or loss equal to the difference, if any, between the sale prices of
such shares and the option price. The Company will not be entitled to a federal
income tax deduction in connection with the grant or exercise of the ISO. If the
employee does not hold such shares for the required period, when the employee
sells such shares, the employee will recognize ordinary compensation income and
possibly capital gain or loss (long-term or short-term depending on the holding
period of the stock sold) in such amounts as are prescribed by the Code and the
regulations thereunder and the Company will generally be entitled to a Federal
income tax deduction in the amount of such ordinary compensation income
recognized by the employee.
An employee to whom a nonqualified stock option ("NSO") is granted will not
recognize income at the time of grant of such Option. When such employee
exercises such NSO, the employee will recognize ordinary compensation income
equal to the excess, if any, of the fair market value, as of the date of Option
exercise, of the shares the employee receives upon such exercise over the option
price paid. The tax basis of such shares to such employee will be equal to the
option price paid plus the amount, if any, includible in the employee's gross
income, and the employee's holding period for such shares will commence on the
date on which the employee recognizes taxable income in respect of such shares.
Gain or loss upon a subsequent sale of any Common Stock received upon the
exercise of a NSO generally would be taxed as capital gain or loss (long-term or
short-term, depending upon the holding period of the stock sold). Subject to the
applicable provisions of the Code and regulations thereunder, the Company will
generally be limited to a Federal income tax deduction in respect of a NSO in an
amount equal to the ordinary compensation income recognized by the employee.
This deduction will, in general, be allowed for the taxable year of the Company
in which the participant recognizes such ordinary income.
Currently there are no outstanding options granted under the Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors appointed the Compensation Committee in October
1997. For the year ended December 31, 1996, Messrs. John M., Jefferson J.,
Joseph R., James E. Gregory and R. Henry Richards, M.D. participated in
deliberations of the Board of Directors concerning executive officer
compensation.
51
<PAGE> 53
CERTAIN TRANSACTIONS
King Pharmaceuticals Benevolent Fund, Inc. (the "Benevolent Fund") is a
nonprofit corporation organized under the laws of the Commonwealth of Virginia
and is exempt from taxation under sec. 501(c)(3) of the Internal Revenue Code.
The Board of Directors of the Benevolent Fund includes John M. Gregory, Joseph
R. Gregory, Jefferson J. Gregory, James E. Gregory and R. Henry Richards, M.D.
who are also executive officers of the Company. The Company advanced $700,000 in
1995 and $400,000 in 1997 to the Benevolent Fund which was used for general
operating purposes. The Benevolent Fund has agreed to reimburse the Company for
those payments which totaled approximately $1.1 million, as of September 30,
1997. The Benevolent Fund is independent of the Company, maintains its own
accounting records and its activities are not directly related to the business
of the Company.
The United Company, a Virginia corporation, and certain of its
shareholders, officers, directors and employees are the beneficial owners of
approximately 30.5% of the Common Stock of the Company. Currently, two members
of the Company's Board of Directors, Lois A. Clarke and Ted G. Wood, are
affiliates of The United Company. As part of the sale of stock to The United
Company on March 17, 1997, the Company executed a Promissory Note in the amount
of $1.8 million payable to The United Company. The Promissory Note provides for
quarterly payments of interest, at a rate of 10.0% per annum, commencing on July
1, 1997, together with a single payment of principal and any accrued unpaid
interest on April 1, 1999. The Company is entitled to prepay the principal and
any accrued interest without penalty. Proceeds of the loan from The United
Company were used to fund, in part, the acquisition of the Cortisporin and
Pediotic product lines from Glaxo Wellcome.
In the past, pursuant to the terms of an Employee Stock Purchase Plan
adopted by the Company on January 1, 1996, and as later amended on October 1,
1996, employees were permitted to purchase shares of the Common Stock of the
Company through either cash payments or regular payroll deductions.
Additionally, certain shareholders and members of management purchased shares of
Common Stock and were permitted to execute promissory notes payable to the
Company. These purchasers included executive officers Joseph R. Gregory, also a
director, Jefferson J. Gregory, also a director, and Terri D. White-Gregory,
James E. and his spouse April Gregory, Brian G. Shrader and his mother Carol
Shrader and R. Henry Richards, M.D., also a director, and his spouse Jean
Richards who executed promissory notes payable to the Company in the amounts of
$300,000, $570,000, $165,180, $165,000, $150,000 and $276,000, respectively. The
interest rate charged on these promissory notes was 8% per annum. All such
persons have paid their notes in full. There are no outstanding promissory notes
payable to the Company for the purchase of Common Stock and the Company has no
obligation to sell any shares of its Common Stock to any person or entity. The
Employee Stock Purchase Plan has since been terminated.
The Company has entered into an agreement for consulting services with Mr.
Bourne, a director. The agreement provides that Bourne & Company, an affiliate
of Mr. Bourne, will receive upon consummation of the offering a fee equal to
1.0% of the net proceeds. The agreement is for a one-year term which began
August 1, 1997 and provides for a monthly retainer fee of $10,000 for the term
of the agreement. The 1.0% fee resulting from this offering will be offset by
the amount of the monthly retainer paid prior to the consummation of the
offering. Assuming the 6,000,000 shares offered hereby are priced at $18.00 per
share, Mr. Bourne would receive a fee of approximately $1.1 million offset by
the monthly retainer fee described above. See "Underwriting."
In addition, as of September 30, 1997, the Company had paid Mr. Bourne
approximately $743,000 and $58,000 for his advisory services in the acquisition
of the Cortisporin product line and consulting services, respectively. Mr.
Bourne provides consulting services to the Company in areas such as corporate
development, financing alternatives and strategies, and general business
planning.
52
<PAGE> 54
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the ownership
of the Common Stock as of October 24, 1997, and as adjusted to reflect the sale
of the shares of the Common Stock offered hereby by the Company and the Selling
Shareholders, for (i) each person who will beneficially own more than 5% of the
Common Stock, (ii) each director and executive officer of the Company, (iii) all
executive officers and directors of the Company as a group, and (iv) each of the
Selling Shareholders.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
COMMON STOCK PRIOR TO COMMON STOCK AFTER THE
OFFERING(1) OFFERING(1)
------------------------ ------------------------
PERCENTAGE NUMBER OF PERCENTAGE
EXECUTIVE OFFICERS, DIRECTORS NUMBER OF OUTSTANDING SHARES TO BE NUMBER OF OUTSTANDING
AND 5% SHAREHOLDERS SHARES SHARES OFFERED SHARES SHARES
----------------------------- ---------- ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
John M. Gregory(2)................. 8,829,529 31.5% 295,137(3) 8,534,392 25.1%
Joseph R. Gregory(4)............... 2,943,150 10.5 60,000 2,883,150 8.5
Jefferson J. Gregory(5)............ 1,101,635 3.9 50,000 1,051,635 3.1
James E. Gregory(6)................ 196,048 * 42,000 154,048 *
R. Henry Richards, M.D.(7)......... 256,141 * 35,000 221,141 *
Brian G. Shrader(8)................ 572,510 2.0 65,000 507,510 1.5
J. Fred Pruden..................... 3,220 * -0- 3,220 *
John P. McCoy(9)................... 42,826 * -0- 42,826 *
Terri D. White-Gregory(5).......... -- -- -- -- --
John A. A. Bellamy................. 38,643 * -0- 38,643 *
Ernest C. Bourne................... 138,001 * -0- 138,001 *
Lois A. Clarke(10)(11)............. 95,200 * -0- 95,200 *
Ted G. Wood(10).................... 28,000 * -0- 28,000 *
All executive officers and
directors as a group (13
persons)......................... 14,244,903 50.9 547,137 13,697,766 40.3
The United Company(12)............. 5,172,594 18.5 -0- 5,172,594 15.2
OTHER SELLING SHAREHOLDERS
- ------------------------
King Pharmaceuticals Benevolent
Fund, Inc.(13)................... 186,246 * 175,000 11,246 *
Mary Ann and Herschel P.
Blessing(14)..................... 477,967 1.7 90,000 387,967 1.1
Mary and Fred Jarvis(15)........... 115,806 * 29,000 86,806 *
Randal J. Kirk(16)................. 1,358,863 4.9 1,358,863 -0- --
A. Willard Lester.................. 402,153 1.4 362,000 40,153 *
Peggy H. Sutphin................... 477,532 1.7 357,000 120,532 *
---------
Total shares sold by
Selling Shareholders... 2,919,000
=========
</TABLE>
- ------------------------------
* Less than 1%.
(1) Based on 28,000,000 shares of Common Stock outstanding prior to and
34,000,000 shares outstanding after the offering.
(2) Includes 6,855,660 shares jointly owned with Mr. Gregory's spouse;
1,852,539 shares owned by S.J., LLC, a limited liability company, the
primary members of which are Mr. Gregory's children; 84,000 shares
registered in the name of The Lazarus Foundation, Inc., a private
foundation controlled by John M. Gregory; and 37,330 shares held in trusts
for the benefit of Martha Rachel Richards and for Erin Spinner Richards,
for which Mr. Gregory serves as trustee. Mr. Gregory's address is 501 Fifth
Street, Bristol, Tennessee 37620.
(3) Includes 220,137 shares to be sold by Mr. Gregory and his spouse and 75,000
shares to be sold by The Lazarus Foundation, Inc.
(4) Includes 966,000 shares owned through Kingsway L.L.C., a limited liability
company, as Manager, the primary members of which are Mr. Gregory, his
spouse and his son. Mr. Gregory's address is 501 Fifth Street, Bristol,
Tennessee 37620.
(5) Ms. White-Gregory and Jefferson J. Gregory jointly beneficially own
1,045,523 of the shares shown above.
(6) All of these shares are jointly owned with Mr. Gregory's spouse.
(7) Includes 243,132 shares jointly owned with Dr. Richards' spouse.
53
<PAGE> 55
(8) Includes 241,500 shares owned by C.B.B., L.L.C., a limited liability
company, the primary members of which are Mr. Shrader and his parents;
56,000 shares held in the name of Mr. Shrader as custodian for Michael
Brian Shrader, a minor; and 10,623 shares jointly owned with Mr. Shrader's
mother.
(9) All of these shares are jointly owned with Mr. McCoy's spouse.
(10) Ms. Clarke and Mr. Wood are affiliates of The United Company.
(11) Includes 16,800 shares held in the name of Ms. Clarke as custodian for
Donald Alan Clarke, a minor.
(12) The United Company along with certain of its affiliates beneficially own in
the aggregate 8,532,595 representing approximately 30.5% of the outstanding
shares of the Company. The address of The United Company is 1005 Glenway
Avenue, Bristol, Virginia 24201.
(13) King Pharmaceuticals Benevolent Fund, Inc., is a nonprofit charitable
organization. See "Certain Transactions."
(14) Includes 369,068 shares jointly owned by Mr. and Mrs. Blessing; 55,863
shares owned by Mrs. Blessing; 52,934 owned by Mr. Blessing; 34 shares held
in the name of Mrs. Blessing as custodian for Benjamin Blessing, a minor;
34 shares held in the name of Mrs. Blessing as custodian for Gregory C.
Jones, a minor; and 34 shares held in the name of Mrs. Blessing as
custodian for Mary Beth Blessing, a minor. Mrs. Blessing is a sister to
Messrs. John M., Joseph R., Jefferson J. and James E. Gregory, and to R.
Henry Richards, M.D. She resigned from the Board of Directors in March
1997.
(15) Includes 79,428 shares owned by Mr. and Mrs. Jarvis and 36,378 shares owned
by Mrs. Jarvis. Mrs. Jarvis is the mother of Messrs. John M., Joseph R.,
Jefferson J. and James E. Gregory, and of R. Henry Richards, M.D.
(16) Includes 161,000 shares owned by Kirkfield, L.L.C.; 42,151 shares owned by
Rahn Labs; 322,000 shares owned by RJK, L.L.C.; 748 shares owned by the
estate of Carol Kirk; 3,220 shares owned by Joseph L. Kirk; and 5,474
shares owned by Julian Kirk, all of which are affiliates of Mr. Kirk. Mr.
Kirk was the co-founder with John M. Gregory of GIV.
Messrs. John M. Gregory, Joseph R. Gregory, Jefferson J. Gregory, James E.
Gregory, Richards, Shrader and Ms. White-Gregory, each of whom is a Selling
Shareholder, serve as executive officers of the Company. Messrs. John M.
Gregory, Joseph R. Gregory and Jefferson J. Gregory also serve as directors of
the Company. See "Management."
54
<PAGE> 56
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
The total amount of authorized capital stock of the Company consists of
150,000,000 shares of Common Stock, no par value per share, and 15,000,000
shares of preferred stock, no par value per share (the "Preferred Stock"). Upon
consummation of the offering, 34,000,000 shares of Common Stock will be issued
and outstanding and no shares of Preferred Stock will be outstanding. The
following summary of certain provisions of the Company's capital stock describes
certain material provisions of, but does not purport to be complete and is
subject to and qualified in its entirety by, the Charter and the Bylaws of the
Company that are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Subject to the prior rights of any Preferred Stock, the
holders of outstanding shares of Common Stock are entitled to receive dividends
out of assets legally available therefor at such times and in such amounts as
the Board of Directors may from time to time determine. See "Dividend Policy."
The shares of Common Stock are not redeemable or convertible, and the holders
thereof have no preemptive or subscription rights to purchase any securities of
the Company. Upon liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive pro rata the assets of the
Company which are legally available for distribution after payment of all debts
and other liabilities and subject to the prior rights of any holders of
Preferred Stock then outstanding. Each outstanding share of Common Stock is
entitled to one vote on all matters submitted to a vote of shareholders. The
Common Stock has been approved, subject to official notice of issuance, for
listing on the Nasdaq National Market under the symbol "KING."
PREFERRED STOCK
The Board of Directors, without further action by the Company's
shareholders, from time to time, may authorize the issuance of shares of
Preferred Stock in series, and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Preferred Stock would reduce the amount of
funds available for the payment of dividends on shares of Common Stock. Holders
of shares of Preferred Stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of shares of Common Stock. Under certain
circumstances, the issuance of shares of Preferred Stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by holders of a large block of the Company's securities or
the removal of incumbent management. See "Risk Factors -- Certain Charter,
Bylaws and Statutory Provisions; Rights Agreement." The Board of Directors,
without shareholder approval, may issue shares of Preferred Stock with voting
and conversion rights which could adversely affect the holders of shares of
Common Stock. Currently, there are no shares of Preferred Stock outstanding, and
the Company has no present intention to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE CHARTER AND BYLAWS AND STATUTORY PROVISIONS
The Charter provides that the Board of Directors will be divided into three
classes, with each class serving for three years, and one class being elected
each year. A majority of the remaining directors then in office, though less
than a quorum, will be empowered to fill any vacancy on the Board of Directors
that arises during the term of a director. The provision for a classified board
may be amended, altered or repealed only upon the affirmative vote of the
holders of at least 80.0% of the outstanding shares of the voting stock of the
Company. The classification of the Board of Directors may discourage a third
party from making a tender offer or otherwise attempting to gain control of the
55
<PAGE> 57
Company and may have the effect of maintain the incumbency of the Board of
Directors. See "Risk Factors -- Antitakeover Effect of Certain Charter, Bylaws
and Statutory Provisions; Rights Agreement" and "Management."
The Bylaws provide that special meetings of the shareholders of the Company
be called only by a majority of the entire Board of Directors or by certain
officers. In addition, the Bylaws provide that shareholders seeking to bring
business before or to nominate directors at any annual meeting of shareholders
must provide timely notice thereof in writing. To be timely, the shareholders'
notice must be delivered to, or mailed and received at, the principal executive
offices of the Company not less than 60 days nor more than 90 days prior to such
meeting or, if less than 70 days' notice was given for the meeting, within 10
days following the date on which such notice was given. The Bylaws also specify
certain requirements for a shareholders' notice to be in proper written form.
These provisions restrict the ability of shareholders to bring matters before
the shareholders or to make nominations for directors at meetings of
shareholders.
The Company is subject to certain antitakeover provisions provided under
Tennessee law.
Business Combination Statute. Tennessee's Business Combination Act
provides that a party owning 10.0% or more of stock in a "resident domestic
corporation" (such party is called an "interested shareholder") cannot engage in
a business combination with the resident domestic corporation unless the
combination (i) takes place at least five years after the interested shareholder
first acquired 10.0% or more of the resident domestic corporation, and (ii)
either (A) is approved by at least two-thirds of the non-interested voting
shares of the resident domestic corporation or (B) satisfies certain fairness
conditions specified in the Business Combination Act.
These provisions apply unless one of two events occurs. A business
combination with an entity can proceed without delay when approved by the target
corporation's board of directors before that entity becomes an interested
shareholder, or the resident corporation may enact a charter amendment or bylaw
to remove itself entirely from the Business Combination Act. This charter
amendment or bylaw must be approved by a majority of the shareholders who have
held shares for more than one year prior to the vote. It may not take effect for
at least two years after the vote. The Company has not adopted a charter or
bylaw amendment removing the Company from coverage under the Business
Combination Act.
The Business Combination Act further provides an exemption from liability
for officers and directors of resident domestic corporations who do not approve
proposed business combinations or charter amendments and bylaws removing their
corporations from the Business Combination Act's coverage as long as the
officers and directors act in "good faith belief" that the proposed business
combination would adversely affect their corporation's employees, customers,
suppliers, or the communities in which their corporation operates and such
factors are permitted to be considered by the board of directors under the
charter.
Control Share Acquisition Act. The Tennessee Control Share Acquisition Act
("TCSAA") strips a purchaser's shares of voting rights any time an acquisition
of shares in a covered Tennessee corporation brings the purchaser's voting power
to one-fifth, one-third or a majority of all voting power. The purchaser's
voting rights can be established only by a majority vote of the other
shareholders. The purchaser may demand a meeting of shareholders to conduct such
a vote. The purchaser can demand such a meeting before acquiring a control share
only if it holds at least 10.0% of outstanding shares and announces a good faith
intention to make the control share acquisition. A target corporation may or may
not redeem the purchaser's shares if the shares are not granted voting rights.
Investor Protection Act. Tennessee's Investor Protection Act ("TIPA")
applies to tender offers directed at corporations (called "offeree companies")
that have "substantial assets" in Tennessee and that are either incorporated in
or have a principal office in Tennessee. The TIPA requires an offeror making a
tender offer for an offeree company to file with the Commissioner of Commerce
and
56
<PAGE> 58
Insurance (the "Commissioner") a registration statement. When the offeror
intends to gain control of the offeree company, the registration statement must
indicate any plans the offeror has for the offeree. The Commissioner may require
additional information material to the takeover offer and may call for hearings.
The TIPA does not apply to an offer that the offeree company's board of
directors recommends to shareholders.
In addition to requiring the offeror to file a registration statement with
the Commissioner, the TIPA requires the offeror and the offeree company to
deliver to the Commissioner all solicitation materials used in connection with
the tender offer. The TIPA prohibits "fraudulent, deceptive, or manipulative
acts or practices" by either side, and gives the Commissioner standing to apply
for equitable relief to the Chancery Court of Davidson County, Tennessee, or to
any other chancery court having jurisdiction whenever it appears to the
Commissioner that the offeror, the offeree company, or any of its respective
affiliates has engaged in or is about to engage in a violation of the TIPA. Upon
proper showing, the Chancery Court may grant injunctive relief. The TIPA further
provides civil and criminal penalties for violations.
Authorized Corporation Protection Act. The Tennessee Authorized
Corporation Protection Act ("TACPA") is the vehicle through which the Tennessee
statutes attempt to permit the Business Combination Act and the TCSAA to govern
foreign corporations. The TACPA provides that an authorized corporation can
adopt a bylaw or a charter provision electing to be subject to the operative
provisions of the Business Combination Act and the TCSAA, which then become
applicable "to the same extent as such provisions apply to a resident domestic
corporation." Authorized corporations are those that are required to obtain a
Certificate of Authority from the Tennessee Secretary of State and that satisfy
any two of the following tests: having its principal place of business located
in Tennessee; having a significant subsidiary located in Tennessee; having a
majority of such corporation's fixed assets located in Tennessee; having more
than 10.0% of the beneficial owners of the voting stock or more than 10.0% of
such corporation's shares of voting stock beneficially owned by residents of
Tennessee; employing more than 250 individuals in Tennessee or having an annual
payroll paid to residents of Tennessee that is in excess of $5.0 million;
producing goods and/or services in Tennessee that result in annual gross
receipts in excess of $10.0 million; or having physical assets and/or deposits
located within Tennessee that exceed $10.0 million in value.
The U.S. Court of Appeals for the Sixth Circuit, however, has held the
TACPA unconstitutional as it applies to target corporations organized under the
laws of states other than Tennessee.
Greenmail Act. The Tennessee Greenmail Act ("TGA") applies to any
corporation chartered under the laws of Tennessee which has a class of voting
stock registered or traded on a national securities exchange or registered with
the Securities and Exchange Commission pursuant to Section 12(g) of the Exchange
Act. The TGA provides that it is unlawful for any corporation or subsidiary to
purchase, either directly or indirectly, any of its shares at a price above the
market value, as defined in the TGA, from any person who holds more than 3.0% of
the class of the securities purchased if such person has held such shares for
less than two years, unless either the purchase is first approved by the
affirmative vote of a majority of the outstanding shares of each class of voting
stock issued or the corporation makes an offer of at least equal value per share
to all holders of shares of such class.
RIGHTS AGREEMENT
The Company's Board of Directors has declared a dividend of one Right for
each share of Common Stock outstanding. The holders of any additional Common
Stock subsequently issued before the earliest of the Distribution Date, as
hereinafter defined, the redemption of the Rights, the exchange of the Rights or
the expiration of the Rights also will be entitled to one Right for each such
additional share. Such Rights entitle the registered holder under certain
circumstances to purchase from the Company one-thousandth of a share of Junior
Participating Preferred Stock, Series A, (the "Preferred Stock") at a price of
$60 per one-thousandth of a share of Preferred Stock (the "Purchase
57
<PAGE> 59
Price"), subject to adjustment. The description and terms of the Rights are set
forth in the Rights Agreement.
The Rights will be evidenced by the Common Stock certificates and not by
separate certificates until the earlier of (i) the day following the first date
of public disclosure that a person or group other than an "Exempt Person" (the
"Acquiring Person"), together with persons affiliated, or associated with such
Acquiring Person (other than Exempt Persons), has acquired, or obtained the
right to acquire, beneficial ownership of 15.0% of the outstanding Common Stock
(the "Stock Acquisition Date") and (ii) the tenth business day after the date of
commencement or public disclosure of an intention to commence a tender offer or
exchange offer by a person other than an Exempt Person, the Company and certain
related entities if, upon consummation of the offer, such person or group,
together with persons affiliated or associated with it (other than those that
are Exempt Persons) would acquire beneficial ownership of 15.0% or more of the
outstanding Common Stock (the earlier of such dates being called the
"Distribution Date"). Until the Distribution Date (or earlier redemption,
exchange, or expiration of the Rights), (i) the Rights will be transferable only
with the Common Stock (except with redemption of the Rights); (ii) Common Stock
certificates will contain a notation incorporating the Rights Agreement by
reference; and (iii) the surrender for transfer of any certificates for Common
Stock will also constitute the transfer of the Right associated with the Common
Stock represented by such certificate. For purposes of the Rights Agreement
"Exempt Persons" is defined to include Messrs. John M., Joseph R. and Jefferson
J. Gregory (the "Gregory Entities").
As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date. From and after the Distribution Date, such separate Rights
Certificates alone will evidence the Rights.
The Rights will become exercisable on or after the Distribution Date
(unless sooner redeemed or exchanged). The Rights will expire at the close of
business on the tenth anniversary of the date of initial issuance (the
"Expiration Date") unless earlier redeemed or exchanged by the Company as
described below.
The Purchase Price payable and the number of shares of Preferred Stock or
other securities, cash or other property issuable upon exercise of the Rights
are subject to adjustment from time to time to prevent dilution (i) in the event
of a stock dividend or distribution on, or a subdivision or combination of, or
reclassification of the Preferred Stock, (ii) upon the grant to holders of the
Preferred Stock of certain rights, options, or warrants to subscribe for
Preferred Stock or securities convertible into Preferred Stock at less than the
current market price of the Preferred Stock, or (iii) upon the distribution to
holders of the Preferred Stock of other securities, cash (excluding regular
periodic cash dividends), property, evidences of indebtedness, or assets.
If a person becomes an Acquiring Person, the Rights will "flip-in" and
entitle each holder of a Right, except as provided below, to purchase, upon
exercise at the then-current Purchase Price, that number of shares of Common
Stock having a market value of two times such Purchase Price. In addition,
following a "flip-in," the Board has the option of exchanging all or part of the
Rights, except as provided below, for Common Stock.
In the event that, following a "flip-in," the Company is acquired in a
merger or other business combination in which the Common Stock does not remain
outstanding or is exchanged or 50% or more of its consolidated assets or earning
power is sold, leased, exchanged, mortgaged, pledged or otherwise transferred or
disposed of (in one transaction or a series of related transactions), the Rights
will "flip-over" and entitle each holder (other than the Acquiring Person and
certain related persons or transferees) of a Right to purchase, upon the
exercise of the Right at the then-current Purchase Price, that number of shares
of common stock of the acquiring company (or, in certain circumstances, one of
its affiliates) which at the time of such transaction would have a market value
of two times such Purchase Price.
58
<PAGE> 60
Any Rights beneficially owned at any time on or after the earlier of the
Distribution Date and the Stock Acquisition Date by an Acquiring Person or an
affiliate or associate (other than an exempt person) of an Acquiring Person
(whether or not such ownership is subsequently transferred) will become null and
void upon the occurrence of a "Triggering Event," and any such holder of such
Rights will have no right to exercise such Rights or have such Rights exchanged
as provided above. A "Triggering Event" will be deemed to occur in the event
that any person becomes an Acquiring Person.
The number of outstanding Rights and the number of one-thousandths of a
share of Preferred Stock issuable upon exercise of each right and the Purchase
Price are subject to adjustment in the event of a stock dividend on the Common
Stock payable in Common Stock or subdivision or combination of the Common Stock
occurring, in any such case, prior to the Distribution Date.
At any time prior to the earlier of the Stock Acquisition Date and the
Expiration Date, the Company may redeem the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive the dividends or distributions.
At any time prior to the Stock Acquisition Date, a majority of the
Continuing Directors (as defined in the Rights Agreement) may, without the
approval of an holder of the Rights (except, in certain circumstances, an Exempt
Person), supplement or amend any provision of the Rights Agreement (including
the date on which the Distribution Date will occur after announcement of
commencement of a tender offer). Thereafter, the Rights Agreement may be amended
by a majority of the Continuing Directors without the approval of any holder of
the Rights only to cure ambiguities, to correct defective or inconsistent
provisions, or in ways that do not adversely affect the Rights holders.
Notwithstanding the foregoing, the Rights Agreement may not be amended to change
the Purchase Price, the number of shares of Preferred Stock, other securities,
cash or other property obtainable upon exercise of a Right, the redemption price
or the Expiration Date.
The Rights have certain anti-takeover effects. The Right may cause
substantial dilution to a person or group other than an Exempt Person that
attempts to acquire the Company on terms not approved by the Board, except
pursuant to an offer conditioned on a substantial number of Rights being
acquired. The Rights should not interfere with any merger or other business
combination approved by the Board of Directors prior to the time a person or
group other than an Exempt Person has acquired beneficial ownership of 15.0% or
more of the Common Stock, because until such time the Rights may be redeemed by
the Company at $.01 per Right.
The foregoing description of the Rights does not purport to be complete and
is qualified in its entirety by reference to the Rights Agreement (a copy of the
form of which is filed as an exhibit to the Registration Statement), including
the definitions therein of certain terms.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Charter limits the liability of directors to the fullest extent
permitted by the Tennessee Business Corporation Act. In addition, the Charter
provides that the Company shall indemnify directors and officers of the Company
to the fullest extent permitted by such law.
TRANSFER AGENT, REGISTRAR, RIGHTS AGENT AND CUSTODIAN
The transfer agent, registrar and Rights Agent for the Company's Common
Stock and the Preferred Stock Purchase Rights and the custodian for the Selling
Shareholders is Union Planters National Bank, Memphis, Tennessee.
59
<PAGE> 61
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock of the Company. Sales of a substantial number of shares of the Company's
Common Stock in the public market following this offering, or the perception
that such sales could occur, could adversely affect the market price of the
Common Stock. Upon completion of this offering, there will be 34,000,000 shares
of Common Stock outstanding. Other than the 8,919,000 shares offered hereby, all
shares of Common Stock held by the Company's current shareholders are
"restricted securities" within the meaning of Rule 144 under the Securities Act
of 1933, as amended (the "Securities Act"), and may only be sold subject to the
provisions of Rule 144 under the Securities Act.
Of the 34,000,000 shares of Common Stock to be outstanding after the
offering, approximately 22,000,000 or 64.7%, of the outstanding shares of Common
Stock will be subject to lock-up agreements entered into by certain offers,
directors and other shareholders of the Company (the "Lock-up Agreements"). The
Company and its directors, officers and certain other shareholders have, among
other things, agreed not to, directly or indirectly, offer for sale, sell,
pledge or otherwise dispose of (or, during the term of the Lock-up Agreement,
enter into any transaction or device that is designed to, or could be expected
to, result in the disposition by any person at any time in the future of), any
Common Stock or securities convertible into or exchangeable for Common Stock,
with certain exceptions, or sell or grant options, rights or warrants with
respect to any shares of Common Stock or securities convertible into or
exchangeable for Common Stock, with certain limited exceptions, or enter into
any swap or other derivatives transaction that transfers to another, in whole or
in part, any of the economic benefits or risk of ownership of such shares of
Common Stock, for a period of 180 days after the date of this Prospectus without
the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives. Of the approximately 12,000,000 shares of Common Stock to be
outstanding after the Offering that are not subject to the Lock-up Agreements,
other than the 8,919,000 shares of Common Stock sold in the Offering, (i)
approximately 1.1 million shares will be immediately eligible for resale in the
public market without restriction in reliance on Rule 144(k) under the
Securities Act, (ii) approximately 800,000 shares may be sold subject to the
volume and manner of sales restrictions of Rule 144 and (iii) the remaining 1.2
million shares may not be sold pursuant to Rule 144 prior to the expiration of
their one-year holding period.
Beginning 180 days after the date of this Prospectus, after the Lock-up
Agreements have expired, approximately (i) 10.0 million additional shares of
Common Stock will become eligible for resale into the public market in reliance
of Rule 144(k)and (ii) approximately 12.0 million additional shares may be sold
subject to the volume and manner of sales restrictions of Rule 144. See
"Underwriting."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including affiliates, who has beneficially owned
shares for at least one year (including holding periods of prior owners other
than affiliates) is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Company's Common Stock (approximately 34,000,000
shares immediately after this offering) or (ii) the average weekly trading
volume in the Company's Common Stock during the four calendar weeks preceding
such sale. A person (or persons whose shares are aggregated) who is not deemed
to be an affiliate of the Company and who has beneficially owned shares for at
least two years (including holding periods of prior owners other than
affiliates) is entitled to sell such shares under Rule 144 without regard to the
volume limitations described above.
The Company intends to file a registration statement under the Securities
Act on Form S-8 covering 3,500,000 shares of Common Stock reserved for issuance
under its Plan. See "Management -- Incentive Stock Option Plan." Such
registration statement is expected to be filed as soon as practicable after the
date of this Prospectus and will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will be
available for sale in the open market, unless such shares are subject to vesting
restrictions with the Company or the contractual restrictions described above.
60
<PAGE> 62
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by
"Non-U.S. Holders." In general, a "Non-U.S. Holder" is an individual or entity
other than: (i) a citizen or resident of the United States; (ii) a corporation
or partnership created or organized in the United States or under the laws of
the United States or of any state; (iii) an estate, the income of which is
includible in gross income for U.S. federal income tax purposes regardless of
its source; or (iv) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have the authority to control all substantial decisions of the
trust. This discussion does not address all aspects of U.S. federal income and
estate taxation and does not deal with foreign, state and local consequences
that may be relevant to Non-U.S. Holders in light of their personal
circumstances, or to certain types of Non-U.S. Holders which may be subject to
special treatment under U.S. federal income tax laws (for example, certain U.S.
expatriates, insurance companies, tax-exempt organizations, financial
institutions and broker-dealers). Furthermore, this discussion is based on
provisions of the Internal Revenue Code of 1986, amended (the "Code"), existing
and proposed regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as of the date hereof, and all of which are subject
to change, possibly with retroactive effect. PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE, LOCAL AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF HOLDING AND DISPOSING OF SHARES OF
COMMON STOCK.
An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a nonresident alien) by virtue of being present in
the United States for at least 31 days in the calendar year and for an aggregate
of at least 183 days during a three-year period ending in the current calendar
year (counting for such purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year). Resident aliens are subject to
U.S. federal tax as if they were U.S. citizens.
DIVIDENDS
The Company does not expect to pay any cash dividends in the foreseeable
future. See "Dividend Policy." In the event, however, that dividends are paid on
shares of Common Stock, dividends paid to a Non-U.S. Holder will generally be
subject to U.S. withholding tax at a 30% rate (or a lower rate prescribed by an
applicable tax treaty) unless the dividends are either (i) effectively connected
with a trade or business carried on by the Non-U.S. Holder within the United
States and the Non-U.S. Holder provides the payor with proper documentation, as
discussed below, or (ii) if certain income tax treaties apply, attributable to a
permanent establishment in the United States maintained by the Non-U.S. Holder.
Dividends effectively connected with such a U.S. trade or business or
attributable to such a U.S. permanent establishment generally will not be
subject to withholding tax (if the Non-U.S. Holder files certain forms,
including, currently, Internal Revenue Service ("IRS") Form 4224, and after
December 31, 1998, subject to certain transition rules, a Form W-8, with the
payor of the dividend) and generally will be subject to U.S. federal income tax
on a net income basis, in the same manner as if the Non-U.S. Holder were a
resident of the United States. In the case of a Non-U.S. Holder that is a
corporation, dividend income so connected or attributable may also be subject to
the branch profits tax (which is generally imposed on a foreign corporation on
the repatriation from the United States of its effectively connected earnings
and profits subject to certain adjustments) at a 30% rate (or a lower rate
prescribed by an applicable income tax treaty). For purposes of determining
whether tax is to be withheld at a 30% rate or at a lower rate as prescribed by
an applicable tax treaty, current law permits the Company to presume that
dividends paid prior to January 1, 1999 to an address in a foreign country are
paid to a resident of such country absent knowledge that such presumption is not
warranted. However, under newly issued regulations, in the case of dividends
paid after December 31, 1998, if a Non-U.S. Holder that is not a corporation or
other exempt recipient meeting certain requirements fails
61
<PAGE> 63
to supply the Company with a valid Form W-8, the Non-U.S. Holder will be subject
to 31% backup withholding reporting rather than the 30% withholding (or
withholding at a reduced treaty rate) discussed above, unless the payment is
made through a foreign intermediary. For purposes of obtaining a reduced rate
under an income treaty, certain information concerning the Non-U.S. Holder's
country of residence must be provided. Prospective investors should consult with
their own tax advisors concerning the effect, if any, of the adoption of these
new regulations on an investment in the Common Stock.
A Non-U.S. Holder that is eligible for a reduced rate of U.S. withholding
tax pursuant to an income tax treaty may obtain a refund of any excess amounts
currently withheld by filing an appropriate claim for refund with the IRS.
SALE OF COMMON STOCK
In general, a Non-U.S. Holder will not be subject to U.S. federal income
tax on any gain recognized upon the disposition of Common Stock unless: (i) the
gain is effectively connected with a trade or business carried on by the
Non-U.S. Holder within the United States or, alternatively, if certain tax
treaties apply, attributable to a permanent establishment in the United States
maintained by the Non-U.S. Holder (and in either such case, the branch profits
tax may also apply if the Non-U.S. Holder is a corporation); (ii) in the case of
an individual Non-U.S. Holder who holds shares of Common Stock as capital
assets, such individual is present in the United States for 183 days or more in
the taxable year of disposition, and certain other conditions are met; or (iii)
the Company is or has been a United States real property holding corporation (a
"USRPHC") for United States federal income tax purposes at any time within the
shorter of the five-year period preceding such disposition or such Non-U.S.
Holder's holding period. A corporation is a USRPHC if the fair market value of
the U.S. real property interests held by the corporation is 50% or more of the
aggregate fair market value of certain assets of the corporation. The Company
believes that it is not likely to become and is not currently a USRPHC. If the
Company were or were to become a USRPHC, gains realized upon a disposition of
Common Stock by a Non-U.S. Holder which did not directly or indirectly own more
than 5% of the Common Stock during the shorter of the periods described above
generally would not be subject to U.S. federal income tax so long as the Common
Stock is "regularly traded" on an established securities market.
If a Non-U.S. Holder who is an individual falls under clause (i) above,
such individual generally will be taxed on the net gain derived from a sale of
Common Stock under regular graduated U.S. federal income tax rates. If an
individual Non-U.S. Holder falls under clause (ii) above, such individual
generally will be subject to a flat 30% tax on the gain derived from a sale,
which may be offset by certain U.S. capital losses (notwithstanding the fact
that such individual is not considered a resident alien of the United States).
Thus, individual Non-U.S. Holders who have spent (or expect to spend) more than
a de minimis period of time in the United States in the taxable year in which
they contemplate a sale of Common Stock are urged to consult their tax advisors
prior to the sale as to the U.S. tax consequences of such sale.
If a Non-U.S. Holder that is a foreign corporation falls under clause (i)
above, it generally will be taxed on its net gain under regular graduated U.S.
federal income tax rates and, in addition, will be subject to the branch profits
tax equal to 30% of its "effectively connected earnings and profits," within the
meaning of the code for the taxable year, as adjusted for certain items, unless
it qualifies for a lower rate under an applicable tax treaty.
ESTATE TAX
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as defined for U.S. federal estate tax purposes) of the
United States at the time of death will be includible in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax
treaty provides otherwise, and therefore may be subject to U.S. federal estate
tax.
62
<PAGE> 64
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to, and the tax withheld with respect to, each Non-U.S.
Holder. These reporting requirements apply regardless of whether withholding was
not required because the dividends were effectively connected with a U.S. trade
or business of the Non-U.S. Holder or reduced or eliminated by an applicable tax
treaty. Copies of this information also may be made available under the
provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides or is established.
Under current rules, United States backup withholding (which generally is
imposed at the rate of 31% on certain payments to persons that fail to furnish
the information required under the U.S. information reporting requirements)
generally will not apply (i) to dividends paid on Common Stock to a Non-U.S.
Holder that is subject to withholding at the 30% rate (or that is subject to
withholding at a reduced rate under an applicable treaty) or (ii) before January
1, 1999, to dividends paid to a Non-U.S. Holder at an address outside the United
States. However, under newly issued regulations, dividends paid after December
31, 1998 generally will be subject to backup withholding at a 31% rate, unless
the Non-U.S. Holder provides a valid Form W-8 or is a corporation or other
exempt recipient that meets certain requirements.
The payment of proceeds from the disposition of Common Stock to or through
a U.S. office of a broker will be subject to information reporting and backup
withholding unless either (i) the Non-U.S. Holder is a corporation or other
exempt recipient meeting certain requirements or (ii) the Non-U.S. Holder
provides a valid Form W-8. The payment of proceeds from the disposition of
Common Stock to or through a non-U.S. office of a non-U.S. broker generally will
not be subject to backup withholding and information reporting. Before January
1, 1999, however, in the case of proceeds from the disposition of Common Stock
effected at a non-U.S. office of a broker that is: (i) a U.S. person; (ii) a
"controlled foreign corporation" for U.S. federal income tax purposes or (iii) a
foreign person 50% or more of whose gross income from certain periods is
effectively connected with a U.S. trade or business, such payments will not be
subject to backup withholding unless such broker has actual knowledge that the
owner is not a Non-U.S. Holder but will be subject to information reporting,
unless such broker has documentary evidence in its files that the owner is a
Non-U.S. Holder and certain other conditions are met. Further, after December
31, 1998, under the newly issued regulations referred to above, information
reporting and backup withholding may apply to payments of the gross proceeds
from the sale or redemption of Common Stock effected through foreign offices of
brokers having any of a broader class of connections with the United States
unless certain certification requirements are complied with. Prospective
investors should consult with their own tax advisors regarding these
regulations, and in particular with respect to whether the use of a particular
broker would subject the investor to these rules.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from a payment to Non-U.S. Holder will be refunded or
credited against the Non-U.S. Holder's U.S. federal income tax liability, if
any, provided that the required information is furnished to the IRS.
63
<PAGE> 65
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement, dated , 1997 (the "Underwriting Agreement"), among the
Company, the Selling Shareholders and the underwriters named below (the
"Underwriters") for whom Lehman Brothers Inc., Credit Suisse First Boston
Corporation and Hambrecht & Quist LLC are acting as representatives (the
"Representatives"), the Underwriters have severally agreed to purchase from the
Company and the Selling Shareholders, and the Company and the Selling
Shareholders have agreed to sell to each Underwriter, the aggregate number of
shares of Common Stock set forth opposite the name of each such Underwriter
below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Lehman Brothers Inc. .......................................
Credit Suisse First Boston Corporation......................
Hambrecht & Quist LLC.......................................
---------
Total............................................. 8,919,000
=========
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price set forth on the cover page hereof, and to certain dealers at such public
offering price less a selling concession not in excess of $ per share.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to certain other Underwriters or to certain other
brokers or dealers. After the offering to the public, the offering price and
other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions, including the condition that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending or threatened by the Securities and
Exchange Commission and that there has been no material adverse change or
development involving a prospective material adverse change in the condition of
the Company from that set forth in the Registration Statement otherwise than as
set forth or contemplated in this Prospectus, and that certain certificates,
opinions and letters have been received from the Company and its counsel, the
Selling Shareholders and their counsel and independent auditors. The
Underwriters are obligated to take and pay for all of the above shares of Common
Stock if any such shares are taken.
The Underwriters and each of the Company and the Selling Shareholders have
agreed in the Underwriting Agreement to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
The Company has granted to the Underwriters an option to purchase up to an
additional 1,000,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the public offering price, less the underwriting discounts
and commissions shown on the cover page of this Prospectus. Such option may be
exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that the option is exercised, each Underwriter will be
committed to purchase a number of additional shares of Common Stock
proportionate to such Underwriter's initial commitment as indicated in the table
above.
The Representatives have informed the Company and the Selling Shareholders
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Shareholders of the Company, including directors and officers, beneficially
owning an aggregate of approximately 22,000,000, or approximately 64.7%, of the
outstanding shares of Common Stock after giving effect to the offering have
agreed not to, directly or indirectly, offer for sale, sell, pledge or otherwise
dispose of (or, during the period of the Lock-up Agreement, enter into any
transaction or
64
<PAGE> 66
device that is designed to, or could be expected to, result in the disposition
by any person at any time in the future of) any shares of Common Stock or
securities convertible into or exchangeable for Common Stock, or sell or grant
options, rights or warrants with respect to any Shares of Common Stock or
securities convertible into or exchangeable for Common Stock, or enter into any
swap or other derivatives transaction that transfers to another, in whole or in
part, any of the economic benefits or risks of ownership of such shares of
Common Stock, for a period of 180 days after the date of this Prospectus without
the prior written consent of Lehman Brothers Inc. on behalf of the
Representatives. Except for the Common Stock to be sold in the offering, the
Company has agreed not to offer for sale, sell, pledge or otherwise dispose of
(or enter into any transaction or device that is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any shares of Common Stock or securities convertible into or exchangeable
for Common Stock or other capital stock, with certain limited exceptions, or
sell or grant options, rights or warrants with respect to any shares of Common
Stock or securities convertible into or exchangeable for Common Stock, with
certain limited exceptions, or enter into any swap or other derivations
transactions that transfers to another in whole or in part, any of the economic
benefits or risks of ownership of such shares of Common Stock prior to the
expiration of 180 days from the date of this Prospectus without the prior
written consent of Lehman Brothers Inc. on behalf of the Representatives.
Prior to this offering, there has been no public market for the Common
Stock. The public offering price will be negotiated between the Company and the
Representatives. The material factors considered in determining the public
offering price of the Common Stock, in addition to the prevailing market
conditions, were the Company's historical performance, capital structure,
estimates of the business potential, revenues and earnings prospects of the
Company, an assessment of the Company's management and consideration of the
above factors in relation to the market values of companies in related
businesses.
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives also may elect to reduce any short position by exercising
all or part of the over-allotment option described herein.
The Representatives also may impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
65
<PAGE> 67
The Company has agreed to pay Bourne & Company, an affiliate of Ernest C.
Bourne, a director, upon consummation of this offering, a fee equal to 1.0% of
the net proceeds. The agreement is for a one-year term which began August 1,
1997 and provides for a monthly retainer fee of $10,000 for the term of the
agreement. The 1.0% fee resulting from the offering will be offset by the amount
of the monthly retainer paid prior to the consummation of the offering. Assuming
the 6,000,000 shares offered hereby are priced at $18.00 per share, Mr. Bourne
would receive a fee of approximately $1.1 million offset by the monthly retainer
fee described above.
The Common Stock has been approved, subject to official notice of issuance,
for listing on the Nasdaq National Market under the symbol "KING."
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Baker, Donelson, Bearman & Caldwell, P.C., Memphis, Tennessee.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1995 and 1996 and September 30, 1997 and for each of the three years in the
period ended December 31, 1996 and the nine months ended September 30, 1997, the
statement of Product Contribution of the Cortisporin Product Line for each of
the two years in the period ended December 31, 1996 and the combined statement
of Product Contribution for the Neosporin, Polysporin, Septra, Proloprim,
Mantadil and Kemadrin Product Lines for each of the two years in the period
ended December 31, 1996 included in this Prospectus have been audited by Coopers
& Lybrand L.L.P., independent auditors, as stated in their reports appearing
herein and are included in reliance upon such reports given upon the authority
of that firm as experts in accounting and auditing.
Warner-Lambert Company's Sterile Products Operations statement of Brand
Contribution for each of the two years in the period ended December 31, 1996 and
the nine months ended September 30, 1997 and the statement of fixed assets as of
December 31, 1996 and September 30, 1997 included in this Prospectus have been
so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, exhibits and schedules thereto) under the Securities Act of 1933, as
amended, with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules filed therewith. For further information with respect to the Company
and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus regarding the contents of any contract
or other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or document filed as an exhibit to the
Registration Statement or the documents incorporated into the Prospectus by
reference, each such statement being qualified in all respects by such
reference. The Registration Statement, including the exhibits and schedules
thereto, may be inspected and copied at prescribed rates at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The
Commission maintains a World Wide
66
<PAGE> 68
Web site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by the Company's independent accountants
and to make available to its shareholders quarterly reports for the first three
quarters of each fiscal year containing unaudited interim financial information.
The Company is not affiliated with Warner-Lambert and, except as expressly
provided in this Prospectus, has no relationship with Warner-Lambert. Except for
the financial statements related to the Sterile Products Acquisition included
herein, Warner-Lambert is making no representation or warranty, express or
implied, to any prospective investor as to any of the matters contained in this
Prospectus.
67
<PAGE> 69
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
King Pharmaceuticals, Inc.
Report of Independent Accountants......................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and
1996 and September 30, 1997........................... F-3
Consolidated Statements of Operations for the years
ended December 31, 1994, 1995 and 1996 and for the
nine months ended September 30, 1996 (unaudited) and
1997.................................................. F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1994, 1995 and 1996 and for the
nine months ended September 30, 1996 (unaudited) and
1997.................................................. F-5
Consolidated Statements of Changes in Shareholders'
Equity for the years ended December 31, 1994, 1995 and
1996 and the nine months ended September 30, 1997..... F-7
Notes to Consolidated Financial Statements................ F-8
Cortisporin Product Line
Report of Independent Accountants......................... F-21
Statement of Product Contribution......................... F-22
Notes to Financial Statement.............................. F-23
Glaxo Wellcome Product Line
Report of Independent Accountants......................... F-25
Combined Statement of Product Contribution................ F-26
Notes to the Combined Financial Statement................. F-27
Warner-Lambert Company's Sterile Products Operations
Report of Independent Accountants on Special Purpose
Financial Statements................................... F-29
Statement of Fixed Assets................................. F-30
Statement of Brand Contribution........................... F-31
Notes to Financial Statements............................. F-32
Pro Forma Consolidated Financial Statements................. F-35
Pro Forma Consolidated Statement of Operations for the
year ended December 31, 1996........................... F-36
Pro Forma Consolidated Statement of Operations for the
nine months ended September 30, 1997................... F-37
Pro Forma Consolidated Balance Sheet as of September 30,
1997................................................... F-38
Notes to Pro Forma Consolidated Financial Statements........ F-39
</TABLE>
F-1
<PAGE> 70
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance sheets of King
Pharmaceuticals, Inc. as of December 31, 1995 and 1996 and September 30, 1997,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years ended December 31, 1994, 1995 and 1996 and for the nine
months ended September 30, 1997. These consolidated 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
King Pharmaceuticals, Inc. as of December 31, 1995 and 1996 and September 30,
1997, and the consolidated results of their operations and their cash flows for
the years ended December 31, 1994, 1995 and 1996 and for the nine months ended
September 30, 1997, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Greensboro, North Carolina
October 22, 1997, except for Notes 6 and 17,
which are dated December 15, 1997
and November 26, 1997, respectively.
F-2
<PAGE> 71
KING PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $10,568 $ 1,392 $ 35
Accounts receivable, net of allowance for doubtful
accounts of $93, $93 and $493, respectively............ 2,772 2,305 7,393
Inventories............................................... 4,202 6,097 8,622
Marketable securities..................................... -- 209 --
Deferred income taxes..................................... 308 499 1,135
Income taxes receivable................................... -- 652 --
Shareholder notes receivable.............................. -- 2,093 --
Prepaid expenses and other assets......................... 303 638 533
------- ------- -------
Total current assets.............................. 18,153 13,885 17,718
------- ------- -------
Property, plant and equipment, net.......................... 15,439 16,691 17,006
Investment in affiliated company............................ 292 -- --
Intangible assets, net...................................... 58 8,703 38,204
Other assets................................................ -- -- 1,325
------- ------- -------
Total assets...................................... $33,942 $39,279 $74,253
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................... $ 3,403 $ -- $ 1,325
Current portion of long-term debt......................... 2,155 4,031 7,765
Accounts payable.......................................... 927 844 3,503
Accrued expenses.......................................... 1,098 1,261 4,027
Income taxes payable...................................... 2,971 -- 1,015
------- ------- -------
Total current liabilities......................... 10,554 6,136 17,635
------- ------- -------
Line-of Credit.............................................. -- -- 2,282
Long-term debt.............................................. 9,497 13,980 22,913
Deferred income taxes....................................... 2,880 3,470 3,614
------- ------- -------
Total liabilities................................. 22,931 23,586 46,444
------- ------- -------
Commitments
Shareholders' equity:
Common stock, no par value, 150,000,000 shares authorized,
12,320,000 19,467,406 and 28,000,000 shares issued and
outstanding, respectively.............................. 926 8,448 16,455
Retained earnings......................................... 10,763 7,938 12,493
Due from related party.................................... (678) (677) (1,139)
Unrealized loss on marketable securities, net of tax...... -- (16) --
------- ------- -------
Total shareholders' equity........................ 11,011 15,693 27,809
------- ------- -------
Total liabilities and shareholders' equity........ $33,942 $39,279 $74,253
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 72
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net sales...................... $ 13,311 $ 25,441 $ 15,457 $ 11,310 $ 33,817
Development revenues........... -- -- 5,000 2,500 --
---------- ----------- ----------- ----------- -----------
Total revenues, net.... 13,311 25,441 20,457 13,810 33,817
---------- ----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of sales.................. 9,754 12,130 8,782 7,050 9,538
Selling, general and
administrative.............. 1,987 8,605 12,106 8,441 13,734
Depreciation and
amortization................ 639 1,777 982 655 1,631
---------- ----------- ----------- ----------- -----------
Total operating costs
and expenses......... 12,380 22,512 21,870 16,146 24,903
GAIN ON SALE OF PRODUCT LINE,
NET............................ -- 13,102 -- -- --
---------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS).......... 931 16,031 (1,413) (2,336) 8,914
---------- ----------- ----------- ----------- -----------
OTHER (EXPENSES) INCOME:
Gain on sale of investment in
affiliate................... -- -- 1,760 1,760 --
Interest expense............... (1,069) (2,006) (1,272) (850) (1,730)
Other income, net.............. 554 367 578 407 211
---------- ----------- ----------- ----------- -----------
Total other (expenses)
income............... (515) (1,639) 1,066 1,317 (1,519)
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY GAIN......... 416 14,392 (347) (1,019) 7,395
Income tax (benefit) expense... (501) 5,058 (107) (316) 2,840
---------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
EXTRAORDINARY GAIN............. 917 9,334 (240) (703) 4,555
Extraordinary gain on early
extinguishment of long-term
debt, net of income taxes of
$272........................ -- 528 -- -- --
---------- ----------- ----------- ----------- -----------
NET INCOME (LOSS)................ $ 917 $ 9,862 $ (240) $ (703) $ 4,555
========== =========== =========== =========== ===========
Income (loss) per common stock
before extraordinary gain... $ .05 $ .34 $ (.01) $ (.03) $ .16
Extraordinary gain, net........ -- .02 -- -- --
---------- ----------- ----------- ----------- -----------
Net income (loss) per share.... $ .05 $ .36 $ (.01) $ (.03) $ .16
========== =========== =========== =========== ===========
Weighted average number of
common and common stock
equivalents (Note 2)........ 18,213,405 27,163,372 27,507,300 27,441,040 28,000,000
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 73
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ----------------------
1994 1995 1996 1996 1997
-------- -------- ------- ----------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 917 $ 9,862 $ (240) $ (703) $ 4,555
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 639 1,777 982 655 1,631
Loss on sale of marketable securities................... -- -- 1 1 32
Extraordinary gain on early extinguishment of long-term
debt.................................................. -- (800) -- -- --
Gain on sale of product line............................ -- (15,608) -- -- --
Gain on sale of property and equipment.................. -- -- (54) (54) --
Gain on sale of investment in affiliate................. -- -- (1,760) (1,760) --
Income from equity in earnings of affiliated company.... -- (166) -- -- --
Gain on conversion of accounts payable to long-term
debt.................................................. (25) -- -- -- --
Employee salaries and other benefits paid by
affiliate............................................. 250 -- -- -- --
Accrued interest added to amount due to affiliate....... 226 -- -- -- --
Deferred income taxes................................... (629) 2,193 410 447 (501)
Changes in operating assets and liabilities:
Accounts receivable..................................... (608) (876) 467 828 (5,088)
Inventories............................................. (770) (1,326) (1,895) (792) (2,525)
Prepaid expenses and other current assets............... (227) 12 (335) (695) 105
Accounts payable........................................ 209 (288) (83) (364) 2,659
Accrued expenses and other.............................. 690 (220) 163 (106) 2,766
Income taxes (receivable) payable....................... -- 2,855 (3,624) (3,896) 1,667
-------- -------- ------- ------- --------
Net cash provided by (used in) operating
activities........................................ 672 (2,585) (5,968) (6,439) 5,301
-------- -------- ------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (890) (1,672) (1,069) (705) (957)
Deposit on equipment...................................... -- (1,325)
Purchase of intangible assets............................. -- (60) (3,275) (1,153) (30,406)
Purchases of marketable securities........................ -- -- (307) (307) --
Proceeds from sales of marketable securities.............. -- -- 72 25 203
Proceeds from sale of product line........................ -- 32,000 -- -- --
Proceeds from sale of investment in affiliated company.... -- -- 2,052 2,052 --
Proceeds from sale of property and equipment.............. -- -- 100 100 --
-------- -------- ------- ------- --------
Net cash (used in) provided by investing
activities........................................ (890) 30,268 (2,427) 12 (32,485)
-------- -------- ------- ------- --------
Cash flows from financing activities:
Proceeds from revolving line of credit.................... 12,039 200,847 -- 72,142 13,219
Payments on revolving line of credit...................... (11,078) (198,405) (3,403) (72,402) (10,937)
Proceeds from issuance of preferred shares................ 800 -- -- --
Proceeds from issuance of common shares................... -- -- 2,844 190 8,007
Payments to retire 8% cumulative common shares............ -- (100) -- -- --
Repayment on shareholder notes receivable................. -- -- -- -- 2,093
Proceeds from short-term debt............................. -- -- -- -- 1,325
Proceeds from long-term debt.............................. -- 329 2,549 2,549 15,924
Payments on long-term debt and capital lease
obligations............................................. (346) (20,127) (2,772) (1,152) (3,342)
Dividends on preferred shares............................. (8) (8) -- -- --
Due from affiliate........................................ -- (679) 1 75 (462)
Advances from affiliate................................... 520 -- -- -- --
Payment of affiliated note payable........................ (1,000) -- -- -- --
-------- -------- ------- ------- --------
Net cash provided by (used in) financing
activities........................................ 927 (18,143) (781) 1,402 25,827
-------- -------- ------- ------- --------
Increase (decrease) in cash................................. 709 9,540 (9,176) (5,025) (1,357)
Cash and cash equivalents, beginning of period.............. 319 1,028 10,568 10,568 1,392
-------- -------- ------- ------- --------
Cash and cash equivalents, end of period.................... $ 1,028 10,568 $ 1,392 $ 5,543 $ 35
======== ======== ======= ======= ========
Supplemental disclosure of cash paid for:
Interest............................................ $ 439 $ 2,505 $ 1,170 $ 484 $ 1,059
======== ======== ======= ======= ========
Taxes............................................... $ 12 $ 283 $ 3,078 $ 3,078 $ 1,675
======== ======== ======= ======= ========
</TABLE>
F-5
<PAGE> 74
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
Supplemental schedule of non-cash investing and financing activities:
During 1996 the Company issued 699,711 common shares for $2,093 in notes
receivable from shareholders. These notes were paid in full in 1997.
For the year ended December 31, 1996 and the nine months ended September
30, 1996 and 1997, the Company entered into capital leases totaling $1,082, $935
and $85, respectively.
The Company purchased intangible assets financed by the seller of $5,500
during 1996 and $750 during the nine months ended September 30, 1997.
The Company converted its 40,000 shares of Series B Preferred Stock into
400,000 common shares during 1995.
In 1994, the Company's acquisition of the exclusive right to manufacture
and distribute the product Anexsia was recorded as follows:
<TABLE>
<S> <C>
Intangible asset............................................ $17,600
Inventory................................................... 600
-------
$18,200
=======
Note payable................................................ $17,500
Other liabilities........................................... 700
-------
$18,200
=======
</TABLE>
During 1994, accounts payable of $313 were converted into a note payable to
vendor after reducing the payable by $120 for return of inventory to the vendor.
In 1994, the Company issued 2,660,000 common shares with a carryover basis
of $126 in exchange for common shares of an affiliated Company.
In 1994, certain equipment amounting to $161 was acquired on behalf of the
Company by an affiliate in exchange for a note payable that is included in due
to affiliate.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 75
KING PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DUE
COMMON PREFERRED UNREALIZED FROM TOTAL
-------------------- ---------------- RETAINED LOSS ON RELATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS SECURITIES PARTY EQUITY
---------- ------- ------- ------ -------- ---------- ------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock granted at
formation................... 1,340,000 $ -- -- $ -- $ -- $ -- $ -- $ --
Exchange of King stock for
shares of an affiliated
Company..................... 2,660,000 126 -- -- -- -- -- 126
Issuance of preferred stock... -- -- 40,000 800 -- -- -- 800
Issuance of 8% preferred
stock....................... -- -- 10,000 100 -- -- -- 100
Dividends on preferred
stock....................... -- -- -- -- (8) -- -- (8)
Net income.................... -- -- -- -- 917 -- -- 917
---------- ------- ------- ----- ------- ---- ------- -------
Balance, December 31, 1994...... 4,000,000 126 50,000 900 909 -- -- 1,935
Conversion of Series B
preferred stock to common
stock....................... 400,000 800 (40,000) (800) -- -- -- --
Repurchase of 8% cumulative
preferred stock............. -- -- (10,000) (100) -- -- -- (100)
Dividends on preferred
stock....................... -- -- -- -- (8) -- -- (8)
Advances to Benevolent fund... -- -- -- -- -- -- (678) (678)
Net income.................... -- -- -- -- 9,862 -- -- 9,862
---------- ------- ------- ----- ------- ---- ------- -------
Balance, December 31, 1995...... 4,400,000 926 -- -- 10,763 -- (678) 11,011
Issuance of common stock...... 1,386,230 4,159 -- -- -- -- -- 4,159
Issuance of common stock under
employee stock purchase
plan........................ 259,532 778 -- -- -- -- -- 778
15% Stock Dividend............ 906,883 2,585 -- -- (2,585) -- -- --
Unrealized loss on securities,
net of tax.................. -- -- -- -- -- (16) -- (16)
Payments from Benevolent
Fund........................ -- -- -- -- -- -- 1 1
Net income (loss)............. -- -- -- -- (240) -- -- (240)
---------- ------- ------- ----- ------- ---- ------- -------
Balance, December 31, 1996...... 6,952,645 8,448 -- -- 7,938 (16) (677) 15,693
Issuance of common stock, net
of $743 of expenses......... 3,047,355 8,007 -- -- -- -- -- 8,007
Realized loss on securities... -- -- -- -- -- 16 -- 16
Advances to Benevolent Fund... -- -- -- -- -- -- (462) (462)
2.8 to 1 common stock split
(Note 17)................... 18,000,000 -- -- -- -- -- -- --
Net income.................... -- -- -- -- 4,555 -- -- 4,555
---------- ------- ------- ----- ------- ---- ------- -------
Balance, September 30, 1997..... 28,000,000 $16,455 -- $ -- $12,493 $ -- $(1,139) $27,809
========== ======= ======= ===== ======= ==== ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 76
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
1. THE COMPANY
King Pharmaceuticals, Inc. ("King" or the "Company") is an integrated
pharmaceutical company that manufactures, acquires, markets and sells branded
and generic form products. The Company also develops and markets
over-the-counter veterinary products. These products are marketed throughout the
United States to pharmaceutical wholesalers, retail pharmacies, and chain drug
stores. The Company also manufactures similar products for others on a contract
basis. Management of the Company believes that the unaudited information at
September 30, 1996, and for the nine months then ended contains all adjustments,
consisting of only normal recurring adjustments, necessary for a fair
presentation of such consolidated financial statements.
These consolidated financial statements include the accounts of King and
its wholly owned subsidiaries, Monarch Pharmaceuticals, Inc. (formerly a
division of King) and King Pharmaceuticals of Nevada, Inc. All intercompany
transactions and balances have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates -- The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. Assets, liabilities, revenues and
expenses, and disclosure of contingent assets and liabilities are affected by
such estimates and assumptions. Actual results could differ from those
estimates. The most significant estimates in the consolidated financial
statements relate to receivables, inventory, self-insurance and revenues.
Revenue Recognition -- Sales are reported net of an estimate for returns
and allowances and an estimate for chargebacks. Chargebacks and returns and
allowances are included in sales when goods are shipped to the customer. Product
sales and sales of manufactured products are recognized upon shipment.
Development revenue is recognized upon approval of the product from the FDA.
Cash and Cash Equivalents -- The Company considers all highly liquid
investments with an original maturity of three months or less when purchased to
be cash equivalents. The Company's cash and cash equivalents are placed in large
domestic banks which limit the amount of credit exposure.
Marketable Securities -- Marketable securities consisted of stock in
another pharmaceutical company, which management had classified as
available-for-sale in the accompanying consolidated financial statements. Such
securities were carried at fair value with the unrealized gains and losses
reported net of tax as a separate component of shareholders' equity. The
unrecognized loss on these securities at December 31, 1996 was $25 ($16, net of
tax). The Company sold these securities at a loss in 1997.
Inventories -- Inventories are stated at the lower of cost or market. Cost
is determined using the first-in, first-out (FIFO) method.
Income Taxes -- Deferred tax assets and liabilities are determined based on
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse (see Note 12).
Financial Instruments -- The fair value of financial instruments are
determined by reference to various market data or other valuation techniques as
appropriate. Unless otherwise disclosed, the fair values of financial
instruments approximate their recorded values (Note 11).
Property, Plant and Equipment -- Property, plant and equipment are stated
at cost. Maintenance and repairs are expensed as incurred. Depreciation is
computed over the estimated useful lives of the related assets using the
straight-line method for financial statement purposes and accelerated methods
for income tax purposes. Retirements, sales and disposals of assets are recorded
by removing the cost and accumulated depreciation with any resulting gain or
loss reflected in income.
F-8
<PAGE> 77
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In the event that facts and circumstances indicate that the cost of
property, plant and equipment may be impaired, evaluation of recoverability is
performed using the estimated future undiscounted cash flows associated with the
asset compared to the asset's carrying amount to determine if a writedown is
required.
Intangible Assets -- Intangible assets are stated at cost, net of
accumulated amortization. Amortization is computed over the estimated useful
lives of 10 to 25 years using the straight-line method.
The Company continually reevaluates the propriety of the carrying amount of
intangibles as well as the related amortization period to determine whether the
current events and circumstances warrant adjustments to the carrying values
and/or revised estimates of useful lives. This evaluation is performed using the
estimated projected future undiscounted cash flows associated with the asset
compared to the asset's carrying amount to determine if a writedown is required.
To the extent such projection indicates that undiscounted cash flow is not
expected to be adequate to recover the carrying amounts the assets are written
down to discounted cash flows.
Other Assets -- Other assets includes a deposit of $1,325 for equipment
that will be leased back to the Company under an operating lease (Note 10).
Gain on Sale of Product Line/Development Revenue -- In December 1995, the
Company sold the Anexsia brand product line and related Abbreviated New Drug
Applications ("ANDA's"), both approved and in the process of development, for
$32,000, which resulted in a net gain of $13,102. As part of the agreement, the
Company entered into a manufacture and supply agreement with the purchaser, with
guaranteed minimum revenues of $4,750 to be earned over 4 years. Additionally,
the Company agreed to develop four ANDA's with the Food and Drug Administration
("FDA") on the purchaser's behalf, for a maximum of $2,500 each, due upon FDA
approval. In 1996, the Company recognized $5,000 as development revenue under
this agreement.
In connection with the gain on the transaction, the Company incurred
certain non-recurring costs related to employee bonuses and charitable
contributions of $2,506.
Self-Funded Health Insurance -- The Company is self-insured with respect to
its health care benefit program. The Company contributes estimated amounts to a
third-party administrator on a monthly basis which are used to pay health care
claims during the year. Under the plan, the Company pays a minimum amount
annually and has an aggregate stop-loss limit based upon the number of
participants and their insured status. Self-insured costs are accrued based upon
reported claims and an estimated liability for claims incurred but not reported.
Research and Development -- The Company incurs research and development
costs that are expensed as incurred. These costs were approximately $543, $682,
$1,298, $704 and $660, for the years ended December 31, 1994, 1995 and 1996 and
the nine months ended September 30, 1996 and 1997, respectively.
Advertising and Promotion -- The Company expenses advertising and promotion
costs as incurred and these costs are included as selling, general and
administrative expenses. Advertising costs for the years ended December 31,
1994, 1995 and 1996 and the nine month period ended September 30, 1997 were $1,
$931, $1,283 and $1,178, respectively.
Income (Loss) Per Share -- Income (loss) per share is calculated by
dividing net income (loss), after deducting preferred stock dividends, by the
weighted average number of common shares outstanding during the period. The
weighted average shares outstanding includes the effects of (i) shares issued
within a one year period from the filing date of the Company's Form S-1 for an
initial public offering of common stock which includes 1,386,230 shares issued
to shareholders and members of management in October 1996 and 3,047,355 shares
issued to The United Company in March 1997,
F-9
<PAGE> 78
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) the stock dividend paid in December 1996 and (iii) the stock split in
October 1997 for all periods on a retroactive basis.
Statement of Accounting Standards Not Yet Adopted -- In February 1997, the
Financial Accounting Standards Board issued Statement Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share, effective for fiscal periods
ending after December 15, 1997. The new standard simplifies the computation of
earnings (loss) per share by replacing primary earnings (loss) per share with
basic earnings (loss) per share. Basic earnings (loss) per share will not
include the effect of any potentially dilutive securities, as under the current
accounting standard, and will be computed by dividing reported income available
to common shareholders by the weighted average number of common shares
outstanding during the period. Fully diluted earnings (loss) per share will now
be called diluted earnings (loss) per share and will reflect the dilution of all
potentially dilutive securities. Companies will be required to restate all prior
period earnings (loss) per share data. The adoption of this standard by the
Company will have no impact on the historical reported earnings (loss) per share
amounts since, prior to September 30, 1997, there were no potentially dilutive
securities.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires public business enterprises to adopt its provisions for periods
beginning after December 15, 1997, and to report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
The Company is evaluating the provisions of SFAS No. 131, but has not yet
determined if additional disclosures will be required.
Reclassifications -- Certain amounts from the prior consolidated financial
statements have been reclassified to conform to the presentation adopted in
1997.
3. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
A significant portion of the Company's sales are to customers in the
pharmaceuticals industry. Approximately 54%, 34% and 33% of accounts receivable
at December 31, 1995 and 1996 and September 30, 1997, respectively were due from
one customer. At December 31, 1995 and 1996 and September 30, 1997, an
additional 27%, 39% and 35%, respectively, were due from two other customers.
The Company monitors the extension of credit to customers and has not
experienced significant credit losses. Furthermore, the majority of sales are
made to large well-established companies.
The following table represents a summary of sales to significant customers
as a percentage of the Company's total revenues:
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS MONTHS
ENDED DECEMBER 31, ENDED
-------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Customer A.................................... 66.6% 27.0% 18.1% n/a
Customer B.................................... n/a n/a 36.7 n/a
Customer C.................................... n/a 11.8 14.9 n/a
Customer D.................................... n/a 18.1 n/a n/a
Customer E.................................... n/a n/a n/a 19.5
Customer F.................................... n/a n/a n/a 13.4
Customer G.................................... n/a n/a n/a 13.1
Customer H.................................... n/a n/a n/a 10.9
</TABLE>
n/a -- sales were less than 10% for the period.
F-10
<PAGE> 79
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Land.............................................. $ 169 $ 306 $ 319
Buildings and improvements........................ 13,006 13,407 13,563
Machinery and equipment........................... 2,960 3,380 4,059
Equipment under capital lease..................... 406 1,488 1,573
Construction in progress.......................... 140 189 298
------- ------- -------
16,681 18,770 19,812
Less accumulated depreciation..................... (1,242) (2,079) (2,806)
------- ------- -------
$15,439 $16,691 $17,006
======= ======= =======
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1994, 1995 and 1996 and for the nine months ended September 30, 1996 and 1997
was $541, $701, $853, $654, and $726 respectively.
5. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Finished goods.................................. $1,603 $3,176 $5,239
Work-in-process................................. 675 525 646
Raw materials................................... 1,924 2,396 2,737
------ ------ ------
$4,202 $6,097 $8,622
====== ====== ======
</TABLE>
6. ACQUISITIONS/INTANGIBLE ASSETS
On May 15, 1997, the Company acquired the rights, title and interest in the
United States to the Viroptic(R) product line for $5,100, plus the assumption of
an estimated liability of $129 for returns of products shipped prior to the
acquisition. The entire purchase price was allocated to intangible assets and is
being amortized over its estimated useful life of 25 years. The purchase price
was financed from internally generated cash funds and borrowings under its
revolving line of credit agreement.
On March 21, 1997, the Company acquired the rights, title and interest in
the United States to the Cortisporin(R) product line for $22,845, plus the
assumption of an estimated $849 for returns of products shipped prior to the
acquisition. The entire purchase price was allocated to intangible assets and is
being amortized over its estimated useful life of 25 years. The purchase price
was financed principally through the raising of equity (Note 15), notes payable
to certain banks and borrowings under the Company's revolving line of credit
agreement.
On January 22, 1997, the Company acquired the rights, title and interest to
the Proctocort(TM) product line for approximately $1,500. The entire purchase
was allocated to intangible assets and is being amortized over its estimated
useful life of 20 years. The acquisition was financed with a note payable to a
bank.
On December 17, 1996, the Company acquired the rights, title and interests
to the Thalitone(R) product line for $1,000, including inventory valued at $268.
The remaining $832 was allocated to
F-11
<PAGE> 80
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
intangible assets and is being amortized over 10 years, the estimated remaining
useful life of its patent. The acquisition was financed with a note payable to a
bank.
On October 2, 1996, the Company acquired the rights, titles and interest to
the Nucofed(R) and Quibron(R) (United States only) product lines for $7,000,
plus the assumptions of an estimated $301 for returns of products shipped prior
to the acquisition. The entire purchase price was allocated to intangible assets
and is being amortized over its estimated useful life of 20 years. The purchase
price was financed by the seller for $5,500 and borrowings under the Company's
revolving line of credit.
On November 14, 1997, the Company acquired the rights, titles and interest
to the Septra(R), Proloprim(R), Mantadil(R)and Kemadrin(R) product lines, as
well as, the exclusive licenses, free of royalty obligations, to manufacture and
market the prescription formulations of Neosporin and Polysporin for $23,000.
The entire purchase price was allocated to intangible assets and will be
amortized over its estimated useful life of 25 years.
On October 31, 1997, the Company entered into a preliminary non-binding
letter of intent with Warner-Lambert for the acquisition of additional branded
product lines, a manufacturing facility and contracts for manufacturing for
third parties. Although the Company has offered $125.0 million for these
products and other assets and Warner-Lambert has indicated that it is willing to
finance up to $35.0 million of the purchase price, the Company has not completed
due diligence and any purchase price will be subject to the results of the
Company's due diligence process. In addition to due diligence, the proposed
transaction is subject to numerous conditions and contingencies, including
internal approvals of both the Company and Warner-Lambert, receipt of regulatory
approvals, resolution of legal and equitable matters relating to employees,
supply and service agreements and intellectual property rights and preparation
and negotiation of documentation.
The following unaudited pro forma summary presents consolidated information
as if the above acquisitions, exclusive of the Warner-Lambert acquisition, had
occurred on January 1, 1996. These pro forma results have been prepared for
comparative purposes and do not purport to be indicative of what would have
occurred had the acquisitions been made on January 1, 1996, nor is it indicative
of future results.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, 1996 ENDED SEPTEMBER 30, 1997
------------------ ------------------------
<S> <C> <C>
Net revenues......................... $50,834 $48,896
======= ==========
Net income........................... $ 9,068 $ 8,915
======= ==========
Net income per common and common
stock equivalent................... $ .33 $ .32
======= ==========
</TABLE>
F-12
<PAGE> 81
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
---- ------ -------------
<S> <C> <C> <C>
Cortisporin........................................ $-- $ -- $23,694
Viroptic........................................... -- -- 5,229
Nucofed/Quibron.................................... -- 7,301 7,301
Proctocort......................................... -- -- 1,483
Thalitone.......................................... -- 832 832
Other.............................................. 60 702 702
--- ------ -------
60 8,835 39,241
Less accumulated amortization...................... (2) (132) (1,037)
--- ------ -------
$58 $8,703 $38,204
=== ====== =======
</TABLE>
Amortization expense for the years ended December 31, 1994, 1995, and 1996
and for the nine months ended September 30, 1996 and 1997 was $98, $1,076, $129,
$1, and $905, respectively.
7. LEASE OBLIGATIONS
The Company leases certain office and manufacturing equipment under
noncancelable operating leases with terms from one to five years. Estimated
future minimum lease payments, as of September 30, 1997 for leases with initial
or remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998...................................................... $116
1999...................................................... 97
2000...................................................... 77
2001...................................................... 17
2002...................................................... 2
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996, and for
the nine months ended September 30, 1996 and 1997 was approximately $131, $111,
$196, $131, and $148, respectively.
Additionally, the Company leases office space in its building to tenants
under agreements ranging from one to twenty years. Such leases are accounted for
as operating leases. Rental income for the years ended December 31, 1994, 1995
and 1996 and for the nine months ended September 30, 1996 and 1997 was
approximately $201, $87, $86, $68, and $33, respectively. As of September 30,
1997 estimated future minimum rental payments to be received are as follows:
<TABLE>
<S> <C>
1998...................................................... $ 18
1999...................................................... 18
2000...................................................... 16
2001...................................................... 16
2002...................................................... 16
Thereafter................................................ 189
</TABLE>
F-13
<PAGE> 82
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capital lease obligations for certain equipment as of September 30, 1997
are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 404
1999........................................................ 385
2000........................................................ 366
2001........................................................ 332
2002........................................................ 49
------
Total minimum lease payments................................ 1,536
Less imputed interest....................................... (257)
------
Present value of minimum lease payments..................... 1,279
------
Less current maturities..................................... (295)
------
$ 984
======
</TABLE>
8. ACCRUED EXPENSES
Accrued expenses were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Payroll and outside personnel services................ $ 275 $ 346 $ 304
Returns and allowances and chargebacks................ 570 351 1,678
Accrued interest...................................... 7 110 803
Franchise taxes....................................... 52 24 47
Due to seller of Proctocort........................... -- -- 750
Incurred but not reported medical claims.............. 112 108 314
Other................................................. 82 322 131
------ ------ ------
$1,098 $1,261 $4,027
====== ====== ======
</TABLE>
9. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Notes payable to former owners, due in equal annual
installments of principal and interest (at a rate
of 6%) of $1,226 through December 2003............ $ 7,611 $ 6,842 $ 6,842
Note payable to pharmaceutical company, due in 5
annual installments of principal and interest (at
a rate of 8%) of $1,378 through October 2, 2001,
collateralized by certain intangible assets....... -- 5,500 5,500
Note payable, due in semiannual installments of
$588, through December 1998, plus monthly interest
at 8%............................................. 3,525 2,350 1,763
Note payable to a bank, due in monthly installments
of $69 through May 15, 1999 with interest at a
rate of LIBOR plus 1.75%, collateralized by
accounts receivable, inventory, contract rights
and certain intangible assets..................... -- 2,014 1,389
</TABLE>
F-14
<PAGE> 83
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Note payable to a bank, due in monthly installments
of $42 through April 1, 2000 with interest at a
rate of 8.25%, collateralized by various equipment
and machinery, accounts receivable, furniture and
intangibles....................................... -- -- 1,250
Note payable to a bank, due in monthly installments
of $49 through January 31, 2000 with interest at a
rate of LIBOR plus 1.75%, collateralized by the
Proctocort product line and associated rights..... -- -- 1,361
Note payable to a bank, due in monthly installments
of $49 through January 21, 2000 with interest at a
rate of LIBOR plus 1.75%, collateralized by the
Thalitone product line and associated rights...... -- -- 1,361
Note payable to a bank, due in monthly installments
of $139 through March 31, 2000 with interest at a
rate of LIBOR plus 1.75%, collateralized by the
Cortisporin product line and associated rights.... -- -- 4,167
Note payable to a bank, due in monthly installments
of $28 through August 1, 2000 with interest at a
rate of LIBOR plus 1.75%, collateralized by a
first deed of trust on a building................. -- -- 968
Note payable to a bank, due August 20, 2000 with
interest at a rate of LIBOR plus 1.75%,
collateralized by a first deed of trust on a
building.......................................... -- -- 2,975
Note payable to shareholder with quarterly interest
payments (interest rate of 10%) through January 1,
1999 with remaining principal due April 1, 1999,
collateralized by real estate of the Company...... -- -- 1,750
Various capital leases with interest rates ranging
from 8.3% to 12.7% and maturing at various times
through 2002...................................... 320 1,237 1,279
Other notes payable................................. 196 68 73
------- ------- -------
11,652 18,011 30,678
Less current portion...................... 2,155 4,031 7,765
------- ------- -------
$ 9,497 $13,980 $22,913
======= ======= =======
</TABLE>
The notes payable to former owners are personally guaranteed by the
Company's Chairman of the Board and CEO.
During December 1995, a fixed rate term note payable of $17,500 to a
pharmaceutical company was retired in advance of maturity due to the sale of the
Anexsia product line. The gain associated with the retirement of the note
amounted to $800 ($528 net of taxes) and was recorded as an extraordinary gain
in the Consolidated Statements of Operations.
Certain financing arrangements of the Company require the Company to
maintain certain minimum net worth, debt to equity, cash flow and current ratio
requirements. As of September 30, 1997, the Company was in violation of the
current ratio requirements of certain debt instruments with
F-15
<PAGE> 84
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balances outstanding at September 30, 1997 of approximately $14.5 million;
however, waivers have been obtained from the appropriate lending institutions
through September 30, 1998.
The aggregate maturities of long-term debt (including capital lease
obligations -- Note 7) at September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................... $ 7,470
1999.................................... 8,465
2000.................................... 6,752
2001.................................... 2,159
2002.................................... 2,305
Thereafter.............................. 2,248
-------
$29,399
=======
</TABLE>
10. LINE OF CREDIT AND SHORT-TERM DEBT
On April 30, 1996, the Company entered into a $3,500 revolving line of
credit facility with a bank. This line of credit was extended and increased to
$8,500 in September 1997. At September 30, 1997 $2,282 was outstanding under
this line of credit. At December 31, 1996 there were no borrowings outstanding
under this line of credit. The principal is due May 1999 and interest is payable
monthly at a rate of LIBOR plus 1.75%. Borrowings under the agreement are
limited to 85% of eligible accounts receivable and 60% of eligible inventory as
defined in the agreement. Collateral consists of accounts receivable, inventory,
and certain intangible assets.
The weighted average interest rate for this line of credit was 8.51% for
the nine months ended September 30, 1997.
During 1997, the Company entered into a financing arrangement to make
certain payments for machinery and equipment. As of September 30, 1997, the
Company had a demand note payable plus interest at prime plus .33% with $1,325
outstanding. The Company intends to refinance this obligation under an operating
lease (Note 14).
11. FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair values of financial
instruments are made in accordance with the requirements of Statement of
Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments." The estimated fair value amounts have been determined by
the Company using available market information and appropriate valuation
methodologies.
Cash and Cash Equivalents, Accounts Receivable and Accounts Payable -- The
carrying amounts of these items are a reasonable estimate of their fair values.
Long-Term Debt, Line of Credit and Short-Term Debt -- The carrying amounts
of the Company's line of credit and short-term debt approximates fair value. The
fair value of the Company's long-term debt including the current portion at
December 31, 1995 and 1996 and September 30, 1997 is estimated to be
approximately $11.1 million, $17.6 million and $30.6 million, respectively using
discounted cash flow analyses and based on the Company's incremental borrowing
rates for similar types of borrowing arrangements.
F-16
<PAGE> 85
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
The net income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
---------------------- ---------------------
1994 1995 1996 1996 1997
----- ------ ----- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current................................ $ 128 $2,865 $(635) $(763) $3,332
Deferred............................... (629) 2,193 528 447 (492)
----- ------ ----- ----- ------
Total (benefit) expense...... $(501) $5,058 $(107) $(316) $2,840
===== ====== ===== ===== ======
</TABLE>
A reconciliation of the difference between the federal statutory tax rate
and the effective income tax rate as a percentage of income (loss) before income
taxes and extraordinary item is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- ---------------------
1994 1995 1996 1996 1997
------- ------ ------ ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Federal statutory tax rate..... (34.0)% 35.0% (34.0)% (34.0)% 34.0%
State income taxes, net of
federal benefit.............. 4.0 3.3 -- -- 4.0
Permanent differences.......... 1.0 (1.3) 2.3 .4 .6
Decrease in valuation
allowance.................... (89.3) -- -- -- --
Other.......................... (1.7) (1.9) .9 2.6 (.2)
------- ------ ------ ------ ------
Effective tax rate............. (120.0)% 35.1% (30.8)% (31.0)% 38.4%
======= ====== ====== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Allowance for doubtful accounts................. $ 35 $ 35 $ 35
Uniform cost capitalization..................... -- -- 36
Accrued expenses................................ 79 225 1,108
Intangible assets............................... 1,350 -- --
State net operating loss carryforward........... 65 261 431
------- ------- -------
Total deferred tax assets............. 1,529 521 1,610
------- ------- -------
Property, plant and equipment................... (4,023) (2,997) (3,825)
Miscellaneous................................... (78) (495) (264)
------- ------- -------
Total deferred tax liabilities........ (4,101) (3,492) (4,089)
------- ------- -------
Net deferred tax liability............ $(2,572) $(2,971) $(2,479)
======= ======= =======
</TABLE>
The Company's state net operating loss carryforward of approximately $13.0
million expires in 2011. Management has determined, based on both their ability
to carryback earnings to prior years and existing deferred tax liabilities, it
is more likely than not that the deferred tax assets will be realizable and no
valuation allowance has been recorded.
F-17
<PAGE> 86
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. BENEFIT PLANS
The Company maintains a defined contribution employee benefit plan which
covers all employees over 21 years of age. The plan allows for employees' salary
deferrals, which are matched by the Company up to a specific amount under
provisions of the plan. The plan also provides for discretionary profit-sharing
contributions by the Company. Company contributions during the years ended
December 31, 1994, 1995 and 1996 and for the nine months ended September 30,
1996 and 1997 were $92, $197, $278, $197, and $155, respectively.
From January 1996 through October 1996, in connection with the Company's
Employee Stock Purchase Plan adopted in January 1996, the Company offered
275,000 and sold 259,532 common shares to employees of the Company. The selling
price was $3 per share. The Plan was terminated in October 1996.
14. COMMITMENTS
As of September 30, 1997 the Company has entered into a firm commitment to
obtain financing for capital expenditures under an operating lease of
approximately $3,500 for machinery and equipment.
15. RELATED PARTY TRANSACTIONS
AFFILIATED COMPANY
The Company owned a 6% interest in a privately held, affiliated
pharmaceutical company. In 1996, the Company sold its investment for $2,052,
resulting in a gain of $1,760. The Company's share of earnings in this
affiliated company was not material and was included in other income in the
consolidated statement of operations.
In connection with the Company's initial acquisition in 1993, 10,000 shares
of Preferred 8% Cumulative Stock were issued to the affiliated company for $100.
The shares were redeemed by the Company at the issue price during 1995.
THE UNITED COMPANY
In connection with its purchase of Cortisporin in 1997, the Company
received $8,750 from The United Company for 3,047,355 common shares on March 17,
1997. The common share purchase agreement states that if the Company has not
effected a public offering by April 1, 1999 or has not achieved certain
forecasted results, The United Company can redeem the shares at an aggregate
redemption price of $8,750 plus 10% interest per year from the date of the
issuance of the shares or an equivalent amount of convertible debt.
OTHER
Certain management and employees of the Company sit on the board of
directors of a private foundation. The Company made contributions to this
foundation and expensed approximately $52, $417, $245, $233, and $108 for the
years ended December 31, 1994, 1995 and 1996 and the nine months ended September
30, 1996 and 1997, respectively. At December 31, 1995 and 1996 and September 30,
1997, the Company had receivables from this foundation of approximately $678,
$677, and $1,139, respectively, for advances made by the Company on their
behalf. The receivables are collateralized by common shares of the Company held
by the foundation and are included in shareholders' equity.
On October 1, 1997 the Company appointed a new member to its' Board of
Directors. For the nine months ended September 30, 1997, the Company paid $743
and $58 to this director's company for assistance in raising capital for the
Cortisporin product line acquisition and consulting services, respectively.
F-18
<PAGE> 87
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1996, the Company issued 1,386,230 common shares to shareholders
and members of management of which 699,711 common shares were financed by notes
receivable of approximately $2,100. At December 31, 1996, the Company had notes
receivable outstanding of $2,093. As of August 5, 1997 these notes were paid in
full.
The Company paid a certain shareholder $180 and $160 for consulting fees
during the years ended December 31, 1995 and 1996, respectively.
During 1995, the Company paid $70 to the members of its Board of Directors.
In December 1994, a shareholder of the Company contributed $800 of cash in
exchange for 40,000 shares of Series B Preferred Stock. The Series B Preferred
Stock was converted into 400,000 common shares during 1995.
16. STOCK DIVIDEND
The Company paid a 15% stock dividend on all common shares issued and
outstanding as of November 1, 1996. Common shares of 906,883 were distributed.
The dividend was charged to retained earnings in the amount of $2,585, which was
based on a recent common share purchase price of $3 per share. The weighted
average shares and all per share amounts included in the accompanying
consolidated financial statements and notes are based on the increased number of
shares giving retroactive effect to the stock dividend.
17. SUBSEQUENT EVENTS
Initial Public Offering: The Company has filed a Registration Statement
with the Securities and Exchange Commission for an initial public offering (the
"Offering") of 6,000,000 common shares. The Company's Offering is scheduled for
closing on or before December 15, 1997.
The following matters were voted upon and became effective at the Company's
Annual Meeting of the Shareholders on November 14, 1997.
- The authorization of a new class of preferred shares, with preference
terms and rights to be determined by the Board of Directors.
- An amendment to the Company's Articles of Incorporation to increase the
number of authorized common shares from 10 million shares of no par value
to 150 million shares of no par value.
- A stock split of 2.8 common shares for each share of the Company's common
shares outstanding. The stock split has been reflected in the average
shares outstanding, shares outstanding and income (loss) per share amounts
in the balance sheets, statements of operations and changes in
shareholders' equity. All other per share information included in the
footnotes do not reflect the affect of the stock split.
- A dividend of one preferred share purchase right (a "Right") for each
common share outstanding. Such rights entitle the registered holder under
certain circumstances to purchase from the Company one-thousandth of a
share of a newly created series of the Company's preferred shares, at a
price of $60 per one-thousandth shares of Preferred Stock, subject to
adjustment.
- A stock-option plan (the "Plan") for employees of the Company. The
aggregate number of shares which may be issued under the Plan shall not
exceed 3,500,000. The vesting of incentive stock options and nonqualified
stock options will be determined by the Board on an individual basis. The
Company plans to account for stock option grants to employees under the
intrinsic method, which does not result in compensation expense when the
option price is equal to the fair value of the shares at the date of
grant.
F-19
<PAGE> 88
KING PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On November 26, 1997, the Company entered into a $12 million Senior Secured
Revolving Credit Facility ("Revolver") and a $40 million Senior Secured Term
Loan ("Term Loan"), collectively referred to as the "Financing." The Financing
includes a five-year revolving line of credit and term loan with customary
covenants and with a floating interest rate based on either LIBOR, the prime
rate, or the fed funds, rate plus an applicable margin selected at the
discretion of the Company. The borrowings under the Revolver are limited to
predetermined levels of trade accounts receivable and inventories. The Financing
is collateralized by all existing and after acquired tangible and intangible
assets of the Company. The Company used this Financing to finance the November
14, 1997 acquisition and pay off approximately $19.0 million of long-term debt
which had been outstanding at September 30, 1997.
Litigation: On October 16, 1997, the Company was named one of many
co-defendants in a purported class action filed in the Superior Court of the
State of Washington in connection with the manufacture of phentermine, an
anorexigenic, under contract for SmithKline Beecham and its use in combination
with other drugs. The suit does not demand monetary damages but seeks court-
supervised, defendant-funded, medical monitoring to detect the existence of
cardiac valvular disease, alleged to have arisen from the ingestion of the
combination of drugs by residents of the State of Washington. While the Company
cannot predict the outcome of this suit, the Company believes that the claims
against it are without merit and intends to vigorously pursue all available
defenses. The Company is being indemnified in this suit by SmithKline Beecham
for which it manufactures such product, provided that neither the lawsuit nor
the associated liabilities are based upon the independent negligence or
intentional acts of the Company, and intends to submit a claim for all
unreimbursed costs to its product liability insurance carrier. The Company does
not believe that this claim will materially affect the Company's operations or
financial position.
F-20
<PAGE> 89
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Glaxo Wellcome, Inc. and King Pharmaceuticals, Inc.:
We have audited the accompanying Statement of Product Contribution for the
Cortisporin Product Line of Glaxo Wellcome Inc. ("Glaxo Wellcome") for the years
ended December 31, 1995 and 1996. The Statement of Product Contribution is the
responsibility of Glaxo Wellcome management. Our responsibility is to express an
opinion on this special purpose statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Product Contribution is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the Statement of Product Contribution.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of
the Statement of Product Contribution. We believe that our audit provides a
reasonable basis for our opinion.
The operations covered by the Statement of Product Contribution referred to
above have no separate legal status or existence. The accompanying statement was
prepared as described in Note 1 to present the Cortisporin Product Line and is
not intended to be a complete presentation of the Cortisporin Product Line.
Accordingly, the resulting statement is not necessarily indicative of the costs
and expenses that would have resulted if the Cortisporin Product Lines had been
operated as a separate entity.
In our opinion, the statement referred to above presents fairly, in all
material respects, the Statement of Product Contribution for the Cortisporin
Product Line for the years ended December 31, 1995 and 1996 in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina
October 20, 1997
F-21
<PAGE> 90
CORTISPORIN PRODUCT LINE
STATEMENT OF PRODUCT CONTRIBUTION
(NOTE 1)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE PERIOD JANUARY 1, 1997 THROUGH MARCH 20, 1997
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, JANUARY 1, 1997
------------------ THROUGH
1995 1996 MARCH 20, 1997
------- ------- ---------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales.............................................. $14,083 $11,562 $3,342
------- ------- ------
Cost of sales.......................................... 2,376 1,445 430
Selling, general and administrative.................... 930 631 188
Distribution........................................... 80 48 10
------- ------- ------
Total costs and expenses..................... 3,386 2,124 628
------- ------- ------
Product contribution................................... $10,697 $ 9,438 $2,714
======= ======= ======
</TABLE>
The accompanying notes are an integral part of
the Statement of Product Contribution
F-22
<PAGE> 91
CORTISPORIN PRODUCT LINE
NOTES TO THE FINANCIAL STATEMENT
1. OWNERSHIP/BASIS OF PRESENTATION
The Cortisporin Product Line includes all rights, title and interest of
seven products within the United States. Effective March 21, 1997 Glaxo Wellcome
Inc. ("Glaxo Wellcome") sold the rights, title and interest of this Product Line
to Monarch Pharmaceuticals, Inc. ("Monarch"), a subsidiary of King
Pharmaceuticals Inc. Glaxo Wellcome continued to manufacture these products
until July 1997, at which point the facility was sold and Monarch was able to
negotiate an agreement with the buyer for which Monarch is charged an agreed
upon contractual amount.
Historically, financial statements were not prepared for the Cortisporin
Product Lines. These statements have been developed from the historical
accounting records of Glaxo Wellcome. All of estimates in the financial
statements, as described in Note 2, are based on the assumptions that Glaxo
Wellcome management believes are reasonable. However, these estimates are not
necessarily indicative of the net sales and costs that would have resulted if
the Cortisporin Product Line had been operated as a separate entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME RECOGNITION
Sales and related cost of sales are included in income when goods are
shipped to the customer.
NET SALES
Net sales include the sales price, net of allowances specifically
identified by product, less an allocation of Glaxo Wellcome's returns and
chargebacks and other miscellaneous sales adjustments based on sales of the
Cortisporin Product Line to total sales of Glaxo Wellcome.
COST OF SALES
Elements in cost of sales include raw materials, direct labor and plant
overhead. Certain of these costs are specifically identifiable to specific
brands, and the remaining costs are allocated based on sales for business
relative to total sales for Glaxo Wellcome.
Inventory from period to period was determined using the first-in,
first-out (FIFO) method of valuation.
Depreciation of plant facilities is computed using the straight-line method
based on estimated useful lives ranging from 5 to 40 years.
DISTRIBUTION
Distribution costs principally include freight and warehousing charges and
are allocated based on a percentage of gross sales. Such percentage is
determined by dividing total Glaxo Wellcome distribution costs by total Glaxo
Wellcome gross sales.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative costs include expenses for
administrative services, such as finance, human resources, legal, information
systems and other corporate affairs. Such costs are allocated based on a
percentage of gross sales. Such percentage is determined by dividing total Glaxo
Wellcome general and administrative costs by total Glaxo Wellcome gross sales.
Although Glaxo Wellcome incurred direct selling, marketing and advertising
costs, no such costs were allocated to the
F-23
<PAGE> 92
CORTISPORIN PRODUCT LINE
NOTES TO THE FINANCIAL STATEMENT -- (CONTINUED)
Cortisporin Product Line because Glaxo Wellcome did not support the Cortisporin
Product Line during the periods presented.
3. SIGNIFICANT CUSTOMER
The Cortisporin Product Line had net sales to two customers representing
approximately 13% and 10% of net sales for the period January 1, 1997 to March
20, 1997. The Cortisporin Product Line had net sales to four customers
representing approximately 18%, 16%, 11% and 10% of net sales for the year ended
December 31, 1996. The Cortisporin Product Line had net sales to three customers
representing approximately 22%, 20% and 14% of net sales for the year ended
December 31, 1995.
4. ESTIMATES
The preparation of the financial statement of Product Contribution in
conformity with generally accepted accounting principles require management to
make estimates and assumptions that affect certain reported amounts of gross
profit for the years ended December 31, 1995 and 1996 and for the period January
1, 1997 through March 20, 1997. Actual results could differ from those
estimates.
F-24
<PAGE> 93
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Glaxo Wellcome, Inc. and King Pharmaceuticals, Inc.
We have audited the accompanying Combined Statement of Product Contribution
for the Neosporin, Polysporin, Septra, Proloprim, Mantadil and Kemadrin Product
Lines (the "Product Lines") of Glaxo Wellcome, Inc. ("Glaxo Wellcome") for the
years ended December 31, 1995 and 1996. The Combined Statement of Product
Contribution is the responsibility of Glaxo Wellcome management. Our
responsibility is to express an opinion on this special purpose statement based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Combined Statement of Product
Contribution is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the Combined
Statement of Product Contribution. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the Combined Statement of Product
Contribution. We believe that our audit provides a reasonable basis for our
opinion.
The operations covered by the Combined Statement of Product Contribution
referred to above have no separate legal status or existence. The accompanying
statement was prepared as described in Note 1 to present the Product Lines and
is not intended to be a complete presentation of the Product Lines. Accordingly,
the resulting statement is not necessarily indicative of the costs and expenses
that would have resulted if the Product Lines had been operated as a separate
entity.
In our opinion, the statement referred to above presents fairly, in all
material respects, the Combined Statement of Product Contribution for the
Product Lines for the years ended December 31, 1995 and 1996 in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Greensboro, North Carolina
November 17, 1997
F-25
<PAGE> 94
NEOSPORIN, POLYSPORIN, SEPTRA, PROLOPRIM, MANTADIL,
AND KEMADRIN PRODUCT LINES
COMBINED STATEMENT OF PRODUCT CONTRIBUTION
(NOTE 1)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales........................................... $18,562 $12,440 $8,667
------- ------- -------
Cost of sales....................................... 3,665 2,030 1,932
Selling, general and administrative................. 1,334 848 423
Distribution........................................ 115 64 31
------- ------- -------
Total costs and expenses.................. 5,114 2,942 2,386
------- ------- -------
Product contribution................................ $13,448 $ 9,498 $6,281
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the Combined Statement of Product
Contribution
F-26
<PAGE> 95
NEOSPORIN, POLYSPORIN, SEPTRA, PROLOPRIM, MANTADIL,
AND KEMADRIN PRODUCT LINES
NOTES TO THE COMBINED FINANCIAL STATEMENT
1. OWNERSHIP/BASIS OF PRESENTATION:
The Neosporin, Polysporin, Septra, Proloprim, Mantadil and Kemadrin Product
Lines (the "Product Lines") include all rights, title and interest of six
product lines within the United States. Effective November 14, 1997 Glaxo
Wellcome, Inc. ("Glaxo Wellcome") sold the rights, title and interest of these
Product Lines to Monarch Pharmaceuticals, Inc. ("Monarch"), a subsidiary of King
Pharmaceuticals, Inc. Glaxo Wellcome has agreed to continue its current
manufacturing agreement with an outside company until December 31, 1998 or until
current orders expire and charge Monarch for the manufacturing.
Historically, financial statements were not prepared for the Product Lines.
This statement has been developed from the historical accounting records of
Glaxo Wellcome. All of the estimates in the combined financial statement, as
described in Note 2, are based on the assumptions that Glaxo Wellcome management
believes are reasonable. However, these estimates are not necessarily indicative
of the net sales and costs that would have resulted if the Product Lines had
been operated as a separate entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Income Recognition -- Sales and related cost of sales are included in
income when goods are shipped to the customer.
Net Sales -- Net sales include the sales price, net of allowances
specifically identified by product, less an allocation of Glaxo Wellcome's
returns and chargebacks and other miscellaneous sales adjustments are based on
sales of the Product Lines to total sales of Glaxo Wellcome.
Cost of Sales -- Elements in cost of sales include raw materials, direct
labor and plant overhead. Certain of these costs are specifically identifiable
to specific brands, and the remaining costs are allocated based on sales of the
Product Lines to total sales of Glaxo Wellcome.
Inventory from period to period was determined using the first-in,
first-out (FIFO) method of valuation.
Depreciation of plant facilities is computed using the straight-line method
based on estimated useful lives ranging from 5 to 40 years.
Distribution -- Distribution costs principally include freight and
warehousing charges and are allocated based on a percentage of gross sales. Such
percentage is determined by dividing total Glaxo Wellcome distribution costs by
total Glaxo Wellcome gross sales.
Selling, General and Administrative -- Selling, general and administrative
costs include expenses for administrative services, such as finance, human
resources, legal, information systems and other corporate affairs. Such costs
are allocated based on a percentage of gross sales. Such percentage is
determined by dividing total Glaxo Wellcome general and administrative costs by
total Glaxo Wellcome gross sales. Although Glaxo Wellcome incurred direct
selling, marketing and advertising costs, no such costs were allocated to the
Product Lines because Glaxo Wellcome did not support these products during the
periods presented.
3. SIGNIFICANT CUSTOMER:
Net sales to four customers represented approximately 17%, 13%, 12% and 11%
for the nine months ended September 30, 1997. Net sales to four customers
represented approximately 18%, 16%, 12% and
F-27
<PAGE> 96
NEOSPORIN, POLYSPORIN, SEPTRA, PROLOPRIM, MANTADIL,
AND KEMADRIN PRODUCTS LINES
NOTES TO THE COMBINED FINANCIAL STATEMENT -- (CONTINUED)
11% of net sales for the year ended December 31, 1996. Net sales to three
customers represented approximately 21%, 17% and 12% of net sales for the year
ended December 31, 1995.
4. ESTIMATES:
The preparation of the combined financial statement of Gross Profit in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported amounts of gross
profit for the years ended December 31, 1995 and 1996 and for the nine months
ended September 30, 1997. Actual results could differ from those estimates.
F-28
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
ON SPECIAL PURPOSE FINANCIAL STATEMENTS
To the Board of Directors and Shareholders
of Warner-Lambert Company
We have audited the accompanying Statement of Fixed Assets of
Warner-Lambert Company's Sterile Products Operations ("Sterile Products
Operations") as of September 30, 1997 and December 31, 1996 and the Statement of
Brand Contribution of Sterile Products Operations for the nine months ended
September 30, 1997 and the years ended December 31, 1996 and 1995. These
statements are the responsibility of Warner-Lambert Company management. Our
responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Fixed Assets and Statement
of Brand Contribution are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the Statement of Fixed Assets and Statement of Brand Contribution. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the Statement
of Fixed Assets and Statement of Brand Contribution. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying Statement of Fixed Assets and Statement of Brand
Contribution reflect certain assets and brand contribution attributable to the
Sterile Products Operations of Warner-Lambert Company as described in Note 1 and
are not intended to be a complete presentation of the assets or revenues and
expenses of Warner-Lambert Company's Sterile Product Operations.
In our opinion, the Statements referred to above present fairly, in all
material respects, the fixed assets as of September 30, 1997 and December 31,
1996 and brand contribution for the nine months ended September 30, 1997 and the
years ended December 31, 1996 and 1995 of Sterile Products Operations, in
conformity with generally accepted accounting principles.
As explained in Note 1 to the financial statements, Warner-Lambert Company
signed a letter of intent on October 31, 1997 to sell Sterile Products
Operations.
/s/ Price Waterhouse LLP
Morristown, New Jersey
November 26, 1997
F-29
<PAGE> 98
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS
STATEMENT OF FIXED ASSETS (IN 000'S)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Buildings (including land of $8)............................ $38,158 $39,500
Machinery, furniture and fixtures........................... 43,274 48,608
Construction in progress.................................... 15,606 10,402
------- -------
97,038 98,510
Less accumulated depreciation............................... (46,118) (48,812)
------- -------
Property, plant and equipment, net.......................... $50,920 $49,698
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 99
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS
STATEMENT OF BRAND CONTRIBUTION (IN 000'S)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Gross sales............................................ $120,554 $120,351 $67,610
Sales deductions....................................... 30,765 29,658 20,110
-------- -------- -------
Net sales.............................................. 89,789 90,693 47,500
Cost of goods sold..................................... 52,908 52,181 36,863
-------- -------- -------
Gross profit........................................... 36,881 38,512 10,637
Voluntary severance.................................... -- -- 2,484
Selling, general and administrative.................... 5,362 5,664 2,972
Distribution........................................... 3,170 3,147 1,468
-------- -------- -------
Brand contribution..................................... $ 28,349 $ 29,701 $ 3,713
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 100
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS
NOTES TO FINANCIAL STATEMENTS (IN 000'S)
NOTE 1 -- DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Warner-Lambert Company's Sterile Products Operations ("Sterile Products")
manufactures, sells and distributes certain sterile pharmaceutical products in
the U.S., primarily to large national wholesalers and retailers. Sterile
Products includes all rights, title and interest in the U.S. to 15 branded
product lines, a manufacturing facility in Rochester, Michigan and contracts for
manufacturing for third parties. The 15 branded product lines in Sterile
Products, as defined in the preliminary non-binding letter of intent discussed
below, are Ketalar, Aplisol, Chloromycetin, Coly-Mycin-S Otic, Coly-Mycin-M
Parenteral, Adrenalin, Vira-A, Pitocin, Pitressin, Histoplasmin, Fluogen,
Anusol-HC, Procan, Procanbid and Humatin.
Historically, financial statements were not prepared for Sterile Products.
These special purpose statements have been developed from the historical
accounting records of Warner-Lambert Company (W-L). These statements may not
necessarily reflect the property, plant and equipment balances and net sales and
related costs that would have resulted had Sterile Products operated as an
independent entity for the periods presented.
On October 31, 1997, W-L signed a preliminary non-binding letter of intent
to sell to King Pharmaceuticals, Inc. the rights, title and interest of the
products in Sterile Products, the manufacturing facility in Rochester, Michigan,
and the contracts for manufacturing for third parties.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized upon shipment of product to the customer except in
limited instances where Sterile Products contract manufactures for third parties
and bills the customer upon completion of finished goods while awaiting shipping
instructions from the customer. Sterile Products warrants products against
defects and for specific quality standards, permitting the return of products
under certain circumstances.
Sales Deductions
Sales deductions are estimated and recognized at the time the applicable
sale is recognized. These deductions are comprised of sales returns and
allowances, customer rebates and cash discounts as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -----------------
<S> <C> <C> <C>
Sales returns and allowances....................... $14,141 $12,602 $ 6,974
Customer rebates................................... 14,775 15,345 12,032
Cash discounts..................................... 1,849 1,711 1,104
------- ------- -------
Total sales deductions............................. $30,765 $29,658 $20,110
======= ======= =======
</TABLE>
Cost of Goods Sold
Elements in cost of goods sold include raw materials, direct labor and
plant overhead.
Inventory from period to period is determined principally on the first-in,
first-out basis.
F-32
<PAGE> 101
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS
NOTES TO FINANCIAL STATEMENTS (IN 000'S) -- (CONTINUED)
Selling, General and Administrative Costs
Selling, general and administrative costs include expenses for
administrative services, such as credit and collections, risk management, human
resources, information systems and accounting services and are allocated based
on a percentage of net sales. Such percentage is determined by dividing total
W-L general and administrative costs by total W-L net sales. Although W-L incurs
direct selling, advertising and promotion costs, none of these costs are
allocated to Sterile Products because W-L did not support these products during
the nine months ended September 30, 1997 or the years ended December 31, 1996 or
1995.
Distribution Costs
Distribution costs principally include freight charges and are allocated
based on a percentage of net sales. Such percentage is determined by dividing
total W-L distribution costs by total W-L net sales.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of revenues and expenses. Sterile
Products' actual results in subsequent periods may differ from the estimates and
assumptions used in the preparation of the accompanying financial statements.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost, less accumulated
depreciation. The cost of maintenance, repairs, minor renewals and betterments
and minor equipment items is charged to income, the cost of major renewals and
betterments is capitalized. Depreciation is calculated on the straight-line
method over the estimated useful lives of the following classes of assets:
<TABLE>
<CAPTION>
<S> <C>
Buildings and improvements................................ 10 to 40 years
Machinery, furniture and fixtures......................... 5 to 15 years
</TABLE>
Depreciation expense totaled $3,307, $3,714 and $3,500 for the nine months
ended September 30, 1997 and the years ended December 31, 1996 and 1995,
respectively. Because Sterile Products does not have borrowings and there is no
allocation of W-L debt to Sterile Products' operations, no interest costs have
been capitalized by Sterile Products with respect to construction in progress.
NOTE 3 -- SIGNIFICANT CONCENTRATIONS
Purchases
All purchases are based on competitive bidding and there are a number of
alternative suppliers. Purchases from three suppliers accounted for
approximately 60% of inventory purchases for each of the periods presented.
Significant Products
For the nine months ended September 30, 1997 Procanbid, Anusol-HC and
Coly-Mycin-M Parenteral accounted for approximately 18%, 17% and 11% of total
sales, respectively. For the years ended December 31, 1996, Anusol-HC and
Fluogen accounted for 16% and 19% of sales, respectively. For the year ended
December 31, 1995, Anusol-HC, Fluogen and Procan SR accounted for 17%, 19% and
12% of sales, respectively.
F-33
<PAGE> 102
WARNER-LAMBERT COMPANY'S STERILE PRODUCTS OPERATIONS
NOTES TO FINANCIAL STATEMENTS (IN 000'S) -- (CONTINUED)
In 1997, due to issues regarding shelf life potency, management decided not
to sell Fluogen, which as noted above, had significant sales in 1996 and 1995.
As a result of this decision, cost of goods sold in 1997 included $5,486 of
unabsorbed overhead and $4,266 of obsolete inventory.
Significant Customers
Sterile Products operates in one industry segment (the manufacture and
distribution of sterile pharmaceutical products) and sells products primarily to
pharmaceutical wholesalers. Sterile Products had sales to three customers each
representing approximately 17%, 14% and 12% of sales for the nine months ended
September 30, 1997. Sterile Products had sales to two customers representing
approximately 12% and 11% of sales in 1996 and each representing 11% of sales in
1995.
NOTE 4 -- VOLUNTARY SEVERANCE PROGRAM
In April 1997, Sterile Products offered voluntary severance to its
employees to reduce headcount. Based on the number of employees electing the
severance, Sterile Products recorded a charge of $2,484.
F-34
<PAGE> 103
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Pro Forma Financial Statements of Operations for the year
ended December 31, 1996 and for the nine months ended September 30, 1997 have
been prepared to give effect to the recent acquisitions of the Company which
include (i) the Nucofed and Quibron product lines on October 2, 1996, (ii) the
Thalitone product line on December 7, 1996, (iii) the Proctocort product line on
January 22, 1997, (iv) the Viroptic product line on May 15, 1997, (v) the
Cortisporin Product Line on March 21, 1997 and (vi) the Glaxo Acquisition on
November 14, 1997 (collectively, the "Recent Acquisitions") and the Sterile
Products Acquisition, in all cases, as if these acquisitions had occurred on
January 1, 1996. The pro forma balance sheet as of September 30, 1997 gives
effect to the Acquisitions and the net proceeds from the sale of 6,000,000
shares of common stock at an assumed initial public offering price of $18.00 per
share.
Separate pro forma financial statements have been included for acquisitions
that have been consummated (referred to as "Pro Forma for Recent Acquisitions")
and the inclusion of both the Recent Acquisitions and the Sterile Products
Acquisition which has not yet been consummated. Consummation of the Sterile
Products Acquisition is contingent upon completion of due diligence, internal
approvals of both the Company and Warner-Lambert, receipt of regulatory
approvals, resolution of legal and equitable matters relating to employees,
supply and service agreements and intellectual property rights and preparation
and negotiation of documentation, including a definitive purchase agreement. The
Company expects to complete the acquisition in the first quarter of 1998;
however there can be no assurance as to the assets that may be acquired, the
purchase price of such assets or the terms of their acquisition.
The pro forma adjustments are based upon available information and certain
assumptions that the Company believes are reasonable in the circumstances. Pro
forma adjustments are applied to the historical financial statements of the
Company and the Acquisitions. The Acquisitions were accounted for under the
purchase method of accounting. The Company's allocation of purchase price was
based upon the estimated fair value of assets acquired and liabilities assumed
in accordance with Accounting Principles Board Opinion No. 16. The allocations
used for the Sterile Products Acquisition are based on preliminary appraisals
and are subject to change once the appraisals are finalized.
The Pro Forma Consolidated Financial Statements should be read in
conjunction with the Company's historical Consolidated Financial Statements and
related Notes thereto, Management's Discussion and Analysis of Financial
Condition and Results of Operations and other financial information included
elsewhere in this Prospectus. The Pro Forma Consolidated Financial Statements
and related notes are provided for information purposes only and do not purport
to be indicative of the results which would have actually been obtained had the
Acquisitions been completed on the dates indicated or which may be expected to
occur in the future.
F-35
<PAGE> 104
KING PHARMACEUTICALS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
RECENT
ACQUISITIONS
FROM
JANUARY 1,
1996 THROUGH
THE EARLIER OF
CORTISPORIN GLAXO DATE OF
THE COMPANY ACQUISITION ACQUISITION ACQUISITION
FOR THE FOR THE FISCAL FOR THE FISCAL OR THE YEAR
YEAR ENDED YEAR ENDED YEAR ENDED ENDED PRO FORMA
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, PRO FORMA FOR RECENT
1996 1996 1996 1996 ADJUSTMENTS ACQUISITIONS
------------ -------------- -------------- -------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues, net...... $ 20,457 $11,562 $12,440 $6,375 $ -- $ 50,834
---------- ------- ------- ------ -------- ----------
Cost of sales............ 8,782 1,445 2,030 759 -- 13,016
Selling, general and
administrative......... 12,106 679 913 559 2,093(2) 16,350
Depreciation and
amortization........... 982 -- -- -- 2,426(3) 3,408
---------- ------- ------- ------ -------- ----------
Total costs and
expenses............... 21,870 2,124 2,943 1,318 4,519 32,774
---------- ------- ------- ------ -------- ----------
Operating income (loss).. (1,413) 9,438 9,497 5,057 (4,519) 18,060
Gain on sale of
investment in
affiliate.............. 1,760 -- -- -- -- 1,760
Interest expense......... (1,272) -- -- -- (3,959)(4) (5,231)
Other income, net........ 578 -- -- -- -- 578
---------- ------- ------- ------ -------- ----------
Income (loss) before
income taxes........... (347) 9,438 9,497 5,057 (8,478) 15,167
Income tax (benefit)
expense................ (107) -- -- -- 6,206 6,099
---------- ------- ------- ------ -------- ----------
Net income (loss)........ $ (240) $ 9,438 $ 9,497 $5,057 $(14,684) $ 9,068
========== ======= ======= ====== ======== ==========
Net income (loss) per
common and common stock
equivalents............ $ (0.01) $ 0.33
========== ==========
Weighted average number
of common and common
stock equivalents...... 27,507,300 27,507,300
========== ==========
<CAPTION>
STERILE
PRODUCTS PRO FORMA
ACQUISITION FOR RECENT
FOR THE FISCAL STERILE ACQUISITIONS
YEAR ENDED PRODUCTS AND STERILE
DECEMBER 31, PRO FORMA PRODUCTS
1996 ADJUSTMENTS ACQUISITION
-------------- ----------- ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues, net...... $90,693 $ -- $ 141,527
------- -------- ----------
Cost of sales............ 52,181(1) (3,714)(10) 61,483
Selling, general and
administrative......... 8,811 5,430(2) 30,591
Depreciation and
amortization........... -- 5,493(3) 8,901
------- -------- ----------
Total costs and
expenses............... 60,992 7,209 100,975
------- -------- ----------
Operating income (loss).. 29,701 (7,209) 40,552
Gain on sale of
investment in
affiliate.............. -- -- 1,760
Interest expense......... -- (3,010)(4) (8,241)
Other income, net........ -- -- 578
------- -------- ----------
Income (loss) before
income taxes........... 29,701 (10,219) 34,649
Income tax (benefit)
expense................ -- 7,793(6) 13,892
------- -------- ----------
Net income (loss)........ $29,701 $(18,012) $ 20,757
======= ======== ==========
Net income (loss) per
common and common stock
equivalents............ $ 0.62
==========
Weighted average number
of common and common
stock equivalents...... 33,507,300
==========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements
F-36
<PAGE> 105
KING PHARMACEUTICALS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
RECENT
ACQUISITIONS
FROM
JANUARY 1,
1997
THROUGH
THE EARLIER
GLAXO OF THE DATE
THE ACQUISITION OF
COMPANY CORTISPORIN FOR THE ACQUISITION
FOR THE ACQUISITION NINE OR THE NINE
NINE JANUARY 1, MONTHS MONTHS
MONTHS 1997 ENDED ENDED PRO FORMA
ENDED THROUGH SEPTEMBER SEPTEMBER PRO FOR
SEPTEMBER 30, MARCH 20, 30, 30, FORMA RECENT
1997 1997 1997 1997 ADJUSTMENTS ACQUISITIONS
------------- --------------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues, net.... $ 33,817 $3,342 $ 8,886 $2,851 $ -- $ 48,896
---------- ------ ------- ------ ------- ----------
Cost of sales.......... 9,538 430 1,829 232 -- 12,029
---------- ------ ------- ------ ------- ----------
Selling, general and
administrative....... 13,734 198 454 150 1,608(2) 16,144
Depreciation and
amortization......... 1,631 -- -- -- 1,012(3) 2,643
---------- ------ ------- ------ ------- ----------
Total costs and
expenses............. 24,903 628 2,283 382 2,620 30,816
Operating income
(loss)............... 8,914 2,714 6,603 2,469 (2,620) 18,080
OTHER (EXPENSES)
INCOME:
Interest expense....... (1,730) -- -- -- (1,899)(4) (3,629)
Other income, net...... 211 -- -- -- -- 211
---------- ------ ------- ------ ------- ----------
Income (loss) before
income taxes......... 7,395 2,714 6,603 2,469 (4,519) 14,662
Income tax (benefit)
expense.............. 2,840 -- -- -- 2,907 5,747
---------- ------ ------- ------ ------- ----------
Net income (loss)...... $ 4,555 $2,714 $ 6,603 $2,469 $(7,426) $ 8,915
========== ====== ======= ====== ======= ==========
Net income per common
and common stock
equivalents.......... $ 0.16 $ 0.32
========== ==========
Weighted average number
of common and common
stock equivalents.... 28,000,000 28,000,000
========== ==========
<CAPTION>
STERILE
PRODUCTS
ACQUISITION
FOR THE NINE PRO FORMA
MONTHS STERILE FOR RECENT
ENDED PRODUCTS ACQUISITIONS
SEPTEMBER PRO AND STERILE
30, FORMA PRODUCTS
1997 ADJUSTMENTS ACQUISITION
------------- ----------- ------------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues, net.... $47,500 $ -- $ 96,396
------- -------- ----------
Cost of sales.......... 36,863(1) (3,307)(10) 45,585
------- -------- ----------
Selling, general and
administrative....... 6,924 699(2) 23,767
Depreciation and
amortization......... -- 4,120(3) 6,763
------- -------- ----------
Total costs and
expenses............. 43,787 1,512 76,115
Operating income
(loss)............... 3,713 (1,512) 20,281
OTHER (EXPENSES)
INCOME:
Interest expense....... -- (2,256)(4) (5,885)
Other income, net...... -- -- 211
------- -------- ----------
Income (loss) before
income taxes......... 3,713 (3,768) 14,607
Income tax (benefit)
expense.............. -- (22)(6) 5,725
------- -------- ----------
Net income (loss)...... $ 3,713 $ (3,746) $ 8,882
======= ======== ==========
Net income per common
and common stock
equivalents.......... $ 0.26
==========
Weighted average number
of common and common
stock equivalents.... 34,000,000
==========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
F-37
<PAGE> 106
KING PHARMACEUTICALS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
STERILE
PRODUCTS
THE COMPANY GLAXO ACQUISITION ACQUISITION
AS OF AS OF AS OF
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, PRO FORMA
1997 1997 1997 ADJUSTMENTS PRO FORMA
------------- ------------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 35 $ -- $(90,000) $95,102(5) $ 5,137
Accounts receivable............ 7,393 -- -- -- 7,393
Inventories(9)................. 8,622 -- -- 8,622
Deferred income taxes.......... 1,135 -- -- -- 1,135
Prepaid expenses and other
assets....................... 533 -- -- -- 533
------- ------- -------- ------- --------
Total current assets..... 17,718 -- (90,000) 95,102 22,820
------- ------- -------- ------- --------
Property, plant and equipment,
net............................ 17,006 -- 79,246(8) -- 96,252
Intangible assets, net........... 38,204 23,000(7) 45,754(8) -- 106,958
Other assets..................... 1,325 -- -- -- 1,325
------- ------- -------- ------- --------
Total assets............. $74,253 $23,000 $ 35,000 $95,102 $227,355
======= ======= ======== ======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................ $ 1,325 $ -- $ -- $ -- $ 1,325
Current portion of long-term
debt......................... 7,765 -- -- (1,175)(5) 6,590
Accounts payable............... 3,503 -- -- -- 3,503
Accrued expenses............... 4,027 -- -- -- 4,027
Income taxes payable........... 1,015 -- -- -- 1,015
------- ------- -------- ------- --------
Total current
liabilities............ 17,635 -- -- (1,175) 16,460
------- ------- -------- ------- --------
Line-of Credit................... 2,282 2,000 -- -- 4,282
Long-term debt................... 22,913 21,000 35,000 (2,338)(5) 76,575
Deferred income taxes............ 3,614 -- -- -- 3,614
------- ------- -------- ------- --------
Total liabilities........ 46,444 23,000 35,000 (3,513) 100,931
------- ------- -------- ------- --------
Commitments
Shareholders' equity:
Common stock, no par value,
150,000,000 shares
authorized, 12,320,000
19,467,406 and 28,000,000
shares issued and
outstanding, respectively.... 16,455 -- -- 98,615(5) 115,070
Retained earnings.............. 12,493 -- -- -- 12,493
Due from related party......... (1,139) -- -- -- (1,139)
------- ------- -------- ------- --------
Total shareholders'
equity................. 27,809 -- -- 98,615 126,424
------- ------- -------- ------- --------
Total liabilities and
shareholders' equity... $74,253 $23,000 $ 35,000 $95,102 $227,355
======= ======= ======== ======= ========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
F-38
<PAGE> 107
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(1) The products that the Company is considering acquiring from
Warner-Lambert are branded prescription pharmaceutical products consisting
primarily of biological products used to elicit immune responses and
anti-infective products. Three of these products accounted for 46% of the total
sales of the Warner-Lambert Products, and one product, Fluogen, had gross sales
of $23.0 million and $22.3 million in 1995 and 1996, respectively, but was not
sold in 1997. Fluogen was subject to a voluntary recall due to shelf life
potency concerns in 1996. Subsequent testing has established Fluogen's shelf
life potency and the Company intends to market Fluogen in 1998. As a result of
Fluogen being discontinued, cost of goods sold in 1997 included approximately
$5.5 million of unabsorbed overhead and approximately $4.3 million of obsolete
inventory. If these costs were excluded from cost of sales in 1997, pro forma
earnings per share including both the Recent Acquisitions and Sterile Products
Acquisition, would have been $0.43. In addition, because the potency issue
related to this product has been resolved the Company intends to market the
product in 1998; however, these pro formas do not reflect any revenues from the
expected sales in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Strategy" and
"Business -- Products and Product Development."
(2) The special purpose historical financial statements for the Recent
Acquisitions and the Sterile Products Acquisition did not directly include
allocations of selling, marketing and advertising. Accordingly, such historical
expenses are not reflected in the pro forma statements of operations. For
purposes of the pro forma statements, additional selling, marketing and
advertising expenses that would have been incurred as a result of the Recent
Acquisitions and the Sterile Products Acquisition were estimated by the Company
to be approximately $2.1 million and $1.6 million for the Recent Acquisitions
and approximately $5.4 million and $0.7 million for the Sterile Products
Acquisition for the year ended December 31, 1996 and the nine month period ended
September 30, 1997, respectively. Subsequent to the Cortisporin acquisition and
in anticipation of further product acquisitions, the Company established a sales
force and distribution system to support the 1997 product line acquisitions,
including the Sterile Products and Glaxo acquisition. The 1997 and 1996 pro
forma adjustments reflect the costs of this additional support structure as of
the beginning of the year. In addition, the Company estimated incremental costs
for information systems, and sampling.
(3) Includes amortization of intangible assets over 10 to 25 years for the
Other Acquisitions, 25 years for the Glaxo and Sterile Products Acquisitions,
and depreciation of fixed assets from the Sterile Products Acquisition over a
period of 5 to 40 years.
(4) Assumes the additional interest costs on approximately $72.0 million of
additional indebtedness, incurred related to the Cortisporin Acquisition ($14.0
million), the Glaxo Wellcome Acquisition ($23.0 million) and the Sterile
Products Acquisition ($35.0 million) and approximately $13.6 million of
additional indebtedness incurred related to the Other Acquisitions at interest
rates ranging from 7.25% to 10.0%. The Company has recognized interest based on
committed rates received in the open market.
(5) Reflects the sale of 6,000,000 shares of Common Stock at the assumed
public offering price of $18.00 per share and the application of the estimated
net proceeds of such sale (after deducting the underwriting discounts and
estimated offering expenses payable by the Company).
(6) Adjustment to reflect a 40% effective tax rate applied to the
incremental pro forma income before income taxes. A reconciliation of the
statutory tax rate to the assumed pro forma tax rate is provided below:
<TABLE>
<S> <C>
Federal statutory rate...................................... 35.0%
State taxes, net of federal benefit......................... 4.0
Other....................................................... 1.0
----
40.0%
====
</TABLE>
(7) The purchase price of the Glaxo Acquisition of $23.0 million was
allocated to intangible assets and amortized over 25 years since no tangible
assets were purchased.
(8) The purchase price of the Sterile Products Acquisition of $125.0
million was allocated to property, plant and equipment ($79.2 million) based on
preliminary appraisal studies and intangible
F-39
<PAGE> 108
assets ($45.8 million) and depreciated/amortized over a period of 5 to 40 years
and 25 years, respectively.
(9) In addition to the Sterile Products Acquisition described in (8) above,
the letter of intent provides that the Company has a right to purchase
inventory, the terms and conditions of which are subject to further negotiation.
These amounts are not estimable by management and therefore have been excluded
from the pro formas.
(10) Reflects the reclassification of depreciation expense to be consistent
with the presentation of the Company's financial statements.
F-40
<PAGE> 109
Photo inside back cover top center: pharmaceutical laboratory with lab
technicians performing various functions.
AN EXPERIENCED PRODUCT DEVELOPMENT TEAM
The Company's laboratories and experienced product development scientists focus
on product line extensions to existing branded products. The Company has filed a
number of abbreviated new drug applications with the FDA, several of which have
been approved.
<PAGE> 110
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER, OR ANY
OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, STOCK TO ANY PERSON IN ANY JURISDICTION WHERE
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Cautionary Statement Regarding
Forward-Looking Statements.......... 15
The Company........................... 15
Use of Proceeds....................... 15
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial
Data................................ 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 32
Management............................ 46
Certain Transactions.................. 52
Principal and Selling Shareholders.... 53
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 60
Certain United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock..................... 61
Underwriting.......................... 64
Legal Matters......................... 66
Experts............................... 66
Additional Information................ 66
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
8,919,000 SHARES
[KING PHARMACEUTICALS LOGO]
COMMON STOCK
-------------------------
PROSPECTUS
, 1998
-------------------------
LEHMAN BROTHERS
CREDIT SUISSE
FIRST BOSTON
HAMBRECHT & QUIST
======================================================
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 58,501
NASD Filing Fee............................................. 18,440
Nasdaq National Market Listing Fee.......................... 1,000
Transfer Agent's Fee........................................ 15,000
Blue Sky Fees and Expenses.................................. 10,000
Printing and Engraving...................................... 125,000
Accounting Fees and Expenses................................ 175,000
Legal Fees and Expenses..................................... 150,000
Advisor Fees................................................ 1,121,800
Miscellaneous............................................... 150,259
----------
Total....................................................... $1,825,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Tennessee Code Annotated Sections 48-18-501 through 48-18-509 authorize a
corporation to provide for the indemnification of officers, directors, employees
and agents in terms sufficiently broad to permit indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended. The Company has adopted
the provisions of the Tennessee statute pursuant to Paragraph 9 of its Amended
and Restated Charter. Also, the Company will have upon consummation of the
offering a "Directors' and Officers' Liability Insurance Policy" which provides
coverage sufficiently broad to permit indemnification under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following information reflects sales by the Company of unregistered
securities within the past three years. Share amounts and designations have been
adjusted for the stock split effected October 1997. The issuance by the Company
of the securities sold in the transactions referenced below were not registered
under the Securities Act of 1933, pursuant to the exemption contemplated in
Section 4(2) thereof, for transactions not involving a public offering. The
consideration paid to the Company in respect of each issuance was cash, unless
otherwise indicated.
In November 1994, an aggregate of 7,448,000 shares of the Company's Common
Stock was issued to Randall J. Kirk, Jefferson J. Gregory, C.B.B., L.L.C., A.
Willard Lester, John M. Gregory and Joseph R. Gregory in exchange for 76,000
shares of General Injectables and Vaccines, Inc. These securities were issued
pursuant to the exemption available under Section 4(2) of the Securities Act of
1933 (the "1933 Act").
In October 1995, an aggregate of approximately 1.1 million shares of the
Company's Common Stock was issued to John M. Gregory in exchange for 40,000
shares of the Company's Preferred Stock originally purchased for $800,000.00.
These securities were issued pursuant to the exemption available under Section
4(2) of the 1933 Act.
From January through October 1996, an aggregate of approximately 727,000
shares of the Company's Common Stock was issued to approximately 200 employees
of the Company under the Company's Employee Stock Purchase Plan. All such shares
were issued for $1.07 cash per share. These securities were issued pursuant to
the exemption available under Section 4(2) of the 1933 Act.
II-1
<PAGE> 112
In December 1996, the Company issued an additional approximately 2,500,000
shares of its Common Stock pursuant to a 15.0% stock dividend. These securities
were issued pursuant to the exemption available under Section 4(2) of the 1933
Act.
In October 1996, certain members of management and other existing
shareholders purchased approximately 3.9 million shares of the Company's Common
Stock for a purchase price of $1.07 per share. These securities were issued
pursuant to the exemption available under Section 4(2) of the 1933 Act.
In March 1997, 8,532,594 shares of the Company's Common Stock were issued
to The United Company in exchange for $8,750,000 in cash ($1.03 per share).
These securities were issued pursuant to the exemption available under Section
4(2) of the 1933 Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.
3.1 -- Amended and Restated Charter of King Pharmaceuticals, Inc.
3.1(a) -- Second Amended and Restated Charter of King Pharmaceuticals,
Inc.
3.2 -- Bylaws of King Pharmaceuticals, Inc., as amended.
3.2(a) -- Amended and Restated Bylaws of King Pharmaceuticals, Inc.
4.1 -- Specimen Common Stock Certificate.
4.2 -- Form of Rights Agreement by and between King
Pharmaceuticals, Inc. and Union Planters National Bank.
5.1 -- Opinion of Baker, Donelson, Bearman & Caldwell, P.C.
10.1 -- Promissory Note between RSR Acquisition Corporation
(predecessor to King Pharmaceuticals, Inc.) and RSR
Laboratories, Inc., dated December 28, 1993, in the amount
of $3,500,000.
10.2 -- Promissory Note between King Pharmaceuticals, Inc., and
General Injectables and Vaccines, Inc., dated October 6,
1994, in the amount of $4,700,000.
10.3 -- Loan Agreement between King Pharmaceuticals, Inc., and First
Tennessee Bank National Association, dated April 30, 1996;
associated Master Note in the amount of $3,500,000;
associated Promissory Note in the amount of $2,500,000.
10.4 -- Promissory Note between Monarch Pharmaceuticals, Inc. and
Roberts Laboratories, Inc., dated October 2, 1996, in the
amount of $5,500,000.
10.5 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated January 21, 1997; associated
Promissory Note in the amount of $1,750,000.
10.6 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated January 29, 1997; associated
Promissory Note in the amount of $1,750,000.
10.7 -- Promissory Note between King Pharmaceuticals, Inc., and
Signet Bank in the amount of $1,500,000, dated March 19,
1997.
10.8 -- Promissory Note between King Pharmaceuticals, Inc., and The
United Company, dated March 17, 1997, in the amount of
$1,750,000.
10.9 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated March 20, 1997; associated
Promissory Note in the amount of $5,000,000.
10.10 -- Loan and Security Agreement by and between King
Pharmaceuticals, Inc. and First American National Bank,
dated August 21; associated Revolving Credit Note in the
principal amount of $2,975,000; and associated Term
Promissory Note in the principal amount of $1,025,000.
10.11 -- Loan Agreement by and among King Pharmaceuticals, Inc.,
Monarch Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated September 10, 1997; associated
Promissory Note in the amount of $8,500,000.
</TABLE>
II-2
<PAGE> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.12 -- Asset Purchase Agreement by and among King Pharmaceuticals,
Inc., King Pharmaceuticals of Nevada, Inc. and Mallinckrodt
Chemical, Inc. for the disposition of the Anexsia Product
Line, dated December 13, 1995.
10.12(a) -- Toll Manufacturing Agreement for APAP/Hydrocodone Bitartrate
Tablets by and between Mallinckrodt Chemical, Inc. and King
Pharmaceuticals, Inc.
10.13 -- Agreement between King Pharmaceuticals, Inc. and Ernest C.
Bourne dated July 30, 1997.
10.14 -- 1997 Incentive and Nonqualified Stock Option Plan for
Employees of King Pharmaceuticals, Inc.
10.15 -- $52,000,000 Credit Agreement among King Pharmaceuticals,
Inc. and General Electric Capital Corporation, as Agent, for
certain Lenders dated November 26, 1997.
*10.16 -- Agreement for Purchase and Sale of Assets Relating to
Cortisporin by and between Glaxo Wellcome Inc. and Monarch
Pharmaceuticals, Inc. dated March 21, 1997.
*10.17 -- Agreement for Purchase and Sale of Assets Relating to
Neosporin and Polysporin by and between Glaxo Wellcome Inc.
and Monarch Pharmaceuticals, Inc. dated November 14, 1997.
*10.18 -- Agreement for Purchase and Sale of Assets Relating to
Septra, Proloprim, Mantadil and Kemadrin by and between
Glaxo Wellcome Inc. and Monarch Pharmaceuticals, Inc. dated
November 14, 1997.
*10.19 -- Manufacture and Supply Agreement with Novartis (Ciba-Geigy
Corporation) dated July 17, 1995.
*10.20 -- Manufacture and Supply Agreement with Roberts Laboratories,
Inc. dated October 5, 1995.
*10.21 -- Supply Agreement with SmithKline Beecham Corporation dated
July 16, 1996.
*10.22 -- Letter of Intent with Warner-Lambert Company dated October
31, 1997.
*10.23 -- Trademark, Patent, Copyright and Know-How License Agreement
between Warner-Lambert Company and Glaxo Wellcome Inc. dated
as of June 30, 1996.
*11.1 -- Statement regarding Computation of Per Share Earnings.
21.1 -- Subsidiaries of the Registrant.
23.1 -- Consent of Baker, Donelson, Bearman & Caldwell, P.C.
(included as Exhibit 5.1).
*23.2 -- Consent of Coopers & Lybrand L.L.P.
*23.3 -- Consent of Price Waterhouse LLP.
24.1 -- Powers of Attorney (included on the signature page of this
Registration Statement).
27.1 -- Financial Data Schedule (for SEC use only).
27.2 -- Financial Data Schedule (for SEC use only).
</TABLE>
- ------------------------------
* Filed herewith.
(b) Financial Statement Schedules -- Not applicable
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant for expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE> 114
(b) The undersigned Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(iii) It will provide to the underwriters at the closing(s) specified
in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-4
<PAGE> 115
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 5 to the Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Bristol, State of Tennessee on January 8, 1998.
KING PHARMACEUTICALS, INC.
By: /s/ JOHN M. GREGORY
------------------------------------
John M. Gregory
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN M. GREGORY Chairman of the Board and January 8, 1998
- ----------------------------------------------------- Chief Executive Officer
John M. Gregory (principal executive
officer)
/s/ BRIAN G. SHRADER Chief Financial Officer January 8, 1998
- ----------------------------------------------------- (principal financial and
Brian G. Shrader accounting officer)
* Director January 8, 1998
- -----------------------------------------------------
Joseph R. Gregory
* Director January 8, 1998
- -----------------------------------------------------
Jefferson J. Gregory
* Director January 8, 1998
- -----------------------------------------------------
Ernest C. Bourne
* Director January 8, 1998
- -----------------------------------------------------
Lois A. Clarke
* Director January 8, 1998
- -----------------------------------------------------
D. Greg Rooker
* Director January 8, 1998
- -----------------------------------------------------
Ted G. Wood
Director
- -----------------------------------------------------
Frank W. De Friece, Jr.
* /s/ JOHN M. GREGORY
----------------------------------------------
As Attorney-in-Fact
</TABLE>
II-5
<PAGE> 116
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement
3.1 -- Amended and Restated Charter of King Pharmaceuticals, Inc.
3.1(a) -- Second Amended and Restated Charter of King Pharmaceuticals,
Inc.
3.2 -- Bylaws of King Pharmaceuticals, Inc., as amended.
3.2(a) -- Amended and Restated Bylaws of King Pharmaceuticals, Inc.
4.1 -- Specimen Common Stock Certificate.
4.2 -- Form of Rights Agreement by and between King
Pharmaceuticals, Inc. and Union Planters National Bank.
5.1 -- Opinion of Baker, Donelson, Bearman & Caldwell, P.C.
10.1 -- Promissory Note between RSR Acquisition Corporation
(predecessor to King Pharmaceuticals, Inc.) and RSR
Laboratories, Inc., dated December 28, 1993, in the amount
of $3,500,000.
10.2 -- Promissory Note between King Pharmaceuticals, Inc., and
General Injectables and Vaccines, Inc., dated October 6,
1994, in the amount of $4,700,000.
10.3 -- Loan Agreement between King Pharmaceuticals, Inc., and First
Tennessee Bank National Association, dated April 30, 1996;
associated Master Note in the amount of $3,500,000;
associated Promissory Note in the amount of $2,500,000.
10.4 -- Promissory Note between Monarch Pharmaceuticals, Inc. and
Roberts Laboratories, Inc., dated October 2, 1996, in the
amount of $5,500,000.
10.5 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated January 21, 1997; associated
Promissory Note in the amount of $1,750,000.
10.6 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated January 29, 1997; associated
Promissory Note in the amount of $1,750,000.
10.7 -- Promissory Note between King Pharmaceuticals, Inc., and
Signet Bank in the amount of $1,500,000, dated March 19,
1997.
10.8 -- Promissory Note between King Pharmaceuticals, Inc., and The
United Company, dated March 17, 1997, in the amount of
$1,750,000.
10.9 -- Loan Agreement by and among Monarch Pharmaceuticals, Inc.,
King Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated March 20, 1997; associated
Promissory Note in the amount of $5,000,000.
10.10 -- Loan and Security Agreement by and between King
Pharmaceuticals, Inc. and First American National Bank,
dated August 21; associated Revolving Credit Note in the
principal amount of $2,975,000; and associated Term
Promissory Note in the principal amount of $1,025,000.
10.11 -- Loan Agreement by and among King Pharmaceuticals, Inc.,
Monarch Pharmaceuticals, Inc., and First Tennessee Bank
National Association, dated September 10, 1997; associated
Promissory Note in the amount of $8,500,000.
10.12 -- Asset Purchase Agreement by and among King Pharmaceuticals,
Inc., King Pharmaceuticals of Nevada, Inc. and Mallinckrodt
Chemical, Inc. for the disposition of the Anexsia Product
Line, dated December 13, 1995.
10.12(a) -- Toll Manufacturing Agreement for APAP/Hydrocodone Bitartrate
Tablets by and between Mallinckrodt Chemical, Inc. and King
Pharmaceuticals, Inc.
10.13 -- Agreement between King Pharmaceuticals, Inc. and Ernest C.
Bourne dated July 30, 1997.
10.14 -- 1997 Incentive and Nonqualified Stock Option Plan for
Employees of King Pharmaceuticals, Inc.
10.15 -- $52,000,000 Credit Agreement among King Pharmaceuticals,
Inc. and General Electric Capital Corporation, as Agent, for
certain Lenders dated November 26, 1997.
*10.16 -- Agreement for Purchase and Sale of Assets Relating to
Cortisporin by and between Glaxo Wellcome Inc. and Monarch
Pharmaceuticals, Inc. dated March 21, 1997.
*10.17 -- Agreement for Purchase and Sale of Assets Relating to
Neosporin and Polysporin by and between Glaxo Wellcome Inc.
and Monarch Pharmaceuticals, Inc. dated November 14, 1997.
*10.18 -- Agreement for Purchase and Sale of Assets Relating to
Septra, Proloprim, Mantadil and Kemadrin by and between
Glaxo Wellcome Inc. and Monarch Pharmaceuticals, Inc. dated
November 14, 1997.
*10.19 -- Manufacture and Supply Agreement with Novartis (Ciba-Geigy
Corporation) dated July 17, 1995.
*10.20 -- Manufacture and Supply Agreement with Roberts Laboratories,
Inc. dated October, 5 1995.
*10.21 -- Supply Agreement with SmithKline Beecham Corporation dated
July 16, 1996.
</TABLE>
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
*10.22 -- Letter of Intent with Warner-Lambert Company dated October
31, 1997
*10.23 -- Trademark, Patent, Copyright and Know-How License Agreement
between Warner-Lambert Company and Glaxo Wellcome Inc. dated
as of June 30, 1996
*11.1 -- Statement regarding Computation of Per Share Earnings
21.1 -- Subsidiaries of the Registrant
23.1 -- Consent of Baker, Donelson, Bearman & Caldwell, P.C.
(included as Exhibit 5.1)
*23.2 -- Consent of Coopers & Lybrand L.L.P.
*23.3 -- Consent of Price Waterhouse LLP.
24.1 -- Powers of Attorney (included on the signature page of this
Registration Statement).
27.1 -- Financial Data Schedule (for SEC use only)
27.2 -- Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 10.16
CONFIDENTIAL
================================================================================
AGREEMENT
FOR
PURCHASE AND SALE
OF ASSETS
BY AND BETWEEN
GLAXO WELLCOME INC.
AND
MONARCH PHARMACEUTICALS, INC.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 CONVEYANCE OF ASSETS; OTHER AGREEMENTS...........................2
1.01 Assets to be Conveyed ...............................................2
1.02 Purchase Price.......................................................3
1.03 Payment..............................................................3
1.04 Existing Inventory of Products.......................................3
1.05 Closing .............................................................4
1.06 Delivery of Documents ...............................................4
1.07 Conveyance of Assets and Inventory ..................................5
1.08 Scope of Monarch's Rights ...........................................5
1.09 Supply Agreement ....................................................7
1.10 Taxes ...............................................................7
1.11 Hart-Scott-Rodino ...................................................7
ARTICLE 2 ACCOUNTS RECEIVABLE AND RETURNED GOODS ..........................7
2.01 Pre Closing Accounts Receivable .....................................7
2.02 Post-Closing Accounts Receivable ....................................7
2.03 Returned Goods ......................................................8
2.04 Excess Returned Goods ...............................................8
ARTICLE 3 REGULATORY MATTERS .............................................10
3.01 Filings with FDA Regarding Transfer of NDAs and INDs ...............10
3.02 Responsibility for the Products ....................................10
3.03 Rebates for Amounts Paid under Government Programs .................12
ARTICLE 4 REPRESENTATIONS AND WARRANTIES .................................12
4.01 Representations and Warranties of GW ...............................12
4.02 Representations and Warranties of Monarch ..........................16
4.03 Survival of Representations and Warranties .........................18
4.04 Certain Limitations ................................................19
ARTICLE 5 INDEMNIFICATION ................................................19
5.01 Indemnification by GW ..............................................19
5.02 Indemnification by Monarch .........................................20
5.03 Payments ...........................................................20
5.04 Conduct of Litigation ..............................................20
ARTICLE 6 MISCELLANEOUS ..................................................22
6.01 Entire Agreement ...................................................22
6.02 Counterparts .......................................................22
6.03 Brokerage and Other Commissions ....................................22
6.04 Notices ............................................................23
6.05 Assignment .........................................................24
6.06 Governing Law ......................................................24
6.07 Headings ...........................................................25
6.08 Expenses............................................................25
6.09 Successors and Assigns..............................................25
6.10 Agreement to Take Necessary and Desirable Actions...................25
6.11 No Implied Waiver ..................................................25
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
6.12 Force Majeure ......................................................26
6.13 Confidentiality ....................................................26
6.14 Relationship .......................................................26
6.15 Severability .......................................................26
6.16 Press Release ......................................................27
6.17 Affiliates .........................................................27
6.18 Waiver of Bulk Sales ...............................................27
6.19 Exhibits and Schedules .............................................27
6.20 Guaranty ...........................................................28
</TABLE>
SCHEDULES
Schedule 1 List of Products
Schedule 1.01(a) Trademarks
Schedule 1.01(b) Description of Know-How
Schedule 1.01(c) Regulatory Approvals and Filings
Schedule 1.03 Wiring Instructions to Glaxo Wellcome Inc.
Schedule 1.04 Inventory
Schedule 1.07 Liens, Claims, Charges, Encumbrances and Restrictions on the
Assets and the Inventory
Schedule 4.01(f) Litigation
Schedule 4.01(k) Form 483s, Warning Letters, Etc.
EXHIBITS
Exhibit A - Bill of Sale
Exhibit B - Assignment of Trademarks
ii
<PAGE> 4
AGREEMENT
THIS AGREEMENT, is dated and entered into as of March 21, 1997 (this
"Agreement"), between GLAXO WELLCOME INC., a corporation organized and existing
under the laws of the State of North Carolina, having a principal place of
business at Five Moore Drive, Research Triangle Park, North Carolina 27709
("GW") and MONARCH PHARMACEUTICALS, INC., a corporation organized and existing
under the laws of the State of Tennessee, having a principal place of business
at 355 Beecham Street, Bristol, Tennessee 37620 ("Monarch").
WITNESSETH:
WHEREAS, GW desires to sell to Monarch, and Monarch desires to purchase
from GW, certain assets relating to GW's pharmaceutical products marketed under
the Cortisporin(R) and Pediotic(R) trademarks listed on Schedule 1 attached
hereto (collectively, the "Products"), on the terms and subject to the
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby mutually acknowledged, GW and Monarch
hereby covenant, contract, and agree as follows:
<PAGE> 5
ARTICLE 1
CONVEYANCE OF ASSETS; OTHER AGREEMENTS
1.01 ASSETS TO BE CONVEYED.
On the Closing Date (as defined below), and subject to the terms and
conditions of this Agreement, GW will sell, assign, convey, transfer, and
deliver to Monarch, and Monarch will purchase and accept from GW, the following:
(A) All of GW's right, title, and interest in the United States of
America, its territories and possessions (the "Territory") in and to the
trademarks set forth on Schedule 1.01(a) attached hereto (collectively, the
"Trademarks"), together with the goodwill of the business symbolized by the
Trademarks in the Territory;
(B) All of GW's right, title, and interest in the Territory in and to
the know-how relating to the production, manufacturing, packaging, release,
validation, and stability of the Products as described or referenced in the
documents and other materials set forth on Schedule 1.01(b) attached hereto (the
"Know-How");
(C) All of GW's right, title, and interest in and to the new drug
applications (and other regulatory applications) for the Products set forth on
Schedule 1.01(c) attached hereto (collectively, the "NDAs"), including
supplements, records, and reports that are required to be kept under 21 C.F.R.
Section 314.81 (or under any comparable regulation applicable to an abbreviated
antibiotic drug application), whether issued, pending, or in draft form,
together with correspondence to or from the United States Food and Drug
Administration (the "FDA") which relates to the Products; and
2
<PAGE> 6
(D) The tradedress, if any, associated with the Products, excluding
any corporate or division name of GW or any of its Affiliates, any logo of GW or
its Affiliates, and any trademark (other than the Trademarks) of GW or any of
its Affiliates (the "Tradedress").
All of the assets described in Sections 1.01(a) - (d) are hereinafter
sometimes referred to collectively as the "Assets."
1.02 PURCHASE PRICE. The purchase price for the Assets (the
"Purchase Price") shall be twenty-two Million Eight Hundred Thousand Dollars
($22,800,000).
1.03 PAYMENT.
The Purchase Price shall be paid as follows: (a) Monarch heretofore has
paid to GW the sum of One Million Dollars ($1,000,000) and GW acknowledges the
receipt of same; and (B) at the Closing (as defined below) Monarch shall pay to
GW the sum of Twenty-One Million Eight Hundred Thousand Dollars ($21,800,000) by
wire transfer of immediately available funds to the account specified in
Schedule 1.03 attached hereto.
1.04 EXISTING INVENTORY OF PRODUCTS.
On the Closing Date, GW will sell, assign, convey, and transfer to
Monarch, and Monarch will purchase and accept from GW, all of GW's finished
goods inventory of the Products as set forth on Schedule 1.04 attached hereto
(the "Inventory"). The purchase price for the Inventory shall be Seven Hundred
Eighty-Seven Thousand, One Hundred Fourteen Dollars ($787,114.00), and shall be
paid by Monarch to GW one hundred twenty (120) days after the Closing by wire
transfer of immediately available funds to the account specified in Schedule
1.03. GW will begin shipping the Inventory on the Closing Date and will complete
shipping of the Inventory within ten (10) days after the Closing Date. All
Inventory will be shipped at Monarch's expense to Monarch's facilities in
Bristol, Tennessee or such other
3
<PAGE> 7
locations as the parties may mutually agree via a carrier designated by Monarch.
GW shall bear the risk of loss to the Inventory until the Inventory has been
delivered to the carrier designated by Monarch, thereafter Monarch shall bear
the risk of loss to the Inventory. GW will provide to Monarch (i) upon shipment
of the Inventory, GW's standard certificate of analysis for each batch of
Product and (ii) within ten (10) days of the initial shipment of each Product, a
complete copy of one representative batch record for such Product.
1.05 CLOSING.
The closing of the transactions provided for in this Agreement (the
"Closing") shall take place at 1:00 p.m. local time on March 21, 1997, or on
such other date as GW and Monarch may agree in writing (the "Closing Date"), at
the offices of GW located at Five Moore Drive, Research Triangle Park, North
Carolina.
1.06 DELIVERY OF DOCUMENTS.
Subject to the terms and conditions of this Agreement, GW will deliver
to Monarch at the Closing (unless otherwise specified):
(a) An irrevocable bill of sale in the form of Exhibit A hereto (the
"Bill of Sale");
(b) An assignment in the form of Exhibit B hereto regarding the
Trademarks (the "Assignment of Trademarks");
(c) Copies of the materials comprising the Know-How described on
Schedule 1.01(b), all in accordance with a time frame and in a manner reasonably
acceptable to the parties, but in no event later than thirty (30) days after the
Closing Date; and
(d) A complete copy of the NDAs, INDs and other materials described
in Section 1.01(c) all in accordance with a time frame and in a manner
reasonably acceptable to the parties, but in no event later than thirty (30)
days after the Closing Date.
4
<PAGE> 8
1.07 CONVEYANCE OF ASSETS AND INVENTORY.
The Assets and the Inventory shall be transferred and conveyed to
Monarch free and clear of all liens, claims, charges, encumbrances, or
restrictions except as specifically described on Schedule 1.07 attached hereto.
1.08 SCOPE OF MONARCH'S RIGHTS.
(a) Monarch hereby acknowledges and agrees that: (i) GW manufactures,
sells, and distributes one or more pharmaceutical products outside of the
Territory that are equivalent or substantially equivalent to the Products and
that GW will continue to do so after the Closing Date; (ii) neither Monarch nor
its Affiliates shall interfere with, or have the right to prohibit, the
development, manufacture, sale, or distribution of the Products outside the
Territory; (iii) Monarch will acquire no right, title, or interest whatsoever in
any property or assets of GW or any of GW's Affiliates except as expressly set
forth in this Agreement, including no right, title, or interest to any property
or assets outside the Territory; (iv) neither Monarch nor its Affiliates shall
use or disclose the Know-How outside of the Territory; and (v) neither Monarch
nor its Affiliates shall manufacture, market, distribute, or sell any of the
Products outside of the Territory or knowingly cause the Products to be
manufactured, marketed, distributed, or sold outside the Territory.
(b) Monarch acknowledges and agrees that GW and its Affiliates shall
be entitled to use the Trademarks and the Know-How after Closing only to the
extent necessary to fulfill GW's obligations hereunder, under the Supply
Agreement (as defined below), or under applicable laws or regulations.
(c) GW shall not, and shall not permit any of its Affiliates to, for a
period of five (5) years from the Closing Date, except as provided in the Supply
Agreement, sell, produce,
5
<PAGE> 9
manufacture, market, or distribute in the Territory any products which contain
hydrocortisone as an active ingredient in combination with neomycin and/or
bacitracin and/or polymyxin (or a base, an ester, or a salt of any of the
foregoing) whether in an otic, topical, or opthalmic dosage form ("Identical
Products"); and neither GW nor its Affiliates shall knowingly cause the Products
to be manufactured, marketed, distributed, or sold inside the Territory;
provided, however, that this Section 1.08(c) shall not apply to any products
produced, sold, manufactured, marketed, or distributed by any business (or any
portion thereof), person, or group of persons, which is acquired by, or which
acquires, or which forms a merger with GW or any of its Affiliates (whether
through the formation of a new holding company or otherwise), in a single
transaction or a series of related transactions. GW agrees that neither GW nor
its Affiliates shall use or disclose the Know-How inside the Territory.
(d) Nothing in this Section 1.08 shall prohibit (i) the sale of any
manufacturing facility owned by GW or any of its Affiliates or the provision by
GW or any of its Affiliates of assistance to the purchaser of any such facility
that is of a type that is customarily provided by sellers of manufacturing
facilities to purchasers of such facilities and that relates solely to
manufacturing; or (ii) the manufacture by GW or any of its Affiliates of any
Identical Products in the Territory for sale or distribution outside the
Territory.
(e) The parties acknowledge that the Inventory purchased under this
Agreement and the Products to be supplied under the Supply Agreement will
contain packaging and labeling with the names, logos, and trademarks of GW and
its Affiliates. Monarch may distribute such Inventory and Products with such
packaging and labeling; however, Monarch shall not, and shall have no right to,
use such names, logos, or trademarks for any other purpose and Monarch shall
acquire no right, title, or interest in or to such names, logos, and trademarks.
6
<PAGE> 10
1.09 SUPPLY AGREEMENT.
Contemporaneously with the execution of this Agreement, GW and Monarch
are entering into a supply agreement (the "Supply Agreement") under which GW
agrees to supply, and Monarch agrees to purchase, certain of the Products on the
terms and conditions more specifically described therein, and which provides for
certain other matters.
1.10 TAXES.
Monarch shall be responsible for and shall promptly pay all federal,
state, and local transfer, sales, and other taxes, if any, levied or imposed as
a result of the transactions contemplated by this Agreement, excluding any tax
payable on any income or gain of GW.
1.11 HART-SCOTT-RODINO.
The parties have made the requisite filings pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and all
applicable waiting periods thereunder have expired or terminated.
ARTICLE 2
ACCOUNTS RECEIVABLE AND RETURNED GOODS
2.01 PRE-CLOSING ACCOUNTS RECEIVABLE.
GW and Monarch agree that any accounts receivable or invoices arising
out of sales of the Products by or on behalf of GW on or prior to 11:59 p.m.
(E.S.T.) on the Closing Date shall inure to the benefit of GW.
2.02 POST-CLOSING ACCOUNTS RECEIVABLE.
Monarch and GW agree that any accounts receivable or invoices arising
out of sales of the Products by or on behalf of Monarch after 11:59 p.m.
(E.S.T.) on the Closing Date shall inure to the benefit of Monarch.
7
<PAGE> 11
2.03 RETURNED GOODS.
Except as otherwise expressly set forth below and subject to Monarch's
timely compliance with its obligations set forth in this Section 2.03 and
Section 2.04, GW and Monarch agree that during the one (1) year period
immediately following the Closing Date, GW shall be responsible for handling
returns of all Products that were sold by GW prior to the Closing Date and that
are returned by customers for credit after the Closing Date. GW shall handle
such returns during such period in accordance with its then applicable returned
goods policy. Monarch agrees to provide GW with any information reasonably
requested by GW from time to time regarding Monarch's selling prices for the
Products in order to assist GW in its determination of the reimbursement prices
for returned Products. Such information shall be provided by Monarch to GW
promptly, and in any event within ten (10) days, after GW's written request
therefor. In the event that during such one year period any returns are
delivered to Monarch, such returns shall be shipped by Monarch to GW and GW
shall reimburse Monarch for the shipping costs incurred.
2.04 EXCESS RETURNED GOODS.
(a) Notwithstanding Section 2.03, or any other provisions of this
Agreement, to the extent the aggregate amount of all credits for returned
Products granted by GW from and after the Closing Date exceeds One Million Five
Hundred Thousand Dollars ($1,500,000) (the "Excess Aggregate Amount"), Monarch
agrees to reimburse GW for the Excess Aggregate Amount promptly, and in any
event within thirty (30) days, after written demand therefor by GW; provided,
however, that any credits granted by GW for any Products as a result of any
product withdrawal or recall by GW (other than a withdrawal or recall resulting
from acts or omissions of Monarch, its Affiliates, or their respective
employees, agents, or distributors) shall not be included for purposes of
determining whether credits for returned goods granted by GW in respect of the
8
<PAGE> 12
Products exceed the Excess Aggregate Amount. GW shall submit to Monarch any
request for an Excess Aggregate Amount within one hundred twenty (120) days
following the end of the one (1) year period described in Section 2.03.
(b) From time to time during the one (1) year period described in
Section 2.03, but no more than once every ninety (90) calendar days from the
Closing Date, GW, upon Monarch's written request, shall provide Monarch with
information related to aggregate amounts of credits extended for returned
Products and the methodology of calculating the same. In the event GW claims
that an Excess Aggregate Amount is owed to it, then Monarch shall have ten (10)
days within which to request in writing an audit (either by Monarch or its duly
authorized agents) of GW's records relative to the claimed Excess Aggregate
Amount. Further, if Monarch requests such an audit in accordance with this
Section, then GW shall permit Monarch or its duly authorized agents to audit all
necessary and reasonable information related to the actual goods returned and
GW's valuation of such goods in order to confirm the accuracy of the claimed
Excess Aggregate Amount. All persons or entities conducting or involved in such
audit shall execute a written agreement to maintain in confidence all
information obtained during the course of any such audit except for disclosure
to Monarch. Each such audit shall be conducted during GW's normal business
hours. In no event shall such audit exceed three (3) business days in duration,
and in all cases Monarch shall use its reasonable efforts to ensure that such
audits are conducted so as not to interfere with the normal and ordinary
operation of GW's business. Monarch shall be responsible for all of its and its
agents' costs and expenses incurred in connection with such audit. In the event
of an audit regarding an Excess Aggregate Amount pursuant to this Section
2.04(b), the date on which the payment of such Excess Aggregate
9
<PAGE> 13
Amount is due pursuant to Section 2.04(a) shall be postponed until such audit is
completed or is required to be completed pursuant to this Section 2.04(b).
ARTICLE 3
REGULATORY MATTERS
3.01 FILINGS WITH FDA REGARDING TRANSFER OF NDAs AND INDs.
At the Closing, the parties shall file with the FDA the information
required pursuant to 21 C.F.R. Section 314.72, or any successor regulation
thereto, regarding the transfer of the NDAs from GW to Monarch. GW shall file
the information required of a former owner, and Monarch shall file the
information required of a new owner. Contemporaneously with such filings, GW
also shall file with the FDA any required information regarding the transfer of
the INDs from GW to Monarch. The parties also agree to use their reasonable best
efforts to take any and all other actions required by the FDA, or other
necessary governmental agencies, if any, to effect the transfer of the NDAs and
the INDs from GW to Monarch. GW may retain an archival copy of the NDAs,
including supplements and records that are required to be kept under 21 C.F.R.
Section 314.81, and the INDs, and GW shall treat such archived copies as
Confidential Information (as defined in the Supply Agreement) of Monarch and
disclosure of such information shall be governed by the Supply Agreement.
3.02 RESPONSIBILITY FOR THE PRODUCTS.
(a) After the Closing, Monarch shall assume all regulatory
responsibilities permitted by applicable laws and regulations to be assumed by
Monarch, reporting and otherwise, in connection with the Products, the NDAs, and
the INDs including, but not limited to, responsibility for reporting any adverse
drug experiences in connection with the Products, and
10
<PAGE> 14
responsibility for compliance with the Prescription Drug Marketing Act of 1987,
as the same may be amended from time to time.
(b) Monarch and its Affiliates agree promptly to submit to GW all
adverse drug experience information or customer complaints brought to the
attention of Monarch or its Affiliates in respect of the Products, as well as
any material events and matters concerning or affecting the safety or efficacy
of the Products. GW and its Affiliates agree promptly to submit to Monarch all
adverse drug experience information or customer complaints brought to the
attention of GW or its Affiliates in respect of the Products, as well as any
material events and matters concerning or affecting the safety or efficacy of
the Products. Monarch and GW agree to determine promptly after Closing a
mutually agreeable reporting procedure to communicate the information required
by this Section 3.02(b).
(c) After the Closing, Monarch shall assume all responsibility for any
and all FDA fee obligations for holders or owners of approved New Drug
Applications and approved, marketed prescription drug products relating to the
Products, including, but not limited to, those defined under the Prescription
Drug User Fee Act of 1992.
(d) Promptly after the Closing, Monarch shall take all actions
necessary or required under applicable laws, rules, and regulations, to reflect
that the Assets are owned by Monarch and that Monarch has responsibility
therefor.
(e) After the Closing, GW shall direct all complaints or inquiries
concerning the Products in the Territory to Monarch to the attention of Medical
Affairs Department, at facsimile number 423-989-6137.
11
<PAGE> 15
3.03 REBATES FOR AMOUNTS PAID UNDER GOVERNMENT PROGRAMS.
Monarch shall reimburse GW for all rebates GW is obligated to pay
pursuant to any government rebate program for amounts charged to GW's NDC codes
for the Products with respect to sales of the Products from thirty (30) days
after the Closing Date. All payments due under this Section 3.03 shall be made
promptly to GW upon submission to Monarch of invoices that describe the
requested payments in reasonable detail. Monarch shall obtain new NDC codes for
the Products as soon as practicable after the Closing Date. In the event Monarch
disputes an amount owed under a government rebate program, GW shall provide to
Monarch copies of any documents and records evidencing original rebate claims
and any resubmissions of such claims and data relating to unit rebate
calculations in order to enable Monarch to resolve such disputed amount.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.01 REPRESENTATIONS AND WARRANTIES OF GW.
GW makes the following representations and warranties. The phrase "to
the knowledge of GW" or any substantially equivalent phrase, as used in this
Article 4, shall mean to the actual knowledge of officers and directors of GW
after reasonable inquiry.
(a) ORGANIZATION AND STANDING. GW is a corporation duly organized,
validly existing, and in good standing under the laws of the State of North
Carolina.
(b) POWER AND AUTHORITY. GW has all requisite corporate power and
authority to execute, deliver, and perform this Agreement and the other
agreements and instruments to be executed and delivered by it pursuant hereto
and to consummate the transactions contemplated herein and therein. The
execution, delivery, and performance of this Agreement by GW does not,
12
<PAGE> 16
and the consummation of the transactions contemplated hereby will not, violate
any provisions of GW's Articles of Incorporation, Bylaws, any law or regulation
applicable to GW, or any agreement, mortgage, lease, instrument, order,
judgment, or decree to which GW is a party or by which GW is bound or result in
the creation or acceleration of any lien, charge, security interest, or other
encumbrance on the Assets.
(c) CORPORATE ACTION; BINDING EFFECT. GW has duly and properly taken
all action required by law, its Articles of Incorporation, its Bylaws, or
otherwise, to authorize the execution, delivery, and performance of this
Agreement, the Bill of Sale, the Supply Agreement, and the Assignment of
Trademarks (collectively, the Bill of Sale, the Supply Agreement, and the
Assignment of Trademarks are referred herein to as the "Collateral Agreements"),
and the other instruments to be executed and delivered by it pursuant hereto and
the consummation of transactions contemplated hereby and thereby. This Agreement
has been duly executed and delivered by GW and constitutes, and the Collateral
Agreements and the other instruments contemplated hereby when duly executed and
delivered by GW will constitute, legal, valid, and binding obligations of GW
enforceable against it in accordance with their respective terms, except as
enforcement may be affected by bankruptcy, insolvency, or other similar laws and
by general principles of equity.
(d) CONSENTS. No consent or approval of, or filing with or notice to,
any federal, state, or local governmental or regulatory authority, agency, or
department or any other person not a party to this Agreement is required or
necessary to be obtained by GW or on its behalf in connection with the
execution, delivery, and performance of this Agreement or to consummate the
transactions contemplated hereby, except as contemplated by Sections 1.11 and
3.01 hereof.
13
<PAGE> 17
(e) OWNERSHIP OF ASSETS. GW is the owner of the Assets described in
Sections l.01(a), 1.01(c), and 1.01(d) and, to GW's knowledge, the Assets
described in Section l.01(b), free and clear of all liens, claims, charges, or
encumbrances, except for liens for taxes not yet due and payable.
(f) LITIGATION OR DISPUTES. Except as disclosed in Schedule 4.01(f)
attached hereto, there is no claim, outstanding commitment to any governmental
regulatory agency, action, suit, proceeding, investigation, or arbitration
pending or, to GW's knowledge, threatened against GW relating to the Assets, and
GW is not in violation of or in default with respect to any applicable law,
rule, regulation, judgment, order, writ, injunction, award, or decree of any
arbitrator, court, or administrative body, the result of any of which, either
individually or cumulatively, would have a materially adverse effect on the
Assets in the Territory or GW's compliance with and performance under the terms
of this Agreement or the Collateral Agreements.
(g) TRADEMARKS; INTELLECTUAL PROPERTY. Schedule 1.01(a) is a true and
correct list of all trademarks owned by GW and used by GW in the manufacture,
marketing, and sale of the Products in the Territory. The Trademarks are the
only trademarks used or held by GW for use in connection with or otherwise
necessary for the conduct of GW's business as now conducted for the Products in
the Territory. GW owns no patents necessary for the conduct of GW's business as
now conducted for the Products in the Territory. GW has not received any notice
of any claim that any of the Assets infringe on any property rights of any other
party. There is no claim, action, suit, or proceeding, pending or, to GW's
knowledge, threatened alleging that the use by GW or its Affiliates of the
Trademarks or the Know-How infringes any patents or other intellectual property
rights of third parties. GW has not executed or granted to any Affiliate or any
14
<PAGE> 18
third party in the Territory any license, sublicense, or contract covering the
Know-How or the Trademarks, except as set forth on Schedule 1.07 attached
hereto.
(h) COMPLIANCE WITH LAW. GW has, to its knowledge, conducted its
operations in connection with the manufacture and sale of the Products in
material compliance with all applicable federal, state, and local laws and
regulations, including FDA regulations, and possesses all approvals, consents,
licenses, and permits required for the conduct of its business as now conducted
for the Products or as will be necessary to perform its obligations under the
Supply Agreement.
(i) WARRANTY AND DISCLAIMER OF WARRANTIES. GW warrants that the
inventory was manufactured in accordance with the then-applicable
specifications for the Products and in accordance with current good
manufacturing practices in effect at the time of manufacture. GW further
warrants that the Inventory, when delivered to Monarch, will not be (i)
adulterated or misbranded by GW within the meaning of the United States Federal
Food, Drug and Cosmetic Act, as amended (the "FD&C Act") or (ii) an article
that may not be introduced into interstate commerce under the provisions of
Sections 404 or 505 of the FD&C Act. Set forth on Schedule 1.04 attached hereto
is a list accurate in all material respects of the expiration dates of the
Inventory. WITH RESPECT TO THE INVENTORY, GW MAKES NO OTHER WARRANTY, EXPRESS
OR IMPLIED, AND SPECIFICALLY MAKES NO WARRANTY OF MERCHANTABILITY OR WARRANTY
OF FITNESS FOR ANY PARTICULAR PURPOSE.
(j) RECALLS OR WITHDRAWALS. During the period commencing on January
1, 1996, and ending on the date hereof, there have been no: (i) Products which
have been recalled or withdrawn by GW or its Affiliates in the Territory
(whether voluntarily or otherwise) or (ii)
15
<PAGE> 19
proceedings in the Territory brought against GW or its Affiliates (whether such
proceedings have since been completed or remain pending) seeking the recall,
withdrawal, or seizure of any of the Products or seeking to enjoin GW or any of
its Affiliates from distributing such Products.
(k) FACILITIES AND MANUFACTURING. Except as set forth in Schedule
4.01(k), and only to the extent it could have a material adverse effect on the
Assets or GW's performance hereunder or under any of the Collateral Agreements,
during the period commencing on January 1, 1996, and ending on the date hereof,
with respect only to the Products, neither GW nor its Affiliates have received
or been subject to: (i) any FDA Form 483's relative to the Products; (ii) any
FDA Notices of Adverse Findings relative to the Products; or (iii) warning
letters or other correspondence from the FDA or any other governmental officials
or agencies concerning the Products in which the FDA or other such governmental
officials or agencies asserted that the operations of GW were not in compliance
with applicable law, regulations, rules, or guidelines.
(l) Since January 1, 1996, GW has conducted its business relating to
the Products in the ordinary course of its business in all material respects
and, since January 1, 1996 through the date hereof, GW has not offered any
extraordinary rebates, discounts, or any other promotion or marketing incentives
relating to the Products other than in the ordinary course of its business.
4.02 REPRESENTATIONS AND WARRANTIES OF MONARCH.
Monarch represents and warrants to GW as follows:
(a) ORGANIZATION AND STANDING. Monarch is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Tennessee.
(b) POWER AND AUTHORITY. Monarch has all requisite corporate power
and authority to execute, deliver, and perform this Agreement and the other
agreements and instruments to be executed and delivered by it pursuant hereto
and to consummate the transactions contemplated
16
<PAGE> 20
herein and therein. The execution, delivery, and performance of this Agreement
by Monarch does not, and the consummation of the transactions contemplated
hereby will not, violate any provision of Monarch's Articles of Incorporation,
Bylaws, any law or regulation applicable to Monarch, or any agreement,
mortgage, lease, instrument, order, judgment, or decree to which Monarch is a
party or by which Monarch is bound.
(c) CORPORATE ACTION; BINDING EFFECT Monarch has duly and properly
taken all action required by law, its Articles of Incorporation, its Bylaws, or
otherwise, to authorize the execution, delivery, and performance by it of this
Agreement, the Collateral Agreements, and the other instruments to be executed
by it pursuant hereto and the consummation of the transactions contemplated
hereby and thereby. This Agreement has been duly executed and delivered by
Monarch and constitutes, and the Collateral Agreements and the other
instruments contemplated hereby when duly executed and delivered by Monarch
will constitute, legal, valid, and binding obligations of Monarch enforceable
against it in accordance with their respective terms, except as enforcement may
be affected by bankruptcy, insolvency, or other similar laws and by general
principles of equity.
(d) ACCESS TO INFORMATION. After the Closing, Monarch agrees to
cooperate with GW and to grant to GW and its employees, attorneys, accountants,
officers, representatives, and agents, during normal business hours and upon
ten (10) days' advance notice, reasonable access to Monarch's management
personnel and to the records relating to the Products (including, without
limitation, the NDAs and INDs) and to permit copying at GW's expense or, where
reasonably necessary, to loan original documents relating to the Assets during
the period the Assets were owned by GW for the sole purposes of (i) any
financial reporting or tax matters (including, without limitation, any
financial and tax audits, tax contests, tax examination,
17
<PAGE> 21
preparation of any GW tax returns or financial records) relating to the
Products, (ii) any claims or litigation involving GW and the Assets relating to
the Products; (iii) any investigation of GW being conducted by any federal,
state, or local governmental authority relating to the Products; (iv) any
matter relating to any indemnification or representation or warranty or any
other term of this Agreement; or (v) any similar or related matter. Monarch
shall maintain all such records and documents in the United States and shall
not destroy or dispose of any such records and documents without the prior
written consent of GW. GW shall use its reasonable efforts to ensure that its
access to and requests for records and documents pursuant to this Section are
conducted so as not to interfere with the normal and ordinary operation of
Monarch's business. GW acknowledges that the records and documents made
available to GW by Monarch pursuant to this Section constitute Confidential
Information (as defined in the Supply Agreement) of Monarch and disclosure of
such information shall be governed by the Supply Agreement.
(e) CONSENTS. No consent or approval of, or filing with or notice
to, any federal, state, or local governmental or regulatory authority, agency,
or department or any other person not a party to this Agreement is required or
necessary to be obtained by Monarch or on its behalf in connection with the
execution, delivery, and performance of this Agreement or to consummate the
transactions contemplated hereby, except as contemplated by Sections 1.11 or
3.01 hereof
4.03 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations, warranties, and indemnities of the parties hereto
hereto contained in this Article 4 and in Article 5, as well as any other
obligations of the parties hereunder, shall survive the Closing Date for a
period equal to three (3) years, except that Section 4.01(e) (Ownership of
Assets) and the indemnification with respect thereto shall survive the Closing
Date for a period equal to five (5) years.
18
<PAGE> 22
4.04 CERTAIN LIMITATIONS.
GW does not make any representation or warranty as to the business
prospects of the Products. Monarch has conducted its own review and analysis,
as it deemed necessary and appropriate, of the business prospects of the
Products and is not relying on any representations or warranties from GW as to
the business prospects.
ARTICLE 5
INDEMNIFICATION
5.01 INDEMNIFICATION BY GW.
(a) GW hereby indemnifies, defends, and holds harmless Monarch from and
against any and all damage, loss, liability, and expense (including, without
limitation, reasonable attorneys' fees and expenses) (collectively,
"Indemnified Amounts") arising out of any misrepresentation or breach of
warranty, covenant, or agreement made or to be performed by GW pursuant to this
Agreement or the Collateral Agreements; provided, however, that GW shall not
have any obligation to indemnify Monarch from and against any Indemnified
Amounts: (i) until Monarch has incurred Indemnified Amounts in excess of a
Fifty Thousand Dollar ($50,000) deductible (after which point GW will be
obligated only to indemnify Monarch from and against further such Indemnified
Amounts) or thereafter (ii) to the extent the Indemnified Amounts Monarch has
incurred exceed a Ten Million Dollar ($10,000,000) aggregate ceiling (after
which point GW will have no obligation to indemnify Monarch from and against
further such Indemnified Amounts).
(b) GW shall not be liable under this Section 5.01 for any
settlement effected without its consent of any claim, litigation, or proceeding
in respect of which indemnity may be sought hereunder, which consent shall not
unreasonably be withheld.
19
<PAGE> 23
5.02 INDEMNIFICATION BY MONARCH.
(a) Monarch hereby indemnifies, defends, and holds harmless GW from
and against any and all Indemnified Amounts arising out of any misrepresentation
or breach of warranty, covenant, or agreement made or to be performed by
Monarch pursuant to this Agreement or the Collateral Agreements; provided,
however, that Monarch shall not have any obligation to indemnify GW from and
against any Indemnified Amounts until GW has incurred Indemnified Amounts in
excess of a Fifty Thousand Dollar ($50,000) deductible (after which point
Monarch will be obligated only to indemnify GW from and against further such
Indemnified Amounts).
(b) Monarch shall not be liable under this Section 5.02 for any
settlement effected without its consent of any claim, litigation or proceeding
in respect of which indemnity may be sought, which consent shall not
unreasonably be withheld.
5.03 PAYMENTS.
All amounts payable under this Article 5 shall be paid promptly after
receipt by the indemnifying party of written notice from the indemnified party
stating that such Indemnified Amounts have been incurred, the amount thereof
and of the related indemnity payment and substantiation of such amount and such
indemnity payment; provided, however, any disputed amounts shall be due and
payable promptly after such amounts are finally determined to be owing by the
indemnifying party to the indemnified party.
5.04 CONDUCT OF LITIGATION.
Each party indemnified under the provisions of this Agreement, upon
receipt of written notice of any claim or the service of a summons or other
initial legal process upon it in any action instituted against it, in respect
of the agreements contained in this Agreement, shall promptly give written
notice of such claim, or the commencement of such action, or threat thereof, to
the party
20
<PAGE> 24
from whom indemnity shall be sought hereunder; provided, however, the failure
to provide such notice within a reasonable period of time shall not relieve the
indemnifying party of any of its obligations hereunder except to the extent the
indemnifying party is prejudiced by such failure. Each indemnifying party shall
be entitled at its own expense to participate in the defense of such claim or
action, or, if it shall elect, to assume such defense, in which event such
defense shall be conducted by counsel chosen by such indemnifying party, which
counsel may be any counsel reasonably satisfactory to the indemnified party
against whom such claim is asserted or who shall be the defendant in such
action, and such indemnified party shall bear all fees and expenses of any
additional counsel retained by it or them. Notwithstanding the immediately
preceding sentence, if the named parties in such action (including impleaded
parties) include the indemnified and the indemnifying parties, and the
indemnified party shall have been advised by counsel that there may be a
conflict between the positions of the indemnifying party and the indemnified
party in conducting the defense of such action or that there are legal defenses
available to such indemnified party different from or in addition to those
available to the indemnifying party, then counsel for the indemnified party
shall be entitled, if the indemnified party so elects, to conduct the defense to
the extent reasonably determined by such counsel to be necessary to protect the
interests of the indemnified party, at the expense of the indemnifying party, if
it is determined by agreement of the indemnifying party and the indemnified
party or by a court of competent jurisdiction that the indemnified party is
entitled to indemnification hereunder for the Indemnified Amounts giving rise to
such action. If the indemnifying party shall elect not to assume the defense of
such claim or action, such indemnifying party shall reimburse such indemnified
party for the reasonable fees and expenses of any counsel retained by it, and
shall be bound by the results obtained by the indemnified party in respect of
such claim or action if it is determined by
21
<PAGE> 25
agreement of the indemnifying party and the indemnified party or by a court of
competent jurisdiction that the indemnified party is entitled to
indemnification hereunder for the Indemnified Amounts giving rise to such
action; provided, however, that no such claim or action shall be settled
without the written consent of the indemnifying party.
ARTICLE 6
MISCELLANEOUS
6.01 ENTIRE AGREEMENT.
This Agreement and the Collateral Agreements constitute the entire
agreement between GW and Monarch with respect to the subject matter hereof and
thereof and supersede all prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof and
thereof. This Agreement or any provision hereof cannot be amended, changed,
supplemented, or waived except in a writing signed by each of the parties
hereto.
6.02 COUNTERPARTS.
This Agreement and any amendment or supplement hereto may be executed in
several counterparts, each of which shall be deemed to be an original, and all
of which taken together shall constitute one and the same instrument.
6.03 BROKERAGE AND OTHER COMMISSIONS.
GW and Monarch each represent and warrant to the other that all negotiations
relative to this Agreement and the transactions contemplated hereby have been
carried on by each directly with the other without intervention of any broker,
finder, or other intermediary and that, subject to the provisions of Article 5,
each indemnifies the other and holds it harmless against any claim against the
other for brokerage or other commissions relating to this Agreement or to the
22
<PAGE> 26
transactions contemplated hereby by any person claiming to have been engaged as
a broker or finder by the indemnifying party.
6.04 NOTICES.
All notices and other communications required or permitted under this
Agreement shall be in writing and shall be delivered personally or sent by: (a)
registered or certified mail, return receipt requested; (b) a
nationally-recognized courier service guaranteeing next-day delivery, charges
prepaid; or (c) facsimile (with the original promptly sent by any of the
foregoing manners). Any such notices shall be addressed to the receiving party
at such party's address set forth below, or at such other address as may from
time to time be furnished by similar notice by either party.
If to GW:
Glaxo Wellcome Inc.
Five Moore Drive
Research Triangle Park, North Carolina 27709
Attention: Company Secretary
Facsimile No.: 919-483-0265
If to Monarch:
Monarch Pharmaceuticals, Inc.
355 Beecham Street
Bristol, Tennessee 37620
Attention: President
Facsimile No.: 423-989-8136
With a copy to:
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
Attention: Legal Department
Facsimile No.: 423-989-6282
23
<PAGE> 27
Any such notice or communication shall be effective upon such
personal delivery or delivery to such courier, upon transmission by facsimile,
or three (3) days after it is sent by such registered or certified mail, as the
case may be. Copies shall be sent in the same manner as originals.
6.05 ASSIGNMENT.
Neither party may assign its rights or obligations under this
Agreement without the prior written consent of the other party; provided,
however, that either party may assign its rights and obligations under this
Agreement, without the prior written consent of the other party, to an
Affiliate or to a successor of the assigning party's business by reason of
merger, sale of all or substantially all of its assets or similar transaction,
provided that such successor agrees in writing to be bound by this Agreement.
Such consent shall not be unreasonably withheld. Any purported assignment
without a required consent shall be void. Any permitted assignee shall assume
all obligations of its assignor under this Agreement. No assignment shall
relieve either party of its responsibility for the performance of any
obligation which accrued prior to the effective date of such assignment.
6.06 GOVERNING LAW.
THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED IN ALL RESPECTS UNDER
AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REGARD
TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
24
<PAGE> 28
6.07 HEADINGS.
The table of contents and all headings used in this Agreement are for
convenience of reference only and shall not affect the interpretation of this
Agreement.
6.08 EXPENSES.
All legal and other costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
party incurring such expenses.
6.09 SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and shall inure to the benefit
of the parties and their respective successors and permitted assigns.
6.10 AGREEMENT TO TAKE NECESSARY AND DESIRABLE ACTIONS.
GW and Monarch each agree to execute and deliver such other documents,
certificates, agreements, and other writings and to take such other actions as
may be reasonably necessary in order to consummate or implement expeditiously
the transactions contemplated by this Agreement.
6.11 NO IMPLIED WAIVER.
No failure or dealy on the part of the parties hereto to exercise any
right, power, or privilege hereunder or under any instrument executed pursuant
hereto shall operate as a waiver; nor shall any single or partial exercise of
any right, power, or privilege preclude any other or further exercise thereof
or the exercise of any other right, power, or privilege. All rights and
remedies granted herein shall be cumulative and in addition to other rights and
remedies to which the parties may be entitled at law or in equity.
25
<PAGE> 29
6.12 FORCE MAJEURE.
Any delay in the performance of any of the obligations of either
party hereto (except the payment of money owed) shall not be considered a
breach of this Agreement and the time required for performance shall be
extended for a period equal to the period of such delay, provided that such
delay is due to: acts of God, weather, fire, explosion; invasion, riot or other
civil unrest; governmental laws, orders, restrictions, actions, embargoes or
blockades; national or regional emergency, injunction, strikes, lock-outs,
labor trouble or other industrial disturbances; inability to obtain or
interruption of materials, labor, containers, fuel or transportation; or any
other cause beyond the control of the affected party. The party so affected
shall give prompt notice to the other party of such cause and shall use its
reasonable efforts to relieve the effect of such cause as rapidly as possible.
6.13 CONFIDENTIALITY.
GW and Monarch have entered into a Confidential Disclosure Agreement
dated as of May 30, 1996 (the "Disclosure Agreement").
6.14 RELATIONSHIP.
Nothing in this Agreement shall be deemed to create an agency, joint
venture, amalgamation, partnership, or similar relationship between Monarch and
GW.
6.15 SEVERABILITY.
In case any provision of this Agreement shall be held to be invalid,
illegal, or unenforceable, the validity, legality, or enforceability of the
remaining provisions hereof will not in any way be affected or impaired
thereby.
26
<PAGE> 30
6.16 PRESS RELEASE.
On the Closing Date, the parties shall issue a joint press release
regarding the sale of the Assets, and GW shall, in cooperation with Monarch,
inform any customer who places a purchase order with GW for the Products that
the Assets have been sold to Monarch. As soon as practicable after the
Closing, GW shall send to all of its current wholesalers and distributors a
letter, in form and substance mutually agreeable to GW and Monarch, on GW
letterhead informing them of the sale of the Assets to Monarch.
6.17 AFFILIATES.
As used in this Agreement, "Affiliate" shall mean any corporation or
non-corporate entity that controls, is controlled by, or is under common
control with the party. A corporation or non-entity shall be regarded as in
control of another corporation if it owns or directly or indirectly controls
at least fifty percent (50%) of the voting stock of the other corporation or
(a) in the absence of the ownership of at least of fifty percent (50%) of the
voting stock of a corporation or (b) in the case of a non-corporate entity,
the power to direct or cause the direction of the management and policies of
such corporation or non-corporate entity, as applicable.
6.18 WAIVER OF BULK SALES.
GW and Monarch waive compliance with any bulk sales law or similar
law in connection with the consummation of the transactions contemplated
herein.
6.19 EXHIBITS AND SCHEDULES.
All Exhibits and Schedules referred to herein form an integral part
of this Agreement and are incorporated into this Agreement by reference.
27
<PAGE> 31
6.20 GUARANTY.
King Pharmaceuticals, Inc., a Tennessee corporation ("King"),
irrevocably and unconditionally guarantees the full and punctual performance
of all of the obligations of Monarch (or any Affiliate to whom Monarch
assigns any right or obligation under this Agreement) contained in or arising
out of this Agreement, including, but not limited to, payment when due of all
amounts owed by Monarch to GW hereunder. This is a guaranty of payment and
performance and not of collection. King is executing this Agreement for the
sole purpose of agreeing to its guaranty obligations set forth in this
Section 6.20. Monarch and King represent and warrant to GW that Monarch is a
wholly-owned subsidiary of King.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
GLAXO WELLCOME INC.
By: /s/ Stephen F. Stefano
---------------------------------------
Name: Stephen F. Stefano
Title: Vice President and General Manager
MONARCH PHARMACEUTICALS, INC.
By: /s/ John Bellamy
----------------------------------------
Name: John Bellamy
Title: Authorized Signatory
KING PHARMACEUTICALS, INC.
By: /s/ Jefferson J. Gregory
----------------------------------------
Name: Jefferson J. Gregory
Title: President
28
<PAGE> 1
EXHIBIT 10.17
CONFIDENTIAL
================================================================================
AGREEMENT
FOR
PURCHASE AND SALE
OF ASSETS RELATING TO
NEOSPORIN(R) AND POLYSPORIN(R)
BY AND BETWEEN
GLAXO WELLCOME INC.
AND
MONARCH PHARMACEUTICALS, INC.
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 CONVEYANCE OF ASSETS; OTHER AGREEMENTS...........................................2
1.01 Assets to be Conveyed...............................................................2
1.02 Trademarks to be Conveyed...........................................................3
1.03 Purchase Price......................................................................3
1.04 Payment.............................................................................3
1.05 Existing Inventory of Products......................................................4
1.06 Closing.............................................................................4
1.07 Delivery of Documents...............................................................5
1.08 Conveyance of Assets and Inventory..................................................6
1.09 Scope of Monarch's Rights...........................................................6
1.10 Supply Agreement....................................................................8
1.11 Taxes...............................................................................9
1.12 Tools, Dies, Molds..................................................................9
ARTICLE 2 ACCOUNTS RECEIVABLE AND RETURNED GOODS...........................................9
2.01 Pre-Closing Accounts Receivable.....................................................9
2.02 Post-Closing Accounts Receivable....................................................9
2.03 Returned Goods......................................................................9
2.04 Excess Returned Goods..............................................................10
ARTICLE 3 REGULATORY MATTERS..............................................................12
3.01 Filings with FDA Regarding Transfer of NDAs........................................12
3.02 Responsibility for the Products....................................................12
3.03 Rebates for Amounts Paid under Government Programs.................................13
ARTICLE 4 REPRESENTATIONS AND WARRANTIES..................................................14
4.01 Representations and Warranties of GW...............................................14
4.02 Representations and Warranties of Monarch..........................................18
4.03 Survival of Representations and Warranties.........................................20
4.04 Certain Limitations................................................................20
ARTICLE 5 INDEMNIFICATION.................................................................21
5.01 Indemnification by GW..............................................................21
5.02 Indemnification by Monarch.........................................................21
5.03 Payments...........................................................................22
5.04 Conduct of Litigation..............................................................22
ARTICLE 6 MISCELLANEOUS...................................................................24
6.01 Entire Agreement...................................................................24
6.02 Counterparts.......................................................................24
6.03 Brokerage and Other Commissions....................................................24
6.04 Notices............................................................................25
6.05 Assignment.........................................................................26
6.06 Governing Law......................................................................26
6.07 Headings...........................................................................26
6.08 Expenses...........................................................................27
6.09 Successors and Assigns.............................................................27
6.10 Agreement to Take Necessary and Desirable Actions..................................27
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
6.11 No Implied Waiver.............................................................27
6.12 Force Majeure.................................................................27
6.13 Confidentiality...............................................................28
6.14 Relationship..................................................................28
6.15 Severability..................................................................28
6.16 Press Release.................................................................28
6.17 Affiliates....................................................................29
6.18 Waiver of Bulk Sales..........................................................29
6.19 Exhibits and Schedules........................................................29
6.20 Guaranty......................................................................29
</TABLE>
SCHEDULES
Schedule 1 List of Product
Schedule 1.01(a) Description of Know-How
Schedule 1.01(b) Regulatory Approvals and Filings
Schedule 1.02 Trademarks
Schedule 1.04 Wiring Instructions to Glaxo Wellcome Inc.
Schedule 1.05 Inventory
Schedule 1.08 Liens, Claims, Charges, Encumbrances and Restrictions on the
Assets and the Inventory
Schedule 1.09(c) Active Ingredients for Identical Products
Schedule 4.01(f) Litigation
Schedule 4.01(k) Form 483s, Warning Letters, Etc.
EXHIBITS
Exhibit A - Note
Exhibit B - Security Agreement
Exhibit C - Bill of Sale
Exhibit D - Assignment and Assumption Agreement
ii
<PAGE> 4
AGREEMENT
THIS AGREEMENT, is dated and entered into as of November 14, 1997 (this
"Agreement"), between GLAXO WELLCOME INC., a corporation organized and existing
under the laws of the State of North Carolina, having a principal place of
business at Five Moore Drive, Research Triangle Park, North Carolina 27709
("GW") and MONARCH PHARMACEUTICALS, INC., a corporation organized and existing
under the laws of the State of Tennessee, having a principal place of business
at 355 Beecham Street, Bristol, Tennessee 37620 ("Monarch").
WITNESSETH:
WHEREAS, GW desires to sell to Monarch, and Monarch desires to purchase
from GW, certain assets relating to GW's pharmaceutical products marketed under
the Neosporin(R) and Polysporin(R) trademarks listed on Schedule 1 attached
hereto (collectively, the "Products"), on the terms and subject to the
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and other good and valuable consideration, the receipt
and legal sufficiency of which are hereby mutually acknowledged, GW and Monarch
hereby covenant, contract, and agree as follows:
<PAGE> 5
ARTICLE 1
CONVEYANCE OF ASSETS; OTHER AGREEMENTS
1.01 ASSETS TO BE CONVEYED.
On the Closing Date (as defined below), and subject to the terms and
conditions of this Agreement, GW will sell, assign, convey, transfer, and
deliver to Monarch, and Monarch will purchase and accept from GW, the
following:
(a) All of GW's right, title, and interest in the United States of
America, its territories and possessions (the "Territory"), in and to the
know-how relating to the production, manufacturing, packaging, release,
validation, and stability of the Products as described or referenced in the
documents and other materials set forth on Schedule 1.01(a) attached hereto
(the "Know-How");
(b) All of GW's right, title, and interest in and to the new drug
applications (and other regulatory applications) for the Products set forth on
Schedule 1.1(b) attached hereto (collectively, the "NDAs"), including
supplements, records, and reports that are required to be kept under 21 C.F.R.
Section 314.81 (or under any comparable regulation applicable to an abbreviated
antibiotic drug application), whether issued, pending, or in draft form,
together with correspondence to or from the United States Food and Drug
Administration (the "FDA") which relates to the Products; and
(c) Subject to Section 1.09 of this Agreement, the tradedress, if any,
associated with the Products in the Territory, excluding any corporate or
division name of GW or any of its Affiliates, any logo of GW or its Affiliates,
and any trademark (other than the Trademarks, as defined in Section 1.02 below)
of GW or any of its Affiliates (the "Tradedress").
2
<PAGE> 6
All of the assets described in Sections 1.01(a) - (c) are hereinafter
sometimes referred to collectively as the "Assets."
1.02 TRADEMARK RIGHTS TO BE ASSIGNED.
On the Closing Date, and subject to the terms and conditions of this
Agreement, GW will assign to Monarch all of GW's right, title, and interest in
the Territory under the Trademark, Patent, Copyright and Know-How License
Agreement dated as of June 30, 1996 between Warner-Lambert Company and GW (the
"Warner-Lambert Agreement") in and to (and only in and to) the trademarks set
forth on Schedule 1.02 attached hereto for use in the Prescription Field (as
defined in the Warner-Lambert Agreement) (collectively, the "Trademarks").
1.03 PURCHASE PRICE.
The purchase price for the Assets and the Trademarks (the "Purchase
Price") shall be (i) Five Million Five Hundred Thousand Dollars ($5,500,000)
for the Assets and Trademark relating to Neosporin(R) and (ii) Three Million
Six Hundred Thousand Dollars ($3,600,000) for the Assets and Trademark relating
to Polysporin(R), resulting in an aggregate Purchase Price of Nine Million One
Hundred Thousand Dollars ($9,100,000).
1.04 PAYMENT.
Monarch shall pay to GW the Purchase Price as follows: (i) One Million
Dollars ($1,000,000) shall be paid to GW by Monarch by wire transfer of
immediately available funds to the account specified in Schedule 1.04 attached
hereto at the Closing (as defined below), and (ii) Monarch shall execute and
deliver to GW at the Closing a promissory note in the original principal amount
of Eight Million One Hundred Thousand Dollars ($8,100,000) in the form of
Exhibit A attached hereto (the "Note"). To secure Monarch's obligations under
the Note, Monarch shall execute and deliver to GW at the Closing a security
agreement in the form of
3
<PAGE> 7
Exhibit B attached hereto (the "Security Agreement") granting GW a security
interest and lien on the collateral described therein.
1.05 EXISTING INVENTORY OF PRODUCTS.
On the Closing Date, GW will sell, assign, convey, and transfer to
Monarch, and Monarch will purchase and accept from GW, all of GW's finished
goods inventory of the Products as set forth on Schedule 1.05 attached hereto
(the "Inventory"). The purchase price for the Inventory shall be Eight Hundred
Seventy Three Thousand, Four Hundred Ten & 37/100 Dollars ($873,410.37),
and shall be paid by Monarch to GW one hundred twenty (120) days after the
Closing by wire transfer of immediately available funds to the account
specified in Schedule 1.04. GW will begin shipping the Inventory on the Closing
Date and will complete shipping of the Inventory within ten (10) business days
after the Closing Date. All Inventory will be shipped at Monarch's expense to
Monarch's facilities in Bristol, Tennessee or such other locations as the
parties may mutually agree via a carrier designated by Monarch. GW shall bear
the risk of loss to the Inventory until the Inventory has been delivered to the
carrier designated by Monarch, thereafter Monarch shall bear the risk of loss
to the Inventory. GW will provide to Monarch (i) upon shipment of the
Inventory, GW's standard certificate of analysis for each batch of Product and
(ii) within ten (10) days of the initial shipment of each Product, a complete
copy of one representative batch record for such Product.
1.06 CLOSING.
The closing of the transactions provided for in this Agreement (the
"Closing") shall take place at 8:30 a.m. local time on November 14, 1997, or on
such other date as GW and Monarch may agree in writing (the "Closing Date"), at
the offices of GW located at Five Moore Drive, Research Triangle Park, North
Carolina.
4
<PAGE> 8
1.07 DELIVERY OF DOCUMENTS.
(a) Subject to the terms and conditions of this Agreement, GW will deliver
to Monarch at the Closing (unless otherwise specified):
(i) An irrevocable bill of sale in the form of Exhibit C hereto (the
"Bill of Sale");
(ii) An assignment and assumption agreement in the form of Exhibit D
hereto regarding GW's right to the Trademarks under the Warner-Lambert
Agreement (the "Assignment and Assumption Agreement");
(iii) Copies of the materials comprising the Know-How described on
Schedule 1.01(a) all in accordance with a time frame and in a manner reasonably
acceptable to the parties, but in no event later than thirty (30) days after
the Closing Date; and
(iv) A complete copy of the NDAs and other materials described in
Section 1.01(b), all in accordance with a time frame and in a manner reasonably
acceptable to the parties, but in no event later than thirty (30) days after
the Closing Date.
(b) Subject to the terms and conditions of this Agreement, Monarch will
deliver to GW at the Closing:
(i) The Note
(ii) The Security Agreement; and
(iii) Uniform Commercial Code Financing Statements in appropriate
form for filing with the offices of the Tennessee Secretary of State and the
Register of Deeds of Sullivan County, Tennessee listing Monarch as debtor and
GW as secured party covering the collateral described in the Security
Agreement.
5
<PAGE> 9
1.08 CONVEYANCE OF ASSETS AND INVENTORY.
The Assets and the Inventory shall be transferred and conveyed to Monarch
free and clear of all liens, claims, charges, encumbrances, or restrictions,
except as specifically described on Schedule 1.08 attached hereto.
1.09 SCOPE OF MONARCH'S RIGHTS.
(a) Monarch hereby acknowledges and agrees that: (i) GW manufactures,
sells, and distributes one or more pharmaceutical products outside of the
Territory that are equivalent or substantially equivalent to the Products and
that GW will continue to do so after the Closing Date; (ii) neither Monarch nor
its Affiliates shall interfere with, or have the right to prohibit, the
development, manufacture, sale, or distribution of the Products outside the
Territory; (iii) Monarch will acquire no right, title, or interest whatsoever
in any property or assets of GW or any of GW's Affiliates except as expressly
set forth in this Agreement, including no right, title, or interest to any
property or assets outside the Territory; (iv) neither Monarch nor its
Affiliates shall use or disclose the Know-How outside of the Territory; and (v)
neither Monarch nor its Affiliates shall manufacture, market, distribute, or
sell any of the Products outside of the Territory or knowingly cause the
Products to be manufactured, marketed, distributed, or sold outside the
Territory.
(b) Monarch acknowledges and agrees that GW and its Affiliates shall be
entitled to use the Trademarks and the Know-How after Closing only to the
extent necessary to fulfill GW's obligations hereunder, under the Supply
Agreement (as defined below), or under applicable laws or regulations.
(c) GW shall not, and shall not permit any of its Affiliates to, for a
period of five (5) years from the Closing Date, except as provided in the
Supply Agreement, sell, produce,
6
<PAGE> 10
manufacture, market, or distribute in the Territory any products in the
Prescription Field which contain the active ingredients set forth on Schedule
1.09(c) attached hereto ("Identical Products"); and neither GW nor its
Affiliates shall knowingly cause the Products to be manufactured, marketed,
distributed, or sold inside the Territory; provided, however, that this Section
1.09(c) shall not apply to any products produced, sold, manufactured, marketed,
or distributed by any business (or any portion thereof), person, or group of
persons, which is acquired by, or which acquires, or which forms a merger with
GW or any of its Affiliates (whether through the formation of a new holding
company or otherwise), in a single transaction or a series of related
transactions. GW agrees that neither GW nor its Affiliates shall use or
disclose the Know-How inside the Territory.
(d) Nothing in this Section 1.09 shall prohibit (i) the manufacture, sale
or distribution by or on behalf of GW of any Identical Products in the
Non-Prescription Field (as defined in the Warner-Lambert Agreement) in the
Territory or otherwise; (ii) the manufacture by GW or any of its Affiliates of
any Identical Products in the Territory for sale or distribution outside the
Territory; or (iii) the provision by GW or any of its Affiliates of assistance
to the purchaser of any manufacturing facility previously owned by GW or any of
its Affiliates that is of the type of assistance that is customarily provided
by sellers of manufacturing facilities to purchasers of such facilities and
that relates solely to manufacturing.
(e) The parties acknowledge that the Inventory purchased under this
Agreement and the Products to be supplied under the Supply Agreement may
contain packaging and labeling with the names, logos, and trademarks of GW and
its Affiliates (the "GW Packaging Materials"). Monarch may distribute such
Inventory and Products with the GW Packaging Materials; however, Monarch shall
not, and shall have no right to, use such names, logos, or trademarks for any
other
7
<PAGE> 11
purpose and Monarch shall acquire no right, title, or interest in or to such
names, logos, and trademarks
(f) Notwithstanding Section 1.09(e) above, (i) Monarch shall use its
reasonable best efforts to make all necessary arrangements as soon as possible
so that Monarch will ship all Products (other than the Inventory) without the
use of any GW Packaging Materials, including obtaining all necessary packaging
and labeling materials to do so and related regulatory approvals and, in any
event, by February 1, 1998, Monarch shall distribute all such Products without
the use of any GW Packaging Materials, (ii) if any changes of packaging and
labeling described in this subsection (f) render obsolete or unusable any
packaging or labeling materials or components acquired by GW for the Products,
then Monarch shall purchase from GW at GW's Acquisition Cost (as defined in the
Supply Agreement) all such packaging and labeling materials or components
rendered obsolete or unusable, and (iii) Monarch will purchase, at its expense,
all tooling and/or equipment necessary to package and label the Products
without GW Packaging Materials as contemplated by this subsection (f), except
the tools, dies, molds, and the like used exclusively in the manufacture of the
Products, if any, referenced in Section 1.12 of this Agreement.
1.10 SUPPLY AGREEMENT.
Contemporaneously with the execution of this Agreement, GW and Monarch are
entering into a supply agreement (the "Supply Agreement") under which GW agrees
to supply, and Monarch agrees to purchase, certain of the Products on the terms
and conditions more specifically described therein, and which provides for
certain other matters.
8
<PAGE> 12
1.11 TAXES.
Monarch shall be responsible for and shall promptly pay all federal,
state, and local transfer, sales, and other taxes, if any, levied or imposed as
a result of the transactions contemplated by this Agreement, excluding any tax
payable on any income or gain of GW.
1.12 TOOLS, DIES, MOLDS.
As soon as reasonably practicable after the Closing, GW will notify its
component suppliers for the Products that GW's right, title, and interest in
the tools, dies, molds, and the like used exclusively in the manufacture of
such components, if any, have been transferred to Monarch. GW, upon the
reasonable request of Monarch, will execute and deliver such instruments and
documents as reasonably necessary to evidence such transfer.
ARTICLE 2
ACCOUNTS RECEIVABLE AND RETURNED GOODS
2.01 PRE-CLOSING ACCOUNTS RECEIVABLE.
GW and Monarch agree that any accounts receivable or invoices arising out
of sales of the Products by or on behalf of GW on or prior to 11:59 p.m. (E.S
T.) on the Closing Date shall inure to the benefit of GW.
2.02 POST-CLOSING ACCOUNTS RECEIVABLE.
Monarch and GW agree that any accounts receivable or invoices arising out
of sales of the Products by or on behalf of Monarch after 11:59 p.m. (E.S.T.) on
the Closing Date shall inure to the benefit of Monarch.
2.03 RETURNED GOODS.
Except as otherwise expressly set forth below and subject to Monarch's
timely compliance with its obligations set forth in this Section 2.03 and
Section 2.04, GW and Monarch agree that
9
<PAGE> 13
during the one (1) year period immediately following the Closing Date, GW shall
be responsible for handling returns of all Products that were sold by GW prior
to the Closing Date and that are returned by customers for credit after the
Closing Date. GW shall handle such returns during such period in accordance with
its then applicable returned goods policy. Monarch agrees to provide GW with any
information reasonably requested by GW from time to time regarding Monarch's
selling prices for the Products in order to assist GW in its determination of
the reimbursement prices for returned Products. Such information shall be
provided by Monarch to GW promptly, and in any event within ten (10) days, after
GW's written request therefor. In the event that during such one (1) year period
any returns are delivered to Monarch, such returns shall be shipped by Monarch
to GW and GW shall reimburse Monarch for the shipping costs incurred.
2.04 EXCESS RETURNED GOODS.
(a) Notwithstanding Section 2.03, or any other provisions of this
Agreement, to the extent the aggregate amount of all credits for returned
Products granted by GW from and after the Closing Date exceeds Six Hundred
Thousand Dollars ($600,000) (the "Excess Aggregate Amount"), Monarch agrees to
reimburse GW for the Excess Aggregate Amount promptly, and in any event within
thirty (30) days, after written demand therefor by GW; provided, however, that
any credits granted by GW for any Products as a result of any product
withdrawal or recall by GW (other than a withdrawal or recall resulting from
acts or omissions of Monarch, its Affiliates, or their respective employees,
agents, or distributors) shall not be included for purposes of determining
whether credits for returned goods granted by GW in respect of the Products
exceed the Excess Aggregate Amount. GW shall submit to Monarch any request for
an Excess
10
<PAGE> 14
Aggregate Amount within one hundred twenty (120) days following the end of the
one (1) year period described in Section 2.03.
(b) From time to time during the one (1) year period described in Section
2.03, but no more than once every ninety (90) calendar days from the Closing
Date, GW, upon Monarch's written request, shall provide Monarch with
information related to aggregate amounts of credits extended for returned
Products and the methodology of calculating the same. In the event GW claims
that an Excess Aggregate Amount is owed to it, then Monarch shall have ten (10)
days within which to request in writing an audit (either by Monarch or its duly
authorized agents) of GW's records relative to the claimed Excess Aggregate
Amount. Further, if Monarch requests such an audit in accordance with this
Section, then GW shall permit Monarch or its duly authorized agents to audit
all necessary and reasonable information related to the actual goods returned
and GW's valuation of such goods in order to confirm the accuracy of the
claimed Excess Aggregate Amount. All persons or entities conducting or involved
in such audit shall execute a written agreement to maintain in confidence all
information obtained during the course of any such audit except for disclosure
to Monarch. Each such audit shall be conducted during GW's normal business
hours. In no event shall such audit exceed three (3) business days in duration,
and in all cases Monarch shall use its reasonable efforts to ensure that such
audits are conducted so as not to interfere with the normal and ordinary
operation of GW's business. Monarch shall be responsible for all of its and its
agents' costs and expenses incurred in connection with such audit. In the event
of an audit regarding an Excess Aggregate Amount pursuant to this Section
2.04(b), the date on which the payment of such Excess Aggregate Amount is due
pursuant to Section 2.04(a) shall be postponed until such audit is completed or
is required to be completed pursuant to this Section 2.04(b).
11
<PAGE> 15
ARTICLE 3
REGULATORY MATTERS
3.01 FILINGS WITH FDA REGARDING TRANSFER OF NDAS.
At the Closing, the parties shall file with the FDA the information
required pursuant to 21 C.F.R. Section 314.72, or any successor regulation
thereto, regarding the transfer of the NDAs from GW to Monarch. GW shall file
the information required of a former owner, and Monarch shall file the
information required of a new owner. The parties also agree to use their
reasonable best efforts to take any and all other actions required by the FDA,
or other necessary governmental agencies, if any, to effect the transfer of the
NDAs from GW to Monarch. GW may retain an archival copy of the NDAs, including
supplements and records that are required to be kept under 21 C.F.R. Section
314.81, and GW shall treat such archived copies as Confidential Information (as
defined in the Supply Agreement) of Monarch and disclosure of such information
shall be governed by the Supply Agreement.
3.02 RESPONSIBILITY FOR THE PRODUCTS.
(a) After the Closing, Monarch shall assume all regulatory
responsibilities permitted by applicable laws and regulations to be assumed by
Monarch, reporting and otherwise, in connection with the Products and the NDAs
including, but not limited to, responsibility for reporting any adverse drug
experiences in connection with the Products, and responsibility for compliance
with the Prescription Drug Marketing Act of 1987, as the same may be amended
from time to time.
(b) Monarch and its Affiliates agree promptly to submit to GW all adverse
drug experience information or customer complaints brought to the attention of
Monarch or its Affiliates in respect of the Products, as well as any material
events and matters concerning or
12
<PAGE> 16
affecting the safety or efficacy of the Products. GW and its Affiliates agree
promptly to submit to Monarch all adverse drug experience information or
customer complaints brought to the attention of GW or its Affiliates in respect
of the Products, as well as any material events and matters concerning or
affecting the safety or efficacy of the Products. Monarch and GW agree to
determine promptly after Closing a mutually agreeable reporting procedure to
communicate the information required by this Section 3.02(b).
(c) After the Closing, Monarch shall assume all responsibility for any and
all FDA fee obligations for holders or owners of approved New Drug Applications
and approved, marketed prescription drug products relating to the Products,
including, but not limited to, those defined under the Prescription Drug User
Fee Act of 1992, as the same may be amended from time to time.
(d) Promptly after the Closing, Monarch shall take all actions necessary
or required under applicable laws, rules, and regulations, to reflect that the
Assets are owned by Monarch and that Monarch has responsibility therefor.
(e) After the Closing, GW shall direct all complaints or inquiries
concerning the Products in the Territory to Monarch to the attention of Medical
Affairs Department, at facsimile number 423-989-6137
3.03 REBATES FOR AMOUNTS PAID UNDER GOVERNMENT PROGRAMS.
Monarch shall reimburse GW for all rebates GW is obligated to pay pursuant
to any government rebate program for amounts charged to GW's NDC codes for the
Products with respect to sales of the Products from thirty (30) days after the
Closing Date. All payments due under this Section 3.03 shall be made promptly
to GW upon submission to Monarch of invoices that describe the requested
payments in reasonable detail. Monarch shall obtain new NDC codes
13
<PAGE> 17
for the Products as soon as practicable after the Closing Date. In the event
Monarch disputes an amount owed under a government rebate program, GW shall
provide to Monarch copies of any documents and records evidencing original
rebate claims and any resubmissions of such claims and data relating to unit
rebate calculations in order to enable Monarch to resolve such disputed amount.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.01 REPRESENTATIONS AND WARRANTIES OF GW.
GW makes the following representations and warranties. The phrase "to the
knowledge of GW" or any substantially equivalent phrase, as used in this
Article 4, shall mean to the actual knowledge of officers and directors of GW
after reasonable inquiry.
(a) ORGANIZATION AND STANDING. GW is a corporation duly organized, validly
existing, and in good standing under the laws of the State of North Carolina.
(b) POWER AND AUTHORITY. GW has all requisite corporate power and
authority to execute, deliver, and perform this Agreement and the other
agreements and instruments to be executed and delivered by it pursuant hereto
and to consummate the transactions contemplated herein and therein. The
execution, delivery, and performance of this Agreement by GW does not, and the
consummation of the transactions contemplated hereby will not, violate any
provisions of GW's Articles of Incorporation, Bylaws, any law or regulation
applicable to GW, or any agreement, mortgage, lease, instrument, order,
judgment, or decree to which GW is a party or by which GW is bound or result in
the creation or acceleration of any lien, charge, security interest, or other
encumbrance on the Assets.
14
<PAGE> 18
(c) CORPORATE ACTION; BINDING EFFECT. GW has duly and properly taken all
action required by law, its Articles of Incorporation, its Bylaws, or otherwise,
to authorize the execution, delivery, and performance of this Agreement, the
Bill of Sale, the Supply Agreement, and the Assignment and Assumption Agreement
(collectively, the Bill of Sale, the Supply Agreement, and the Assignment and
Assumption Agreement are referred herein to as the "Collateral Agreements"), and
the other instruments to be executed and delivered by it pursuant hereto and the
consummation of transactions contemplated hereby and thereby. This Agreement has
been duly executed and delivered by GW and constitutes, and the Collateral
Agreements and the other instruments contemplated hereby when duly executed and
delivered by GW will constitute, legal, valid, and binding obligations of GW
enforceable against it in accordance with their respective terms, except as
enforcement may be affected by bankruptcy, insolvency, or other similar laws and
by general principles of equity.
(d) CONSENTS. No consent or approval of, or filing with or notice to, any
federal, state, or local governmental or regulatory authority, agency, or
department or any other person not a party to this Agreement is required or
necessary to be obtained by GW or on its behalf in connection with the
execution, delivery, and performance of this Agreement or to consummate the
transactions contemplated hereby, except as contemplated by Section 3.01 hereof
(e) OWNERSHIP OF ASSETS. GW is the owner of the Assets described in
Sections 1.01(b) and 1.01(c) and, to GW's knowledge, the Assets described in
Section 1.01(a), free and clear of all liens, claims, charges, or encumbrances,
except for liens for taxes not yet due and payable and except as described on
Schedule 1.08 attached hereto
(f) LITIGATION OR DISPUTES. Except as disclosed in Schedule 4.01(f)
attached hereto, there is no claim, outstanding commitment to any governmental
regulatory agency, action, suit,
15
<PAGE> 19
proceeding, investigation, or arbitration pending or, to GW's knowledge,
threatened against GW relating to the Assets or the Trademarks, and GW is not
in violation of or in default with respect to any applicable law, rule,
regulation, judgment, order, writ injunction, award, or decreee of any
arbitrator, court, or administrative body, the result of any of which, either
individually or cumulatively, would have a materially adverse effect on the
Assets or the Trademarks in the Territory or GW's compliance with and
perforance under the terms of this Agreement or the Collateral Agreements.
(g) TRADEMARKS; INTELLECTURAL PROPERTY. Schedule 1.02 attached hereto is a
true and correct list of all trademarks used by GW in the manufacture,
marketing, and sale of the Products in the Territory. The Trademarks are the
only trademarks used in connection with or otherwise necessary for the conduct
of GW's business as now conducted for the Products in the Territory. GW owns no
patents necessary for the doncudt of GW's business as now conducted for the
Products in the Territory. GW has not received any notice of any claim that any
of the Assets or the Trademarks infringe on any property rights of any other
party. There is no claim, action, suit, or proceeding, pending or, to GW's
knowledge, threatened alleging that the use by GW or its Affiliates of the
Trademarks or the Know-How infringes any parents or other intellectual property
rights of third parties. GW has not executed or granted to any Affiliate or
any third party in the Territory any license, sublicense, or contract covering
the Trademarks or the Know-How.
(h) COMPLIANCE WITH LAW. GW has, to its knowledge, conducted its
operations in connection with the manufacture and sale of the Products in
material compliance with all applicable federal, state, and local laws and
regulations, including FDA regulations, and possesses all approvals, consents,
licenses, and permits required for the conduct of its business as now
16
<PAGE> 20
conducted for the Products or as will be necessary to perform its obligations
under the Supply Agreement.
(i) WARRANTY AND DISCLAIMER OF WARRANTIES. GW warrants that the Inventory
was manufactured in accordance with the then-applicable specifications for the
Products and in accordance with current good manufacturing practices in effect
at the time of manufacture. GW further warrants that the Inventory, when
delivered to Monarch, will not be (i) adulterated or misbranded by GW within
the meaning of the United States Federal Food, Drug and Cosmetic Act, as
amended (the "FD&C Act") or (ii) an article that may not be introduced into
interstate commerce under the provisions of Sections 404 or 505 of the FD&C Act.
Set forth on Schedule 1.05 attached hereto is a list accurate in all material
respects of the expriation dates of the Inventory. WITH RESPECT TO THE
INVENTORY, GW MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, AND SPECIFICALLY
MAKES NO WARRANTY OF MERCHANTABILITY OR WARRANTY OF FITNESS FOR ANY PARTICULAR
PURPOSE.
(j) RECALLS OR WITHDRAWALS. During the period commencing on June 30, 1996,
and ending on the date hereof, there have been no: (i) Products which have been
recalled or withdrawn by GW or its Affiliates in the Territory (whether
voluntarily or otherwise) or (ii) proceedings in the Territory brought against
GW or its Affiliaits (whether such proceedigns have since been completed or
remain pending) seeking the recall, withdrawal or seizure of any of the
Products or seeking to enjoin GW or any of its Affiliates from distributing
such Products.
(k) FACILITIES AND MANUFACTURING. Except as set forth on Schedule 4.01(k)
attached hereto, and only to the extent it could have a material adverse effect
on the Assets or GW's performance hereunder or under any of the Collateral
Agreements, during the period commencing
17
<PAGE> 21
on June 30, ]996, and ending on the date hereof, with respect only to the
Products, neither GW nor its Affiliates have received or been subject to: (i)
any FDA Form 483's relative to the Products; (ii) any FDA Notices of Adverse
Findings relative to the Products; or (iii) warning letters or other
correspondence from the FDA or any other governmental officials or agencies
concerning the Products in which the FDA or other such governmental officials
or agencies asserted that the operations of GW were not in compliance with
applicable law, regulations, rules, or guidelines.
(l) Since June 30, 1996, GW has conducted its business relating to the
Products in the ordinary course of its business in all material respects and,
since June 30, 1996, through the date hereof, GW has not offered any
extraordinary rebates, discounts, or any other promotion or marketing
incentives relating to the Products other than in the ordinary course of its
business.
4.02 REPRESENTATIONS AND WARRANTIES OF MONARCH.
Monarch represents and warrants to GW as follows:
(a) ORGANIZATION AND STANDING. Monarch is a corporation duly organized,
validly existing and in good standing under the laws of the State of Tennessee.
(b) POWER AND AUTHORITY. Monarch has all requisite corporate power and
authority to execute, deliver, and perform this Agreement and the other
agreements and instruments to be executed and delivered by it pursuant hereto
and to consummate the transactions contemplated herein and therein. The
execution, delivery, and performance of this Agreement by Monarch does not, and
the consummation of the transactions contemplated hereby will not, violate any
provision of Monarch's Articles of Incorporation, Bylaws, any law or regulation
applicable to Monarch, or any agreement, mortgage, lease, instrument, order,
judgment, or decree to which Monarch is a party or by which Monarch is bound.
18
<PAGE> 22
(c) CORPORATE ACTION; BINDING EFFECT. Monarch has duly and properly taken
all action required by law, its Articles of Incorporation, its Bylaws, or
otherwise, to authorize the execution, delivery, and performance by it of this
Agreement, the Note, the Security Agreement, the Collateral Agreements, and the
other instruments to be executed by it pursuant hereto and the consummation of
the transactions contemplated hereby and thereby. This Agreement has been duly
executed and delivered by Monarch and constitutes, and the Collateral
Agreements and the other instruments contemplated hereby when duly executed and
delivered by Monarch will constitute, legal, valid, and binding obligations of
Monarch enforceable against it in accordance with their respective terms,
except as enforcement may be affected by bankruptcy, insolvency, or other
similar laws and by general principles of equity
(d) ACCESS TO INFORMATION. After the Closing, Monarch agrees to cooperate
with GW and to grant to GW and its employees, attorneys, accountants, officers,
representatives, and agents, during normal business hours and upon ten (10)
days' advance notice, reasonable access to Monarch's management personnel and
to the records relating to the Products (including, without limitation, the
NDAs) and to permit copying at GW's expense or, where reasonably necessary, to
loan original documents relating to the Assets during the period the Assets
were owned by GW for the sole purposes of (i) any financial reporting or tax:
matters (including, without limitation, any financial and tax audits, tax
contests, tax examination, preparation of any GW tax returns or financial
records) relating to the Products; (ii) any claims or litigation involving GW
and the Assets relating to the Products; (iii) any investigation of GW being
conducted by any federal, state, or local governmental authority relating to
the Products; (iv) any matter relating to any indemnification or representation
or warranty or any other term of this Agreement; or (v) any similar or related
matter. Monarch shall maintain all such records and documents in the United
19
<PAGE> 23
States and shall not destroy or dispose of any such records and documents
without the prior written consent of GW. GW shall use its reasonable efforts to
ensure that its access to and requests for records and documents pursuant to
this Section are conducted so as not to interfere with the normal and ordinary
operation of Monarch's business. GW acknowledges that the records and documents
made available to GW by Monarch pursuant to this Section constitute
Confidential Information (as defined in the Supply Agreement) of Monarch and
disclosure of such information shall be governed by the Supply Agreement.
(e) CONSENTS. No consent or approval of, or filing with or notice to, any
federal, state, or local governmental or regulatory authority, agency, or
department or any other person not a party to this Agreement is required or
necessary to be obtained by Monarch or on its behalf in connection with the
execution, delivery, and performance of this Agreement or to consummate the
transactions contemplated hereby, except as contemplated by Section 3.01
hereof.
4.03 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
The representations, warranties, and indemnities of the parties hereto
contained in this Article 4 and in Article 5 shall survive the Closing Date for
a period equal to three (3) years, except that Section 4.01(e) (Ownership of
Assets) and the indemnification with respect thereto shall survive the Closing
Date for a period equal to five (5) years.
4.04 CERTAIN LIMITATIONS.
GW does not make any representation or warranty as to the business
prospects of the Products. Monarch has conducted its own review and analysis,
as it deemed necessary and appropriate, of the business prospects of the
Products and is not relying on any representations or warranties from GW as to
the business prospects.
20
<PAGE> 24
ARTICLE 5
INDEMNIFICATION
5.01 INDEMNIFICATION BY GW.
(a) GW hereby indemnifies, defends, and holds harmless Monarch from and
against any and all damage, loss, liability, and expense (including, without
limitation, reasonable attorneys' fees and expenses) (collectively,
"Indemnified Amounts") arising out of any misrepresentation or breach of
warranty, covenant, or agreement made or to be performed by GW pursuant to this
Agreement or the Collateral Agreements; provided, however, that GW shall not
have any obligation to indemnify Monarch from and against any Indemnified
Amounts: (i) until Monarch has incurred Indemnified Amounts in excess of a
Fifty Thousand Dollar ($50,000) deductible (after which point GW will be
obligated only to indemnify Monarch from and against further such Indemnified
Amounts) or thereafter (ii) to the extent the Indemnified Amounts Monarch has
incurred exceed a Four Million Five Hundred Fifty Thousand Dollar ($4,550,000)
aggregate ceiling (after which point GW will have no obligation to indemnify
Monarch from and against further such Indemnified Amounts).
(b) GW shall not be liable under this Section 5.01 for any settlement
effected without its consent of any claim, litigation, or proceeding in respect
of which indemnity may be sought hereunder, which consent shall not
unreasonably be withheld.
5.02 INDEMNIFICATION BY MONARCH.
(a) Monarch hereby indemnifies, defends, and holds harmless GW from and
against any and all Indemnified Amounts arising out of any misrepresentation or
breach of warranty, covenant, or agreement made or to be performed by Monarch
pursuant to this Agreement or the Collateral Agreements; provided, however,
that Monarch shall not have any obligation to
21
<PAGE> 25
indemnify GW from and against any Indemnified Amounts until GW has incurred
Indemnified Amounts in excess of a Fifty Thousand Dollar ($50,000) deductible
(after which point Monarch will be obligated only to indemnify GW from and
against further such Indemnified Amounts).
(b) Monarch shall not be liable under this Section 5.02 for any settlement
effected without its consent of any claim, litigation or proceeding in respect
of which indemnity may be sought, which consent shall not unreasonably be
withheld.
5.03 PAYMENTS.
All amounts payable under this Article 5 shall be paid promptly after
receipt by the indemnifying party of written notice from the indemnified party
stating that such Indemnified Amounts have been incurred, the amount thereof
and of the related indemnity payment and substantiation of such amount and such
indemnity payment; provided, however, any disputed amounts shall be due and
payable promptly after such amounts are finally determined to be owing by the
indemnifying party to the indemnified party.
5.04 CONDUCT OF LITIGATION.
Each party indemnified under the provisions of this Agreement, upon
receipt of written notice of any claim or the service of a summons or other
initial legal process upon it in any action instituted against it, in respect
of the agreements contained in this Agreement, shall promptly give written
notice of such claim, or the commencement of such action, or threat thereof, to
the party from whom indemnity shall be sought hereunder; provided, however, the
failure to provide such notice within a reasonable period of time shall not
relieve the indemnifying party of any of its obligations hereunder except to
the extent the indemnifying party is prejudiced by such failure. Each
indemnifying party shall be entitled at its own expense to participate in the
defense of such claim or action, or, if it shall elect, to assume such defense,
in which event such defense shall be
22
<PAGE> 26
conducted by counsel chosen by such indemnifying party, which counsel may be
any counsel reasonably satisfactory to the indemnified party against whom such
claim is asserted or who shall be the defendant in such action, and such
indemnified party shall bear all fees and expenses of any additional counsel
retained by it or them. Notwithstanding the immediately preceding sentence, if
the named parties in such action (including impleaded parties) include the
indemnified and the indemnifying parties, and the indemnified party shall have
been advised by counsel that there may be a conflict between the positions of
the indemnifying party and the indemnified party in conducting the defense of
such action or that there are legal defenses available to such indemnified party
different from or in addition to those available to the indemnifying party, then
counsel for the indemnified party shall be entitled, if the indemnified party so
elects, to conduct the defense to the extent reasonably determined by such
counsel to be necessary to protect the interests of the indemnified party, at
the expense of the indemnifying party, if it is determined by agreement of the
indemnifying party and the indemnified party or by a court of competent
jurisdiction that the indemnified party is entitled to indemnification hereunder
for the Indemnified Amounts giving rise to such action. If the indemnifying
party shall elect not to assume the defense of such claim or action, such
indemnifying party shall reimburse such indemnified party for the reasonable
fees and expenses of any counsel retained by it, and shall be bound by the
results obtained by the indemnified party in respect of such claim or action if
it is determined by agreement of the indemnifying party and the indemnified
party or by a court of competent jurisdiction that the indemnified party is
entitled to indemnification hereunder for the Indemnified Amounts giving rise to
such action, provided, however, that no such claim or action shall be settled
without the written consent of the indemnifying party.
23
<PAGE> 27
ARTICLE 6
MISCELLANEOUS
6.01 ENTIRE AGREEMENT.
This Agreement, the Note, the Security Agreement, and the Collateral
Agreements constitute the entire agreement between GW and Monarch with respect
to the subject matter hereof and thereof and supersede all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and thereof. This Agreement or any provision hereof
cannot be amended, changed, supplemented, or waived except in a writing signed
by each of the parties hereto.
6.02 COUNTERPARTS.
This Agreement and any amendment or supplement hereto may be executed in
several counterparts, each of which shall be deemed to be an original, and all
of which taken together shall constitute one and the same instrument.
6.03 BROKERAGE AND OTHER COMMISSIONS.
GW and Monarch each represent and warrant to the other that all
negotiations relative to this Agreement and the transactions contemplated
hereby have been carried on by each directly with the other without
intervention of any broker, finder, or other intermediary and that, subject to
the provisions of Article 5, each indemnifies the other and holds it harmless
against any claim against the other for brokerage or other commissions relating
to this Agreement or to the transactions contemplated hereby by any person
claiming to have been engaged as a broker or finder by the indemnifying party.
24
<PAGE> 28
6.04 NOTICES.
All notices and other communications required or permitted under this
Agreement shall be in writing and shall be delivered personally or sent by: (a)
registered or certified mail, return receipt requested; (b) a nationally
recognized courier service guaranteeing next-day delivery, charges prepaid; or
(c) facsimile (with the original promptly sent by any of the foregoing
manners). Any such notices shall be addressed to the receiving party at such
party's address set forth below, or at such other address as may from time to
time be furnished by similar notice by either party.
If to GW:
Glaxo Wellcome Inc.
Five Moore Drive
Research Triangle Park, North Carolina 27709
Attention: Company Secretary
Facsimile No.: 919-483-0265
If to Monarch:
Monarch Pharmaceuticals, Inc.
355 Beecham Street
Bristol, Tennessee 37620
Attention: President
Facsimile No.: 423-989-8136
With a copy to:
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
Attention: Legal Department
Facsimile No.: 423-989-6282
Any such notice or communication shall be effective upon such personal
delivery or delivery to such courier, upon transmission by facsimile, or three
(3) days after it is sent by such
25
<PAGE> 29
registered or certified mail, as the case may be. Copies shall be sent in the
same manner as originals.
6.05 ASSIGNMENT.
Neither party may assign its rights or obligations under this Agreement
without the prior written consent of the other party; provided, however, that
either party may assign its rights and obligations under this Agreement,
without the prior written consent of the other party, to an Affiliate or to a
successor of the assigning party's business by reason of merger, sale of all or
substantially all of its assets or similar transaction, provided that such
successor agrees in writing to be bound by this Agreement. Such consent shall
not be unreasonably withheld. Any purported assignment without a required
consent shall be void. Any permitted assignee shall assume all obligations of
its assignor under this Agreement. No assignment shall relieve either party of
its responsibility for the performance of any obligation which accrued prior to
the effective date of such assignment. For the avoidance of doubt, the parties
acknowledge that no consent of GW shall be required for the sale by Monarch of
the Assets.
6.06 GOVERNING LAW.
THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED IN ALL RESPECTS UNDER AND
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REGARD TO
THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
6.07 HEADINGS.
The table of contents and all headings used in this Agreement are for
convenience of reference only and shall not affect the interpretation of this
Agreement.
26
<PAGE> 30
6.08 EXPENSES.
All legal and other costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
6.09 SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and shall inure to the benefit of the
parties and their respective successors and permitted assigns.
6.10 AGREEMENT TO TAKE NECESSARY AND DESIRABLE ACTIONS.
GW and Monarch each agree to execute and deliver such other documents,
certificates, agreements, and other writings and to take such other actions as
may be reasonably necessary in order to consummate or implement expeditiously
the transactions contemplated by this Agreement.
6.11 NO IMPLIED WAIVER.
No failure or delay on the part of the parties hereto to exercise any
right, power, or privilege hereunder or under any instrument executed pursuant
hereto shall operate as a waiver; nor shall any single or partial exercise of
any right, power, or privilege preclude any other or further exercise thereof
or the exercise of any other right, power, or privilege. All rights and
remedies granted herein shall be cumulative and in addition to other rights and
remedies to which the parties may be entitled at law or in equity.
6.12 FORCE MAJEURE.
Any delay in the performance of any of the obligations of either party
hereto (except the payment of money owed) shall not be considered a breach of
this Agreement and the time required for performance shall be extended for a
period equal to the period of such delay, provided that such delay is due to:
acts of God, weather, fire, explosion; invasion, riot or other
27
<PAGE> 31
civil unrest; governmental laws, orders, restrictions, actions, embargoes or
blockades; national or regional emergency, injunction, strikes, lock-outs,
labor trouble or other industrial disturbances; inability to obtain or
interruption of materials, labor, containers, fuel or transportation; or any
other cause beyond the control of the affected party. The party so affected
shall give prompt notice to the other party of such cause and shall use its
reasonable efforts to relieve the effect of such cause as rapidly as possible.
6.13 CONFIDENTIALITY.
GW and Monarch have entered into a Confidential Disclosure Agreement dated
as of May 30, 1996 and a Confidential Disclosure Agreement dated November 3,
1997 (collectively, the "Disclosure Agreement").
6.14 RELATIONSHIP.
Nothing in this Agreement shall be deemed to create an agency, joint
venture, amalgamation, partnership, or similar relationship between Monarch and
GW.
6.15 SEVERABILITY.
In case any provision of this Agreement shall be held to be invalid,
illegal, or unenforceable, the validity, legality, or enforceability of the
remaining provisions hereof will not in any way be affected or impaired
thereby.
6.16 PRESS RELEASE.
On the Closing Date, the parties shall issue a joint press release
regarding the sale of the Assets, and GW shall, in cooperation with Monarch,
inform any customer who places a purchase order with GW for the Products that
the Assets have been sold to Monarch. As soon as practicable after the Closing,
GW shall send to all of its current wholesalers and distributors a
28
<PAGE> 32
letter, in form and substance mutually agreeable to GW and Monarch, on GW
letterhead informing them of the sale of the Assets to Monarch.
6.17 AFFILIATES.
As used in this Agreement, "Affiliate" shall mean any corporation or
non-corporate entity that controls, is controlled by, or is under common control
with the party. A corporation or non-corporate entity shall be regarded as in
control of another corporation if it owns or directly or indirectly controls at
least fifty percent (50%) of the voting stock of the other corporation or (A) in
the absence of the ownership of at least of fifty percent (50%) of the voting
stock of a corporation or (B) in the case of a non-corporate entity, the power
to direct or cause the direction of the management and policies of such
corporation or non-corporate entity, as applicable.
6.18 WAIVER OF BULK SALES.
GW and Monarch waive compliance with any bulk sales law or similar law in
connection with the consummation of the transactions contemplated herein.
6.19 EXHIBITS AND SCHEDULES.
All Exhibits and Schedules referred to herein form an integral part of
this Agreement and are incorporated into this Agreement by reference.
6.20 GUARANTY.
King Pharmaceuticals, Inc., a Tennessee corporation ("King"), irrevocably
and unconditionally guarantees the full and punctual performance of all of the
obligations of Monarch (or any Affiliate to whom Monarch assigns any right or
obligation under this Agreement) contained in or arising out of this Agreement,
the Note, the Security Agreement, and the Assignment and Assumption Agreement,
including, but not limited to, payment when due of all
29
<PAGE> 33
amounts owed by Monarch to GW hereunder and thereunder. This is a guaranty of
payment and performance and not of collection.
King consents and agrees that, without the necessity of any reservation of
rights against it, the whole or any part of the security now or hereafter held
for the Note may be exchanged, compromised, or surrendered from time to time;
the time or place of payment of the Note or of any security therefor may from
time to time be extended, in whole or in part, to a time certain or otherwise,
and may be renewed, in whole or in part; Monarch may be granted indulgences
generally; and any of the provisions of this Agreement, the Note, the Security
Agreement, or the Assignment and Assumption Agreement may be modified or
waived, all without notice to or further assent by King, who shall remain
bound, notwithstanding any such exchange, compromise, surrender, extension,
renewal, modification, indulgence, or release.
King expressly waives: (a) presentment and demand for payment of the Note
or of payment or performance under this Agreement or the Security Agreement;
(b) protest and notice of dishonor or of default to King or to any other party
with respect to the Note or with respect to any security therefor; (c) any
diligence in collecting the Note or this guaranty or protecting or realizing
upon any security therefor; (d) any duty or obligation on the part of GW to
ascertain the validity, extent, or nature of any security for the Note, or any
insurance or other rights respecting such security, or the liability of any
party primarily or secondarily liable for payment of the Note or liable upon
any security therefor, or to take any steps or action to safeguard, protect,
handle, obtain, or convey information respecting, or otherwise follow in any
manner, any such security, insurance, or other rights; (e) any duty or
obligation on GW to proceed to collect payment of the Note from, or to commence
an action against, Monarch or any other person, or to resort to any security
despite any notice or request of King to do so; (f) any rights of King pursuant
to North
30
<PAGE> 34
Carolina General Statute Chapter 26 or any similar or subsequent law; (g) all
other notices to which King might otherwise be entitled; (h) any defense
relative to the financial condition of Monarch; and (i) demand for payment or
performance under this guaranty.
Until all obligations of Monarch under this Agreement, the Note, the
Security Agreement, and the Assignment and Assumption Agreement shall have been
fully paid to GW or otherwise performed, King shall not be released by any act
or thing which might, but for this provision, be deemed a legal or equitable
discharge of a surety, or by reason of any waiver, extension, modification,
forebearance or delay or other act or omission of GW or its failure to proceed
promptly or otherwise, or by reason of any action taken or omitted or
circumstance which may or might vary the risk or affect the rights or remedies
of King, or by reason of any further dealings between Monarch and King, and
King hereby expressly waives and surrenders any defense to its liability
hereunder based upon any of the foregoing acts, omissions, agreements, or
waivers; it being the purpose and intent of King and GW that the obligations of
King hereunder are absolute and unconditional under any and all circumstances.
Upon the payment of all such obligations, GW agrees to take such action as may
be required by the Security Agreement.
This guaranty shall continue to be effective, or be reinstated, as the
case may be, if at any time payment of any of the obligations under the Note or
any security therefor, or any part thereof, is rescinded or must otherwise be
restored or returned by GW upon the insolvency, bankruptcy, dissolution,
liquidation, or reorganization of Monarch, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, Monarch or any substantial part of its property, or otherwise, all
as though such payments had not been made.
31
<PAGE> 35
King is executing this Agreement for the sole purpose of agreeing to its
guaranty obligations set forth in this Section 6.20. Monarch and King represent
and warrant to GW that Monarch is a wholly-owned subsidiary of King.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
GLAXO WELLCOME INC.
By: /s/ Dean J. Mitchell
----------------------------------------
Name: Dean J. Mitchell
Title: Vice President
MONARCH PHARMACEUTICALS, INC.
By: /s/ John Bellamy
----------------------------------------
Name: John Bellamy
Title: Authorized Agent
KING PHARMACEUTICALS, INC.
By: /s/ Jefferson J. Gregory
----------------------------------------
Name: Jefferson J. Gregory
Title: President
32
<PAGE> 1
EXHIBIT 10.18
CONFIDENTIAL
===============================================================================
AGREEMENT
FOR
PURCHASE AND SALE
OF ASSETS RELATING TO
SEPTRA(R), PROLOPRIM(R), MANTADIL(R),
AND KEMADRIN(R)
BY AND BETWEEN
GLAXO WELLCOME INC.
AND
MONARCH PHARMACEUTICALS, INC.
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1 CONVEYANCE OF ASSETS; OTHER AGREEMENTS.................................... 2
1.01 Assets to be Conveyed................................................. 2
1.02 Purchase Price........................................................ 3
1.03 Payment............................................................... 3
1.04 Existing Inventory of Products........................................ 3
1.05 Closing............................................................... 4
1.06 Delivery of Documents................................................. 4
1.07 Conveyance of Assetes and Inventory................................... 5
1.08 Scope of Monarch's Rights............................................. 5
1.09 Supply Agreement...................................................... 8
1.10 Taxes................................................................. 8
1.11 Tools, Dies, Molds.................................................... 8
ARTICLE 2 ACCOUNTS RECEIVABLE AND RETURNED GOODS.................................... 9
2.01 Pre-Closing Accounts Receivable....................................... 9
2.02 Post-Closing Accounts Receivable...................................... 9
2.03 Returned Goods........................................................ 9
2.04 Excess Returned Goods.................................................10
ARTICLE 3 REGULATORY MATTERS........................................................11
3.01 Filings with FDA Regarding Transfer of NDAs...........................11
3.02 Responsibility for the Products.......................................12
3.03 Rebates for Amounts Paid under Government Programs....................13
ARTICLE 4 REPRESENTATIONS AND WARRANTIES............................................14
4.01 Representations and Warranties of GW..................................14
4.02 Representations and Warranties of Monarch.............................18
4.03 Survival of Representations and Warranties............................20
4.04 Certain Limitations...................................................20
ARTICLE 5 INDEMNIFICATION...........................................................20
5.01 Indemnification by GW.................................................20
5.02 Indemnification by Monarch............................................21
5.03 Payments..............................................................22
5.04 Conduct of Litigation.................................................22
ARTICLE 6 MISCELLANEOUS.............................................................23
6.01 Entire Agreement......................................................23
6.02 Counterparts..........................................................24
6.03 Brokerage and Other Commissions.......................................24
6.04 Notices...............................................................24
6.05 Assignment............................................................25
6.06 Governing Law.........................................................26
6.07 Headings..............................................................26
6.08 Expenses..............................................................26
6.09 Successors and Assigns................................................26
6.10 Agreement to Take Necessary and Desirable Actions.....................26
6.11 No Implied Waiver.....................................................27
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
6.12 Force Majeure.........................................................27
6.13 Confidentiality.......................................................28
6.14 Relationship..........................................................28
6.15 Severability..........................................................28
6.16 Press Release.........................................................28
6.17 Affiliates............................................................28
6.18 Waiver of Bulk Sales..................................................29
6.19 Exhibits and Schedules................................................29
6.20 Guaranty..............................................................29
</TABLE>
<TABLE>
<CAPTION>
SCHEDULES
<S> <C>
Schedule 1 List of Products
Schedule 1.01(a) Trademarks
Schedule 1.01(b) Description of Know-How
Schedule 1.01(c) Regulatory Approvals and Filings
Schedule 1.03 Wiring Instructions to Glaxo Wellcome Inc.
Schedule 1.04 Inventory
Schedule 1.07 Liens, Claims, Charges, Encumbrances and Restrictions on the Assets
and the Inventory
Schedule 1.08(c) Active Ingredients for Identical Products
Schedule 4.01(f) Litigation
Schedule 4.01(k) Form 483s, Warning Letters, Etc.
EXHIBITS
Exhibit A - Note
Exhibit B - Security Agreement
Exhibit C - Bill of Sale
Exhibit D - Assignment of Trademarks
</TABLE>
ii
<PAGE> 4
AGREEMENT
THIS AGREEMENT, is dated and entered into as of November 14, 1997 (this
"Agreement"), between GLAXO WELLCOME INC., a corporation organized and existing
under the laws of the State of North Carolina, having a principal place of
business at Five Moore Drive, Research Triangle Park, North Carolina 27709
("GW") and MONARCH PHARMACEUTICALS, INC., a corporation organized and existing
under the laws of the State of Tennessee, having a principal place of business
at 355 Beecharn Street, Bristol, Tennessee 37620 ("Monarch")
WITNESSETH:
WHEREAS, GW desires to sell to Monarch, and Monarch desires to purchase
from GW, certain assets relating to GW's pharmaceutical products marketed under
the Septra(R), Proloprim(R), Mentadil(R), and Kemadrin(R) trademarks listed on
Schedule I attached hereto (collectively, the "Products"), on the terms and
subject to the conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
hereinafter set forth and other good and valuable consideration, the receipt and
legal sufficiency of which are hereby mutually acknowledged, GW and Monarch
hereby covenant, contract, and agree as follows:
<PAGE> 5
ARTICLE 1
CONVEYANCE OF ASSETS; OTHER AGREEMENTS
1.01 ASSETS TO BE CONVEYED.
On the Closing Date (as defined below), and subject to the terms and
conditions of this Agreement, GW will sell, assign, convey, transfer, and
deliver to Monarch, and Monarch will purchase and accept from GW, the following:
(a) All of GW's right, title, and interest in the United States of
America, its territories and possessions (the "Territory"), in and to the
trademarks set forth on Schedule 1.01(a) attached hereto (collectively, the
"Trademarks"), together with the goodwill of the business symbolized by the
Trademarks in the Territory;
(b) All of GW's right, title, and interest in the Territory in and to
the know-how relating to the production, manufacturing, packaging, release,
validation, and stability of the Products as described or referenced in the
documents and other materials set forth on Schedule 1.01(b) attached hereto (the
"Know-How");
(c) All of GW'S right, title, and interest in and to the new drug
applications (and other regulatory applications) for the Products set forth on
Schedule 1.01(c) attached hereto (collectively, the "NDAs"), including
supplements, records, and reports that are required to be kept under 21 C.F.R.
ss. 314.81 (or under any comparable regulation applicable to an abbreviated
antibiotic drug application), whether issued, pending, or in draft form,
together with correspondence to or from the United States Food and Drug
Administration (the "FDA") which relates to the Products; and
(d) Subject to Section 1.08(e) of this Agreement, the tradedress, if
any, associated with the Products in the Territory, excluding any corporate or
division name of GW or any of its
2
<PAGE> 6
Affiliates, any logo of GW or its Affiliates, and any trademark (other than the
Trademarks) of GW or any of its Affiliates (the "Tradedress")
All of the assets described in Sections 1.01(a) - (d) are hereinafter
sometimes referred to collectively as the "Assets." Monarch acknowledges and
agrees that the Assets do not include any assets of the type described in
Section 1.01(c) relating to Mantadil(R)).
1.02 PURCHASE PRICE.
The purchase price for the Assets (the "Purchase Price") shall be
Thirteen Million Nine Hundred Thousand Dollars ($13,900,000).
1.03 PAYMENT.
Monarch shall pay to GW the Purchase Price as follows: (i) One Million
Dollars ($1,000,000) shall be paid to GW by Monarch by wire transfer of
immediately available funds to the account specified in Schedule 1.03 attached
hereto at the Closing (as defined below), and (ii) Monarch shall execute and
deliver to GW at the Closing a promissory note in the original principal amount
of Twelve Million Nine Hundred Thousand Dollars ($12,900,000) in the form of
Exhibit A attached hereto (the "Note"). To secure Monarch's obligations under
the Note, Monarch shall execute and deliver to GW at the Closing a security
agreement in the form of Exhibit B attached hereto (the "Security Agreement")
granting GW a security interest and lien on the collateral described therein.
1.04 EXISTING INVENTORY OF PRODUCTS.
On the Closing Date, GW will sell, assign, convey, and transfer to
Monarch, and Monarch will purchase and accept from GW, all of GW's finished
goods inventory of the Products as set forth on Schedule 1.04 attached hereto
(the "Inventory"). The purchase price for the Inventory shall be Seven Hundred
Twenty Seven Thousand Six Hundred Twenty Nine & 42 Dollars ($727,629 42/100 ),
3
<PAGE> 7
and shall be paid by Monarch to GW one hundred twenty (120) days after the
Closing by wire transfer of immediately available funds to the account specified
in Schedule 1.03. GW will begin shipping the Inventory on the Closing Date and
will complete shipping of the Inventory within ten (10) business days after the
Closing Date. All Inventory will be shipped at Monarch's expense to Monarch's
facilities in Bristol, Tennessee or such other locations as the parties may
mutually agree via a carrier designated by Monarch. GW shall bear the risk of
loss to the Inventory until the Inventory has been delivered to the carrier
designated by Monarch, thereafter Monarch shall bear the risk of loss to the
Inventory. GW will provide to Monarch (i) upon shipment of the Inventory, GW's
standard certificate of analysis for each batch of Product and (ii) within ten
(10) days of the initial shipment of each Product, a complete copy of one
representative batch record for such Product.
1.05 CLOSING.
The closing of the transactions provided for in this Agreement (the
"Closing") shall take place at 8:30 a.m. local time on November 14, 1997, or on
such other date as GW and Monarch may agree in writing (the "Closing Date"), at
the offices of GW located at Five Moore Drive, Research Triangle Park, North
Carolina.
1.06 DELIVERY OF DOCUMENTS.
(a) Subject to the terms and conditions of this Agreement, GW will
deliver to Monarch at the Closing (unless otherwise specified):
(i) An irrevocable bill of sale in the form of Exhibit B hereto
(the "Bill of Sale");
(ii) An assignment in the form of Exhibit C hereto regarding the
Trademarks (the "Assignment of Trademarks");
4
<PAGE> 8
(iii) Copies of the materials comprising the Know-How described on
Schedule 1.01(b), all in accordance with a time frame and in a manner reasonably
acceptable to the parties, but in no event later than thirty (30) days after the
Closing Date, and
(iv) A complete copy of the NDAs and other materials described in
Section 1.01(c), all in accordance with a time frame and in a manner reasonably
acceptable to the parties, but in no event later than thirty (30) days after the
Closing Date.
(b) Subject to the terms and conditions of this Agreement, Monarch will
deliver to GW at the Closing:
(i) The Note,
(ii) The Security Agreement, and
(iii) Uniform Commercial Code Financing Statements in appropriate
form for filing with the offices of the Tennessee Secretary of State and the
Register of Deeds of Sullivan County, Tennessee listing Monarch as debtor and GW
as secured party covering the collateral described in the Security Agreement.
1.07 CONVEYANCE OF ASSETS AND INVENTORY.
The Assets and the Inventory shall be transferred and conveyed to
Monarch free and clear of all liens, claims, charges, encumbrances, or
restrictions, except as specifically described on Schedule 1.07 attached hereto.
1.08 SCOPE OF MONARCH'S RIGHTS
(a) Monarch hereby acknowledges and agrees that: (i) GW manufactures,
sells, and distributes one or more pharmaceutical products outside of the
Territory that are equivalent or substantially equivalent to the Products and
that GW will continue to do so after the Closing Date; (ii) neither Monarch nor
its Affiliates shall interfere with, or have the right to prohibit, the
5
<PAGE> 9
development, manufacture, sale, or distribution of the Products outside the
Territory, (iii) Monarch will acquire no right, title, or interest whatsoever in
any property or assets of GW or any of GW's Affiliates except as expressly set
forth in this Agreement, including no right, title, or interest to any property
or assets outside the Territory; (iv) neither Monarch nor its Affiliates shall
use or disclose the Know-How outside of the Territory; and (v) neither Monarch
nor its Affiliates shall manufacture, market, distribute, or sell any of the
Products outside of the Territory or knowingly cause the Products to be
manufactured, marketed, distributed, or sold outside the Territory.
(b) Monarch acknowledges and agrees that GW and its Affiliates shall be
entitled to use the Trademarks and the Know-How after Closing only to the extent
necessary to fulfill GW's obligations hereunder, under the Supply Agreement (as
defined below), or under applicable laws or regulations.
(c) GW shall not, and shall not permit any of its Affiliates to, for a
period of five (5) years from the Closing Date, except as provided in the Supply
Agreement, sell, produce, manufacture, market, or distribute in the Territory
any products which contain the active ingredients set forth on Schedule 1.08(c)
attached hereto ("Identical Products"); and neither GW nor its Affiliates shall
knowingly cause the Products to be manufactured, marketed, distributed, or sold
inside the Territory; provided, however, that this Section 1.08(c) shall not
apply to any products produced, sold, manufactured, marketed, or distributed by
any business (or any portion thereof), person, or group of persons, which is
acquired by, or which acquires, or which forms a merger with GW or any of its
Affiliates (whether through the formation of a new holding company or
otherwise), in a single transaction or a series of related transactions. GW
agrees that neither GW nor its Affiliates shall use or disclose the Know-How
inside the Territory.
6
<PAGE> 10
(d) Nothing in this Section 1.08 shall prohibit (i) the provision by GW
or any of its Affiliates of assistance to the purchaser of any manufacturing
facility previously owned by GW or any of its Affiliates that is of the type of
assistance that is customarily provided by sellers of manufacturing facilities
to purchasers of such facilities and that relates solely to manufacturing, or
(ii) the manufacture by GW or any of its Affiliates of any Identical Products in
the Territory for sale or distribution outside the Territory.
(e) The parties acknowledge that the Inventory purchased under this
Agreement and the Products to be supplied under the Supply Agreement may contain
packaging and labeling with the names, logos, and trademarks of GW and its
Affiliates (the "GW Packaging Materials"). Monarch may distribute such Inventory
and Products with the GW Packaging Materials; however, Monarch shall not, and
shall have no right to, use such names, logos, or trademarks for any other
purpose and Monarch shall acquire no right, title, or interest in or to such
names, logos, and trademarks.
(f) Notwithstanding Section 1.08(e) above, (i) Monarch shall use its
reasonable best efforts to make all necessary arrangements as soon as possible
so that Monarch will ship all Products (other than the Inventory) without the
use of any GW Packaging Materials, including obtaining all necessary packaging
and labeling materials to do so and related regulatory approvals and, in any
event, by February 1, 1998, Monarch shall distribute all such Products without
the use of any GW Packaging Materials, (ii) if any changes of packaging and
labeling described in this subsection (f) render obsolete or unusable any
packaging or labeling materials or components acquired by GW for the Products,
then Monarch shall purchase from GW at GWs Acquisition Cost (as defined in the
Supply Agreement) all such packaging and labeling materials or components
rendered obsolete or unusable, and (iii) Monarch will purchase, at its expense,
all
7
<PAGE> 11
tooling and/or equipment necessary to package and label the Products without GW
Packaging Materials as contemplated by this subsection (f), except the tools,
dies, molds, and the like used exclusively in the manufacture of the Products,
if any, referenced in Section 1.11 of this Agreement.
1.09 SUPPLY AGEREEMENT.
Contemporaneously with the execution of this Agreement, GW and Monarch
are entering into a supply agreement (the "Supply Agreement") under which GW
agrees to supply, and Monarch agrees to purchase, certain of the Products on the
terms and conditions more specifically described therein, and which provides for
certain other matters.
1.10 TAXES.
Monarch shall be responsible for and shall promptly pay all federal,
state, and local transfer, sales, and other taxes, if any, levied or imposed as
a result of the transactions contemplated by this Agreement, excluding any tax
payable on any income or gain of GW.
1.11 TOOLS, DIES, MOLDS.
As soon as reasonably practicable after the Closing, GW will notify its
component suppliers for the Products that GW's right, title, and interest in the
tools, dies, molds, and the like used exclusively in the manufacture of such
components, if any, have been transferred to Monarch. GW, upon the reasonable
request of Monarch, will execute and deliver such instruments and documents as
reasonably necessary to evidence such transfer.
8
<PAGE> 12
ARTICLE 2
ACCOUNTS RECEIVABLE AND RETURNED GOODS
2.01 PRE-CLOSING ACCOUNTS RECEIVABLE.
GW and Monarch agree that any accounts receivable or invoices arising
out of sales of the Products by or on behalf of GW on or prior to 11:59 p.m.
(E.S.T.) on the Closing Date shall inure to the benefit of GW.
2.02 POST-CLOSING ACCOUNTS RECEIVABLE.
Monarch and GW agree that any accounts receivable or invoices arising
out of sales of the Products by or on behalf of Monarch after 11:59 p.m.
(E.S.T.) on the Closing Date shall inure to the benefit of Monarch.
2.03 RETURNED GOODS.
Except as otherwise expressly set forth below and subject to Monarch's
timely compliance with its obligations set forth in this Section 2.03 and
Section 2.04, GW and Monarch agree that during the one (1) year period
immediately following the Closing Date, GW shall be responsible for handling
returns of all Products that were sold by GW prior to the Closing Date and that
are returned by customers for credit after the Closing Date. GW shall handle
such returns during such period in accordance with its then applicable resumed
goods policy. Monarch agrees to provide GW with any information reasonably
requested by GW from time to time regarding Monarch's selling prices for the
Products in order to assist GW in its determination of the reimbursement prices
for returned Products. Such information shall be provided by Monarch to GW
promptly, and in any event within ten (10) days, after GW's written request
therefor.
9
<PAGE> 13
In the event that during such one (1) year period any returns are
delivered to Monarch, such returns shall be shipped by Monarch to GW and GW
shall reimburse Monarch for the shipping costs incurred.
2.04 EXCESS RETURNED GOODS.
(a) Notwithstanding Section 2.03, or any other provisions of this
Agreement, to the extent the aggregate amount of all credits for resumed
Products granted by GW from and after the Closing Date exceeds One Million One
Hundred Thousand Dollars ($1,100,000) (the "Excess Aggregate Amount"), Monarch
agrees to reimburse GW for the Excess Aggregate Amount promptly, and in any
event within thirty (30) days, after written demand therefor by GW; provided,
however, that any credits granted by GW for any Products as a result of any
product withdrawal or recall by GW (other than a withdrawal or recall resulting
from acts or omissions of Monarch, its Affiliates, or their respective
employees, agents, or distributors) shall not be included for purposes of
determining whether credits for returned goods granted by GW in respect of the
Products exceed the Excess Aggregate Amount. GW shall submit to Monarch any
request for an Excess Aggregate Amount within one hundred twenty (120) days
following the end of the one (1) year period described in Section 2.03.
(b) From time to time during the one (1) year period described in
Section 2.03, but no more than once every ninety (90) calendar days from the
Closing Date, GW, upon Monarch's written request, shall provide Monarch with
information related to aggregate amounts of credits extended for returned
Products anal the methodology of calculating the same. In the event GW claims
that an Excess Aggregate Amount is owed to it, then Monarch shall have ten (10)
days within which to request in writing an audit (either by Monarch or its duly
authorized agents) of GW's records relative to the claimed Excess Aggregate
Amount. Further, if Monarch requests
10
<PAGE> 14
such an audit in accordance with this Section, then GW shall permit Monarch or
its duly authorized agents to audit all necessary and reasonable information
related to the actual goods returned and GW's valuation of such goods in order
to confirm the accuracy of the claimed Excess Aggregate Amount. All persons or
entities conducting or involved in such audit shall execute a written agreement
to maintain in confidence all information obtained during the course of any
such audit except for disclosure to Monarch. Each such audit shall be conducted
during GW's normal business hours. In no event shall such audit exceed three
(3) business days in duration, and in all cases Monarch shall use its
reasonable efforts to ensure that such audits are conducted so as not to
interfere with the normal and ordinary operation of GW's business. Monarch
shall be responsible for all of its and its agents' costs and expenses incurred
in connection with such audit. In the event of an audit regarding an Excess
Aggregate Amount pursuant to this Section 2.04(b), the date on which the
payment of such Excess Aggregate Amount is due pursuant to Section 2.04(a)
shall be postponed until such audit is completed or is required to be completed
pursuant to this Section 2.04(b).
ARTICLE 3
REGULATORY MATTERS
3.01 FILINGS WITH FDA REGARDING TRANSFER OF NDAS.
At the Closing, the parties shall file with the FDA the information
required pursuant to 21 C.F.R. ss. 314.72, or any successor regulation thereto,
regarding the transfer of the NDAs from GW to Monarch. GW shall file the
information required of a former owner, and Monarch shall file the information
required of a new owner. The parties also agree to use their reasonable best
efforts to take any and all other actions required by the FDA, or other
necessary governmental agencies, if any, to effect the transfer of the NDAs from
GW to Monarch. GW may retain an
11
<PAGE> 15
archival copy of the NDAs, including supplements and records that are required
to be kept under 21 C.F.R. ss. 314.81, and GW shall treat such archived copies
as Confidential Information (as defined in the Supply Agreement) of Monarch and
disclosure of such information shall be governed by the Supply Agreement.
3.02 RESPONSIBILITY FOR THE PRODUCTS.
(a) After the Closing, Monarch shall assume all regulatory
responsibilities permitted by applicable laws and regulations to be assumed by
Monarch, reporting and otherwise, in connection with the Products and the NDAs
including, but not limited to, responsibility for reporting any adverse drug
experiences in connection with the Products, and responsibility for compliance
with the Prescription Drug Marketing Act of 1987, as the same may be amended
from time to time.
(b) Monarch and its Affiliates agree promptly to submit to GW all
adverse drug experience information or customer complaints brought to the
attention of Monarch or its Affiliates in respect of the Products, as well as
any material events and matters concerning or affecting the safety or efficacy
of the Products. GW and its Affiliates agree promptly to submit to Monarch all
adverse drug experience information or customer complaints brought to the
attention of GW or its Affiliates in respect of the Products, as well as any
material events and matters concerning or affecting the safety or efficacy of
the Products. Monarch and GW agree to determine promptly after Closing a
mutually agreeable reporting procedure to communicate the information required
by this Section 3.02(b).
(c) After the Closing, Monarch shall assume all responsibility for any
and all FDA fee obligations for holders or owners of approved new drug
applications and approved, marketed prescription drug products relating to the
Products, including, but not limited to, those defined
12
<PAGE> 16
under the Prescription Drug User Fee Act of 1992, as the same may be amended
from time to time.
(d) Promptly after the Closing, Monarch shall take all actions
necessary or required under applicable laws, rules, and regulations, to reflect
that the Assets are owned by Monarch and that Monarch has responsibility
therefor.
(e) After the Closing, GW shall direct all complaints or inquiries
concerning the Products in the Territory to Monarch to the attention of Medical
Affairs Department, at facsimile number 423-989-6137.
3.03 REBATES FOR AMOUNTS PAID UNDER GOVERNMENT PROGRAMS.
Monarch shall reimburse GW for all rebates GW is obligated to pay
pursuant to any government rebate program for amounts charged to GW's NDC codes
for the Products with respect to sales of the Products from thirty (30) days
after the Closing Date. All payments due under this Section 3.03 shall be made
promptly to GW upon submission to Monarch of invoices that describe the
requested payments in reasonable detail. Monarch shall obtain new NDC codes for
the Products as soon as practicable after the Closing Date. In the event Monarch
disputes an amount owed under a government rebate program, GW shall provide to
Monarch copies of any documents and records evidencing original rebate claims
and any resubmissions of such claims and data relating to unit rebate
calculations in order to enable Monarch to resolve such disputed amount.
13
<PAGE> 17
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.01 REPRESENTATIONS AND WARRANTIES OF GW.
GW makes the following representations and warranties. The phrase "to
the knowledge of GW" or any substantially equivalent phrase, as used in this
Article 4, shall mean to the actual knowledge of officers and directors of GW
after reasonable inquiry.
(A) ORGANIZATION AND STANDING. GW is a corporation duly organized,
validly existing, and in good standing under the laws of the State of North
Carolina.
(B) POWER AND AUTHORITY. GW has all requisite corporate power and
authority to execute, deliver, and perform this Agreement and the other
agreements and instruments to be executed and delivered by it pursuant hereto
and to consummate the transactions contemplated herein and therein. The
execution, delivery, and performance of this Agreement by GW do not, and the
consummation of the transactions contemplated hereby will not, violate any
provisions of GW's Articles of Incorporation, Bylaws, any law or regulation
applicable to GW, or any agreement, mortgage, lease, instrument, order,
judgment, or decree to which GW is a party or by which GW is bound or result in
the creation or acceleration of any lien charge, security interest, or other
encumbrance on the Assets.
(C) CORPORATE ACTION; BINDING ECT. GW has duly and properly taken all
action required by law, its Articles of Incorporation, its Bylaws, or otherwise,
to authorize the execution, delivery, and performance of this Agreement, the
Bill of Sale, the Supply Agreement, and the Assignment of Trademarks
(collectively, the Bill of Sale, the Supply Agreement, and the Assignment of
Trademarks are referred herein to as The "Collateral Agreements"), and the other
instruments to be executed and delivered by it pursuant hereto and the
consummation of
14
<PAGE> 18
transactions contemplated hereby and thereby. This Agreement has been duly
executed and delivered by GW and constitutes, and the Collateral Agreements and
the other instruments contemplated hereby when duly executed and delivered by GW
will constitute, legal, valid, and binding obligations of GW enforceable against
it in accordance with their respective terms, except as enforcement may be
affected by bankruptcy, insolvency, or other similar laws and by general
principles of equity.
(d) Consents. No consent or approval of, or filing with or notice to,
any federal, state, or local governmental or regulatory authority, agency, or
department or any other person not a party to this Agreement is required or
necessary to be obtained by GW or on its behalf in connection with the
execution, delivery, and performance of this Agreement or to consummate the
transactions contemplated hereby, except as contemplated by Section 3.01 hereof.
(e) OWNERSHIP OF ASSETS. GW is the owner of the Assets described in
Sections 1.01(a), 1.01(c), and 1.01(d) and, to GW's knowledge, the Assets
described in Section 1.01(b), free and clear of all liens, claims, charges, or
encumbrances, except for liens for taxes not yet due and payable and except as
described on Schedule 1.07 attached hereto.
(f) LITIGATION OR DISPUTES. Except as disclosed in Schedule 4.01(f)
attached hereto, there is no claim, outstanding commitment to any governmental
regulatory agency, action, suit, proceeding, investigation, or arbitration
pending or, to GW's knowledge, threatened against GW relating to the Assets, and
GW is not in violation of or in default with respect to any applicable law,
rule, regulation, judgment, order, writ, injunction, award, or decree of any
arbitrator, court, or administrative body, the result of any of which, either
individually or cumulatively, would have a materially adverse effect on the
Assets in the Territory or GW's compliance with and performance under the terms
of this Agreement or the Collateral Agreements.
15
<PAGE> 19
(g) TRADEMARKS; INTELLECTUAL PROPERTY. Schedule 1.01(a) attached hereto
is a true and correct list of all trademarks owned by GW and used by GW in the
manufacture, marketing, and sale of the Products in the Territory. The
Trademarks are the only trademarks used or held by GW for use in connection with
or otherwise necessary for the conduct of GW's business as now conducted for the
Products in the Territory. GW owns no patents necessary for the conduct of GW's
business as now conducted for the Products in the Territory. GW has not received
any notice of any claim that any of the Assets infringe on any property rights
of any other party. There is no claim, action, suit, or proceeding, pending or,
to GW's knowledge, threatened alleging that the use by GW or its Affiliates of
the Trademarks or the Know-How infringes any patents or other intellectual
property rights of third parties. GW has not executed or granted to any
Affiliate or any third party in the Territory any license, sublicense, or
contract covering the Know-How or the Trademarks.
(h) COMPLIANCE WITH LAW. GW has, to its knowledge, conducted its
operations in connection with the manufacture and sale of the Products in
material compliance with all applicable federal, state, and local laws and
regulations, including FDA regulations, and possesses all approvals, consents,
licenses, and permits required for the conduct of its business as now conducted
for the Products or as will be necessary to perform its obligations under the
Supply Agreement.
(i) WARRANTY AND DISCLAIMER OF WARRANTIES. GW warrants that the
Inventory was manufactured in accordance with the then-applicable specifications
for the Products and in accordance with current good manufacturing practices in
effect at the time of manufacture. GW further warrants that the Inventory, when
delivered to Monarch, will not be (i) adulterated or misbranded by GW within the
meaning of the United States Federal Food, Drug and Cosmetic
16
<PAGE> 20
Act, as amended (the "FD&C Act") or (ii) an article that may not be introduced
into interstate commerce under the provisions of Sections 404 or 505 of the FD&C
Act. Set forth on Schedule 1.04 attached hereto is a list accurate in all
material respects of the expiration dates of the Inventory. WITH RESPECT TO THE
INVENTORY, GW MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED, AND SPECIFICALLY
MAKES NO WARRANTY OF MERCHANTABILITY OR WARRANTY OF FITNESS FOR ANY PARTICULAR
PURPOSE.
(j) RECALLS OR WITHDRAWALS. During the period commencing on June 30,
1996, and ending on the date hereof, there have been no: (i) Products which have
been recalled or withdrawn by GW or its Affiliates in the Territory (whether
voluntarily or otherwise) or (ii) proceedings in the Territory brought against
GW or its Affiliates (whether such proceedings have since been completed or
remain pending) seeking the recall, withdrawal, or seizure of any of the
Products or seeking to enjoin GW or any of its Affiliates from distributing such
Products.
(k) FACILITIES AND MANUFACTURE. Except as set forth on Schedule 4.01(k)
attached hereto, and only to the extent it could have a material adverse effect
on the Assets or GW's performance hereunder or under any of the Collateral
Agreements, during the period commencing on June 30, 1996, and ending on the
date hereof, with respect only to the Products, neither GW nor its Affiliates
have received or been subject to: (i) any FDA Form 483's relative to the
Products; (ii) any FDA Notices of Adverse Findings relative to the Products, or
(iii) warning letters or other correspondence from the FDA or any other
governmental officials or agencies concerning the Products in which the FDA or
other such governmental officials or agencies asserted that the operations of GW
were not in compliance with applicable law, regulations, rules, or guidelines.
17
<PAGE> 21
(l) Since June 30, 1996, GW has conducted its business relating to the
Products in the ordinary course of its business in all material respects and,
since June 30, 1996, through the date hereof, GW has not offered any
extraordinary rebates, discounts, or any other promotion or marketing incentives
relating to the Products other than in the ordinary course of its business
4.02 REPRESENTATIONS AND WARRANTIES OF MONARCH.
Monarch represents and warrants to GW as follows:
(a) ORGANIZATION AND STANDING. Monarch is a corporation duly organized,
validly existing and in good standing under the laws of the State of Tennessee.
(b) POWER AND AUTHORITY. Monarch has all requisite corporate power and
authority to execute, deliver, and perform this Agreement, and the other
agreements and instruments to be executed and delivered by it pursuant hereto
and to consummate the transactions contemplated herein and therein. The
execution, delivery, and performance of this Agreement by Monarch do not, and
the consummation of the transactions contemplated hereby will not, violate any
provision of Monarch's Articles of Incorporation, Bylaws, any law or regulation
applicable to Monarch, or any agreement, mortgage, lease, instrument, order,
judgment, or decree to which Monarch is a party or by which Monarch is bound.
(c) CORPORATE ACTION; BINDING EFFECT. Monarch has duly and properly
taken all action required by law, its Articles of Incorporation, its Bylaws, or
otherwise, to authorize the execution, delivery, and performance by it of this
Agreement, the Note, the Security Agreement, the Collateral Agreements, and the
other instruments to be executed by it pursuant hereto and the consummation of
the transactions contemplated hereby and thereby. This Agreement has been duly
executed and delivered by Monarch and constitutes, and the Collateral
Agreements, and the other instruments contemplated hereby when duly executed and
delivered by Monarch will
18
<PAGE> 22
constitute, legal, valid, and binding obligations of Monarch enforceable against
it in accordance with their respective terms, except as enforcement may be
affected by bankruptcy, insolvency, or other similar laws and by general
principles of equity.
(d) ACCESS TO INFORMATION. After the Closing, Monarch agrees to
cooperate with GW and to grant to GW and its employees, attorneys, accountants,
officers, representatives, and agents, during normal business hours and upon ten
(10) days' advance notice, reasonable access to Monarch's management personnel
and to the records relating to the Products (including, without limitation, the
NDAs) and to permit copying at GW's expense or, where reasonably necessary, to
loan original documents relating to the Assets during the period the Assets were
owned by GW for the sole purposes of (i) any financial reporting or tax matters
(including, without limitation, any financial and tax audits, tax contests, tax
examination, preparation of any GW tax returns or financial records) relating to
the Products; (ii) any claims or litigation involving GW and the Assets relating
to the Products; (iii) any investigation of GW being conducted by any federal,
state, or local governmental authority relating to the Products; (iv) any matter
relating to any indemnification or representation or warranty or any other term
of this Agreement, or (v) any similar or related matter. Monarch shall maintain
all such records and documents in the United States and shall not destroy or
dispose of any such records and documents without the prior written consent of
GW. GW shall use its reasonable efforts to ensure that its access to and
requests for records and documents pursuant to this Section are conducted so as
not to interfere with the nommal and ordinary operation of Monarch's business.
GW acknowledges that the records and documents made available to GW by Monarch
pursuant to this Section constitute Confidential Information (as defined in the
Supply Agreement) of Monarch and disclosure of such information shall be
governed by the Supply Agreement.
19
<PAGE> 23
(e) Consents. No consent or approval of, or filing with or notice to,
any federal, state, or local governmental or regulatory authority, agency, or
department or any other person not a party to this Agreement is required or
necessary to be obtained by Monarch or on its behalf in connection with the
execution, delivery, and performance of this Agreement or to consummate the
transactions contemplated hereby, except as contemplated by Section 3.01 hereof.
4.03 SURVIVAL OF REPRESENTATIONS WARRANTIES.
The representations, warranties, and indemnities of the parties hereto
contained in this Article 4 and in Article 5 shall survive the Closing Date for
a period equal to three (3) years, except that Section 4.01(e) (Ownership of
Assets) and the indemnification with respect thereto shall survive the Closing
Date for a period equal to five (5) years.
4.04 CERTAIN LIMITATIONS.
GW does not make any representation or warranty as to the business
prospects of the Products. Monarch has conducted its own review and analysis, as
it deemed necessary and appropriate, of the business prospects of the Products
and is not relying on any representations or warranties from GW as to the
business prospects.
ARTICLE 5
INDEMNIFICATION
5.01 INDEMNIFICATION BY GW.
(a) GW hereby indemnifies, defends, and holds harmless Monarch from and
against any and all damage, loss, liability, and expense (including, without
limitation, reasonable attorneys' fees and expenses) (collectively, "Indemnified
Amounts") arising out of any misrepresentation or breach of warranty, covenant,
or agreement made or to be performed by GW pursuant to this Agreement or the
Collateral Agreements; provided, however, that GW shall not have any
20
<PAGE> 24
obligation to indemnify Monarch from and against any Indemnified Amounts: (i)
until Monarch has incurred Indemnified Amounts in excess of a Fifty Thousand
Dollar ($50,000) deductible (after which point GW will be obligated only to
indemnify Monarch from and against further such Indemnified Amounts) or
thereafter (ii) to the extent the Indemnified Amounts Monarch has incurred
exceed a Six Million Nine Hundred Fifty Thousand Dollar ($6,950,000) aggregate
ceiling (after which point GW will have no obligation to indemnify Monarch from
and against further such Indemnified Amounts).
(b) GW shall not be liable under this Section 5.01 for any settlement
effected without its consent of any claim, litigation, or proceeding in respect
of which indemnity may be sought hereunder, which consent shall not unreasonably
be withheld.
5.02 INDEMNIFICATION BY MONARCH.
(a) Monarch hereby indemnifies, defends, and holds harmless GW from and
against any and all Indemnified Amounts arising out of any misrepresentation or
breach of warranty, covenant, or agreement made or to be performed by Monarch
pursuant to this Agreement or the Collateral Agreements; provided, however, that
Monarch shall not have any obligation to indemnify GW from and against any
Indemnified Amounts until GW has incurred Indemnified Amounts in excess of a
Fifty Thousand Dollar ($50,000) deductible (after which point Monarch will be
obligated only to indemnify GW from and against further such Indemnified
Amounts).
(b) Monarch shall not be liable under this Section 5.02 for any
settlement effected without its consent of any claim, litigation or proceeding
in respect of which indemnity may be sought, which consent shall not
unreasonably be withheld.
21
<PAGE> 25
5.03 PAYMENTS.
All amounts payable under this Article 5 shall be paid promptly after
receipt by the indemnifying party of written notice from the indemnified party
stating that such Indemnified Amounts have been incurred, the amount thereof and
of the related indemnity payment and substantiation of such amount and such
indemnity payment; provided, however, any disputed amounts shall be due and
payable promptly after such amounts are finally determined to be owing by the
indemnifying party to the indemnified party.
5.04 CONDUCT OF LITIGATION.
Each party indemnified under the provisions of this Agreement, upon
receipt of written notice of any claim or the service of a summons or other
initial legal process upon it in any action instituted against it, in respect of
the agreements contained in this Agreement, shall promptly give written notice
of such claim, or the commencement of such action, or threat thereof, to the
party from whom indemnity shall be sought hereunder; provided, however, the
failure to provide such notice within a reasonable period of time shall not
relieve the indemnifying party of any of its obligations hereunder except to the
extent the indemnifying party is prejudiced by such failure. Each indemnifying
party shall be entitled at its own expense to participate in the defense of such
claim or action, or, if it shall elect, to assume such defense, in which event
such defense shall be conducted by counsel chosen by such indemnifying party,
which counsel may be any counsel reasonably satisfactory to the indemnified
party against whom such claim is asserted or who shall be the defendant in such
action, and such indemnified party shall bear all fees and expenses of any
additional counsel retained by it or them. Notwithstanding the immediately
preceding sentence, if the named parties in such action (including impleaded
parties) include the indemnified and the indemnifying parties, and the
indemnified party shall have been advised by counsel that there may
22
<PAGE> 26
be a conflict between the positions of the indemnifying party and the
indemnified party in conducting the defense of such action or that there are
legal defenses available to such indemnified party different from or in addition
to those available to the indemnifying party, then counsel for the indemnified
party shall be entitled, if the indemnified party so elects, to conduct the
defense to the extent reasonably determined by such counsel to be necessary to
protect the interests of the indemnified party, at the expense of the
indemnifying party, if it is determined by agreement of the indemnifying party
and the indemnified party or by a court of competent jurisdiction that the
indemnified party is entitled to indemnification hereunder for the Indemnified
Amounts giving rise to such action. If the indemnifying party shall elect not to
assume the defense of such claim or action, such indemnifying party shall
reimburse such indemnified party for the reasonable fees and expenses of any
counsel retained by it, and shall be bound by the results obtained by the
indemnified party in respect of such claim or action if it is determined by
agreement of the indemnifying party and the indemnified party or by a court of
competent jurisdiction that the indemnified party is entitled to indemnification
hereunder for the Indemnified Amounts giving rise to such action; provided,
however, that no such claim or action shall be settled without the written
consent of the indemnifying party.
ARTICLE 6
MISCELLANEOUS
6.01 ENTIRE AGREEMENT.
This Agreement, the Note, the Security Agreement, and the Collateral
Agreements constitute the entire agreement between GW and Monarch with respect
to the subject matter hereof and thereof and supersede all prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof and thereof. This Agreement or any
23
<PAGE> 27
provision hereof cannot be amended, changed, supplemented, or waived except in a
writing signed by each of the parties hereto.
6.02 COUNTERPARTS.
This Agreement and any amendment or supplement hereto may be executed
in several counterparts, each of which shall be deemed to be an original, and
all of which taken together shall constitute one and the same instrument.
6.03 BROKERAGE AND OTHER COMMISSIONS.
GW and Monarch each represent and warrant to the other that all
negotiations relative to this Agreement and the transactions contemplated hereby
have been carried on by each directly with the other without intervention of any
broker, finder, or other intermediary and that, subject to the provisions of
Article 5, each indemnifies the other and holds it harmless against any claim
against the other for brokerage or other commissions relating to this Agreement
or to the transactions contemplated hereby by any person claiming to have been
engaged as a broker or finder by the indemnifying party.
6.04 NOTICES.
All notices and other communications required or permitted under this
Agreement shall be in writing and shall be delivered personally or sent by: (A)
registered or certified mail, return receipt requested; (B) a
nationally-recognized courier service guaranteeing next-day delivery, charges
prepaid; or (C) facsimile (with the original promptly sent by any of the
foregoing manners). Any such notices shall be addressed to the receiving party
at such party's address set forth below, or at such other address as may from
time to time be furnished by similar notice by either party.
24
<PAGE> 28
If to GW:
Glaxo Wellcome Inc.
Five Moore Drive
Research Triangle Park, North Carolina 27709
Attention: Company Secretary
Facsimile No.: 919-483-0265
If to Monarch:
Monarch Pharmaceuticals, Inc.
355 Beecham Street
Bristol, Tennessee 37620
Attention: President
Facsimile No.: 423-989-8136
With a copy to:
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
Attention: Legal Department
Facsimile No.: 423-989-6282
Any such notice or communication shall be effective upon such personal
delivery or delivery to such courier, upon transmission by facsimile, or three
(3) days after it is sent by such registered or certified mail, as the case may
be. Copies shall be sent in the same manner as originals.
6.05 ASSIGNMENT.
Neither party may assign its rights or obligations under this Agreement
without the prior written consent of the other party; provided, however, that
either party may assign its rights and obligations under this Agreement, without
the prior written consent of the other party, to an Affiliate or to a successor
of the assigning party's business by reason of merger, sale of all or
substantially all of its assets or similar transaction, provided that such
successor agrees in writing
25
<PAGE> 29
to be bound by this Agreement. Such consent shall not be unreasonably withheld.
Any purported assignment without a required consent shall be void. Any permitted
assignee shall assume all obligations of its assignor under this Agreement. No
assignment shall relieve either party of its responsibility for the performance
of any obligation which accrued prior to the effective date of such assignment.
For the avoidance of doubt, the parties acknowledge that no consent of GW shall
be required for the sale by Monarch of the Assets.
6.06 GOVERNING LAW.
THIS AGREEMENT SHALL BE CONSTRUED AND GOVERNED IN ALL RESPECTS UNDER
AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF NORTH CAROLINA, WITHOUT REGARD
TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.
6.07 HEADINGS.
The table of contents and all headings used in this Agreement are for
convenience of reference only and shall not affect the interpretation of this
Agreement.
6.08 EXPENSES.
All legal and other costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby shall be paid by the party
incurring such expenses.
6.09 SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and shall inure to the benefit of
the parties and their respective successors and permitted assigns.
6.10 AGREEMENT TO TAKE NECESSARY AND DESIRABLE ACTIONS.
GW and Monarch each agree to execute and deliver such other documents,
certificates, agreements, and other writings and to take such other actions as
may be reasonably necessary in
26
<PAGE> 30
order to consummate or implement expeditiously the transactions contemplated by
this Agreement.
6.11 NO IMPLIED WAIVER.
No failure or delay on the part of the parties hereto to exercise any
right, power, or privilege hereunder or under any instrument executed pursuant
hereto shall operate as a waiver; nor shall any single or partial exercise of
any right, power, or privilege preclude any other or further exercise thereof or
the exercise of any other right, power, or privilege. All rights and remedies
granted herein shall be cumulative and in addition to other rights and remedies
to which the parties may be entitled at law or in equity.
6.12 FORCE MAJEURE.
Any delay in the performance of any of the obligations of either party
hereto (except the payment of money owed) shall not be considered a breach of
this Agreement and the time required for performance shall be extended for a
period equal to the period of such delay, provided that such delay is due to:
acts of God, weather, fire, explosion; invasion, riot or other civil unrest;
governmental laws, orders, restrictions, actions, embargoes or blockades;
national or regional emergency, injunction, strikes, lock-outs, labor trouble or
other industrial disturbances; inability to obtain or interruption of materials,
labor, containers, fuel or transportation; or any other cause beyond the control
of the affected party. The party so affected shall give prompt notice to the
other party of such cause and shall use its reasonable efforts to relieve the
effect of such cause as rapidly as possible.
27
<PAGE> 31
6.13 CONFIDENTIALITY
GW and Monarch have entered into a Confidential Disclosure Agreement
dated as of May 30, 1996 and a Confidential Disclosure Agreement dated November
3, 1997 (collectively the "Disclosure Agreement").
6.14 RELATIONSHIP.
Nothing in this Agreement shall be deemed to create an agency, joint
venture, amalgamation, partnership, or similar relationship between Monarch and
GW.
6.15 SEVERABILITY.
In case any provision of this Agreement shall be held to be invalid,
illegal, or unenforceable, the validity, legality, or enforceability of the
remaining provisions hereof will not in any way be affected or impaired thereby.
6.16 PRESS RELEASE.
On the Closing Date, the parties shall issue a joint press release
regarding the sale of the Assets, and GW shall, in cooperation with Monarch,
inform any customer who places a purchase order with GW for the Products that
the Assets have been sold to Monarch. As soon as practicable after the Closing,
GW shall send to all of its current wholesalers and distributors a letter, in
form and substance mutually agreeable to GW and Monarch, on GW letterhead
informing them of the sale of the Assets to Monarch.
6.17 AFFILIATES.
As used in this Agreement, "Affiliate" shall mean any corporation or
non-corporate entity that controls, is controlled by, or is under common control
with the party. A corporation or non-corporate entity shall be regarded as in
control of another corporation if it owns or directly or indirectly controls at
least fifty percent (50%) of the voting stock of the other corporation or (A)
28
<PAGE> 32
in the absence of the ownership of at least of fifty percent (50%) of the voting
stock of a corporation or (b) in the case of a non-corporate entity, the power
to direct or cause the direction of the management and policies of such
corporation or non-corporate entity, as applicable.
6.18 WAIVER OF BULK SALES.
GW and Monarch waive compliance with any bulk sales law or similar law
in connection with the consummation of the transactions contemplated herein.
6.19 EXHIBITS AND SCHEDULES.
All Exhibits and Schedules referred to herein form an integral part of
this Agreement and are incorporated into this Agreement by reference.
6.20 GUARANTY.
King Pharmaceuticals, Inc., a Tennessee corporation ("King"),
irrevocably and unconditionally guarantees the full and punctual performance of
all of the obligations of Monarch (or any Affiliate to whom Monarch assigns any
right or obligation under this Agreement) contained in or arising out of this
Agreement, the Note, and the Security Agreement, including, but not limited to,
payment when due of all amounts owed by Monarch to GW hereunder and thereunder.
This is a guaranty of payment and performance and not of collection.
King consents and agrees that, without the necessity of any reservation
of rights against it, the whole or any part of the security now or hereafter
held for the Note may be exchanged, compromised, or surrendered from time to
time, the time or place of payment of the Note or of any security therefor may
from time to time be extended, in whole or in part, to a time certain or
otherwise, and may be renewed, in whole or in part; Monarch may be granted
indulgences generally; and any of the provisions of this Agreement, the Note, or
the Security Agreement may be modified or waived, all without notice to or
further assent by King, who shall remain bound,
29
<PAGE> 33
notwithstanding any such exchange, compromise, surrender, extension, renewal,
modification, indulgence, or release.
King expressly waives: (a) presentment and demand for payment of the
Note or of payment or performance under this Agreement or the Security
Agreement; (b) protest and notice of dishonor or of default to King or to any
other party with respect to the Note or with respect to any security therefor;
(c) any diligence in collecting the Note or this guaranty or protecting or
realizing upon any security therefor; (d) any duty or obligation on the part of
GW to ascertain the validity, extent, or nature of any security for the Note, or
any insurance or other rights respecting such security, or the liability of any
party primarily or secondarily liable for payment of the Note or liable upon any
security therefor, or to take any steps or action to safeguard, protect, handle,
obtain, or convey information respecting, or otherwise follow in any manner, any
such security, insurance, or other rights; (e) any duty or obligation on GW to
proceed to collect payment of the Note from, or to commence an action against,
Monarch or any other person, or to resort to any security despite any notice or
request of King to do so; (f) any rights of King pursuant to North Carolina
General Statute Chapter 26 or any similar or subsequent law; (g) all other
notices to which King might otherwise be entitled; (h) any defense relative to
the financial condition of Monarch; and (i) demand for payment or performance
under this guaranty.
Until all obligations of Monarch under this Agreement, the Note, and
the Security Agreement shall have been fully paid to GW or otherwise performed,
King shall not be released by any act or thing which might, but for this
provision, be deemed a legal or equitable discharge of a surety, or by reason of
any waiver, extension, modification, forbearance or delay or other act or
omission of GW or its failure to proceed promptly or otherwise, or by reason of
any action taken or omitted or circumstance which may or might vary the risk or
affect the rights or remedies
30
<PAGE> 34
of King, or by reason of any further dealings between Monarch and King, and King
hereby expressly waives and surrenders any defense to its liability hereunder
based upon any of the forgoing acts, omissions, agreements, or waivers; it being
the purpose and intent of King and GW that the obligations of King hereunder are
absolute and unconditional under any and all circumstances. Upon the payment of
all such obligations, GW agrees to take such action as may be required by the
Security Agreement.
This guaranty shall continue to be effective, or be reinstated, as the
case may be, if at any time payment of any of the obligations under the Note or
any security therefor, or any part thereof, is rescinded or must otherwise be
restored or returned by GW upon the insolvency, bankruptcy, dissolution,
liquidation, or reorganization of Monarch, or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or similar
officer for, Monarch or any substantial part of its property, or otherwise, all
as though such payments had not been made.
King is executing this Agreement for the sole purpose of agreeing to
its guaranty obligations set forth in this Section 6.20. Monarch and King
represent and warrant to GW that Monarch is a wholly-owned subsidiary of King.
31
<PAGE> 35
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the date first above written.
GLAXO WELLCOME INC.
By: /s/ Dean J. Mitchell
-----------------------------------
Name: Dean J. Mitchell
---------------------------------
Title: Vice President
--------------------------------
MONARCH PHARMACEUTICALS, INC.
By: /s/ John Bellamy
-----------------------------------
Name: John Bellamy
---------------------------------
Title: Authorized Agent
--------------------------------
KING PHARMACEUTICALS, INC.
By: /s/ Jefferson J. Gregory
-----------------------------------
Name: Jefferson J. Gregory
---------------------------------
Title: President
--------------------------------
32
<PAGE> 1
EXHIBIT 10.19
MANUFACTURE AND SUPPLY
AGREEMENT
PROGRAM(R) SUSPENSION
&
INTERCEPTOR(R) BEEF FLAVORED
TABLETS
BETWEEN CIBA-GEIGY CORPORATION
410 Swing Road
Post Office Box 18300
Greensboro, North Carolina 27419
AND KING PHARMACEUTICALS, INC.
501 Fifth Street
Bristol, Tennessee 37620
EFFECTIVE DATE: July 17, 1995
Agreement No.__
<PAGE> 2
MANUFACTURE AND SUPPLY AGREEMENT
THIS AGREEMENT, is made this 17th day of July, 1995 by and between
CIBA-GEIGY CORPORATION, a New York corporation with offices at 410 Swing Road,
Post Office Box 18300, Greensboro, North Carolina 27419 ("CIBA") and KING
PHARMACEUTICALS, INC., a Tennessee corporation with offices at 501 Fifth Street,
Bristol, Tennessee 37620 ("KPI").
WITNESSETH:
WHEREAS, CIBA-GEIGY desires KPI to undertake the manufacture of PROGRAM
(R) SUSPENSION and INTERCEPTOR(R) Tablets (beef flavored) and to purchase same
from KPI and KPI desires to manufacture and sell same to CIBA;
NOW, THEREFORE, in consideration of the covenants and conditions set
forth herein, the parties agree as follows:
1.0 - GENERAL DEFINITIONS
1.1 "AGREEMENT" shall mean this document and all attachments, exhibits,
schedules, and addenda.
1.2 "PRODUCT" shall mean (a) liquid in suspension form containing lufenuron
for the purpose of controlling external parasites (fleas) on dogs and cats which
is known as PROGRAM(R) Suspension; and (b) INTERCEPTOR (R) beef-flavored tablets
containing milbemycin oxime for use in dogs.
1.3 "FDA" shall mean the U. S. Food and Drug Administration.
1.4 "FURNISHED MATERIALS" shall mean lufenuron technical and milbemycin
oxime technical material supplied by CIBA.
<PAGE> 3
1.5 "CONFORMING PRODUCTS" shall mean Product conforming to the
specifications set forth in Schedule A attached hereto and made a part hereof.
1.6 "CONFORMING FURNISHED MATERIALS" shall mean Furnished Materials
conforming to the specifications set forth in Schedule B attached hereto and
made a part hereof.
1.7 "TARGETED YIELD RATIOS" shall mean the yield ratios of Conforming
Products to Furnished Materials set forth in Schedule D attached hereto and
made a part hereof.
1.8 "TRANSFER PRICE" shall mean the price charged to CIBA by KPI for the
production of each batch of Conforming Product (the "Batch Price"), said price
being described in Schedule E attached hereto and made a part hereof.
1.9 "PRODUCTION YEAR" shall mean each period of one calendar year from
January 1st through December 31st during the term of this Agreement, provided
that the initial "Production Year" for this Agreement shall commence on the
date of this Agreement and shall terminate on December 31, 1995.
1.10 "BY-PRODUCT" shall mean all materials, except Conforming Products, that
are present at the KPI facility, produced or generated in connection with the
manufacture of Products, including Product that does not meet specifications,
wastewater, residue, waste, bottoms and other remainders and materials,
packaging of components of Products, and components of Products that are not
used in the manufacture of Products.
1.11 "PLURALS, GENDERS AND PERSONS" In this Agreement, words importing the
singular number only shall include the plural and vice versa; words importing a
specification of gender shall include the other genders; and, references to
persons shall include corporations and one or more persons, their heirs,
executors, administrators or assigns, as the case may be.
2
<PAGE> 4
1.12 "GUARANTEED PURCHASES" shall mean Targeted purchase amounts in the
amounts for each Product for the period specified as set forth in Schedule F,
which is attached hereto and incorporated herein by reference.
2.0 - SCOPE OF WORK
Subject to the terms and conditions of this Agreement, CIBA agrees to
make the Guaranteed Purchases of the Products from KPI and KPI agrees to
manufacture and supply to CIBA Product in the quantities ordered by CIBA,
subject to the provisions of this Agreement, and conforming to the
specifications set forth in Schedule A from Furnished Materials received from
CIBA which conform to the specifications set forth in Schedule B. KPI shall be
responsible for conducting a stability program concerning the Products, said
program to be carried out in the manner and at the cost outlined in Schedule C
attached hereto and made a part hereof and at the cost set forth in Section 3.0
herein. KPI shall manufacture the Products strictly in accordance with Schedule
A.
CIBA agrees to provide to KPI such quantities of Conforming Furnished
Materials as CIBA reasonably determines to be sufficient in accordance with the
applicable Targeted Yield Ratios set forth in Schedule D or otherwise agreed
upon by the parties for the manufacture of the quantities of Conforming Products
requested by CIBA, and to pay the applicable fee for the manufacture of such
Conforming Products.
2.1 QUANTITIES OF PRODUCTS PRODUCED. KPI agrees to produce such quantities of
Conforming Products as are ordered by CIBA during the term of this Agreement in
accordance with the Targeted Yield Ratios applicable to such Products all
subject to the provisions of Section 7 and other related Sections.
3
<PAGE> 5
2.2 QUANTITIES OF FURNISHED MATERIALS. During the term of this Agreement,
CIBA agrees to supply KPI with such quantities of Conforming Furnished Materials
as CIBA reasonably determines to be sufficient, based on the Targeted Yield
Ratio applicable to a Conforming Product, for the manufacture of the quantity of
such Conforming Products ordered by CIBA. CIBA shall supply such quantities of
Conforming Furnished Materials at a mutually agreed upon time prior to the
commencement of each production campaign.
2.3 PACKAGING NOT REQUIRED. KPI shall not be required to perform the
finished packaging of any Product. All Products shall be supplied to CIBA in
bulk form in bulk containers approved by CIBA.
3.0 - DEVELOPMENTAL WORK AND STABILITY TESTING
This Agreement contemplates no development work. Any Arrangement for
development work will be negotiated by the parties and memorialized in a
separate agreement. KPI shall make use of its facilities in conducting the
stability program set out in Schedule C. CIBA shall pay KPI for such stability
work at KPI's then prevailing rates, as such rates are from time to time
established by KPI, which shall not be less than $50.00 per hour (or any part
thereof) per laboratory technician or support person. The rate of $50.00 per
hour (or any part thereof) per laboratory technician or support person shall
apply to stability testing also.
4.0 - FINANCIAL PROVISIONS
4.1 TRANSFER PRICE. Subject to the provisions of Subsection 4.2 during
the initial term of this Agreement, KPI shall manufacture and sell the
Conforming Product to CIBA at the Transfer Price. Said Transfer Price is
conditioned upon, and assumes delivery, F.O.B. King Pharmaceuticals, Inc.,
Bristol, Tennessee.
4
<PAGE> 6
4.2 PAYMENT. The balance of any invoice shall be due KPI within thirty
(30) days of the date of the invoice, said invoice to be issued by KPI upon
shipment of the Conforming Product to CIBA. Late payment of undisputed invoiced
amounts will incur additional interest charges at the current prime rate
established by Citibank, New York on the first day of the month in which the
original payment was due for the period from the due date until the date
payment is made.
5.0 - TERM AND TERMINATION
5.1 TERM. This Agreement shall commence on the date first written above and
shall continue until December 31, 1997 unless sooner terminated or extended as
hereinafter provided.
5.2 TERMINATION. Prior to the expiration of the initial or any renewal
term, this Agreement may be terminated as below provided upon the occurrence of
any of the following events:
5.2.1 MATERIAL BREACH. Such termination shall be effective sixty (60)
days after written notice is delivered by either party to the other party in the
event that the other party breaches any material provision of this Agreement,
and such other party fails to remedy such material breach prior to expiration of
the sixty (60) day notice period.
5.2.2 INSOLVENCY. Such termination shall be immediately effective upon
written notice delivered by either party to the other upon the insolvency,
bankruptcy or any other reorganization of the other party under the Bankruptcy
Code.
5.2.3 REPEATEDLY LATE PAYMENTS. Such termination shall be effective
sixty (60) days after written notice of a history or continuing series of
uncontested payments or failure to pay interest due on late payments. In this
context, any three instances of late payments, late interest payments or any
combination of the two in any Production Year shall be considered a "history or
continuing series".
5
<PAGE> 7
5.2.4 FAILURE TO PROVIDE PROJECTIONS. Such termination at King's
option shall be immediately effective upon two or more failures of CIBA during
any Production Year or renewal term hereof to supply projections or forecasts
within the established time.
5.2.5 FAILURE TO MEET GUARANTEED PURCHASES. Such termination at King's
option shall be immediately effective upon any failure by CIBA to purchase its
Guaranteed Purchases during the applicable Production Year.
5.2.6 FDA ACTION. Such termination shall be immediately effective in
the event of action by the FDA or any federal, state or local regulatory agency,
board, or group removing or recalling Product or materially interrupting with
the continuous manufacturing, packaging, or shipping of the Product;
5.2.7 MUTUAL CONSENT. Such termination shall be immediately effective
upon the written consent of the Parties; or
5.2.8 OTHERWISE PROVIDED. As may be otherwise provided or permitted
under this Agreement.
5.3 SURVIVAL PROVISIONS. Termination under Subsection 4.2 shall not relieve
either party of any obligations or liabilities incurred by the party prior to or
in connection with termination. The provisions of Sections 11.0, 12.0, 14.0,
16.0, 17.0 and 22.0 shall survive the termination or cancellation of this
Agreement for any reason.
6
<PAGE> 8
6.0 - REQUIRED DOCUMENTS
6.1 REGULATORY FILINGS. The parties agree to cooperate fully in the
preparation and filing of any and all documents required by regulatory agencies
to allow KPI to lawfully produce the Product and CIBA to lawfully use or sell
the Product. Notwithstanding the foregoing, regulatory approval of the Product
shall be the sole responsibility of CIBA, except as provided herein.
6.2 PRODUCTION AND CONTROL DOCUMENTS. CIBA will provide KPI with copies of
all information necessary to manufacture, package and ship the Product
including, but not limited to, all information described in Schedules A, B, C,
and D, analytical methods, other control procedures and relevant material safety
data sheets.
6.3 APPLICABILITY OF THE CONFIDENTIALITY PROVISIONS. Any exchange of
information by the parties required by Subsections 6.1 and 6.2 above shall be
governed by and subject to the provisions of Section 22.0 of this Agreement.
7.0 - MANUFACTURE AND SUPPLY ARRANGEMENTS
7.1 REQUIREMENT ESTIMATES. At the time of execution of this Agreement,
CIBA shall furnish KPI with an estimate of its annual requirements of the
Products from KPI, calculated on a month to month basis. Every six months,
commencing at the time of execution of this Agreement, CIBA shall furnish KPI
with an estimate of its requirements of the Products from KPI for the next six
month period, calculated on a month to month basis; provided, however, KPI
shall have the opportunity to comment upon all forecasts and, within ten (10)
business days after receipt of such Product forecast, shall advise CIBA whether
a forecast unreasonably exceeds KPI's anticipated capacity or other concerns
KPI may have about the forecast. CIBA shall also at the time of execution of
this Agreement submit its first firm purchase order as outlined below.
7
<PAGE> 9
7.2 PURCHASE ORDERS. CIBA shall submit to KPI in writing a firm Purchase
Order sixty (60) days in advance of delivery. CIBA is obligated to submit firm
purchase orders of not less than 50% of its monthly projections in its estimate
of its annual requirements of the Products or not less than 80% of its monthly
projections in its six month estimate of its six month requirements of the
Products, whichever is greater. KPI shall not be obligated to deliver full
quantities of Products required by said purchase order within the sixty (60) day
period if the quantity ordered is plus 50% of the monthly projections in the
annual estimate or plus 20% of the monthly projection in the six month estimate
as provided to KPI, whichever is less. Subject to Targeted batch sizes, KPI
shall not be obligated to furnish finished Product to the extent Furnished
Materials are not delivered to KPI in a timely manner and in sufficient quantity
for KPI to meet production forecasts and schedules. The obligations of the
parties otherwise are governed by the terms and conditions of this Agreement and
none of the general terms and conditions of any CIBA purchase order form or any
KPI acknowledgment shall be controlling. CIBA acknowledges again its obligations
for Guaranteed Purchases and will not submit forecasts or purchase orders which
would result in a shortfall of CIBA's obligations for Guaranteed Purchases.
7.3 DELIVERY OF FURNISHED MATERIALS. Based on the Targeted Yield Ratios
required for a batch, CIBA shall make available to KPI adequate quantities of
Furnished Materials sufficiently in advance of scheduled production of such
batch at a mutually agreed upon time prior to commencement of each production
campaign. Furnished Materials shall be delivered to KPI's facility located to
501 Fifth Street, Bristol, Tennessee 37620 at CIBA's expense.
8
<PAGE> 10
7.4 OTHER MATERIALS AND INPUTS. KPI shall be responsible at its sole cost
and expense to provide all materials, except Furnished Materials, and labor and
other inputs necessary to produce the quantities of Conforming Products ordered
by CIBA pursuant to this Agreement, and agrees that the sole compensation due to
KPI for such materials and input is the Transfer Price set forth herein.
7.5 DELIVERY OF PRODUCT. KPI shall deliver the Products to CIBA FOB the
carrier approved by CIBA at KPI's facility.
7.6 RETURN TO CIBA OF BY-PRODUCT. KPI shall deliver all By-Products to
CIBA at CIBA's expense.
7.7 ARTWORK AND COPY. CIBA shall be responsible for all artwork and copy
relating to the final packaging and labeling of the Product. CIBA shall also be
responsible for compliance with all federal, state and local laws and
regulations concerning packaging and labeling, and for obtaining any necessary
regulatory approvals of printed materials, artwork and copy.
7.8 INSPECTIONS. Upon ten (10) calendar days' written notice, CIBA shall
have the right to inspect, no more than once every quarter of a calendar year,
during normal business hours, all records and facilities associated with the
manufacture, processing and packaging of Product, as well as with the receipt,
storage and issuance of components and ingredients thereof.
7.9 REPORTS AND RECORDS. KPI agrees to maintain and to preserve throughout
the term of this Agreement, and for a period of three (3) years following
termination of this Agreement, or for such longer period as may be required by
applicable law or regulation, all books, records and other documents relating to
KPI's performance of manufacturing services pursuant to this
9
<PAGE> 11
Agreement. During such period(s), CIBA shall have the right, upon ten (10)
days' written notice and within normal business hours, to examine and copy,
without charge, any such records.
7.10 TARGETED QUANTITY. CIBA shall purchase from KPI during the relevant
period no less than the Guaranteed Purchases of Products as shown in SCHEDULE F.
8.0 - TITLE AND RISK OF LOSS
Title to and risk of loss of Furnished Materials and Products shall
remain with CIBA. KPI shall not sell, pledge, hypothecate, dispose of, or
otherwise transfer any interest in the Furnished Materials, By-Product or
Products except as otherwise provided in this Agreement, and shall use the
Furnished Materials solely for purposes of manufacturing Products for CIBA. KPI
shall provide safe and secure storage conditions for the Furnished Materials and
Products while they are at KPI's location. KPI shall fully cooperate with CIBA
in taking such steps as CIBA may reasonably require in order to protect its
interest in Products or Furnished Material against the claims or competing
interests of third parties, including any creditors of KPI.
9.0 - ANALYTICAL CERTIFICATION AND REGULATORY COMPLIANCE
9.1 CERTIFICATE OF ANALYSIS. Before delivery to CIBA, each lot of Product
shall be tested by KPI in accordance with the specifications for Conforming
Products. The items tested, specifications and test results shall be set forth
in a Certificate of Analysis for each lot delivered. These certificates shall
confirm that the Product lot test results met the acceptance criteria
established for Conforming Products.
9.2 REGULATORY COMPLIANCE. KPI shall advise CIBA immediately if an
authorized agent of any governmental agency visits KPI's manufacturing facility
and requires changes to be made in the method of manufacture or packaging of the
Product. In such event, KPI shall not
10
<PAGE> 12
implement any such change without obtaining prior written approval from CIBA,
which approval shall not be unreasonably withheld. Copies of documents left by
authorized agents of governmental agencies (e.g., Form FDA 483) that relate to
the Product shall be furnished to CIBA in a timely manner.
10.0 - REJECTED SHIPMENTS
10.1 PRODUCT FAILS TO MEET SPECIFICATIONS. Within thirty (30) days after its
receipt of each shipment of Product and the related Certificate of Analysis,
CIBA shall notify KPI in writing if CIBA chooses to reject the shipment,
otherwise the shipment shall be deemed accepted by CIBA. Any notification of
rejection shall state with specificity the basis for rejection, and shall state
whether CIBA requires the rejected shipment to be replaced with a new shipment
of Product. A replacement shipment of Product so required by CIBA shall be made
by KPI as soon as practicable using reasonable efforts (but no later than
forty-five (45) days after KPI receives such notification), or as soon
thereafter as the Furnished Materials are made available by CIBA to KPI for the
manufacture of replacement Product. Such replacement Product shall be invoiced
by KPI and paid for by CIBA at the same price as invoiced for the rejected
shipment of Product.
10.2 No Obligation to Pay. CIBA shall not be obligated to pay for any
rejected shipment of Product which fails to meet specifications for Conforming
Products, but CIBA shall be obligated to pay in full for any rejected shipment
of Product which does meet said specifications. In the event CIBA states in its
Notice of Rejection that such rejection is based on the Product failing to meet
the appropriate specifications, KPI shall have fifteen (15) days within which to
notify CIBA in writing of KPI's objection thereto, and the parties shall, within
ten (10) days after
11
<PAGE> 13
KPI sends its objection to CIBA, submit the issue to an independent laboratory
in accordance with Subsection 10.3 below.
10.3 CONFLICTING TEST RESULTS. In the event of a conflict between the test
results of KPI, and the test results of CIBA with respect to any shipment of
Product by KPI an effort will be made to reconcile the test results. If the
parties fail to reconcile such results with ten (10) days after KPI sends it
notice of objection pursuant to Section 10.2, an adequate sample of the rejected
Product in its bulk material form shall be submitted by KPI to an independent
laboratory acceptable to both parties for testing against the specifications for
Conforming Products using the procedures described in these specifications. The
test results obtained by such laboratory shall be final and controlling, and the
fees and expenses of the laboratory shall be borne entirely by the party against
whom such laboratory findings are made. If the laboratory's findings are in
flavor of KPI, CIBA shall immediately pay KPI the price invoiced for the
rejected Product.
10.4 PRODUCT OUT OF SPECIFICATION. In the event that any batch of Product
produced by KPI fails to meet the Specifications set forth in Schedule A or is
not manufactured in accordance with its Targeted Yield Ratio, then KPI shall,
within twenty (20) days after obtaining either KPI's test results or confirming
test results from an independent laboratory pursuant to Section 10.3 or batch
records showing such failure, notify CIBA in writing of such failure and of
KPI's election of one of the following options:
(a) Permit CIBA to terminate its obligations regarding the Product in
question (Interceptor(R) or Program(R) under this Agreement; provided, however,
CIBA's obligations with respect to Products other than the Products in question
shall remain in full force and effect, and further provided that CIBA shall,
within 30 (thirty) calendar days of the date on which KPI sends
12
<PAGE> 14
CIBA notice of its election of options, inform KPI of whether or not it will
immediately terminate its obligations for Interceptor, or continue with the
terms for Interceptor in place.
(b) Negotiate with CIBA to establish a mutually agreeable price for the
replacement of Furnished Materials used in the manufacture of the batch of
Product that failed to meet specifications or that exceeded the Targeted Yield
Ratio for that batch.
10.5 RETURN OF REJECTED SHIPMENTS. KPI shall make arrangements with CIBA for
the disposal of any shipment of Product rejected by CIBA pursuant to this
Section. The disposal costs for any rejected shipment of Product shall be paid
by KPI unless the independent laboratory determination pursuant to Section 10.3
demonstrates that such rejected shipment of Product conforms to the appropriate
specifications, in which case any such disposal costs shall be for the account
of CIBA.
11.0-PRODUCT COMPLAINTS/ADVERSE REACTION REPORTS
If either party becomes aware of any report concerning the Product
which may involve or impact KPI's manufacture hereunder, the party shall
promptly communicate such report to the other party in writing. If KPI receives
any Adverse Reaction Reports relating to the Product, KPI shall notify CIBA
thereof within twenty-four (24) hours via telephone and shall follow-up with a
written notification within forty-eight (48) hours after receiving such report.
12.0-PRODUCT RECALLS
In the event a governmental entity issues a request, directive or order
that the Product be recalled, or a court of competent jurisdiction orders such a
recall, or CIBA voluntarily elects to recall the Product, the parties shall take
all appropriate recall actions. If such recall results from the breach of KPI's
warranties under this Agreement, defective manufacture or packaging, or
13
<PAGE> 15
AUTOMOBILE LIABILITY INSURANCE including non-owned and hired vehicle
coverage with limits of liability of not less than: Bodily Injury $500,000 each
occurrence; Property Damage $250,000 each occurrence and $500,000 in the
aggregate.
EXCESS LIABILITY INSURANCE OVER COMPREHENSIVE GENERAL LIABILITY AND
COMPREHENSIVE AUTOMOBILE LIABILITY coverages afforded by the primary policies
described above with Targeted limits of $1,000,000 per occurrence and $2,000,000
in the aggregate in excess of the specified limits. This policy shall cover,
among other risks, the contractual liability assumed in this Agreement.
FIRE INSURANCE WITH EXTENDED COVERAGE in such form and amount as CIBA
may reasonably require in order to protect CIBA's interest in Furnished
Materials up to a maximum coverage of $1,000,000.
ENVIRONMENTAL IMPAIRMENT LIABILITY INSURANCE for non-sudden and
accidental occurrences, if required by applicable law or regulation.
13.2 CERTIFICATES OF INSURANCE. Upon request, KPI shall promptly furnish
CIBA with certificates of insurance or true copies of policies, showing the
above coverages and providing for at least thirty (30) days prior written notice
to CIBA of cancellation or modification. The policy or certificate of
Comprehensive General Liability and Excess Liability coverages shall state that
it is primary coverage and not concurrent or excess over other valid insurance
which may be available to CIBA, and shall certify, as to KPI's Comprehensive
General Liability Insurance (a) that restrictive clauses, such as the care,
custody and control exclusion in the property damage section have been
eliminated from the Policy and no similar restrictive clauses are included: and
(b) that all liability assumed by KPI under this Agreement is insured.
15
<PAGE> 16
13.3 INCREASED EXPENSE. If so required by CIBA, KPI shall alter the kinds of
insurance and/or increase the limits thereof, from those set forth in Section
13.l of this Agreement, and any such changes shall be at the expense of CIBA,
but only to the extent that such expense is applicable to this Agreement. In the
event KPI so desires, it may carry out or take additional kinds of insurance or
increased limits over those set forth in this Agreement, but in any such case at
its own expense.
13.4 LOSSES OR EXPENSES OF CIBA. Losses or expenses of CIBA compensated by
the foregoing insurance, whether or not due to the negligence or fault of KPI,
or its subcontractors, their agents or employees, shall be payable to CIBA by
KPI whether or not encompassed by the indemnity provisions of this Agreement.
14.0 COMPLIANCE WITH LAWS
14.1 HEALTH AND SAFETY INFORMATION. Material Safety Data Sheets for
Furnished Materials are included in Schedule A. CIBA shall promptly forward to
KPI revisions and updates, if any, to such Material Safety Data Sheets. KPI
shall transmit such Materials Safety Data Sheets and communicated the
information contained therein to its agents and employees, as required by all
applicable local, state and federal laws and regulations. It is understood that
CIBA has conveyed to the best of its ability its knowledge relative to the safe
handling of Furnished Materials, By-Product containing Furnished Materials and
Products, and that KPI will take all required safety precautions during the use
and handling of the same. KPI acknowledges that it is fully familiar with such
information and the risks expressly disclosed by CIBA, as well as risks that,
based on its expertise as an experienced pharmaceutical manufacturer, are
implicit in manufacturing the
16
<PAGE> 17
Products, and KPI accepts full responsibility for such risks, subject to the
indemnity obligations of CIBA.
14.2 PERMITS. KPI represents that its holds and, during the term, will
maintain all required licenses, permits and similar governmental authorizations
(collectively, the "Permits") required for its performance under this Agreement
and will, at CIBA's request, provide copies of such permits. KPI shall provide
CIBA with prompt, written notice if, during the term of this Agreement, any
Permit is due to expire and will not be (or is not likely to be) renewed as
currently in force or becomes the subject of any judicial or administrative
action.
14.3 ADDITIONAL AGREEMENTS. KPI agrees to, and shall comply with, the
following:
(a) Report promptly to CIBA any hazards or operational difficulties
experienced in handling or processing CIBA's Furnished Materials, By-Products
containing Furnished Materials or Products and any complaints or adverse
reaction reports concerning the Products received by KPI;
(b) Comply with all applicable federal, state and local laws and
regulations regarding the environment and worker health and safety in
performance of this Agreement;
(c) Otherwise comply with all federal, state and local laws and
regulations applicable to its performance under this Agreement, including
without limitation, the delivery of Products to CIBA; and
(d) Cooperate fully in the preparation of such and all documents
required by regulatory agencies to permit performance under this Agreement.
Notwithstanding the foregoing, regulatory approval of the Products shall be the
sole responsibility of CIBA.
17
<PAGE> 18
15.0 KPI WARRANTY
KPI warrants that the Product will be manufactured in conformity with
the specifications for Product set forth in Schedule A. KPI further warrants
that: (a) it is knowledgeable in manufacturing pharmaceutical products and has
at its facility all equipment and supplies, with the exception of Furnished
Materials, required for the production of Product under this Agreement, and (b)
it currently holds all Permits required for manufacture of the Product in full
compliance with federal, state and local laws or regulations.
16.0-INDEMNIFICATION
16.1 INDEMNIFICATION BY CIBA. CIBA shall indemnify, defend and hold KPI
harmless from and against any and all liabilities, damages, losses, costs or
expenses (including reasonable attorney fees), resulting from any third party
claims made or suits brought against KPI which arise out of the handling,
storage, promotion, marketing, distribution, use or sale of the Product or
Furnished Materials, including without limitation, any claims (express, implied
or statutory), involving the efficacy, safety, or use to be made of the Product,
or which otherwise arise out of the negligence or willful misconduct of CIBA or
its material breach of this Agreement, except to the extent such liability,
damage, loss, cost or expense (including reasonable attorneys fees) results from
the breach of KPI's warranties under Section 15.0 hereof or KPI's negligence or
willful misconduct.
16.2 INDEMNIFICATION BY KPI. KPI shall indemnify, defend and hold CIBA
harmless from and against any and all claims, liabilities, damages, losses,
costs or expenses (including reasonable attorney fees), resulting from any third
party claims or suits brought against CIBA which arise out of KPI's negligence
or willful misconduct in its manufacture, packaging or
18
<PAGE> 19
handling of the Furnished Materials or Product or its material breach of this
Agreement, except to the extent such liability, damage, loss, cost or expense
(including reasonable attorneys fees) results from the manufacture or packaging
of Product in accordance with the specifications or by reason of CIBA's
negligence or willful misconduct. Notwithstanding the foregoing, KPI shall not
be liable for any lost profits to CIBA arising from CIBA's failure to make sales
of the Product due to the failure of KPI to supply Conforming Product.
16.3 CONDITIONS IMPOSED UPON INDEMNITY. If either party proposes to seek
indemnification from the other under this Section, it shall notify the other
party in writing within thirty (30) days of notice of any claim or suit and
shall cooperate fully with the other party in the defense of all such claims or
suits. The indemnifying party shall have control of any suit, and no settlement
or compromise shall be made or binding on the indemnifying party without its
prior written consent.
17.0-CIBA WARRANTIES
CIBA warrants to KPI that the sales of the Products shall not infringe
any patent, trade secret or other proprietary rights and that manufacture of the
Product according to specifications furnished by CIBA to KPI represents
compliance with applicable regulatory-approved documents. CIBA shall indemnify,
defend and hold KPI harmless from and against any and all judgments,
liabilities, damages, losses, costs or other expenses (including reasonable
attorney fees) arising from claims that any Product infringes patent or other
proprietary rights of a third party or that any Product manufactured according
to said specification is not in compliance with applicable regulatory-approved
documents.
19
<PAGE> 20
18.0-DEFAULT
If either party hereto shall fail to perform or fulfill, at the time
and in the manner herein provided, any obligation or condition required to be
performed or fulfilled by such party, and (a) if such party fails to remedy any
such default (other than a default in a monetary payment) within sixty (60) days
written notice theretofore given to it by the other party, or (b) if such
failure consists of a default in a monetary payment which is not in dispute and
the defaulting party fails to make such payment within thirty (30) days written
notice theretofore given to it by the other party, or (c) if either party files
a bankruptcy petition or initiates a similar proceeding under state or federal
law, or is insolvent, or (d) if either party, following the other party's
written request therefor, fails to provide adequate written assurances of its
intent and ability to timely and fully discharge its obligations under this
Agreement, such other party thereafter shall have the immediate right to
terminate this Agreement upon written notice of a default termination. Nothing
contained in this Section shall be construed to exclude any other remedy for
legal or equitable relief otherwise provided.
19.0 DISPOSITION OF PROPERTY UPON TERMINATION
Upon termination of this Agreement, KPI, at the request of CIBA, shall
permit any Product or any Furnished Materials then held by KPI to remain at
KPI's facility, without cost or charge to CIBA, for a period not exceeding ten
(10) days after termination, as CIBA to dispose or arrange for the disposition
of such property. During such 10-day period, CIBA shall have the right to enter
the facility at any time during normal business hours in order to arrange for
the disposition of such Product or Furnished Materials, and CIBA will remove or
cause the removal of all such property within such 10-day period.
20
<PAGE> 21
20.0-INDEPENDENT CONTRACTOR
CIBA neither assumes nor authorizes any representative or other person
to assume for it any obligation or liability other than such as is expressly set
forth herein. KPI shall be an independent contractor with respect to the
services to be performed hereunder. Neither KPI nor its employees shall be
deemed servants, joint venturers, partners, employees or agents of CIBA.
Both KPI and CIBA acknowledge that this Agreement does not constitute a
partnership, joint venture, cooperative effort, or any relationship between the
parties other than as independent contractors.
21.0-FORCE MAJEURE
Delay in or failure of performance by either party hereto shall be
excused if and to the extent that such delay or failure is caused by an
occurrence beyond the reasonable control of the party affected, including but
not limited to the availability of raw materials, acts of God, compliance with
orders of any governmental authority whether valid or invalid, acts of war,
rebellion, fires, floods, explosions, storms, riots, strikes or any similar
cause. Upon the happening of an event constituting Force Majeure, the party
affected thereby shall be excused from performance during its continuance. Such
party shall promptly notify the other in writing of the happening of the event
and of the time during which it is anticipated such event will affect the
notifying party's ability to perform its obligations under this Agreement. The
party invoking the terms of this Section shall use its reasonable efforts to
correct or ameliorate conditions giving rise to any delay or failure of
performance; but the settlement of any strike or labor dispute will be entirely
within the discretion of the affected party.
21
<PAGE> 22
22.0-CONFIDENTIALITY
During the term of this Agreement it may be necessary for one party to
disclose to the other certain confidential information including, but not
limited to, Product information, manufacturing information, testing methods,
forecasts, marketing plans, proposals, improvements and quality assurance
requirements (hereinafter "Confidential Information"). For a period of five (5)
years after the termination or expiration of this Agreement with respect to the
Product (including any extension hereof), the party receiving any such
Confidential Information from the disclosing party hereunder shall exercise due
care at all times to prevent the unauthorized disclosure or use of Confidential
Information relating to said Product. This obligation shall not apply to:
(a) information which is known to the receiving party prior to
disclosure or is independently developed by the receiving party, as evidenced by
such party's written records;
(b) information disclosed to the receiving party hereunder in a
non-confidential manner by a third party who has a right to make a disclosure
and does not have an obligation of confidentiality to the disclosing party
hereunder with respect to this disclosure;
(c) information which is or becomes (through no breach or fault of the
receiving party) patented, published or otherwise part of the public domain; and
(d) information which is required to be disclosed under penalty of law;
provided, however, that the receiving party has taken all steps available under
law (but not the institution of legal action) to protect this information and
notifies the disclosing party hereunder of its obligation to make the disclosure
sufficiently prior to the time such disclosure is made to allow the disclosing
party to seek a protective order.
22
<PAGE> 23
All copies of Confidential Information disclosed in writing by one
party to the other shall be returned to the disclosing party within thirty (30)
days of the termination of this Agreement; however, the return of said copies
does not relieve the parties of their continuing obligation under this Agreement
to maintain the confidentiality of this information.
23.0-GENERAL PROVISIONS
23.1 NOTICES. Any notices permitted or required by this Agreement shall be
sent by telex or telecopy, or by certified or registered mail, and shall be
effective when received if sent and addressed as follows, or to such other
address as may be designated by a party in writing:
<TABLE>
<S> <C>
If to KPI: Jefferson J. Gregory, Executive Vice President/General Manager
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
with a copy to: John A. A. Bellamy, Corporate Counsel
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
If to CIBA: Animal Health Division
Ciba-Geigy Corporation
Post Office Box 18300
Greensboro, North Carolina 27419-8300
with copy to: Legal Department
Ciba-Geigy Corporation
Post Office Box 18300
Greensboro, North Carolina 27419-8300
</TABLE>
23.2 ENTIRE AGREEMENT. The parties hereto acknowledge that this Agreement
sets forth the entire agreement and understanding of the parties and supersedes
all prior written or oral agreements or understandings with respect to the
subject matter hereof. No modification of any
23
<PAGE> 24
of the terms of this Agreement, or any amendments thereto, shall be deemed to
be valid unless in writing and signed by the party against whom enforcement is
sought. No course of dealing or usage of trade shall be used to modify the terms
and conditions herein.
23.3 WAIVER. No waiver by either party of any default shall be effective
unless in writing, nor shall any such waiver operate as a waiver of any other
default or of the same default on a future occasion.
23.4 OBLIGATIONS TO THIRD PARTIES. Each party warrants and represents that
proceeding herein is not inconsistent with any contractual obligations,
expressed or implied, undertaken with any third party.
23.5 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the successors or permitted assigns of each of the parties and may
not be assigned by either party without the prior written consent of the other,
which consent shall not be unreasonably withheld. An attempted assignment,
without such consent, shall be void.
23.6 BIDS ON GOVERNMENTAL CONTRACTS. CIBA agrees that it will not offer a
bid relating to Products produced under this Agreement to any governmental
agency without the expressed written consent of KPI.
23.7 GOVERNING LAW. The validity, interpretation and effect of this
Agreement shall be governed by and construed under the laws of the State of
Tennessee and any action brought by either party shall be maintained exclusively
in courts of the State of Tennessee.
23.8 SEVERABILITY. In the event that any provision of this Agreement shall
violate any applicable statute, ordinance or rule of law in any jurisdiction in
which it is used, or is otherwise
24
<PAGE> 25
unenforceable, that provision shall be ineffective to the extent of the
violation without invalidating any other provision hereof.
23.9 HEADINGS. The headings used in this Agreement are for convenience only
and are not a part of this Agreement.
23.10 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same original.
23.11 SCHEDULES. The Schedules attached hereto are made a part of this
Agreement as if fully set forth herein.
23.12 CONSTRUCTION OF VARIOUS WORDS AND PHRASES. The word "hereby",
"hereunder", and similar words refer to this entire Agreement and not merely to
the sections, subsections, or paragraphs wherein such words may appear.
"Including", "includes", and "include" and similar terms shall mean "including
without limitation," "includes without limitation," and "include without
limitation."
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement
to be executed by their duly authorized representatives as of the date first
above written.
CIBA-GEIGY CORPORATION KING PHARMACEUTICALS, INC.
By:/s/ T.P. McGowan By: /s/ John M. Gregory
-------------------------------- ------------------------------
Name: T.P. McGowan Name: John M. Gregory
------------------------------ ----------------------------
Title: President Title: President
----------------------------- ---------------------------
25
<PAGE> 26
ADDENDUM TO
MANUFACTURE AND SUPPLY AGREEMENT
FOR
PROGRAM(R) SUSPENSION & INTERCEPTOR(R) BEEF FLAVORED TABLETS
WHEREAS, KING PHARMACEUTICALS, Inc. ("KING") and CIBA-GEIGY Corporation
("CIBA") have previously entered into and executed a Manufacture and Supply
Agreement with an effective date of July 17, 1995 (the "Agreement") obligating
KING to provide, and CIBA to purchase, subject to the terms and conditions of
the Agreement, Program(R) Suspension and Interceptor(R) Beef Flavored Tablets
(as more particularly defined as "Products" in the Agreement),
WHEREAS, Section 3.0 of the Agreement also obligates KING to conduct a
stability program for the Products according to the specifications as set out in
Schedule C of the Agreement,
WHEREAS, CIBA is obligated to conduct a routine stability for purposes
of GMP compliance and in fulfillment of stability requirements in CIBA's NADA
for the Products,
WHEREAS, CIBA does not want KING to conduct or maintain any stability
program on the Products other than one three-year study for Interceptor(R) Beef
Flavored Tablets which study is scheduled to conclude in May of 1996, and
WHEREAS, CIBA has contracted with another independent third party to
conduct and maintain a stability program for the Products at no expense or risk
of loss or injury to KING:
NOW, THEREFORE in consideration of the foregoing KING and CIBA mutually agree to
the following:
1. Section 3.0 of the Agreement is deleted in its entirety and a new Section 3.0
inserted in its stead as follows:
This agreement contemplates no development work.
Any arrangement for development work will be negotiated
by the parties and memorialized in a separate agreement.
KING shall have no obligation or responsibility to conduct,
maintain, supervise or monitor any stability program for the
Products other than a three (3)-year stability study for
<PAGE> 27
Interceptor(R) beef-flavored tablets which is scheduled to conclude
in May of 1996. From time to time KING may request copies of the
routine stability work being performed by or on behalf of CIBA and
CIBA shall promptly furnish same to KING.
2. To the extent not otherwise changed or effected by Paragraph 1 above of this
Addendum, the Parties agree that all terms, conditions and/or covenants
included in the Manufacture and Supply Agreement, effective July 17, 1995,
will continue to have the same force and effect originally intended.
3. CIBA agrees to indemnify and hold KING harmless from any and all claims,
contests, complaints, or causes of action arising out of, steming from or
related to CIBA's corporate decision to not have KING perform routine
stability programs for the Products.
4. This written Addendum is intended to be a modification or amendment of the
Amendment as contemplated under Section 23.2 of the Agreement and shall be
binding upon the parties.
IN WITNESS WHEREOF, the parties hereto have each caused this Addendum to be
executed by their duly authorized officers to be retroactively effective as of
July 17, 1995.
CIBA-GEIGY CORPORATION KING PHARMACEUTICALS, INC.
BY: /s/ T.P McGowan BY: /s/ John A.A. Bellamy
-------------------------------- --------------------------------------
NAME: T.P. McGowan NAME: John A.A. Bellamy
------------------------------ --------------------------------------
TITLE: President and ? TITLE: Vice President and General Counsel
----------------------------- -----------------------------------
DATE: 3/6/96 DATE: Jannuary 17, 1996
------------------------------ ------------------------------------
<PAGE> 28
SECOND ADDENDUM TO THE
MANUFACTURE AND SUPPLY
AGREEMENT
INTERCEPTOR(R) BEEF FLAVORED
TABLETS
&
PROGRAM(R) SUSPENSION
Between Novartis Animal Health US, Inc.
1500 Pinecroft Road Suite 400
Greensboro, North Carolina 27407
and King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
1
<PAGE> 29
WHEREAS there exists a Manufacture and Supply Agreement dated July 17, 1995
(hereinafter the "Original Agreement") between Novartis Animal Health US, Inc.
(hereinafter "Novartis"), successor to Ciba-Geigy Corporation and King
Pharmaceuticals, Inc. (hereinafter "King"), as amended by the First Addendum
executed March 6, 1996;
WHEREAS the parties wish to modify specific terms of the Original Agreement and
extend its term;
NOW THEREFORE THE PARTIES AGREE AS FOLLOWS:
1. To extend the term of the Original Agreement with respect to Interceptor(R)
until December 31, 1999. King shall be the exclusive manufacturer of
Interceptor for Novartis through the term of this extension:
2. Novartis agrees to purchase and King agrees to provide a minimum of fifty
(50) batches of Interceptor in 1997. The forecast for the 1997 requirements
is attached as Exhibit 1.
3. For the contract year 1998, Novartis agrees to purchase and King agrees to
provide a minimum of thirty (30) batches of Interceptor. The forecast for the
1998 requirements is attached as Exhibit 2.
4. For the contract year 1999, Novartis agrees to purchase and King agrees to
provide a minimum of thirty (30) batches of Interceptor. The forecast for the
1999 requirements is attached as Exhibit 3.
5. The Transfer Price for Interceptor for the additional contract years stated
herein will remain the Transfer Price as stated in Exhibit E to the Original
Agreement.
6. The ordering of each batch of Interceptor will be through Purchase Order in
accordance with Section 7.2 of the Original Agreement.
7. The parties agree that the forecast amounts contained in the Exhibits
attached hereto shall be firm and binding minimum commitments and that the
number of batches may be increased or decreased by up to 75% (in whole batch
sizes) in each month by so indicating in the Purchase Order. In the event
that the orders are decreased however, Novartis agrees to order and take
delivery of at least the number of batches projected in each six-month
calendar period of January through June and July through December for the
1998 and 1999 contract years, as set out in Exhibits 2 and 3 to the Addendum.
8. The specifications for Interceptor set forth in schedule A, Part II, attached
to the Original A greement shall be replaced in their entirety by the
specifications for
2
<PAGE> 30
Interceptor set forth in the revised Schedule A, Part II, attached to this
Second Addendum, to facilitate removal of dyes from Interceptor.
9. This Agreement does not include conditions or volumes for the production of
the so-called "Italian Batches". The "Italian Batches" will continue to be
manufactured under a separate understanding.
10. Concerning Program(R) Suspension orders for 1997, Novartis agrees to pay and
King agrees to receive upon execution of this Second Addendum a one time
pay-out of $350,000, via wire transfer in immediately available United
States funds to an account designated by King in lieu of any monetary
penalty or compensation owed by Novartis under the Guaranteed Purchases
provisions of the Original Agreement for Program Suspension in 1997. This
payment fully satisfies Novartis' liability to King pursuant to the terms of
the minimum Guaranteed Purchase provisions of the Original Agreement for
Program Suspension.
11. For contract years 1998 and 1999, there will be no Guaranteed Purchases of
Program Suspension.
12. King agrees to manufacture Program Suspension on an as-ordered basis through
the use of Purchase Orders with a 60 day order to delivery lead time through
the term of this contract extension. The terms and conditions of the
Original Agreement shall govern Purchase Orders for Program Suspension
submitted by Novartis to King pursuant to this paragraph 12.
13. To the extent not otherwise changed or affected by Paragraphs 1 through 12
above of this Second Addendum, the Parties agree that all terms, conditions
and/or covenants included in the Manufacture and Supply Agreement, effective
July 17, 1995, and as amended by the First Addendum, will continue to have
the same force and effect originally intended.
IN WITNESS WHEREOF, the parties hereto have each caused this Second Addendum to
be executed by their duly authorized officers to be effective as of the date of
the last party to sign.
Novartis Animal Health US, Inc. King Pharmaceuticals, Inc.
/s/ /s/
- ------------------------- ------------------------
CEO
Date: 7-29-97 Date: 7-30-97
------------ ------------
3
<PAGE> 1
EXHIBIT 10.20
MANUFACTURE AND SUPPLY
AGREEMENT
BETWEEN ROBERTS LABORATORIES INC.
MERIDIAN CENTER II, 4 INDUSTRIAL WAY WEST
EATONTOWN, NEW JERSEY, 07724
AND KING PHARMACEUTICALS, INC.
501 FIFTH STREET
BRISTOL, TN 37620
<PAGE> 2
MANUFACTURE AND SUPPLY AGREEMENT
KPI AND ROBERTS LABORATORIES, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
1.0 - GENERAL DEFINITIONS......................................................................................2
2.0 - SCOPE OF WORK............................................................................................3
3.0 - DEVELOPMENTAL WORK AND STABILITY TESTING.................................................................4
4.0 - FINANCIAL PROVISIONS.....................................................................................4
5.0 - TERM AND TERMINATION.....................................................................................5
6.0 - REQUIRED DOCUMENTS.......................................................................................7
7.0 - MANUFACTURE AND SUPPLY ARRANGEMENTS......................................................................8
8.0 - TITLE AND RISK OF LOSS..................................................................................10
9.0 - ANALYTICAL CERTIFICATION AND REGULATORY COMPLIANCE......................................................10
10.0 - REJECTED SHIPMENTS......................................................................................10
11.0 - PRODUCT COMPLAINTS/ADVERSE REACTION REPORTS.............................................................12
12.0 - PRODUCT RECALLS.........................................................................................13
13.0 - COMPLIANCE WITH LAWS....................................................................................14
14.0 - KPI WARRANTY............................................................................................14
15.0 - lNDEMNIFICATION.........................................................................................15
16.0 - ROBERTS' WARRANTIES.....................................................................................16
17.0 - DEFAULT.................................................................................................16
18.0 - DISPOSITION OF PROPERTY UPON TERMINATION................................................................17
19.0 - INDEPENDENT CONTRACTOR..................................................................................17
20.0 - FORCE MAJEURE...........................................................................................18
21.0 - CONFIDENTIALITY.........................................................................................18
22.0 - GENERAL PROVISIONS......................................................................................20
</TABLE>
<PAGE> 3
MANUFACTURE AND SUPPLY AGREEMENT
THIS AGREEMENT, is made this 5th day of October, 1995 (the "Effective
Date") by and between ROBERTS LABORATORIES INC., a New Jersey corporation with
offices at Meridian Center II, 4 Industrial Way West, Eatontown, New Jersey,
07724 ("ROBERTS") and KING PHARMACEUTICALS, INC., a Tennessee corporation with
offices at 501 Fifth Street, Bristol, Tennessee 37620 ("KPI"); individually KPI
or ROBERTS may be referred to as a "Party" and collectively as the "Parties."
WITNESSETH:
WHEREAS, ROBERTS desires KPI to undertake the manufacture of Nucofed(R)
in syrup and capsule presentations and Tigan(R) in capsule, suppository,
ampoule, vial, and syringe presentations and to purchase same from KPI and KPI
desires to manufacture and sell same to ROBERTS;
NOW, THEREFORE, in consideration of the covenants and conditions set
forth herein, the Parties agree as follows:
1.0 - GENERAL DEFINITIONS
1.1 "AGREEMENT" shall mean this document and all attachments, exhibits,
schedules, and addenda.
1.2 "PRODUCT" OR "PRODUCTS" shall mean those products in the strengths and
presentations listed in Exhibit A, attached hereto and incorporated herein by
reference.
2
<PAGE> 4
1.3 "ACT" means the United States Food, Drug, and Cosmetic Act, as amended.
1.4 "FDA" shall mean the U. S. Food and Drug Administration.
1.5 "SPECIFICATIONS" shall mean the confidential specifications for the
manufacture of Products set forth in Schedule B, attached hereto and
incorporated herein by reference, and which may be modified in writing by mutual
agreement of the Parties from time to time and with any necessary FDA approval
as appropriate.
1.6 "TRANSFER PRICE" shall mean the price charged to ROBERTS by KPI for the
Products, said price being described in Schedule C attached hereto and made a
part hereof, subject; however, to price adjustments as provided for in this
Agreement and in Schedule C itself.
1.7 "PRODUCTION YEAR" shall mean each period of one calendar year from January
1st through December 31st during the term of this Agreement, provided that the
initial "Production Year" for this Agreement shall commence on the Effective
Date of this Agreement and shall terminate on December 31, 1995.
2.0 - SCOPE OF WORK
Subject to the terms and conditions of this Agreement, ROBERTS agrees to
purchase all of its requirements for the Products from KPI and KPI agrees to
manufacture and supply to ROBERTS' Product, conforming to the Specifications, in
the quantities ordered by ROBERTS, subject to the provisions of Section 7 of
this Agreement and all other provisions and conditions of this Agreement. KPI
shall be responsible for conducting a stability program concerning the Products,
said program to be carried out in the manner outlined in Exhibit D, attached
hereto and made a part hereof, and at the cost set forth in Section 3.0 herein.
3
<PAGE> 5
3.0 - DEVELOPMENTAL WORK AND STABILITY TESTING
This Agreement contemplates no development work. Any arrangement for
development work will be negotiated by the Parties and memorialized in a
separate agreement. KPI shall make use of its facilities in conducting the
stability program set out in Exhibit D. ROBERTS shall pay KPI for such stability
work at KPI's then prevailing rates, as such rates are from time to time
established by KPI, but which shall not be less than $60.00 per hour (or any
part thereof) per laboratory technician or support person.
4.0 - FINANCIAL PROVISIONS
4.1 TRANSFER PRICE. Subject to the provisions of Subsection 4.2, KPI shall
manufacture and sell Product to ROBERTS at the scheduled Transfer Price, further
subject to any price adjustments described in Subsection 4.3. Said Transfer
Price is conditioned upon, and assumes delivery, F.O.B. KING Pharmaceuticals,
Inc., Bristol, Tennessee.
4.2 PAYMENT. The balance of any invoice shall be due KPI within thirty (30) days
of the date of the invoice, said invoice to be issued by KPI upon shipment of
the Product to ROBERTS. Late payment of undisputed invoiced amounts will incur
interest charges at the rate of one and one-half percent (1.5%) per month
beginning on the first day of the month in which the original payment was due
for the period from the due date until the date payment is made.
4.3 INCREASES TO TRANSFER PRICES. The term Transfer Price shall be subject to
increase according to the following mechanisms at KPI's sole discretion:
4.3.1 RAW MATERIAL/REGULATORY COST INCREASES. KPI shall have the
unconditional right to increase the Transfer Prices for Products up to five
percent (5%) per Production Year without documentation of cost increases to
ROBERTS. If KPI's documented year-over-year raw
4
<PAGE> 6
materials' costs increase more than five percent (5%), then KPI shall also have
the additional right to increase the Transfer Price by a corresponding amount
provided; however, KPI shall provide written proof of same to ROBERTS. If new or
additional U.S. Governmental regulations or state regulations increase KPI's
regulatory costs, then the Parties agree to negotiate in good faith additional
price increases.
4.3.2 COST OF LIVING INCREASES. In addition to the adjustments to the
Transfer Prices outlined in Subsection 4.3.1, KPI shall have the unconditional
right to increase the Transfer Prices for Products by percentages equal to
increases in the Cost of Living as evidenced by the Consumer Price Index as
published quarterly by the United States Government.
5.0 - TERM AND TERMINATION
5.1 TERM. This Agreement shall commence on the Effective Date (but shall also
apply to ROBERTS' purchase order #2666 dated October 5, 1995) and shall
continue until 11:59 p.m. on December 31, 2000 or unless sooner terminated or
extended as hereinafter provided. Notwithstanding the foregoing, this Agreement
shall be automatically renewed for additional two (2) year periods unless either
party shall notify the other of its intention not to renew the Agreement at
least two (2) years prior to the expiration of the initial term of this
Agreement or of any renewal or renewals thereof.
5.2 TERMINATION. Prior to the expiration of the initial or any renewal term,
this Agreement may be terminated as below provided upon the occurrence of any of
the following events:
5.2.1 MATERIAL BREACH. Such termination shall be effective sixty (60)
days written notice is delivered by either Party to the other Party in the event
that the other Party
5
<PAGE> 7
breaches any material provision of this Agreement, and such other Party fails to
remedy such material breach prior to expiration of the sixty (60) day notice
period.
5.2.2 INSOLVENCY. Such termination shall be immediately effective upon
written notice delivered by either Party to the other upon the insolvency,
bankruptcy or any other reorganization of the other Party under the Bankruptcy
Code.
5.2.3 REPEATEDLY LATE PAYMENTS. Such termination shall be effective
sixty (60) days after written notice of a history or continuing series of late
uncontested payments or failure to pay interest due on late payments. In this
context, any three instances of late payments, late interest payments, or any
combination of the two in any Production Year shall be considered a "history or
continuing series."
5.2.4 FAILURE TO PROVIDE PROJECTIONS. Such termination at KPI's option
shall be immediately effective upon two or more failures of ROBERTS during any
Production Year or renewal term hereof to supply projections or forecasts within
the established time.
5.2.5 FDA ACTION. Such termination shall be immediately effective in
the event of action by the FDA or any federal, state or local regulatory agency,
board, or group removing or recalling Product or materially interrupting with
the continuous manufacturing, packaging, or shipping of the Product, through no
fault of KPI.
5.2.6 NO PURCHASES. As to any of the Products listed in Schedule A, if
ROBERTS should fail to order a minimum of one (1) batch per Production Year with
the exception of the first Production Year, then the Agreement shall become void
only as to those Products not ordered.
6
<PAGE> 8
5.2.7 MUTUAL CONSENT. Such termination shall be immediately effective
upon the written consent of the Parties; or
5.2.8 OTHERWISE PROVIDED. As may be otherwise provided or permitted
under this Agreement.
5.3 SURVIVAL PROVISIONS. Termination under Subsection 5.2 shall not relieve
either Party of any obligations or liabilities incurred by such Party prior to
or in connection with termination. The provisions of Sections 11.0, 12.0, 13.0,
15.0, 16.0 and 21.0 shall survive the termination or cancellation of this
Agreement for any reason.
6.0 - REQUIRED DOCUMENTS
6.1 REGULATORY FILINGS. It will be the primary obligation of ROBERTS to prepare
and file any and all documents required by regulatory agencies to allow KPI to
lawfully produce the Product and ROBERTS to lawfully use or sell the Product;
however King agrees to cooperate in such preparation and filing and to supply
whatever information and documentation may be necessary or advisable in
connection with any such regulatory filings. Any requests by ROBERTS for or that
results in duplication or copies of work previously submitted to ROBERTS by KPI
will be charged to ROBERTS at the then prevailing rate for stability work.
Notwithstanding the foregoing, regulatory approval and administration of the
Product shall be the sole responsibility of ROBERTS.
6.2 PRODUCTION AND CONTROL DOCUMENTS. ROBERTS will provide KPI with copies of
all information necessary to manufacture, package and ship the Product
including, but not limited to, all information described in the Schedules,
analytical methods, other control procedures and
7
<PAGE> 9
relevant material safety data sheets to the extent that any such information is
not in KPI's possession.
6.3 APPLICABILITY OF THE CONFIDENTIALITY PROVISIONS. Any exchange of information
by the parties required by Subsections 6.1 and 6.2 above shall be governed by
and subject to the provisions of Section 21.0 of this Agreement.
7.0 - MANUFACTURE AND SUPPLY ARRANGEMENTS
7.1 FORECASTS AND REQUIREMENT ESTIMATES. Within thirty (30) days of the
Effective Date of this Agreement, ROBERTS shall furnish KPI with an estimate of
its annual requirements of the Products from KPI, calculated on a month to month
basis. This annual forecast shall be updated only once per quarter year by
ROBERTS and shall be updated on or before sixty (60) calendar days prior to the
start of each subsequent calendar quarter. Each current or first quarter of the
rolling annual forecast shall constitute a binding purchase order by ROBERTS;
provided however, that KPI shall have the opportunity to comment upon all
forecasts and quarterly updates and, within ten (10) business days after receipt
of such Product forecast, shall advise ROBERTS whether a forecast unreasonably
exceeds KPI's anticipated capacity or other concerns KPI may have about the
forecast. For any given calendar quarter, KPI shall be obligated to provide no
less that ninety percent (90%) and no more than one hundred ten percent (110%)
of the Product forecast for the quarter immediately preceding the then current
quarter. The obligations of the Parties otherwise are governed by the terms and
conditions of this Agreement and none of the general terms and conditions of any
ROBERTS purchase order form or any KPI
8
<PAGE> 10
acknowledgment shall be controlling. ROBERTS acknowledges the materiality of the
forecasts to this Agreement and their importance to KPI's production planning.
7.2 DELIVERY OF PRODUCT. KPI shall deliver the Products to the carrier approved
by ROBERTS FOB KPI's facility in Bristol, Tennessee.
7.3 ARTWORK AND COPY. ROBERTS shall be responsible for all artwork and copy
relating to the final packaging and labeling of the Product. ROBERTS shall also
be responsible for compliance with all federal, state and local laws and
regulations concerning the content of packaging and labeling, and for obtaining
any necessary regulatory approvals of printed materials, artwork and copy.
7.4 INSPECTIONS. Upon ten (10) calendar days' written notice, ROBERTS shall have
the right to inspect, no more than once a calendar year, during normal business
hours, all records and facilities associated with the manufacture, processing
and packaging of Product, as well as with the receipt, storage and issuance of
components and ingredients thereof.
7.5 REPORTS AND RECORDS. KPI agrees to maintain and to preserve throughout the
term of this Agreement, and for a period of three (3) years following
termination of this Agreement, or for such longer period as may be required by
applicable law or regulation, all books, records and other documents relating to
KPI's performance of manufacturing services pursuant to this Agreement. During
such period(s), ROBERTS shall have the right, upon ten (10) days' written notice
and within normal business hours, to examine and copy, any such records.
9
<PAGE> 11
8.0 - TITLE AND RISK OF LOSS
Title to and risk of loss of and Products shall remain with ROBERTS.
KPI shall not sell, pledge, hypothecate, dispose of, or otherwise transfer any
interest in the Products except as otherwise provided in this Agreement. KPI
shall provide safe and secure storage conditions for the Products while they are
at KPI's location.
9.0 - ANALYTICAL CERTIFICATION AND REGULATORY COMPLIANCE
9.1 CERTIFICATE OF ANALYSIS. Before delivery to ROBERTS, each lot of Product
shall be tested by KPI in accordance with the Specifications. The items tested,
general specifications and test results shall be set forth in a Certificate of
Analysis for each lot delivered. These certificates shall confirm that the
Product lot test results met the acceptance criteria established for the
Products.
9.2 REGULATORY COMPLIANCE. KPI shall advise ROBERTS immediately if an authorized
agent of any governmental agency visits KPI's manufacturing facility and
requires changes to be made in the method of manufacture or packaging of the
Product. In such event, KPI shall not implement any such change without
obtaining prior written approval from ROBERTS, which approval shall not be
unreasonably withheld, always subject to any necessary regulatory approvals.
Copies of documents left by authorized agents of governmental agencies (Form
FDA 483) that directly relate to the Product shall be furnished to ROBERTS in a
timely manner.
10.0 - REJECTED SHIPMENTS
10.1 PRODUCT FAILS TO MEET SPECIFICATIONS. Within fifteen (15) days after its
receipt of each shipment of Product and the related Certificate of Analysis,
ROBERTS shall notify KPI in writing if ROBERTS chooses to reject the shipment,
otherwise the shipment shall be deemed
10
<PAGE> 12
accepted by ROBERTS. Any notification of rejection shall state with specificity
the basis for rejection, and shall state whether ROBERTS requests the rejected
shipment to be replaced with a new shipment of Product. A replacement shipment
of Product so requested by ROBERTS shall be made by KPI as soon as practicable
using reasonable efforts (but no later than sixty (60) days after KPI receives
such notification), or as soon thereafter as the necessary materials and
components are made available to KPI for the manufacture of replacement Product.
Such replacement Product shall be invoiced by KPI and paid for by ROBERTS at the
same price as invoiced for the rejected shipment of Product.
10.2 NO OBLIGATION TO PAY. ROBERTS shall not be obligated to pay for any
rejected shipment of Product which fails to meet Specifications for the
Products, but ROBERTS shall be obligated to pay in full for any rejected
shipment of Product which does meet said Specifications. In the event ROBERTS
states in its Notice of Rejection that such rejection is based on the Product
failing to meet the appropriate specifications, KPI shall have twenty (20) days
within which to notify ROBERTS in writing of KPI's objection thereto, and the
parties shall, within ten (10) days after KPI sends its objection to ROBERTS,
submit the issue to an independent laboratory in accordance with Subsection 10.3
below.
10.3 CONFLICTING TEST RESULTS. In the event of a conflict between the test
results of KPI and the test results of ROBERTS with respect to any shipment of
Product by KPI, an effort will be made to reconcile the test results. If the
parties fail to reconcile such results within (10) days after KPI sends it
notice of objection pursuant to Section 10.2, an adequate sample of the rejected
Product shall be submitted by KPI to an independent laboratory acceptable to
both Parties for
11
<PAGE> 13
testing against the Specifications for the Products using the procedures
described in those Specifications. The test results obtained by such laboratory
shall be final and controlling, and the fees and expenses of the laboratory
shall be borne entirely by the Party against whom such laboratory findings are
made. If the laboratory's findings are in favor of KPI, ROBERTS shall
immediately pay KPI the price invoiced for the rejected Product together with
any interest or late payment charges that would have otherwise accrued.
10.4 RETURN OF REJECTED SHIPMENTS. KPI shall make arrangements with ROBERTS for
the disposal of any shipment of Product rightfully and timely rejected by
ROBERTS pursuant to this Section 10. The disposal costs for any rejected
shipment of Product shall be paid by KPI unless the independent laboratory
determination pursuant to Section 10.3 demonstrates that such rejected shipment
of Product conforms to the appropriate Specifications, in which case any such
disposal costs shall be for the account of ROBERTS.
11.0 - PRODUCT COMPLAINTS/ADVERSE REACTION REPORTS
11.1 KPI TO NOTIFY ROBERTS. KPI shall notify ROBERTS in writing within two (2)
working days of obtaining any information or knowledge concerning any visit or
inspection of KPI by the FDA regarding Products or KPI's manufacturing processes
related to the Products and any serious or unexpected side effect, injury,
toxicity, or sensitivity reaction, any unexpected incidents, or any adverse drug
experience reports and the severity thereof associated with Product whether or
not determined to be related to use of Products. Such notice to ROBERTS shall be
sent by fax, to the attention of the Director of Roberts' Regulatory Affairs
department, or his designate, at the current fax number of (908) 389-1014. KPI
shall also notify ROBERTS in
12
<PAGE> 14
writing in a timely manner of any other adverse experience whether or not
considered related to Products.
11.2 PRODUCT COMPLAINTS. Product complaint reports received by ROBERTS will be
summarized and sent to KPI by fax, to the Medical Affairs Department, to the
attention of Dr. Henry Richards at the current fax number (423) 989-6137 with an
original sent on the same day by U.S. Mail as provided in section 22.1. Product
complaint reports which may meet FDA Field-alert Report criteria codified at 21
CFR 314.82 (B) (1) will be communicated to ROBERTS in a timely fashion. ROBERTS
will investigate all Product complaints associated with distribution or handling
and provide a written summary to KPI and a written response to the complainant,
with a copy to KPI as provided in Section 22.1. KPI will investigate all
Products complaints associated only with active or inactive ingredients,
container/closure systems, or general product quality.
12.0 - PRODUCT RECALLS
In the event a governmental entity issues a request, directive or order
that the Product be recalled, or a court of competent jurisdiction orders such a
recall, or ROBERTS voluntarily elects to recall the Product, the Parties shall
take all appropriate recall actions. If such recall results from the breach of
KPI's warranties under this Agreement, defective manufacture or packaging, or
other breach or fault of KPI, KPI shall be responsible for the expenses of the
recall. However, in the event the recall occurs for any other reason, including
without limitation, misrepresentation, misbranding, or ROBERTS negligence or
willful action, or other breach or fault of ROBERTS, ROBERTS shall be
responsible for all expenses of recall. For the purposes
13
<PAGE> 15
of this Agreement, the "expenses of recall" shall mean the expenses associated
with customer notification, product return, replacement or destruction, and any
other charges incurred in order to comply with recall procedures.
13.0 COMPLIANCE WITH LAWS
13.1 PERMITS. KPI represents that it holds and, during this Agreement, will
maintain all required licenses, permits and similar governmental authorizations
(collectively, the "Permits") required for its performance under this Agreement.
13.2 ADDITIONAL AGREEMENTS. KPI agrees to, and shall comply with, the following:
(a) Comply with all federal, state and local laws and regulations
applicable to its performance under this Agreement, including, the delivery of
Products to ROBERTS; and
(b) Cooperate in the preparation of documents required by regulatory
agencies to permit performance under this Agreement. Notwithstanding the
foregoing, regulatory approval of any Products shall be the sole responsibility
of ROBERTS provided; however, any work done by KPI, but not required by such
regulatory agencies to be done by KPI, to assist ROBERTS in such matters (or to
assist ROBERTS with the transfer of TIGAN(R) products to its ownership) shall be
billed to ROBERTS by KPI at the rate then prevailing for stability work.
14.0 KPI WARRANTY
KPI warrants that the Product will be manufactured in conformity with
the Specifications for Products. KING MAKES NO OTHER WARRANTIES, EXPRESS OR
IMPLIED, WITH RESPECT TO PRODUCTS. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE, ARE HEREBY DISCLAIMED.
14
<PAGE> 16
15.0 - INDEMNIFICATION
15.1 INDEMNIFICATION BY ROBERTS. ROBERTS shall indemnify, defend and hold KPI
harmless from and against any and all liabilities, damages, losses, costs or
expenses (including reasonable attorneys' fees), resulting from any third Party
claims made or suits brought against KPI which arise out of the handling,
storage, promotion, marketing, distribution, use or sale of the Products,
including without limitation, any claims (express, implied or statutory),
involving the efficacy, safety, or use to be made of the Products, or which
otherwise arise out of the negligence or willful misconduct of ROBERTS or its
material breach of this Agreement, except to the extent such liability, damage,
loss, cost or expense (including reasonable attorneys' fees) results from the
breach of KPI's warranties under Section 13.0 hereof or KPI's negligence or
willful misconduct.
15.2 INDEMNIFICATION BY KPI. KPI shall indemnify, defend and hold ROBERTS
harmless from and against any and all claims, liabilities, damages, losses,
costs or expenses (including reasonable attorney fees), resulting from any third
party claims or suits brought against ROBERTS which arise out of KPI's
negligence or willful misconduct in its manufacture, packaging or handling of
the Product or its material breach of this Agreement, except to the extent such
liability, damage, loss, cost or expense (including reasonable attorneys fees)
results from the manufacture or packaging of Product in accordance with the
Specifications or by reason of ROBERTS' negligence or willful misconduct.
Notwithstanding the foregoing, KPI shall not be liable for any lost profits to
ROBERTS arising from ROBERTS' failure to make sales of the Product due to the
failure of KPI to supply Product.
15
<PAGE> 17
15.3 CONDITIONS IMPOSED UPON INDEMNITY. If either Party proposes to seek
indemnification from the other under this subsection, it shall notify the other
Party in writing within thirty (30) days of receipt of the notice of any claim
or suit and shall cooperate fully with the other Party in the defense of all
such claims or suits. The indemnifying Party shall have control of any suit, and
no settlement or compromise shall be made or binding on the indemnifying Party
without its prior written consent.
16.0 - ROBERTS' WARRANTIES
ROBERTS warrants to KPI that the sales of the Products shall not
infringe any patent, trade secret or other proprietary rights and that
manufacture of the Product according to Specifications furnished by ROBERTS to
KPI represents compliance with applicable regulatory-approved documents. ROBERTS
shall indemnify, defend and hold KPI harmless from and against any and all
judgments, liabilities, damages, losses, costs or other expenses (including
reasonable attorney fees) arising from claims that any Product infringes patent
or other proprietary rights of a third party or that any Product manufactured
according to said Specifications are not in compliance with applicable
regulatory-approved documents.
17.0 - DEFAULT
If either Party hereto shall fail to perform or fulfill, at the time
and in the manner herein provided, any obligation or condition required to be
performed or fulfilled by such Party, and (a) if such Party fails to remedy any
such default (other than a default in a monetary payment) within sixty (60) days
of written notice theretofore given to it by the other Party, or (b) if such
failure consists of a default in a monetary payment which is not in dispute and
the defaulting Party fails
16
<PAGE> 18
to make such payment within thirty (30) days written of notice given to it by
the other Party, or (c) if either Party files a bankruptcy petition or initiates
a similar proceeding under state or federal law, or is insolvent, or (d) if
either Party, following the other Party's written request therefor, fails to
provide adequate written assurances of its intent and ability to discharge its
obligations timely and fully under this Agreement, such other Party thereafter
shall have the immediate right to terminate this Agreement upon written notice
of a default termination. Nothing contained in this Section 17 shall be
construed to exclude any other remedy for legal or equitable relief otherwise
provided, all rights and remedies being cumulative.
18.0 - DISPOSITION OF PROPERTY UPON TERMINATION
Upon termination of this Agreement, KPI, at the request of ROBERTS,
shall permit any Product then held by KPI to remain at KPI's facility, without
cost or charge to ROBERTS, for a period not exceeding thirty (30) days after
termination, in order for ROBERTS to dispose or arrange for the disposition of
such property.
19.0 - INDEPENDENT CONTRACTOR
ROBERTS neither assumes nor authorizes any representative or other
person to assume for it any obligation or liability other than such as is
expressly set forth herein. KPI shall be an independent contractor with respect
to the services to be performed hereunder. Neither KPI nor its employees shall
be deemed servants, joint ventures, partners, employees or agents of ROBERTS.
Both KPI and ROBERTS acknowledge that this Agreement does not constitute a
partnership, joint venture, cooperative effort, or any relationship between the
parties other than as independent contractors.
17
<PAGE> 19
20.0 - FORCE MAJEURE
Delay in or failure of performance by either Party hereto shall be
excused if and to the extent that such delay or failure is caused by an
occurrence beyond the reasonable control of the Party affected, including, but
not limited to, the availability of raw materials, acts of God, compliance with
orders of any governmental authority whether valid or invalid, acts of war,
rebellion, fires, floods, explosions, storms, riots, strikes or any similar
cause (i.e., "Force Majeure"). Upon the happening of an event constituting Force
Majeure, the Party affected thereby shall be excused from performance during its
continuance. Such Party shall promptly notify the other in writing of the
happening of the event and of the time during which it is anticipated such event
will affect the notifying Party's ability to perform its obligations under this
Agreement. The Party invoking the terms of this Section 20.0 shall use its
reasonable efforts to correct or ameliorate conditions giving rise to any delay
or failure of performance, but the settlement of any strike or labor dispute
will be entirely within the discretion of the affected Party.
21.0 - CONFIDENTIALITY
During the term of this Agreement it may be necessary for one Party to
disclose to the other certain confidential information including, but not
limited to, Product information, manufacturing information, testing methods,
forecasts, marketing plans, proposals, improvements, quality assurance
requirements, and the like (hereinafter "Confidential Information"). For a
period of two (2) years after the termination or expiration of this Agreement
with respect to the Products (including any extension hereof), the Party
receiving any such Confidential Information from the disclosing Party hereunder
shall exercise due care at all times
18
<PAGE> 20
22.0 - GENERAL PROVISIONS
22.1 NOTICES. Any notices permitted or required by this Agreement shall be
sent by telex or telecopy, or by certified or registered mail return receipt
requested and shall be effective when received if sent and addressed as follows,
or to such other address as may be designated by a Party in writing:
<TABLE>
<S> <C>
If to KPI: Jefferson J. Gregory, Executive Vice President/General Manager
KPI Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
with a copy to: John A. A. Bellamy, Corporate Counsel
KPI Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
If to ROBERTS Attn: Moises Saporta
ROBERTS LABORATORIES INC
Meridian Center II, 4 Industrial Way West
Eatontown, New Jersey, 07724
with copy to: Anthony A. Rascio
ROBERTS LABORATORIES INC.
Meridian Center II, 4 Industrial Way West
Eatontown, New Jersey, 07724
</TABLE>
22.2 ENTIRE AGREEMENT. The Parties hereto acknowledge that this Agreement
sets forth the entire agreement and understanding of the Parties and supersedes
all prior written or oral agreements or understandings with respect to the
Products and the subject matter hereof, including specifically any rights or
obligations of the Parties arising out of or in any way connected to or stemming
from that certain manufacture and supply agreement, dated April 20, 1990,
between Beecham, Inc. and RSR Laboratories, Inc. (KPI being a successor in
interest to RSR Laboratories, Inc. under that agreement and Roberts being a
successor in interest, in part, to
20
<PAGE> 21
to prevent the unauthorized disclosure or use of Confidential Information
relating to said Product. This obligation shall not apply to:
(a) information which is known to the receiving Party prior to disclosure,
information known from or through prior agreements, or information independently
developed by the receiving Party, as evidenced by such Party's written records;
(b) information disclosed to the receiving Party hereunder in a
non-confidential manner by a third party who has a right to make a disclosure
and does not have an obligation of confidentiality to the disclosing Party
hereunder with respect to this disclosure;
(c) information which is or becomes (through no breach or fault of the
receiving Party) patented, published or otherwise part of the public domain; and
(d) information which is required to be disclosed under penalty of law;
provided, however, that the receiving Party has taken all steps available under
law (but not the institution of legal action) to protect this information and
notifies the disclosing Party hereunder of its obligation to make the disclosure
sufficiently prior to the time such disclosure is made to allow the disclosing
Party to seek a protective order.
All copies of Confidential Information disclosed in writing by one Party to
the other shall be returned to the disclosing Party within thirty (30) days of
the termination of this Agreement; however, the return of said copies does not
relieve the parties of their continuing obligation under this Agreement to
maintain the confidentiality of this information.
19
<PAGE> 22
the rights and obligations of Beecham, Inc. in the same agreement). No
modification of any of the terms of this Agreement, or any amendments thereto,
shall be deemed to be valid unless in writing and signed by the Party against
whom enforcement is sought. No course of dealing or usage of trade shall be used
to modify the terms and conditions herein.
22.3 WAIVER. No waiver by either Party of any default shall be effective
unless in writing, nor shall any such waiver operate as a waiver of any other
default or of the same default on a future occasion.
22.4 OBLIGATIONS TO THIRD PARTIES. Each Party warrants and represents that
the proceeding herein is not inconsistent with any contractual obligations,
expressed or implied, undertaken with any third party.
22.5 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of the successors or permitted assigns of each of the Parties and may
not be assigned by either Party without the prior written consent of the other,
which consent shall not be unreasonably withheld. An attempted assignment,
without such consent, shall be void.
22.6 GOVERNING LAW. The validity, interpretation and effect of this
Agreement shall be governed by and construed under the laws of the State of
Tennessee and any action brought by either Party shall be maintained exclusively
in courts sitting within the State of Tennessee.
22.7 SEVERABILITY. In the event that any provision of this Agreement shall
violate any applicable statute, regulation, ordinance or rule of law in any
jurisdiction in which it is used, or is otherwise unenforceable, that provision
shall be ineffective to the extent of the violation without invalidating any
other provision hereof.
21
<PAGE> 23
22.8 HEADINGS. The headings used in this Agreement are for convenience only
and are not a part of this Agreement.
22.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same original.
22.10 SCHEDULES. The Exhibits attached hereto are made a part of this
Agreement as if fully set forth herein.
22.11 CONSTRUCTION OF VARIOUS WORDS AND PHRASES. The word "hereby",
"hereunder", and similar words refer to this entire Agreement and not merely to
the sections, subsections, or paragraphs wherein such words may appear.
"Including," "includes," and "include" and similar terms shall mean "including
without limitation," "includes without limitation," and "include without
limitation."
22.12 PLURALS, GENDERS, AND PERSONS. In this Agreement, words importing the
singular number only shall include the plural and vice versa; words importing a
specification of gender shall include the other gender; and, references to
persons shall include corporations, other business entities, and one or more
persons, their heirs, executors, administrators or assigns, as the case may be.
22
<PAGE> 24
IN WITNESS WHEREOF, the Parties hereto have each caused this Agreement
to be executed by their duly authorized representatives to be effective on the
Effective Date.
ROBERTS LABORATORIES INC. KING PHARMACEUTICALS, INC.
By:/s/ Anthony A. Rascio By:/s/ John M. Gregory
--------------------- -------------------------
Name: Anthony A. Rascio Name: John M. Gregory
------------------- -----------------------
Title: Vice President Title: President
------------------ ----------------------
Date: Nov. 30, 1995 Date: Nov. 27, 1995
------------------- -----------------------
23
<PAGE> 25
ADDENDUM
TO
MANUFACTURE AND SUPPLY AGREEMENT
BETWEEN
ROBERTS LABORATORIES, INC.
AND
KING PHARMACEUTICALS, INC.
WHEREAS, ROBERTS LABORATORIES, INC. ("ROBERTS") and KING
PHARMACEUTICALS, INC. ("KPI") entered into and executed a Manufacture and Supply
Agreement (the "Agreement") with an effective Date of (as the term "Effective
Date" is defined in the Agreement) of October 5, 1995, and
WHEREAS, the Agreement between ROBERTS and KPI provides for the
manufacture of certain Products (as the term "Products" is defined in the
Agreement) by KPI for ROBERTS at agreed upon Transfer Prices (as the term
"Transfer Price" is defined in the Agreement); and
WHEREAS, ROBERTS and KPI now desire to add Tigan Suppositories 200 mg
in a sample presentation package of two and Tigan Pediatric Suppositories in a
sample presentation package of two to the definition of Products (as shown in
Exhibit A to the Agreement) with Transfer Prices of $0.85 for the Tigan 200 mg.
Suppository in a package of two (2) and $0.76 for the Tigan Pediatric
Suppository in a package of two (2);
NOW, THEREFORE, the Parties mutually agree:
1. The definition of Products in the Agreement and Exhibit A ("Products")
to the Agreement are amended to include the following:
<TABLE>
<CAPTION>
PRODUCT NAME UNIT SIZE
------------ ---------
<S> <C>
TIGAN Suppositories 200 mg 2 Suppositories/pkg.
TIGAN Pediatric Suppositories 2 Suppositories/pkg.
2. The definition of Transfer Prices in the Agreement and Exhibit C
("Transfer Prices") to the Agreement are amended to include the
following:
<CAPTION>
PRODUCT & UNIT SIZE PRICE\UNIT
------------------- ----------
<S> <C>
TIGAN Suppositories 200 mg PKG of 2's $0.85
TIGAN Pediatric Suppositories PKG of 2's $0.76
</TABLE>
<PAGE> 26
3. The Transfer Prices for the Tigan Suppositories 200 mg PKG of 2's and
the Tigan Pediatric Suppositories PKG of 2's are subject to price
revision of Section 4.3 of the Agreement as are all base Transfer
Prices.
4. All other terms, provisions, requirements, and conditions of the
Agreement not otherwise amended hereby remain in full force and effect.
IN WITNESS WHEREOF, the Parties hereto have each caused this Addendum
to be executed by their duly authorized representatives to be effective on the
date of signature by the last to sign of either ROBERTS or KPI.
ROBERTS LABORATORIES, INC. KING PHARMACEUTICALS, INC.
By:/s/ Anthony A. Rascio By:/s/ John M. Gregory
--------------------- -------------------------
Name: Anthony A. Rascio Name: John M. Gregory
------------------- -----------------------
Title: Vice President Title: President
------------------ ----------------------
Date: April 4, 1996 Date: March 29, 1996
------------------- -----------------------
<PAGE> 27
ASSIGNMENT AND ASSUMPTION OF CONTRACT AGREEMENT
This Assignment of Contract is made and entered into this 3rd day of
October, 1996, by and between Monarch Pharmaceuticals, Inc. ("Monarch"), a
Tennessee corporation, and King Pharmaceuticals, Inc. ("King"), a Tennessee
corporation, collectively Monarch and King are from time to time referred to as
"the Parties."
WHEREAS, Monarch has entered into a certain Asset Purchase Agreement
dated October 2, 1996 ("Asset Purchase Agreement") with Roberts Laboratories,
Inc. ("Roberts"), a New Jersey corporation, for the purchase of, among other
things, the Nucofed(R) product line, as the phrase "Nucofed(R) product line" is
defined in said Asset Purchase Agreement;
WHEREAS, pursuant to the Asset Purchase Agreement Roberts has assigned
and transferred to Monarch its rights and obligations with respect to the
manufacture of the Nucofed(R) products under a certain Manufacture and Supply
Agreement dated October 5, 1995 and as effectively amended on April 4, 1996 (the
"Manufacturing Agreement") entered into by Roberts and King;
WHEREAS, pursuant to the Asset Purchase Agreement Monarch has agreed to
assume all of the rights, interests and (except as set forth in the Asset
Purchase Agreement) obligations of Roberts related to the Nucofed(R) products
under the Manufacture and Supply Agreement; and
EXECUTION COPY
1
<PAGE> 28
WHEREAS, King desires to consent to the assignment to Monarch of the
rights, interests, and obligations of Roberts under the Manufacture and Supply
Agreement as regards the Nucofed(R) products under the Manufacture and Supply
Agreement:
NOW THEREFORE, for valuable and good consideration, the receipt of
which is hereby acknowledged, Monarch, effective October 2, 1996, enters into
this Assignment and Assumption of Contract Agreement (the "Agreement") and
hereby assumes and agrees to pay, perform and discharge effective October 2,
1996 all of the obligations and liabilities of Roberts with respect to the
Nucofed(R) products under the Manufacture and Supply Agreement, to the extent
that they remain unperformed or unfulfilled on, or by their terms continue in
effect after, October 2, 1996.
By its execution of this Agreement, King hereby accepts: (i) Roberts'
assignment to Monarch of all of Roberts' rights with respect to the Nucofed(R)
products under the Manufacture and Supply Agreement and (ii) Monarch's
assumption of all of Roberts' obligations and liabilities with respect to the
Nucofed(R) products under the Manufacture and Supply Agreement a copy of which
is attached hereto and incorporated herein by reference as if fully set forth
verbatim herein.
Each of Monarch and King for itself, its successors and assigns, hereby
covenants and agrees that, at any time and from time to time upon the request of
the other, it will, at
EXECUTION COPY
2
<PAGE> 29
its expense, do, execute, acknowledge and deliver or cause to be done, executed,
acknowledged and delivered, all such further acts, deeds or instruments, as may
be reasonably requested by the other, in order to effect the assignment of
rights and the assumption of obligations and liabilities pursuant hereto.
King hereby represents and warrants that Roberts is not in default of
any of its obligations under the Manufacture and Supply Agreement with respect
to the Nucofed(R) products under said Manufacture and Supply Agreement nor has
it waived by any action or inaction any of its rights under the Manufacture and
Supply Agreement. King further represents and warrants that King itself is not
in default of any of its obligations under the Manufacture and Supply Agreement
and that it will continue to honor its obligations thereunder with respect to
the Nucofed(R) products for the balance of the term of the Manufacture and
Supply Agreement or any sooner termination thereof.
It is specifically understood that Monarch is not hereby, and shall not
in any event be deemed to have assumed, undertaken or incurred any liability or
responsibility whatsoever for any obligation, liability or duty pursuant to the
Manufacture and Supply Agreement to the extent any such obligation, liability or
duty arises out of or relates to any performance (or failure to perform)
required or undertaken pursuant to the terms of the Manufacture and Supply
Agreement prior to October 2, 1996, or which otherwise relate to actions or
omissions of Roberts prior to October 2, 1996.
EXECUTION COPY
3
<PAGE> 30
Anything herein or in the Asset Purchase Agreement to the contrary
notwithstanding, this Agreement and the Asset Purchase Agreement shall not
constitute an agreement to assign, transfer, or novate any contract, order,
commitment, license, or right if any such attempted assignment, transfer or
novation without the consent of the other party would constitute a breach
thereof or in any material way impair the rights of Roberts or Monarch (as
assignee) thereunder, unless and until such consent is obtained.
IN WITNESS WHEREOF, the parties have executed this Agreement this 3rd
day of October, 1996.
MONARCH PHARMACEUTICALS, INC.
By:/s/ Joseph R. Gregory
-----------------------------------------
Its: President
----------------------------------------
KING PHARMACEUTICALS, INC.
By:/s/ Jefferson J. Gregory
-----------------------------------------
Its: President
----------------------------------------
EXECUTION COPY
4
<PAGE> 31
STATE OF TENNESSEE
COUNTY OF SULLIVAN
The foregoing Assignment and Assumption of Contracts Agreement was
executed and acknowledged before me this 3rd day of October, 1996 by Joseph R.
Gregory, personally known to me to be the President of Monarch Pharmaceuticals,
Inc., a Tennessee corporation, on behalf of said corporation.
----------------------------------------
Notary Public
My commission expires: January 24, 1999
EXECUTION COPY
5
<PAGE> 32
STATE OF TENNESSEE
COUNTY OF SULLIVAN
The foregoing Assignment and Assumption of Contracts Agreement was executed
and acknowledged before me this 3rd day of October, 1996 by Jefferson J.
Gregory, personally known to me to be the President of King Pharmaceuticals,
Inc., a Tennessee corporation, on behalf of said corporation.
----------------------------------------
Notary Public
My commission expires: January 24, 1999
EXECUTION COPY
6
<PAGE> 33
SECOND ADDENDUM TO
MANUFACTURE AND SUPPLY AGREEMENT
BETWEEN
ROBERTS LABORATORIES, INC.
AND
KING PHARMACEUTICALS, INC.
WHEREAS, ROBERTS LABORATORIES, INC. ("ROBERTS") and KING
PHARMACEUTICALS, INC. ("KPI") entered into and executed a Manufacture and Supply
Agreement (the "Agreement") with an effective Date of (as the term "Effective
Date" is defined in the Agreement) of October 5, 1995, and
WHEREAS, the Agreement between ROBERTS and KPI provides for the
manufacture of certain Products (as the term "Products" is defined in the
Agreement) by KPI for ROBERTS, and
WHEREAS, the definition of Products in the Agreement included, among
other things, the Nucofed(R) products, and
WHEREAS, ROBERTS and KPI subsequently amended the Agreement by
executing an Addendum effective August 4, 1996 (the "Addendum") to the
Agreement, and
WHEREAS, effective October 2, 1996, ROBERTS sold to MONARCH
PHARMACEUTICALS, INC. ("MPI") the Nucofed(R) product line, as the term
"Nucofed(R) product line" is defined in the Asset Purchase agreement dated
October 2, 1996 entered into and executed by ROBERTS and MPI, and
WHEREAS, KPI has consented to the assignment and assumption to and by
MPI of ROBERTS' rights, obligations, and interests under the Agreement relative
to the Nucofed(R) product line and MPI has assumed such rights, obligations, and
interests, and
WHEREAS, ROBERTS and KPI now desire to remove from the Agreement and
the Addendum, effective October 2, 1996, any obligation of ROBERTS to purchase
from KPI any Nucofed(R) product under the Agreement or the Addendum;
NOW, THEREFORE, ROBERTS and KPI (collectively, the "Parties") mutually
agree:
1. Effective October 2, 1996, the definition of "Products" under the
Agreement is amended to exclude all of the Nucofed(R) products.
<PAGE> 34
2. Any obligation, responsibility, liability, or charge of ROBERTS
arising on or before October 2, 1996 with respect to the Products, including the
Nucofed(R) product line, shall remain the obligation, responsibility, liability
of charge of ROBERTS under the terms and provisions of the Agreement or the
Addendum.
3. All other terms, provisions, requirements and conditions of the
Agreement an Addendum not otherwise amended hereby, including obligations of
Roberts, arising on or before October 2, 1996, remain in full force and effect.
IN WITNESS WHEREOF, the Parties hereto have each caused this Addendum
to be executed by their duly authorized representatives to be effective on the
date set forth above.
ROBERTS LABORATORIES INC. KING PHARMACEUTICALS, INC.
By:/s/ Anthony A. Rascio By:/s/ John Bellamy
------------------------ -------------------------
Name: Anthony A. Rascio Name: John Bellamy
---------------------- -----------------------
Title: VP & General Counsel Title: VP & General Counsel
--------------------- ----------------------
Date: 1/16/97 Date: 01/07/97
---------------------- -----------------------
<PAGE> 1
EXHIBIT 10.21
SUPPLY AGREEMENT
THIS PRODUCT SUPPLY AGREEMENT (the "Agreement") is made this 16th day
of July, 1996, by and between SmithKline Beecham Corporation, a corporation
organized under the laws of Pennsylvania ("SB") with principal offices at One
Franklin Plaza, Phila, PA, and King Pharmaceuticals Inc. ("SELLER"), having a
place of business at Bristol, Tennessee. SB and SELLER are from time to time
referred to as "the Parties."
WHEREAS, SB is in the business of developing, manufacturing and
marketing a variety of human health products;
WHEREAS, SB desires King to undertake the manufacture and packaging of
the human prescription pharmaceuticals BACTROBAN, Fastin, Halfan, and Menest,
and the animal health product BACTODERM, and King desires to manufacture,
package, and sell such products to SB.
NOW, THEREFORE, the parties intending to be legally bound, agree as
follows:
1. GENERAL DEFINITIONS
(a) "AFFILIATE" means (i) any corporation or business entity fifty
percent (50%) or more of the voting stock of which is and continues to be owned
directly or indirectly by any party hereto; (ii) any corporation or business
entity which directly or indirectly owns fifty percent (50%) or more of the
voting stock of any party hereto; or (iii) any corporation or business entity
under the direct or indirect control of such corporation or business entity as
described in (i) or (ii).
(b) "ACQUISITION COST" is the price for each PRODUCT as described in
Schedule A.
(c) "PRODUCT" shall mean each of the products and "PRODUCTS" shall mean
all of the products listed in Schedule A, manufactured according to the
SPECIFICATIONS.
(d) "SPECIFICATIONS" shall mean those written specifications for the
manufacture of PRODUCT attached hereto as Schedule B.
(e) "TERRITORY" shall mean the United States, its territories, and
possessions.
(f) "MENEST" shall mean any final solid oral dosage form product
containing esterified estrogen as an active ingredient.
(g) "BACTROBAN" and "BACTODERM" shall include any final finished
topical ointment product (excluding intra-nasal products) containing mupirocin
(and not mupirocin calcium) 20 mg per g (2%) as a single active ingredient.
Page 2
<PAGE> 2
(h) "FASTIN" shall include any final solid oral dosage form product
containing phentermine HCl as a single active ingredient.
(i) "HALFAN" shall include any final solid oral dosage form product
containing halofantrine as a single active ingredient.
(j) "SB" shall include SB's AFFILIATES, successors, assigns, licensees,
and any other third parties with which either contracts for the sale, promotion,
or distribution of any PRODUCT.
(k) "SELLER" shall include SELLER's AFFILIATES, successors, assigns,
licensees, and any other third parties with which either contracts for the sale,
promotion, or distribution of any PRODUCT.
(l) "STANDARD COST" as referred to in Schedule A shall be defined
according to the cost analysis provided under Schedule E.
2. SUPPLY
(a) During the term of this Agreement, and subject to Sections 3 and 10
below, SELLER shall supply and SB shall purchase exclusively from SELLER all of
SB's requirements for MENEST, FASTIN and HALFAN in the TERRITORY.
(b) During the term of this Agreement, and subject to Section 10 below,
Seller shall supply and SB shall purchase twenty-two (22) lots total in any
combination of lots of BACTROBAN or BACTODERM, as specified by SB. Seller shall
promptly manufacture one lot of BACTODERM. The remaining twenty-one (21) lots
will be campaigned upon delivery of components. Provided however, no PRODUCTS
shall be manufactured by SELLER until all mupirocin necessary to manufacture all
twenty-two (22) lots of BACTROBAN and BACTODERM have been received and accepted
at SELLER's facilities in Bristol, Tennessee.
(c) During the term of this Agreement, and subject to the provisions
herein set forth, SELLER shall allocate sufficient production resources and
adopt sufficient production planning procedures in order to meet SB's purchase
orders of PRODUCTS.
3. MANUFACTURE AND SUPPLY ARRANGEMENTS
(a) Simultaneously with the execution of this Agreement and then no
later than November 1st of each year during the term of this Agreement, covering
the period from January 1st through December 31st, and then again no later than
May 1st of each year during the term of this Agreement, covering the period from
July 1st through June 30th, SB shall provide SELLER with a twelve (12) month
forecast including delivery dates, organized by months and SKU's, of SB's
estimated requirements of HALFAN, FASTIN and MENEST. The first six (6) months of
said forecasts shall be a binding order and SB shall, simultaneously with the
submission of each forecast, submit purchase orders for such binding orders.
Under no circumstances shall SELLER be required to produce greater than two
Page 3
<PAGE> 3
hundred percent (200%) of the number of units forecasted for a specific month in
the initial forecast or applicable subsequent annual forecasts. After receiving
SB's twelve month forecasts, SELLER shall notify SB within ten working days in
the event the forecast unreasonably exceeds SELLER's anticipated capacity. In
any event SELLER shall use reasonable efforts to adjust its production capacity
to accommodate such forecast up to 200% of the initial or applicable subsequent
annual forecast for each PRODUCT. In the event SELLER is unable to meet SB's
forecast, SB shall have the option to purchase the excess PRODUCT not supplied
by SELLER from a third party.
(b) SELLER is not required to deliver PRODUCTS sooner than ninety (90)
days after receipt of SB's written purchase orders for the same. SELLER shall
not be required to manufacture or package PRODUCTS in quantities less than
multiplies of whole batch sizes possessing a single label. Not withstanding the
foregoing, SELLER will use reasonable effort to meet SB's request for deliveries
less than ninety (90) days
SELLER will attempt to accommodate any changes requested by SB in
delivery schedules for PRODUCTS after SELLER's receipt of SB's binding purchase
order, provided that no such changes shall result in SB purchasing less PRODUCT
than that covered in any binding purchase order. SB will bear the reasonable
out-of-pocket costs incurred by SELLER in connection with any delay in the
shipment of PRODUCT caused by SB's rescheduling of shipping dates. SELLER will
ship purchase orders immediately upon release by SELLER's QA department in a
single shipment to a single destination.
(c) The supply and purchase of BACTROBAN and BACTODERM, under this
Agreement shall commence as soon as practicable with SELLER to use best efforts
to deliver BACTROBAN and BACTODERM in the amounts and by the delivery dates
specified on the mutually agreed upon purchase orders issued simultaneously with
the execution of this Agreement.
(d) SB and SELLER shall negotiate in good faith standard operating
procedures, conforming to the responsibilities delegated between the Parties in
this Agreement, to meet regulatory and customer service standards as specified
in the Checklist (see Schedule C) from SB's contract quality manual.
(e) SB will purchase esterified estrogen, mupirocin, and halafantrine
(the "Materials") for its own account for delivery to SELLER. The expenses for
the purchase, supply and delivery of the Materials shall be borne solely by SB
and provided at no charge to SELLER. It will be the responsibility of SELLER to
manage the Materials and to be accountable for their usage. Upon request, SELLER
will furnish SB a monthly report, summarizing the usage of Materials by lot
number and showing the beginning and ending inventories of the Materials and
reconcile the usage of the Materials to within ten percent (10%+/-) of the
amounts received from SB. No more than once every calendar quarter and upon
delivery of reasonable prior written notice to SELLER, any representative
authorized by SB shall have the right to examine SELLER's records for the sole
purpose of verifying SELLER's inventory and use of the Materials directly
related to the PRODUCTS. SELLER and SB will establish a mutually agreeable
minimum yield based on the average yield for the prior 24 months (including
PRODUCT manufacturing time under prior agreements with SB). SELLER shall
reimburse SB on an annual basis for a yield of less
Page 4
<PAGE> 4
than 97% of the minimum yield at a prorated schedule. Notwithstanding the
foregoing, SELLER shall have no responsibility for any loss to or of esterified
estrogen supplied by SB until MENEST is fully validated. MENEST shall not be
subject to any minimum yield ratio until it is completely validated. Further,
until MENEST is completely validated, SELLER shall be entitled to full payment
of the ACQUISITION COSTS for completed batches of MENEST even if such batches
fail to SPECIFICATIONS unless the failed batches are due to the negligence of
SELLER.
(f) Insurance. SELLER will, at its expense, insure the Materials on its
premises under an all risks policy in an amount mutually agreeable to the
parties, and SB will be named as an additional loss payee under said policy.
(g) Transfer of PRODUCTS. Upon termination of this Agreement in its
entirety or as to any PRODUCT, SELLER will provide reasonable assistance to SB
in the transfer of the Materials and manufacturing process of the PRODUCT(S) to
other facilities. Such assistance shall include, transfer of manufacturing
records, plant visits, and operator training.
(h) SB agrees to provide: (i) up to $100,000 for facilities upgrades to
improve SELLER's Menest production area (which SELLER will bill to SB at actual
cost as incurred); and (ii) a previously used and operating Accelecoater or
equivalent (with air handling)
(i) If SB determines that changes, alterations, or modifications to the
facilities or equipment (including the purchase of new equipment) are necessary
to manufacture or to facilitate the manufacture of any PRODUCT under this
Agreement, in accordance with either the SPECIFICATIONS or cGMP standards, then
the costs and expenses of such changes, alterations, or modifications to the
facilities or the equipment (including the purchase of new equipment) shall be
borne by SB to the extent that such costs and expenses are attributable to the
PRODUCT under this Agreement. SB shall make its determinations as to the
compliance of SELLER's facilities or equipment or SELLER's compliance with its
warranties under this Agreement in a reasonable and good faith manner.
(j) If, as the result of a specific audit, inspection, or inquiry
related to SELLER's facility, the FDA, the DEA, EPA, the Occupational Safety
and Health Administration or any federal or state governmental agency
determines that changes, alterations, or modifications to the facilities or the
equipment (including the purchase of new equipment) at SELLER's facilities are
necessary solely because of any process or procedure required by SELLER to
fulfill its obligations under this Agreement as to any PRODUCT of SB, and if
such changes, alterations, or modifications to the facilities or the equipment
(including the purchase of new equipment) total Three Hundred Thousand Dollars
($300,000) or less, then the parties shall share equally between them those
costs and charges, and provided further that if such costs total more than
Three Hundred Thousand ($300,000), then the Parties agree that either party may
elect to be excused from its requirements under this Agreement unless the other
party consents to bear the entire costs of the changes, alterations, or
modifications. An election by one party to discontinue the Agreement shall
apply only as to the requirements of that electing party with respect to the
particular Product precipitating such changes, alterations, or modifications to
the facilities or the equipment (including the purchase of new equipment).
Notwithstanding paragraphs 5(g) and 5(h) of this
Page 5
<PAGE> 5
Agreement the SELLER certifies that it is not aware of any pending or current
request from any such agency which would result in any such costs under this
provision.
(k) As specified in Schedule D, SB will furnish labeling components and
bottles to SELLER for use by SELLER in providing the PRODUCTS under this
Agreement. SB will transfer those items on Schedule D to Seller at SB's actual
direct costs for these items.
4. PRICES; PAYMENT; SHIPMENT
(a) During the term of this Agreement, SELLER shall manufacture in
accordance with current Good Manufacturing Practices, including, without
limitation, those set forth in 21 C.F.R., parts 210 and 211 ("cGMPs"), and sell
PRODUCTS to SB at the prices (and which meet the SPECIFICATIONS) listed in
Schedule A. Purchase orders shall be shipped by SELLER F.O.B. SELLER's plant, in
accordance with those shipping and handling instructions specified in each
purchase order, limited to one location per purchase order. Title to PRODUCTS
and risk of loss to same shall pass to SB upon delivery to SB's designated
carrier at SELLER's plant.
(b) SB agrees to pay SELLER for PRODUCT to be provided in accordance
with Section 4(a) above net thirty (30) days from the date of invoicing. All
payments hereunder shall be made in U.S. Dollars. Invoices shall issue upon
SELLER's QA release. Delinquent invoices shall incur interest charges at the
rate of one and one-half percent (1.5%) per month until paid in full.
(c) Each shipment of PRODUCTS to SB shall be accompanied by a typed
certificate of analysis specifying that the lot of PRODUCTS conform to the
SPECIFICATIONS for same.
(d) Within fifteen (15) days of receipt of PRODUCTS by SB under this
Agreement, SB shall have the right to test and inspect the PRODUCTS and reject
any PRODUCT or component thereof which was not manufactured in accordance with
cGMPs or does not conform to the SPECIFICATIONS. In the event of such rejection,
SB shall notify SELLER in writing within 72 hours of such rejection, and SELLER
shall, at SB's option, within 30 days from its receipt of SB's rejection notice,
either credit the cost paid by SB or replace the rejected PRODUCT at SELLER's
expense or notify SB that SELLER disputes that PRODUCT failed to meet cGMPs or
the SPECIFICATIONS. In the event that SELLER disputes SB's rejection of PRODUCT,
then the parties shall submit such disputed batches of PRODUCTS and accompanying
documentation to a mutually acceptable independent laboratory for testing. The
costs and expenses of the related laboratory tests shall be borne by the party
in error. Likewise, SB shall notify SELLER of any defects not reasonably
discoverable in PRODUCT which are discovered by SB within fifteen (15) days
after detection; in case SELLER contests SB's allegations, an independent
laboratory shall make the final decision whether the PRODUCTS meet cGMPs or the
SPECIFICATIONS as provided above.
(e) Within fifteen (15) days of receipt of the Materials by SELLER
under this Agreement, SELLER shall have the right to test and inspect the
Materials and reject any of the Materials or component thereof which was not
manufactured in accordance with cGMPs or does not conform to the SPECIFICATIONS.
In the event of such rejection, SELLER shall notify SB in writing within 72
Page 6
<PAGE> 6
hours of such rejection, and SB shall, within 30 days from its receipt of
SELLER's rejection notice, replace the rejected Material at SB's expense or
notify SELLER that SB disputes that the Material failed to meet cGMPs or the
SPECIFICATIONS. In the event that SB disputes SELLER's rejection of the
Materials, then the Parties shall submit such disputed batches of Materials and
accompanying documentation to a mutually acceptable independent laboratory for
testing. The costs and expenses of the related laboratory tests shall be borne
by the party in error. Likewise, SELLER shall notify SB of any defects not
reasonably discoverable in the Materials which are discovered by SELLER within
fifteen (15) days after detection; in case SB contests SELLER's allegations, an
independent laboratory shall make the final decision whether the Materials meet
cGMPs or the SPECIFICATIONS as provided above.
(f) If either party becomes aware at any time of any defect associated
with the PRODUCT or the Materials, said party shall notify the other party
immediately and confirm the notification as soon as possible in writing.
(g) Notwithstanding the effective date of this Agreement, any purchase
orders currently submitted to SELLER but not released by SELLER's Quality
Assurance department shall be invoiced to SB at the ACQUISITION COSTS shown in
Schedule A.
(h) In establishing the ACQUISITION COSTS of the PRODUCTS, the parties
have assumed, based on the recent stability in pricing, that the annual
inflation rate will not exceed four percent (4.0%). Because this assumption may
in fact prove false, the parties agree that beginning on the first anniversary
of this Agreement, and on each anniversary thereafter during the term of this
Agreement, Seller shall have the right to increase the ACQUISITION COSTS for the
forthcoming calendar year by an amount equal to the excess, if any, of the
actual rate of inflation for the twelve (12) months preceding the anniversary
date (as measured by the Consumer Price Index - Urban, ("CPI-U") published by
the U.S. Department of Labor, Bureau of Statistics) over the parties' assumed
rate of four percent (4.0%). Subject to offset for any increases permitted above
on an annual basis, SELLER shall have the right to increase the ACQUISITION
COSTS by an amount equal to the increase, if any, of the actual CPI-U which is
in excess of a 10% cumulative rate for the initial term of this Agreement.
5. REGULATORY MATTERS
(a) SELLER represents that it currently has, and shall maintain, all
regulatory and governmental permits, licenses and approvals that may be
necessary to manufacture and ship PRODUCTS to SB. Without limiting the
generality of the foregoing, SELLER shall manufacture the PRODUCTS: (i) under
conditions that are in accordance with all United States governmental regulatory
requirements concerning cGMPs; and (ii) in a facility maintaining drug
establishment registration with the U.S. Food and Drug Administration (FDA) as
set forth in 21 C.F.R., part 207.
(b) (1) During the term of this Agreement, SELLER will be responsible
for any reporting of matters regarding the PRODUCTS to the appropriate
governmental authorities in accordance with pertinent laws and regulations.
SELLER shall immediately notify SB of any such matter and shall promptly furnish
copies of such reports to SB. SELLER shall also advise SB of any
Page 7
<PAGE> 7
occurrences or information which arises out of SELLER's manufacturing activities
which have or could reasonably be expected to have regulatory compliance and/or
reporting consequences.
(2) SELLER shall be responsible for handling and responding to any
appropriate governmental agency inspections with respect to PRODUCTS during the
term of this Agreement. SELLER shall provide to SB any information reasonably
requested by SB related to the PRODUCTS and all information requested by any
governmental agency in connection with any governmental inspection related to
the PRODUCTS. SELLER shall immediately advise SB of any requests by any
governmental agency for such inspections with respect to PRODUCTS and SB shall
cooperate and provide reasonable assistance as requested by SELLER.
(3) During the term of this Agreement, upon reasonable notice,
during normal business hours, and no more than once a year, SB shall have the
right to inspect and perform Quality Assurance (QA) audits of the SELLER's
manufacturing sites where PRODUCTS are manufactured pursuant to this Agreement
to assure regulatory compliance with cGMPs. SELLER has the right to accompany SB
during the QA audits. Subject to Section 3(i), if deficiencies are discovered
during these QA audits that would prevent SELLER or third party manufacturers
from passing cGMPs, or other relevant regulatory inspections, SELLER shall,
following consultation with SB, correct such deficiencies with respect to
SELLER's manufacturing sites and, with respect to third party manufacturing
facilities, use its reasonable best efforts to assure correction of such
deficiencies.
(c) SELLER will not modify or change any ingredient used in the
manufacture of the PRODUCTS or in any other way deviate from any manufacturing
or control process employed in manufacturing the PRODUCTS, or change any
manufacturing site or any supplier or vendor of any ingredient used in the
manufacture of the PRODUCTS, without first obtaining SB's prior written
approval. Should such change or deviation occur, SELLER shall immediately notify
SB of such change, giving details of the same.
(d) For all PRODUCTS, SB shall be responsible for all stability
testing. Further, SELLER shall have no obligation or responsibility to conduct,
maintain, supervise or monitor any stability program for the PRODUCTS unless the
Parties otherwise agree in a separate writing memorialized by both Parties. From
time to time SELLER may request copies of the stability work being performed by
or on behalf of SB and SB shall promptly furnish same to SELLER.
(e) SB shall be solely responsible for all artwork and copy relating to
the final packaging and labeling of all PRODUCTS. SB shall also be solely
responsible for the compliance with all federal, state and local laws and
regulations concerning packaging and labeling, and for obtaining any necessary
regulatory approvals of printed materials, artwork, and copy.
(f) SB agrees that within one hundred and eighty (180) calendar days
from the execution by SB of this Agreement, SB will authorize and approve by a
duly authorized signatory written copies of production cards, product and
packaging specifications, batch formulations, and analytical methods. Further,
during the life of this Agreement, SB shall continue to review and execute such
documents submitted by SELLER within one hundred eighty (180) calendar days.
Page 8
<PAGE> 8
(g) With respect to MENEST, SB agrees to: (i) rework promptly the
tablet physical appearance to replace the imprinting with debossing; (ii)
promptly develop and change the coating process to use of an aqueous solvent;
(iii) eliminate use of methylene chloride from the manufacturing process if
practicable; (iv) execute production cards necessary to such changes; and (v)
file all necessary supplements, applications, authorizations or other regulatory
documents as soon as practicable.
(h) SB agrees to validate the manufacturing processes for the PRODUCTS
as soon as practicable. SB and SELLER shall agree to the validation protocol.
However, if the parties cannot agree to the validation protocol, or any element
of a validation protocol for any PRODUCT, then the Parties agree to submit the
proposed protocol for a final determination to a mutually agreeable, independent
third-party consulting company of national reputation and expertise.
SELLER agrees to provide services to support the validation as
requested by SB. Further, SELLER shall have the right of first refusal as to any
and/or all services to be provided related to the validation of the PRODUCTS.
"Right of first-refusal" as used in this provision shall mean that if SB decides
to contract for any services or responsibilities related to the validation of
the PRODUCTS, then SB shall first offer the work to SELLER under the terms set
forth in subsection (i), infra, or if SB has approached another person of entity
(the "Proposed Contractor") for the work desired, then SB shall offer such work
or services to SELLER at the same price and upon the same terms and conditions
as have been offered to SB in writing by a bona fide Proposed Contractor, who is
properly licensed, insured, and capable of performing the desired work. SB shall
give SELLER a copy of the written offer from the Proposed Contractor for the
desired validation services, which copy shall identify the name and address of
the Proposed Contractor for the validation services, the proposed rates, terms,
timelines, and the conditions upon which the Proposed Contractor is able and
willing to perform. SELLER shall have sixty (60) days after receipt of such copy
of the proposed services in which to exercise its right to choose to perform
such services, and its exercise of the decision to perform such services shall
be communicated to SB by written notice within the sixty (60) day period.
(i) In consideration of SELLER providing any services or conducting any
part of the validation of products or providing other services under Section 5
of this Agreement at SB's request, SB shall pay to SELLER the sum of One Hundred
Dollars ($100.00) per hour, or any part thereof, per person performing work for
or on behalf of SB for the validation of PRODUCTS or other services hereunder.
SELLER shall invoice SB monthly for work performed by SELLER's personnel related
to the validation of PRODUCTS or other services and such invoices shall be due
within thirty (30) days of the date of the invoice. Delinquent invoices shall
incur interest at the rate of one and one-half percent (1.5%) per month until
paid.
6. TERM AND TERMINATION
(a) The initial term of this Agreement shall commence immediately upon
the execution of this Agreement by the last party to sign and shall extend
through December 31, 1999.
Page 9
<PAGE> 9
(b) The initial term of the Agreement for PRODUCTS other than BACTROBAN
and BACTODERM shall be automatically extended for one (1) year periods unless
either party provides one year written notice of non-renewal prior to
expiration.
(c) Either SB or SELLER may terminate this Agreement prior to its then
current expiration date upon 45 days' prior written notice delivered by either
party to the other party in the event the other party has breached any material
provision of this Agreement and fails to remedy the breach prior to expiration
of the 45 day period.
(d) This Agreement may be canceled upon thirty (30) days' prior written
notice by either party at any time during this Agreement if, the other party
shall file in any court pursuant to any statute of any government in any country
for which PRODUCT are being supplied by SELLER for sale in such country by SB a
petition in bankruptcy or insolvency or for reorganization or for an arrangement
or for the appointment of a receiver or trustee of the party or of its assets;
or if any other party proposes a written agreement of composition for extension
of its debts; or if the other party shall be served with an involuntary petition
against it, filed in any insolvency proceeding, and such petition shall not be
dismissed within 60 days after filing thereof; or if the other party shall be a
party to any dissolution or liquidation, or if the other party shall make an
assignment for the benefit of its creditors; or if the other party is subject to
any final order of debarment which can be expected to have a material adverse
effect on the sales of PRODUCTS in such country.
7. WARRANTY AND INDEMNIFICATION
(a) Except as conditioned upon SB's obligations under Section 5(h) of
this Agreement, SELLER warrants that PRODUCTS contained in each shipment shall
conform strictly to SPECIFICATIONS and shall be manufactured in accordance with
applicable cGMPs. THIS WARRANTY AND THE WARRANTIES SET FORTH IN SECTION 5 ARE IN
LIEU OF ALL OTHER WARRANTIES WITH RESPECT TO THE PRODUCTS, EXPRESS OR IMPLIED,
INCLUDING, BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, WHETHER THE PRODUCT IS USED ALONE OR IN COMBINATION
WITH OTHER SUBSTANCES.
(b) SB warrants that the Materials contained in each shipment to SELLER
shall conform strictly to SPECIFICATIONS for same and shall be manufactured in
accordance with applicable cGMPs. THIS WARRANTY AND THE WARRANTIES SET FORTH IN
SECTION 5 ARE IN LIEU OF ALL OTHER WARRANTIES WITH RESPECT TO THE MATERIALS,
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WHETHER THE MATERIALS ARE
USED ALONE OR IN COMBINATION WITH OTHER SUBSTANCES.
(c) In the event that any PRODUCTS or Materials have to be quarantined
or recalled, or are subject to a stop-sale action, whether voluntary or by
governmental action, it is agreed and understood that any expenses, including
reasonable fees of any experts or attorneys that may be utilized by either
party, government fines or penalties, related to such recall, quarantine or
stop-sale, shall be
Page 10
<PAGE> 10
borne by the party determined to have been responsible for the basis upon which
said recall, quarantine or stop-sale was initiated. Said determination may be
made by the governmental agency involved, or by mutual agreement of the parties
following examination and review of all records pertinent to the manufacture of
PRODUCT or Materials subject to said recall.
(d) SB shall indemnify and hold SELLER harmless from and defend against
any and all third party claims, suits, actions or threats of action based upon,
related to or arising from a breach of any representation, warranty or covenant
in this Agreement or from omissions, negligence, or willful misconduct or any
wrongdoing of SB in connection with this Agreement. SB shall bear the cost,
including reasonable attorneys fees, arising in connection herewith. However,
the obligation of SB to indemnify SELLER shall be excluded if: (i) the losses
incurred are based on negligent acts or omissions of SELLER; and/or (ii) if
SELLER fails to promptly notify SB of the assertion of any such claims of which
SB was actually aware; and/or (iii) if SELLER recognizes or settles all or part
of any such claims without SB's prior consent, which shall not be unreasonably
conditioned, withheld or delayed.
(e) SELLER shall be liable for and shall indemnify, hold harmless and
defend SB, its directors and employees from and against, any damages or injuries
to persons or to property, including reasonable attorneys fees, arising from or
in connection with any third party claims, suits, actions or threats of action
resulting from a breach of any representation, warranty or covenant in this
Agreement or from omissions, negligence, or willful misconduct or any wrongdoing
of SELLER in connection with this Agreement, provided, however, that any such
negligence could not reasonably be determined during the incoming inspection of
goods as described in this Agreement. However, the obligation of SELLER to
indemnify SB shall be excluded to the extent that (i) the losses incurred are
based on negligent acts or omissions of SB; and/or (ii) if SB fails to promptly
notify SELLER of the assertion of any such claims to the extent that SB was
actually aware of the existence of such claims of which SELLER was actually
aware; and/or (iii) if SB recognizes or settles all or part of any such claims
without SELLER's prior consent, which shall not be unreasonably conditioned,
withheld or delayed.
(f) Competitive Products. During the term of this Agreement and one
year thereafter, SELLER warrants that it shall not produce, distribute, or sell
any PRODUCT included in this Agreement to a third party which is identical in
all respects to any of the PRODUCTS.
8. ENVIRONMENTAL
(a) SELLER shall properly dispose of any and all hazardous waste
materials directly; involved with the manufacture of PRODUCTS and in full
compliance with all applicable federal and local laws and regulations, generated
or resulting from the activities performed hereunder, if any, at SELLER's sole
liability and expense. SELLER warrants and represents that the manufacture of
PRODUCTS is currently and will in the future be in compliance with all
applicable US environmental laws and regulations.
(b) SELLER shall promptly notify SB in writing of any unauthorized
release, spill or emission of a reportable amount of hazardous materials, used
or generated from the activities performed
Page 11
<PAGE> 11
hereunder; and, of any alleged environmental violation or litigation relating to
the facility for the activities performed hereunder.
9. ADVERSE REACTION REPORTS
(a) SELLER shall refer all adverse reaction reports and shall notify SB
of the name and address of each person giving such a report to SB. It is the
responsibility of SB to address any adverse reaction reports. SELLER shall
exercise all reasonable efforts to provide SB any pertinent information
regarding any claims against the manufacture of PRODUCTS as defined in this
Agreement.
(b) Should adverse reaction reports be sent to SELLER directly as the
manufacturer, SELLER will promptly notify SB by telephone or Fax and forward the
original to SB for response within 2 working days.
10. FORCE MAJEURE
If the performance of any part of this Agreement by either party of any
obligation under this Agreement is prevented, restricted, interfered with or
delayed by reason of any cause beyond the reasonable control of the party liable
to perform, the party so affected shall upon giving a written notice to the
other party be excused from such performance to the extent of such prevention,
restriction, interference or delay provided that the affected party shall use
its reasonable best efforts to avoid or remove such causes of non-performance
and shall continue performance with the utmost dispatch whenever such causes are
removed. When such circumstances arise, the parties shall discuss what, if any,
modification of the terms of this Agreement may be required in order to arrive
at an equitable solution.
11. CONFIDENTIAL INFORMATION
(a) Each party recognizes that in the performance of this Agreement
confidential and/or proprietary information belonging to other parties regarding
the PRODUCTS may be disclosed or become known to other parties ("Confidential
Information"). Unless otherwise expressed in writing to the other parties,
information, including that expressed orally, that is exchanged between or among
the parties shall be presumed to be Confidential Information. Each party agrees
to take such precautions as it normally takes with its confidential and/or
proprietary information and to hold in confidence Confidential information for a
period of two (2) years after the earlier of: (i) termination of this Agreement
in its entirety or (ii) with respect to Confidential Information about a
particular Product, the termination of SELLER's obligation to manufacture said
PRODUCT. This obligation shall not apply to:
(i) information that, at the time of disclosure, is in the
public domain;
(ii) information that, after disclosure, is published or
otherwise becomes part of the public domain through no fault of the party to
whom the information was disclosed;
(iii) information that a party can show through its records
was in its possession or the possession of an AFFILIATE at the time of
disclosure;
Page 12
<PAGE> 12
(iv) information which becomes available to the receiving party
from a third party which is lawfully entitled to disclose such information; and
(v) information which is known to the receiving party prior to
disclosure or is independently developed as evidenced by such party's written
records
(b) Each party shall maintain, however, the right to disclose such
Confidential Information if required to do so by law, but shall endeavor to keep
and assist the other parties in keeping it confidential by all appropriate
means. If a party finds it necessary to disclose any such information in any
judicial or administrative hearing or proceeding, the party shall immediately
notify the other party that it finds such disclosure to be necessary and shall
attempt to disclose such Confidential Information "in camera" or subject to
"protective order or on some other non-public basis."
(c) Upon termination of this Agreement, the parties shall return each
other's Confidential Information, provided that the parties shall each be
entitled to retain one record copy in their respective legal departments to
determine the extent of their continuing obligations.
Page 13
<PAGE> 13
12. GENERAL PROVISIONS
(a) Insurance
During the term of this Agreement, each party shall maintain
comprehensive general liability insurance, product liability and property damage
insurance, or self insurance, in such amounts and with such scope of coverage as
are appropriate for companies of like size taking into account the scope of
activities contemplated herein.
(b) Assignment
This Agreement shall be binding upon and inure to the benefit of the
successors in interest of the respective Parties. Neither this Agreement nor any
interest hereunder shall be assignable by either party without the prior written
consent of the other provided, however, that, without obtaining the consent of
the other party: (i) SB may assign its right and obligations hereunder (to the
extent that the same relates to any PRODUCT) to any third party to which SB
sells such PRODUCT line provided that said third party expressly agrees in
writing to assume the obligations regarding such PRODUCT under this Agreement;
and (ii) either party may assign this Agreement to any AFFILIATE or to any
corporation with which it may merge or consolidate, or to which it may transfer
all or substantially all of its assets, if such AFFILIATE or other corporation
(the "Assuming Party") expressly agrees in writing to assume all obligations
under this Agreement and if such assigning party fully guarantees the
performance of all the Assuming Party's obligations under this Agreement.
Approval of all Assignments for which approval is required shall not be
unreasonably withheld.
(c) Change of Control
This Agreement shall survive any sale by SELLER or SB of all of its
assets, or any portion thereof, to which this Agreement relates. Prior to such
sale, the selling party shall fully guarantee in writing the performance of all
of its obligations and responsibilities hereunder.
(d) Waiver
The failure of any party to enforce at any time any of the provisions
of this Agreement shall in no way constitute or be construed as a waiver of that
or any other provision of this Agreement nor in any way to affect the validity
of this Agreement or any other provision hereof or the right of such party to
enforce thereafter each and every provision of this Agreement nor be deemed to
be a waiver of any other provision or breach.
(e) Governing Law
This Agreement and the relations of the parties hereunder shall be governed by
the laws of the State of Tennessee.
Page 14
<PAGE> 14
(f) Arbitration
Any dispute, controversy, or claim arising out of or relating to this
contract, or the breach, termination, or invalidity thereof, which is not
settled by agreement between the parties, shall be finally settled by
arbitration held according to the commercial Arbitration Rules, in effect on the
date of this contract, of the American Arbitration Association ("AAA"), except
that in the event of any actual or threatened breach or default which could give
rise to irreparable harm, the non-defaulting party may apply to any court for
injunctive or other equitable relief, pending the outcome of the arbitration.
The arbitration shall be held in Bristol, Tennessee in accordance with
the substantive law of the state of Tennessee (without reference to Tennessee's
choice of law rules).
The arbitration panel shall consist of three arbitrators; each party
may appoint one arbitrator and a third arbitrator shall be appointed by
agreement of the two party-appointed arbitrators. In the event that the
party-appointed arbitrators cannot select the third arbitrator, then the AAA
shall appoint a third arbitrator. Judgment upon the award of such arbitrators
shall be final and binding on both parties, and any right of appeal therefore is
hereby waived. Judgment upon the award rendered may be entered in any court
having jurisdiction, or application may be made to such court for confirmation
of the award.
(g) Independent Contractor
Nothing in this Agreement shall be constructed to constitute SB or
SELLER as a partner, joint venture, agent or other representative of the other.
Each is an independent company retaining complete control over and complete
responsibility for its own operations and employees. Nothing in this Agreement
shall be construed to grant either party any right or authority to assume or
create any obligation on behalf or in the name of the other, to accept
summonses, or legal process for the other, or to bind the other in any manner
whatsoever.
(h) Obligation to Third Parties.
Each party warrants and represents that proceeding as provided herein
is not inconsistent with any contractual obligations, expressed or implied,
undertaken with any third party.
(i) Severability.
If any one or more of the provisions of this Agreement shall be held to
be invalid, illegal or unenforceable, the validity, legality or enforceability
of the remaining provisions hereof shall not in any way be affected or impaired
thereby. To the extent permitted by applicable law, each party waives any
provision of law which renders any provision hereof invalid, illegal or
unenforceable in any respect. In the event any provision of this Agreement shall
be held to be invalid, illegal or unenforceable, the parties hereto shall use
best efforts to substitute a valid, legal and enforceable provision which,
insofar as practical, implements the purposes hereof.
Page 15
<PAGE> 15
(j) Entire Agreement
This Agreement, entered into as of the date written above, together
with any Appendices or Schedules hereto constitutes the entire agreement between
the Parties relating to the subject matter hereof regarding the supply of
PRODUCTS and supersedes all previous writings and understandings. No terms or
provisions of this Agreement shall be varied or modified by any prior or
subsequent statement, conduct or act of either of the Parties, except that the
Parties may amend this Agreement by written instruments specifically referring
to and executed in the same manner as this Agreement.
(k) Notices
All notices hereunder shall be addressed as follows:
if to SB:
SmithKline Beecham Corporation.
One Franklin Plaza
PO Box 7929
Phila, PA 19101
ATTN: VP, Purchasing
with copies to:
SmithKline Beecham
One Franklin Plaza
PO Box 7929
Phila, PA. 19101
ATTN: Legal
Page 16
<PAGE> 16
if to SELLER:
King Pharmaceuticals
Attention: John M. Gregory, Chairman of the Board
501 Fifth Street
Bristol, Tennessee 37620
with a copy to:
King Pharmaceuticals
Attention: John A. A. Bellamy, Vice President & General Counsel
501 Fifth Street
Bristol, Tennessee 37620
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
SMITHKLINE BEECHAM CORPORATION KING PHARMACEUTICALS, INC.
By:/s/ D. Whiterman By:/s/ John M. Gregory
--------------------------- ----------------------------
Title: VP & Director, WSO-NA Title: President & CEO
------------------------ -------------------------
Date: July 16, 1996 Date: 7/17/96
------------------------- -------------------------
Page 17
<PAGE> 1
Exhibit 10.22
[WARNER LAMBERT LETTERHEAD]
October 31, 1997
CONFIDENTIAL
Mr. John A.A. Bellamy
Executive Vice President & General Counsel
King Pharmaceuticals, Inc.
501 Fifth Street
Bristol, Tennessee 37620
Re: Proposed Acquisition of the Parkedale Facility and Certain Products
Dear Mr. Bellamy;
1. This letter sets forth the preliminary understanding among King
Pharmaceuticals, Inc. (hereinafter, "King"), Warner-Lambert Company
(hereinafter, "W-L") and Parke, Davis & Company (hereinafter "PD") relating to
the proposed acquisition of certain of W-L's and/or PD's or their affliates'
rights in and to the following assets (all of the following are hereinafter
collectively referred to as the "Assets");
(a) To the extent assignable, rights to commercialize in the United
States all prescription pharmaceutical products, including all
formulations, dosage forms andd strengths, sold under the Ketalar(R),
Aplisol(R), Chlormycetin(R), Coly-Mycin(R) Coly-Mycin(R)-S Otic,
Coly-Mycin(R)-M Parenteral, Adrenalin(R), Vira-A(R), Pitocin(R),
Pitressin(R), Histoplasmin(R), Fluogen(R), Anusol(R)-HC(R), Procan(R),
Procanbid(R) and Humatin(R) trademarks (collectively hereinafter, the
"Products"), provided, however that such rights shall not include the
rights to sell over-the-counter under any such trademarks, those
pharmaceutical products or any formulations, dosage forms or strengths
thereof which W-L currently sells over-the-counter under any such
trademarks. Fluogen(R), Aplisol(R) and Aplitest (R) may also be sold
outside of the UInited States. The Products subject to these
restrictions shall be identified in the definitive purchase agreements
contemplated herein;
(b) Certain rights (either as owner or licensee, as mutually agreed by
the parties) in such tradedress, trademarks, patents, trade secrets and
other forms or formats of intellectual property directly related to the
Products and necessary to make, have made, use, offer for sale and sell
the Products in the United States (collectively hereinafter, the
"Intellectual Property"). The parties acknowledge that certain
trademarks owned or controlled by W-L are used for the sale of the
Products as well as for the over-the-counter sale of other products and
that King shall only acquire a license to use the Intellectual Property
for the manufacture and sale of such Products;
(c) Rights to such regulatory filings, applications, licenses,
approvals, supplements, permits and reports directly related to the
Products which may be necessary to make, have made, use, offer for sale
and sell the Products in the United States (collectively hereinafter,
the "Regulatory Property"):
(d) All goodwill associated solely with the Products (collectively
hereinafter, the "Goodwill");
(e) All the real property (being 82 acres more or less), appurtenances
thereto, the buildings and to the extent owned by Warner-Lambert all
equipment and support systems necessary to
<PAGE> 2
manufacture the products and fixtures at the site commonly referred to
as the Parke-Davis plant at 870 Parkedale Road in Rochester, Michigan
(collectively hereinafter, the "Parkedale Facility");
(f) To the extent assignable, the rights and obligations of W-L under
certain contracts exclusively relating to (I) the manufacture,
packaging, testing, distribution, marketing, or sale of any of the
Products or (II) the manufacture, packaging, testing, marketing or
distribution of other pharmaceutical drug products or drug substances
for or on behalf of all third-parties performed at or from the
Parkedale Facility (collectively hereinafter, the "Contractual
Rights").
(g) All information concerning all accounts receivable, pending
purchase orders, sales data, customer lists, target lists, sampling
lists, physician lists, distribution agreements, co-promotion
agreements, volume prescriber lists, discount arrangements, marketing
strategies, marketing summaries, advertising data, and advertisements
related to the Products in any form or fashion in and outside the
United States, together with all internal and external correspondence,
historical records, and copies (whether hard copies or electronically
archived) of all of the foregoing (collectively, hereinafter the "Sales
Data").
2. In consideration of the acquisition by King of the Assets, King
shall pay to W-L and/or PD or their designated affiliates the sum of One
Hundred Twenty-five Million Dollars ($125,000,000.00) (the "Purchase Price").
The Purchase Price will be paid as follows: (a) the sum of Ninety Million
Dollars ($90,000,000.00) to be paid on the date of execution of: (I) definitive
asset purchase agreements for the Assets, and (II) other definitive agreements
and the closing of the transactions contemplated herein (the "Closing Date") by
wire transfer to accounts designated by W-L and PD; and (b) the remaining sum
of Thirty-five Million Dollars ($35,000,000.00) to be paid pursuant to the
terms of a promissory note payable to W-L and PD in three (3) equal annual
installments of principal with the first such principal payment due on the
first anniversary of the Closing Date and the remaining principal payments to
be due on the second and third anniversaries of the Closing Date, respectively,
together with semi-annual interest payments on the outstanding balance at a per
annum rate of seven percent (7%). King shall have the right to prepay all or
any portion of the outstanding principal amount of the note (plus accrued
interest) at any time without penalty. Such note shall be secured by
appropriate collateral valued at no less than 110% of the principal amount of
the promissory note, as negotiated by the parties.
3. On and as of the Closing Date, W-L may have an inventory of raw
materials, components, in-process goods and finished goods on hand relating to
the production of the Products or products produced pursuant to the Contractual
Rights. W-L and King will negotiate in good faith the terms on which King may
acquire at book value such finished inventory and will memorialize same in the
definitive agreements contemplated herein.
4. Consummation of the transactions contemplated herein is contingent
upon the fulfillment of all of the following conditions to the satisfaction of
the parties: (a) the negotiation of mutually acceptable definitive purchase
agreements and other definitive agreements related thereto; (b) receipt by
King, W-L and PD of all required internal approvals and board of directors
approvals; (c) receipt of any required approvals from relevant regulatory
authorities or governmental agencies; (d) completion of a due diligence
investigation by King and/or its agents of all matters surrounding each and all
of the Assets; (e) a resolution of all legal and equitable matters relating to
a transfer or continuation of labor at the Parkedale Facility; (f) negotiation
and execution of a mutually acceptable manufacture and supply agreement,
substantially on the terms outlined in paragraph 5 below, for those certain
products not presently manufactured at the Parkedale Facility (collectively
hereinafter, the "Non-Parkedale Products"); (g) negotiation and execution of a
mutually acceptable manufacture and supply agreement, substantially on the
terms outlined in paragraph 6 below, for those certain products presently
manufactured at the Parkedale Facility which are not Assets (collectively
hereinafter, the "W-L Retained Products"); and (h) negotiation of a
transitional services agreement governing the transfer of operations at the
Parkedale Facility from W-L to King.
<PAGE> 3
5. The manufacture and supply agreement for the Non-Parkedale
Products would be for a term of two (2) years. In the manufacture and supply
agreement, King would agree to purchase all of its requirements for the
Non-Parkedale Products exclusively from W-L and W-L would agree to manufacture
for U.S. the Non-Parkedale Products exclusively for King. King would pay a
transfer price for each unit of Non-Parkedale Products equal to the "Direct
Manufacturing Costs" plus fifty percent (50%). Direct Manufacturing Costs to
be defined to include the actual cost of labor (manufacturing, packaging and
release testing), material components and packaging components. W-L would
warrant the Non-Parkedale Products to have been manufactured in compliance with
cGMP standards and in accordance with mutually agreed upon specifications. W-L
would conduct and maintain routine stability testing for the Non-Parkedale
Products and report and results of same to King on at least an annual basis.
6. The manufacture and supply agreement for the W-L Retained
Products would be for a term of five (5) years. In the manufacture and supply
agreement, W-L would agree to purchase all of its requirements for the W-L
Retained Products exclusively from King and King would agree to manufacture the
W-L Retained Products exclusively for W-L. W-L would pay a transfer price for
each unit of Retained W-L Products equal to the "Direct Manufacturing Costs"
plus fifty percent (50%). Direct Manufacturing Costs to be defined as the
actual cost of labor (manufacturing, packaging and release testing), material
components and packaging components. King would warrant the W-L Retained
Products to have been manufactured in the compliance with cGMP standards and in
accordance with specifications provided by W-L. King would conduct and
maintain routine stability testing for the W-L Retained Products and report
the results of same to W-L on at least an annual basis.
7. The definitive agreements to be executed by W-L King relating to
the transactions contemplated herein will contain terms, conditions, warranties
and representations usual and customary in transactions of this type in the
pharmaceutical industry, including, but not limited to, indemnification
provisions applicable to both parties, an appropriate non-competition agreement
with respect to the Products, the Retained Products, the Intellectual Property
and the Regulatory Property, and such other terms and conditions as may be
mutually agreed to by the parties.
8. Each party represents to the other that there is no basis for a
claim against the other party for brokers' commissions, finders' fees or
similar compensation in connection with the transactions described herein based
on arrangements made by the representing party. Each party shall be
responsible for the payment of its respective costs and expenses incurred in
connection with the negotiations, drafting and closing of the agreements and
transactions contemplated herein.
9. The parties agree that the subject matter described herein and
the fact that negotiations with respect to such subject matter are taking place
or have taken place between the parties will be kept confidential until the
contents and timing of a public announcement are mutually agreed, except if
required by applicable law, in which case the party required to make a public
disclosure agrees to inform the other party prior to any disclosure, provide
the other party with a copy of such disclosure and allow the other party a
chance to review and comment on such disclosure and to minimize the information
released insofar as possible. Disclosures relating to any proposed public sale
of either party's shares of stock shall not be deemed to be required by
applicable law and any such disclosures must be mutually agreed to by the
parties.
10. This letter shall be deemed to have been made in, and shall be
construed in accordance with the laws of, the State of New York, exclusive of
choice of law rules.
11. This letter expresses the present intention of the parties with
respect to the Assets and except for the provisions of paragraphs 8, 9, 10 and
11 hereof, notwithstanding any words of agreement or other language used
herein, this letter is not intended to create a binding legal obligation on the
part of any party nor shall it be deemed to be a contract to contract. Binding
legal obligations shall be created solely upon execution of, and in accordance
with, the terms of the definitive agreements between the parties.
<PAGE> 4
If the foregoing accurately reflects your understanding of the present
intentions of the parties, please execute both copies of this letter in the
space provided below and return one original to the undersigned.
Very truly yours,
WARNER-LAMBERT COMPANY
BY: /s/ Dr. Anthony H. Wild
---------------------------------------
NAME: Dr. Anthony H. Wild
------------------------------------
TITLE: President Pharmaceutical Sector
------------------------------------
PARKE, DAVIS & COMPANY
BY: /s/ Dr. Anthony H. Wild
----------------------------------------
NAME: Dr. Anthony H. Wild
-------------------------------------
TITLE: President Pharmaceutical Sector
-------------------------------------
AGREED TO AND ACCEPTED:
KING PHARMACEUTICALS, INC.
By: /s/ John M. Gregory
-------------------------
Name: John M. Gregory
----------------------
Title: CEO
----------------------
Date: 10/31/97
----------------------
<PAGE> 1
EXHIBIT 10.23
================================================================================
TRADEMARK, PATENT, COPYRIGHT AND KNOW-HOW
LICENSE AGREEMENT
between
WARNER-LAMBERT COMPANY
and
GLAXO WELLCOME INC.
-------------------------
Dated as of June 30, 1996
-------------------------
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1 Definitions ............................. 1
SECTION 2 Grant of Rights ......................... 4
SECTION 3 Scope of Rights ......................... 5
SECTION 4 Quality Control ......................... 6
SECTION 5 Reservation of Rights ................... 7
SECTION 6 Protection of the Mixed-Use Intellectual
Property................................ 8
SECTION 7 Maintenance of the Mixed-Use Trademarks,
Mixed-Use Patents and Mixed-Use
Copyrights; Challenging of Applications;
Abandonment ............................ 10
SECTION 8 Consultation ............................ 11
SECTION 9 Rights to the Mixed-Use Intellectual
Property ............................... 11
SECTION 10 Confidentiality ......................... 12
SECTION 11 Third Party Mixed-Use Know-How .......... 13
SECTION 12 Indemnification ......................... 14
SECTION 13 Term; Termination ....................... 14
SECTION 14 Further Assurances ...................... 16
SECTION 15 Notices ................................. 16
SECTION 16 Contractual Relationship ................ 17
SECTION 17 Governing Law ........................... 17
SECTION 18 Submission to Jurisdiction .............. 17
SECTION 19 Counterparts............................. 17
SECTION 20 Entire Understanding .................... 17
SECTION 21 Transferability; Binding Effect ......... 18
SECTION 22 Amendment ............................... 18
SECTION 23 Severability ............................ 19
SECTION 24 Waiver .................................. 19
SECTION 25 Remedies ................................ 19
SECTION 26 Headings ................................ 20
</TABLE>
<PAGE> 3
TRADEMARK, PATENT, COPYRIGHT AND KNOW-HOW
LICENSE AGREEMENT
This AGREEMENT is made as of this 30th day of June, 1996, by and
between WARNER-LAMBERT COMPANY, a Delaware corporation with its principal place
of business at 201 Tabor Road, Morris Plains, New Jersey 07950 ("Licensor"),
AND
GLAXO WELLCOME INC., a North Carolina corporation with its principal
place of business at Five Moore Drive, Research Triangle Park, North Carolina
27709 ("Licensee").
WHEREAS Licensee or its Affiliates are the proprietor of certain
intellectual property outside the Core Territory and concurrently with the
execution of this Agreement Licensee or its Affiliates will enter into an
agreement dated as of the date hereof with Licensor or its Affiliates which
grants a license to Licensor or its Affiliates to use such intellectual property
outside the Core Territory to develop and manufacture products sold in the
Non-Prescription Field exclusively for sale in the Core Territory; and
WHEREAS Licensor is the proprietor of the Mixed-Use Intellectual
Property in the Territory and Licensee desires to license such Mixed-Use
Intellectual Property under the terms and conditions contained herein.
NOW IT IS HEREBY AGREED as follows:
1 . DEFINITIONS.
In this Agreement the following words shall have the meanings set forth
below:
"Claims" shall mean all claims, costs, liabilities, damages, losses,
expenses (including reasonable fees and disbursements of counsel), obligations,
liens, assessments, judgements and fines.
"Copyright" shall mean original works of authorship fixed in
any tangible medium of expression
<PAGE> 4
2
including, literary works, musical, dramatic, pictorial, graphic and sculptured
works.
"Core Territory" shall mean Andorra, Australia, Austria, Belgium,
Canada, Denmark, Finland, France (including its overseas departments and
overseas territories and Monaco), Germany, Gibraltar, Greece, Iceland, Ireland,
Italy, Liechtenstein, Luxembourg, Mexico, the Netherlands, New Zealand, Norway,
Portugal, San Marino, Spain, Sweden, Switzerland, the United Kingdom, the United
States and the Vatican City.
"Line Extensions" shall mean any extensions of (a) any Product listed
on Schedule 1A, 2A, 3A or 4A hereto which extensions (i) utilize any of the same
Mixed-Use Intellectual Property as such Product and (ii) are sold by or on
behalf of Licensee in the Non-Prescription Field exclusively for sale outside
the Core Territory (it being understood that such a sale may be made within the
Core Territory only if it is exclusively for resale and delivery outside the
Core Territory and each purchaser with respect thereto confirms and agrees to
such restriction) or (b) any Product listed on Schedule 13, 2B, 3B or 4B hereto
which extensions (i) utilize any of the same Mixed-Use Intellectual Property as
such Product, (ii) are of the same or similar product class, category or
formulation as such Product and (iii) are sold in the Prescription Field by or
on behalf of Licensee. For the avoidance of doubt, Line Extensions shall exclude
any extensions developed by or on behalf of Licensor,
"Mixed-Use Copyrights" shall mean any Copyright used in the Territory
on or in connection with a Product (i) in the Non-Prescription Field as
identified on Schedule 3A or (ii) in the Prescription Field as identified on
Schedule 3B. For the avoidance of doubt, unregistered copyrights used on or in
connection with Products identified on Schedule 3A or 3B as of the date hereof
are deemed Mixed-Use Copyrights; however, any unregistered copyrights developed
after the date hereof by Licensor shall not be considered Mixed-Use Copyrights.
"Mixed-Use Intellectual Property" shall mean the Mixed-Use
Trademarks, Mixed-Use Patents, Mixed-Use Copyrights and Mixed-Use Know-How.
"Mixed-Use Know-How" shall mean all trade secrets, technology,
discoveries and improvements, know-how,
<PAGE> 5
3
proprietary rights, formulae, confidential and proprietary information,
technical information, techniques, inventions, designs, drawings, procedures,
processes, models, manuals and systems, whether or not patentable, which are
invented, developed, acquired, owned or licensed by Licensor as of the date
hereof and which relate specifically to the manufacture, use or sale of the
Products (whether or not they also relate to the manufacture, use or sale of
other products) specified on Schedule 4A or 4B hereto, including, but not
necessarily limited to, all biological, chemical, biochemical, toxicological,
pharmacological and metabolic material and information and data relating thereto
and formulation, clinical, analytical and stability information and data;
provided, however, that Mixed-Use Know-How shall not include any know-how in the
public domain.
"Mixed-Use Patents" shall mean any Patent used in the Territory in
connection with a Product (i) in the Non-Prescription Field as identified on
Schedule 2A or (ii) in the Prescription Field as identified on Schedule 2B.
"Mixed-Use Trademarks" shall mean any Trademark used in the Territory
on or in connection with a Product (i) in the Non-Prescription Field as
identified on Schedule 1A or (ii) in the Prescription Field as identified on
Schedule 1B. For the avoidance of doubt, unregistered trademarks, service marks,
trade dress, logos and slogans used on or in connection with Products identified
on Schedule 1A or 1B as of the date hereof are deemed Mixed-Use Trademarks;
however, any of the foregoing developed after the date hereof by Licensor shall
not be considered Mixed-Use Trademarks.
"Non-Prescription Field" shall mean the non-prescription consumer
health care business.
"Patents" shall mean patents, patent rights, patent applications,
registered designs, registered design applications, industrial designs,
industrial design applications and industrial design registrations, including
any and all divisions, continuations, continuations-in-part, extensions,
substitutions, renewals, registrations, revalidations, reissues or additions,
including supplementary certificates of protection, of or to any of the
aforesaid items.
"Prescription Field" shall mean the prescription consumer health care
business.
<PAGE> 6
4
"Products" shall mean any of the products specified on Schedules 1A,
1B, 2A, 2B, 3A, 3B, 4A and 4B hereto, as applicable (and any Line Extensions in
respect of such Products, which Line Extensions shall be deemed to be Products
identified on Schedule 1A, 1B, 2A, 2B, 3A, 3B, 4A or 4B hereto, as applicable).
"Territory" shall mean the United States.
"Trademarks" shall mean trademarks, trademark registrations, trademark
applications, service marks, service mark registrations, service mark
applications, business marks, brand names, trade names, trade dress, names,
logos and slogans and all goodwill associated therewith.
"United States" shall mean the fifty states of the United States of
America, the District of Columbia, United States territories and possessions,
including the Commonwealth of Puerto Rico, and U.S. military bases worldwide.
Capitalized terms used herein which are not defined herein shall have
the meanings set forth in the Purchase Agreement dated as of June 30, 1996,
between (i) Warner-Lambert Company and (ii) Glaxo Wellcome plc and Wellcome plc
(the "Purchase Agreement"). References to Licensee hereunder shall include
Affiliates of Licensee except to the extent the context requires otherwise.
2. GRANT OF RIGHTS.
(a) Subject to any pre-existing rights of any third party as described
in Schedule 6 and subject to Section 3, Licensor hereby grants to Licensee an
exclusive, royalty-free license to use and employ the Mixed-Use Intellectual
Property in the Territory solely in connection with
(i) the development and manufacture by or on behalf of Licensee of any
Product sold by or on behalf of Licensee in the Non-Prescription Field
exclusively for sale outside the Core Territory (it being understood that
such a sale may be made within the Core Territory only if it is exclusively
for resale and delivery outside the Core Territory and each purchaser with
respect thereto confirms and agrees to such restriction) which Product is
specified for such Mixed-
<PAGE> 7
5
Use Intellectual Property on Schedule 1A, 2A, 3A or 4A hereto, as applicable,
and
(ii) the development, manufacturing, marketing, distribution and sale
in the Prescription Field by or on behalf of Licensee of any Product
specified for such Mixed-Use Intellectual Property on Schedule 1B, 2B, 3B or
4B hereto, as applicable.
The right of Licensee to have any Product in the Non-Prescription Field
described in the foregoing clause (i) manufactured by a third party shall be
subject to the prior written consent of Licensor, which consent shall not be
unreasonably withheld or delayed. Licensor may only withhold consent with
respect to a third party manufacturer if Licensor has a reasonable basis to
believe that such third party manufacturer might engage in activities which
would result in the diversion of any Products in the Non-Prescription Field for
sale inside the Core Territory or engage in any other activities or arrangements
with similar results.
(b) In the event that Licensee desires to use any Trademark with
respect to a Product listed on Schedule 1B in the Prescription Field in the
Territory which is the same as or confusingly similar to any Mixed-Use Trademark
identified on Schedule 1B, Licensor shall, at Licensee's reasonable request, use
reasonable efforts to register such Trademark and license such Trademark to
Licensee pursuant to the terms of this Agreement.
3. SCOPE OF RIGHTS.
(a) Licensee shall not use or register, or attempt to register, in the
Core Territory any Trademark which is the same as or confusingly similar to any
Trademark on Schedule 1A, except for such use as is provided for herein.
(b) If required by any Governmental Rule, when any Mixed-Use Trademark
is used by Licensee, it shall be accompanied by wording to show that it is a
Trademark used by Licensee with the permission of Licensor. The terms of such
wording and its placement shall be in accordance with any applicable
Governmental Rules.
(c) Licensee undertakes to use the Mixed-Use Trademarks and Mixed-Use
Copyrights in the Territory only in
<PAGE> 8
6
respect of, upon or in connection with (i) Products identified on Schedule 1A or
3A, as applicable, that are developed and manufactured by or on behalf of
Licensee and sold by or on behalf of Licensee in the Non-Prescription Field
exclusively for sale outside the Core Territory or (ii) Products identified on
Schedule 1B or 3B, as applicable, that are developed, manufactured, marketed,
distributed and sold in the Prescription Field by or on behalf of Licensee. The
foregoing does not affect Licensee's right to use its Trademarks and Copyrights
outside of the Core Territory.
(d) In connection with Section 2 hereof, Licensee shall not:
(i) incorporate packaging of Products used by Licensor in the Core
Territory unless required by Governmental Authority to incorporate such
packaging, provided that where such packaging is used by Licensee as of the
date hereof, this restriction shall apply only to any change to such
packaging after the date of this Agreement which change increases or is
likely to increase the risk of confusion; and
(ii) use in connection with the marketing or sale, outside the Core
Territory, of any Product or any products that are the same as or similar to
any Products, any packaging or user instructions printed in any language
other than the language used by the government in the country where such
Product or product is intended to be marketed or sold (and in respect of
countries in the former Soviet Union, Russian), provided that (x) this
restriction shall apply only to any change in packaging or user instructions
after the date of this Agreement and (y) one or more languages commonly used
on packaging or user instructions in such country may be used if it can be
reasonably demonstrated that the use of such other language or languages is
well-established and widespread on packaging or user instructions in such
country for products similar to such Products or products in which event such
language or languages may be used on packaging or user instructions in such
country. Licensee shall notify Licensor of any such use under (y) within a
reasonable period of time.
<PAGE> 9
7
4. QUALITY CONTROL.
(a) Licensee agrees to adhere to all standards required by any
applicable Governmental Rule, including any standards relating to current good
manufacturing practices with respect to the Products, but only to the extent
that the failure to comply might reasonably be expected to have a material
adverse effect on the Mixed-Use Trademarks or Licensor's rights thereto.
Licenser acknowledges that the standards of quality employed as of the date
hereof with respect to the Products identified on Schedules 1A, 1B, 3A and 3B
hereto (excluding Line Extensions) are acceptable to Licensor and Licensee
agrees to adhere to such standards unless it obtains the prior written consent
of Licensor, such consent not to be unreasonably withheld or delayed. Licensee
shall notify Licensor of standards of quality with respect to any Line
Extensions within sixty (60) days prior to launch of such Line Extensions and
Licensor shall notify Licensee as to whether such standards of quality are
acceptable or, if unacceptable, provide a reasonably detailed description of the
reasons why such standards are unacceptable. If Licensor fails to notify
Licensee within thirty (30) days after being notified by Licensee of such
standards of quality, such standards of quality shall be deemed acceptable by
Licensor.
(b) Licensee agrees to furnish to Licensor or its representatives upon
the reasonable request of Licensor or its representatives, samples of the
Products, whether or not manufactured by Licensee, and other Product materials
using the Mixed-Use Trademarks, including, but not limited to, labelling,
packaging, advertising and publicity material.
(c) Licensee shall use the Mixed-Use Trademarks in an appropriate
manner, without jeopardizing the significance, distinctiveness or validity of
such Mixed-Use Trademarks. Licensor hereby consents to the Product packaging and
other uses of the Mixed-Use Trademarks existing on the date hereof.
5. RESERVATION OF RIGHTS.
Licenser reserves for itself all rights to use and employ any of the
Mixed-Use Intellectual Property for any purpose other than those granted in
Section 2, including, without limitation, Licensor or any of its Affiliates'
rights to use any of the Mixed-Use Intellectual Property in the Non-Prescription
Field in the Core Territory; provided,
<PAGE> 10
8
however, that Licensor and its Affiliates shall not have the right to use such
Mixed-Use Intellectual Property in the Prescription Field in the Core Territory
except for any of the Mixed-Use Intellectual Property identified on Schedule 1A,
2A, 3A or 4A which either:
(x) is to be used in connection with a Product identified in Schedule
1A, 2A, 3A or 4A in a jurisdiction in which such Product is required pursuant
to any Governmental Action after the date hereof to be sold only in the
Prescription Field;
(y) is used for sale of a product in the Prescription Field in a Switch
Jurisdiction (as defined below) in which Licensee is not selling a Product
associated with such Mixed-Use Intellectual Property in the Prescription
Field and Licensee consents to such use, such consent not to be unreasonably
withheld (Licensee agreeing to consider such potential use in good faith but
giving due consideration to its business needs). Licensor agrees that it will
use all commercially reasonable efforts to cause any product being sold in
the Prescription Field pursuant to clause (y) above to be switched to the
Non-Prescription Field as soon as possible consistent with applicable
Governmental Rules. "Switch Jurisdiction" means, with respect to a product, a
jurisdiction in the Core Territory in which it can be reasonably demonstrated
that under applicable Governmental Rules such product must be sold in the
Prescription Field for a period of time prior to being sold in the
Non-Prescription Field.
6. PROTECTION OF THE MIXED-USE INTELLECTUAL PROPERTY.
(a) As to any proceedings instituted by a third party seeking to
impeach the validity of or challenging the title to or ownership of any of the
Mixed-Use Intellectual Property, Licensor shall be responsible for taking
reasonable action to defend or prosecute such proceedings; provided, however,
that Licensor may, but shall not be required to act under this Section 6(a) with
respect to any Mixed-Use Intellectual Property if Licensee has discontinued sale
of the Product relating to such Mixed-Use Intellectual Property for three years.
(b) In the event that Licensee or Licensor becomes aware at any time
during the period of this Agreement of any unauthorized use or infringement, or
any
<PAGE> 11
9
alleged unauthorized use or infringement, by a third party of any of the
Mixed-Use Intellectual Property, whether in the Prescription Field or the
Non-Prescription Field, immediately upon becoming aware thereof, it shall notify
the other party hereto in writing of such unauthorized use or infringement or
alleged unauthorized use or infringement.
(c) Licensor may, but shall not be required to, prosecute any
unauthorized use or infringement, or any alleged unauthorized use or
infringement, by a third party of any of the Mixed-Use Intellectual Property of
which it is aware or which is brought to its attention, in which case it shall
act in its own name and at its own expense. In the event Licensor brings such an
action, Licensee shall, at the reasonable request and, subject to the following
sentence, expense of Licensor, cooperate fully with Licensor. Any recovery
obtained from such action shall accrue solely to the benefit of Licensor;
provided that if Licensee bears a proportionate share (based on its relative use
of the relevant Mixed-Use Intellectual Property) of the expenses of such action,
as incurred, it shall be entitled to the same proportionate share of such
recovery.
(d) If Licensor has failed to prosecute under Section 6(c) with respect
to an unauthorized use or infringement, or alleged unauthorized use or
infringement, by a third party of any of the Mixed-Use Intellectual Property by
the earlier of (i) three months after it has been notified in writing by
Licensee of such unauthorized use or infringement, or alleged unauthorized use
or infringement, or (ii) one month before the time limit, if any, set forth in
the appropriate laws and regulations for the filing of such actions, Licensee
may, but shall not be required to, prosecute any such alleged infringement or
threatened infringement. In such event, Licensee shall notify Licensor in
writing before taking such action and Licensee shall act in its own name and at
its own expense. In such event, Licensor shall cooperate fully with Licensee at
the reasonable request and, subject to the following sentence, expense of
Licensee, including, if required in order to bring such an action, the
furnishing of a power of attorney or, to the extent possible, consenting to
become a party. Any recovery obtained from any such action shall accrue solely
to the benefit of Licensee; provided that if Licensor bears a proportionate
share (based on its relative use of the relevant Mixed-Use Intellectual
Property) of the expenses of such action, as incurred, it shall be entitled to
the same proportionate share of such recovery. Licensee
<PAGE> 12
10
shall not reach any settlement with respect to any such action without the prior
written consent of Licensor, which consent shall not be unreasonably withheld.
Notwithstanding the provisions of this Section 6(d), in the event that Licensor
reasonably believes that the commencement of a prosecution of an unauthorized
use or infringement, or alleged unauthorized use or infringement, of any
Mixed-Use Intellectual Property in or with respect to the Non-Prescription Field
solely in the Core Territory is not in the best interests of Licensor, then
Licensor may give notice to Licensee to that effect and in such event Licensee
shall have no right to prosecute any such unauthorized use or infringement, or
alleged unauthorized use or infringement, of any Mixed-Use Intellectual Property
in or with respect to the Non-Prescription Field.
(e) Licensor and Licensee may agree jointly to prosecute any
infringement described in Section 6(b) with a mutually agreed upon allocation of
all costs and expenses of, as well as any recovery obtained from, such action.
(f) To the extent permitted or required by any Governmental Rule,
Licensor shall, at Licensor's expense, apply for registration of Licensee as a
registered user of the Mixed-Use Trademarks in the Territory and Licensee shall
join in and do all such things and execute such documents as may be necessary or
convenient for effecting the said registered user entry or, to the extent
appropriate, to effect the recordal of Licensee as a user of the Mixed-Use
Trademarks in the Territory.
7. MAINTENANCE OF THE MIXED-USE TRADEMARKS, MIXED-USE PATENTS AND MIXED-USE
COPYRIGHTS; CHALLENGING OF APPLICATIONS; ABANDONMENT.
(a) Licensor shall be responsible for, and shall cause to be paid all
costs and fees in connection with, the application for and the prosecution,
maintenance (including, but not limited to, renewals, extensions, restorations,
fees, taxes, annuities, filings, evidences of use, certified copies of
registration, affidavits and declarations) or protection (including, but not
limited to, administrative or judicial proceedings unless any such proceeding is
initiated by Licensee in accordance with the terms hereof) of, the Mixed-Use
Trademarks, Mixed-Use Patents sad Mixed-Use Copyrights, in accordance with any
applicable Governmental Rule
<PAGE> 13
11
(b) Licensor shall be responsible for monitoring applications for
confusingly similar Trademarks in the Territory and for instituting proceedings
in the Territory in opposition to the registration or use of such Trademarks, in
each case as appropriate in the reasonable opinion of Licensor.
(c) Licensee shall provide Licensor with such assistance as Licensor
may reasonably request, including the provision of documentation and information
in its possession or knowledge to permit Licensor to fulfill its obligations
under this Section 7.
(d) With respect to Licensor's maintenance expenses incurred pursuant
to this Section 7 with respect to any Mixed-Use Trademark, Mixed-Use Patent or
Mixed-Use Copyright identified on Schedules 1B, 2B or 3B hereto, as applicable,
Licensee shall pay to Licensor within sixty (60) days after the end of each
calendar year an amount equal to one half of the actual cost of such expenses.
(e) Licensor may provide services under this Section 7 through any of
its Affiliates, in which case Licensor may require Licensee to provide the
assistance, compensation and reimbursement contemplated by this Section 7
directly to such Affiliate.
(f) In the event that at any time following the date of this Agreement
Licensee determines that a Mixed-Use Trademark, Mixed-Use Patent or Mixed-Use
Copyright is of no further interest to Licensee, Licensee shall give notice of
such determination to Licensor within sixty (60) days of such determination,
whereupon Licensor shall have full right to abandon such Mixed-Use Trademark,
Mixed-Use Patent or Mixed-Use Copyright.
8. CONSULTATION.
In the event that any applicable legal provision or governmental or any
other administrative act or decision is likely to the beat of the parties'
knowledge or belief to have the effect of invalidating or endangering any of the
Mixed-Use Intellectual Property, the parties shall consult with each other in
order to decide upon an appropriate course of action so as to implement to the
fullest extent legally possible the objectives of this Agreement.
<PAGE> 14
12
9. RIGHTS TO THE MIXED-USE INTELLECTUAL PROPERTY.
Licensee acknowledges that it has not acquired legal title to any of
the Mixed-Use Intellectual Property and will not acquire legal title to any of
the Mixed-Use Intellectual Property by reason of this Agreement. Licensee will
not at and time do or knowingly permit to be done any act or thing which is
designed, or might reasonably be expected, to in any way impair the rights of
Licensor in and to any of the Mixed-Use Intellectual Property or depreciate its
value or reputation, or which would threaten the confidentiality of the
Mixed-Use Know-How. Except as expressly permitted hereunder, Licensor will not
at any time do or knowingly permit to be done any act or thing which is
designed, or might reasonably be expected, to in any way impair the rights of
Licensee in and to any of the Mixed-Use Intellectual Property or depreciate its
value or reputation, or which would threaten the confidentiality of the
Mixed-Use Know-How, and Licensor shall use the Mixed-Use Trademarks in an
appropriate manner, without jeopardizing the significance, distinctiveness or
validity of such Mixed-Use trademarks. Licensee acknowledges that any goodwill
which relates to Mixed-Use Trademarks during the term of this Agreement shall
accrue to Licensor.
10. CONFIDENTIALITY
(a) Neither party shall, during the period while any provision of this
Agreement is in effect, disclose, or permit any of its Affiliates to disclose,
to any Person other than such party's Affiliates, any information (that is not
publicly available or generally known other than by breach of the provisions of
this Agreement or made available by a third party which is not in breach of an
obligation of confidentiality) (i) regarding the terms of this Agreement or (ii)
obtained by such party pursuant to or in connection with the negotiation,
execution, delivery and performance of this Agreement; except (v) with respect
to Intellectual Property Rights as permitted in Section 10(b), (w) with the
prior written consent of Licensor, in the case of a disclosure by Licensee or
any of its Affiliates, or the prior written consent of Licensee, in the case of
a disclosure by Licensor or any of its Affiliates; (x) to the extent necessary
to comply with the requirements of the Securities and Exchange Commission, the
London Stock Exchange and any other Governmental Authority or pursuant to any
Governmental Rule, in which event the party making such disclosure shall so
notify the other party as promptly as
<PAGE> 15
13
practicable (and, if possible, prior to making such disclosure) and shall seek
confidential treatment of such information; (y) any such disclosure that is
reasonably necessary in connection with enforcement of such party's rights
hereunder; or (z) disclosures to a professional advisor to such party.
(b) In addition to the above provisions and except for those rights
granted herein, Licensee (whether on its own behalf or with or on behalf of any
ether Person) shall not, and shall not permit any of its Affiliates to, at any
time after the date hereof, (1) make any use in the Core Territory of the
Mixed-Use Patents or Mixed-Use Know-How or (2) disclose in any country or
territory such Mixed-Use Patents or Mixed-Use Know-How, in whole or in part, to
any Person whatsoever other than its Affiliates, which Affiliates shall be bound
by the confidentiality provisions contained herein, and then only in accordance
with the provisions hereof; provided, however, that these obligations shall not
apply to (i) any such Mixed-Use Patents or Mixed-Use Know-How that are publicly
available or generally known other than by breach of the provisions of this
Agreement, (ii) any disclosure of such Mixed-Use Patents or Mixed-Use Know-How
required by the Securities and Exchange Commission, the London Stock Exchange or
any other Governmental Authority or pursuant to any Governmental Rule, in which
event Licensee shall notify Licensor as promptly as practicable (and, if
possible, prior to making such disclosure) and shall seek confidential treatment
of such information, (iii) any disclosure of such Mixed-Use Patents or Mixed-Use
Know-How that is reasonably necessary in connection with enforcement of the
rights of Licensee or any of its Affiliates hereunder, including disclosure to
such entity's counsel, (iv) any disclosure to a third party of such Mixed-Use
Patents or Mixed-Use Know-How pursuant to a confidentiality agreement with such
third party which agreement contains confidentiality provisions the same as or
substantially similar to those contained herein and as to which Licensee has
used all reasonable efforts to obtain a provision to the effect that Licensor or
its Affiliates are third party beneficiaries of such agreement or (v) any
disclosure of such Mixed-Use Patents to any patent authority having appropriate
jurisdiction to the extent necessary to fulfill the requirements of United
States Code, Title 35, Patents Sections 112-113 or its foreign equivalents.
<PAGE> 16
14
11. THIRD PARTY MIXED-USE KNOW-HOW.
In the case of Mixed-Use Know-How licensed or disclosed under license
to Licensor from or by a third party, with a right to sublicense, if Licensor
makes available to Licensee the benefit of such Mixed-Use Know-How in accordance
with the other provisions of this Agreement, Licensee shall assume and bear the
expense of all obligations of confidentiality, maintenance and royalty payments
and all other obligations of Licensor with respect thereto to the extent that
any such obligations relate to benefits derived by Licensee, as shall be
specified by Licensor and agreed upon by Licensee.
12. INDEMNIFICATION.
(a) Each of Licensee and Licensor shall indemnify, defend and hold
harmless the other and their respective Affiliates (and their respective
officers, directors, employees, agents and representatives) from and against all
Claims arising from, based upon, relating to or caused by any material breach of
this Agreement by Licensee or Licensor, as applicable.
(b) Any indemnification pursuant to this Section 12 shall be governed
by the provisions of Sections 7.04, 7.05, 7.06, 7.07 and 7.08 of the Purchase
Agreement.
(c) Without limiting the remedies set forth in Section 13(c), Licensor
may pursue any additional remedy pursuant to this Section 12.
13. TERM; TERMINATION.
(a) Term. Unless otherwise terminated earlier in accordance with the
provisions of this Section 13, the initial term of this Agreement shall commence
on the date hereof and continue for forty (40) years, and upon the expiration of
the initial term of this Agreement, this Agreement shall be automatically
renewed for successive one year periods.
(b) Patent Expiration. This Agreement shall terminate immediately in
respect of any Mixed-Use Patent upon the expiration of such Mixed-Use Patent.
<PAGE> 17
15
(c) Termination for Breach. If Licensee (i) fails to meet the quality
control provisions with respect to any Product identified for any Mixed-Use
Trademark in a material respect or (ii) commits a material breach of any other
terms and conditions of this Agreement which, in each case has a significant
adverse effect on any Mixed-Use Trademark and, in any such case, fails to remedy
the same (where such failure or breach is capable of remedy) within one hundred
and twenty (120) days from the date of written notice given by Licensor of such
failure or breach, Licensor may bring an action against Licensee for equitable
relief and/or damages. If, however, Licensor obtains a favorable judgment from a
court of competent jurisdiction or a favorable settlement agreement in any two
such actions in the same country with respect to any particular Mixed-Use
Trademark, and Licensee commits a further breach described in the foregoing
clauses (i) or (ii) of this Agreement in such country with respect to such
Mixed-Use Trademark, Licensor may immediately terminate this Agreement as it
relates to the use of such Mixed-Use Trademark only.
(d) Effect of Termination. Upon any termination of this Agreement in
respect of any of the Mixed-Use Trademarks for any reason:
(i) Licensee will immediately (A) cease to use the relevant Mixed-Use
Trademarks and will not thereafter use upon or in respect of the Products or
any other products such Mixed-use Trademarks (or any Trademarks or packaging
which are similar to or so nearly resemble such Mixed-Use Trademarks) or any
Trademark as would or might be likely to deceive or cause confusion or to
constitute passing off; and (B) at the request of Licensor, relabel,
overlabel, destroy or deliver any and all remaining stocks of materials and
Products bearing the Mixed-Use Trademarks in respect of which this Agreement
has been terminated; provided, however, that, with respect to any
termination under Section 13(c) hereof, Licensee shall have the right to
dispose of existing stocks of materials and Products bearing the Mixed-Use
Trademark in respect of which this Agreement has been terminated within a
one (1) year period following the date of termination. The terms of this
Agreement in respect of any such Mixed-Use Trademark shall be deemed to be
in effect during such one (1) year period.
<PAGE> 18
16
(ii) Licensor may apply for cancellation of the entry of Licensee as a
registered user under the Mixed-Use Trademarks in respect of which this
Agreement has been terminated and Licensee hereby consents to such
cancellation and undertakes to execute any documents that Licensor may
reasonably request Licensee to execute for that purpose.
(e) Other. Unless termination of this Agreement, or a part hereof, is
the result of a breach by a party hereto, such party shall have no liability for
such termination but shall have liability for antecedent breaches. The
provisions of Section 10 hereof shall survive for a period of five years (except
with respect to Mixed-Use Know-How, the protection of which shall be unlimited
in duration or such shorter duration as provided by applicable law) after all
provisions of this Agreement have been otherwise ended or terminated.
14. FURTHER ASSURANCES.
Subject to the provisions of this Agreement with respect to costs, each
party shall facilitate the implementation of the terms of this Agreement by
executing at its own expense all appropriate assignments, licenses and all other
documents, and by taking other actions, reasonably necessary or desirable to
give effect to this Agreement.
15. NOTICES.
All notices, demands, requests and other communications required or
permitted to be given hereunder shall be in writing and deemed duly given on the
date delivered by hand, mailed by registered or certified mail, postage prepaid,
or by overnight courier or by facsimile transmission the receipt of which is
confirmed by the
<PAGE> 19
17
telephone and, pending the designation of another address, addressed as follows:
If to Licensor:
Warner-Lambert Company
201 Tabor Road
Morris Plains, NJ 07950
Attention of Vice President of Planning,
Investment and Development
Facsimile: 201-540-6485
Attention of Vice President and
General Counsel
Facsimile: 201-540-3927
If to Licensee:
Glaxo Wellcome Inc.
Five Moore Drive
Research Triangle Park, NC 27709
Attention of Vice President and
General Counsel
Facsimile:
With a copy to:
Glaxo Wellcome plc
Glaxo Wellcome House
Berkeley Avenue
Greenford, Middlesex UB6 ONN
England
Attention of Trademark Manager
Facsimile: 44-181-966-8079
16. CONTRACTUAL RELATIONSHIP.
Nothing in this Agreement shall be deemed to constitute the parties
hereto as partners or as principal or agent between themselves.
17. GOVERNING LAW.
This Agreement shall be governed, construed and enforced in
accordance with the laws of the State of New
<PAGE> 20
18
York without regard to the applicable principles of conflicts of laws that might
otherwise govern.
18. SUBMISSION TO JURISDICTION.
(a) In the event of any legal suit, action or proceeding arising out of
or relating in any way to this Agreement, the parties to this Agreement agree to
submit to the jurisdiction of any New York State court sitting in New York
County or any Federal court of the United States sitting in the Borough of
Manhattan in the City of New York, and any appellate court from any such court.
(b) Each party irrevocably consents to service of process on it or any
agent for service appointed from time to time in the manner provided for notices
in Section 15 with respect to any suit, action or proceeding. Nothing in this
Agreement shall affect the right of any party to serve process in any other
manner permitted by law.
19. COUNTERPARTS.
This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original.
20. ENTIRE UNDERSTANDING.
No rights are granted by either party to the other hereunder with
respect to the subject matter of this Agreement except those expressly set forth
in this Agreement. Without limiting the foregoing, no representation made by
either party to the other prior to the execution of this Agreement with respect
to the subject matter of this Agreement shall survive the execution of this
Agreement.
21. TRANSFERABILITY; BINDING EFFECT.
The respective rights and obligations of each party hereto shall be
assignable in whole or in part by such party without the prior written consent
of the other party so long as such assignee executes and delivers to the other
party an agreement satisfactory in form and substance to such other party under
which such assignee assumes and agrees to perform and discharge all the
obligations and liabilities of the assigning party; provided, however, that (a)
any such assignment to an Affiliate of either party shall not relieve the
assigning party of its obligations
<PAGE> 21
19
hereunder and (b) Licensee's right to assign any of its rights and obligations
under this Agreement shall be subject to Licensor's rights pursuant to the
Miscellaneous Agreement including its rights of first offer and first refusal.
In the extent this Agreement can not be assigned to a third party by Licensee
due to the provisions of any Governmental Rule, Licensor shall, if permitted to
do so by applicable Governmental Rules, enter into an agreement with such third
party under the same terms and conditions set forth herein and provided that
this Agreement could otherwise be assigned to such third party in accordance
with the terms hereof. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective permitted successors and
assignees. Nothing in this Agreement, expressed or implied, is intended or shall
be construed to confer upon or give to any Person, other than the parties hereto
and their respective permitted successors and assignees, any remedy or claim
under or by reason of this Agreement.
22. AMENDMENT.
No amendment or variation of this Agreement shall be valid and
effective unless in writing and signed by or on behalf of each party.
23. SEVERABILITY.
If and to the extent that any Governmental Authority holds any
provision (or any part thereof) of this Agreement to be invalid or
unenforceable, such holding shall in no way affect the validity of the remainder
of the Agreement. If and to the extent compliance with any provision of this
Agreement, in the reasonable opinion of a party, would result in a violation of
a Governmental Rule, such party need not comply with such provision; provided,
however, that such party shall provide, to the extent practicable, prior written
notice to the other party and, where not practicable, prompt notice following
such non-compliance.
24. WAIVER.
The failure of either party at any time to require performance by the
other of any provision hereof shall in no way affect the full right to require
such performance at any time thereafter. Nor shall the waiver, indulgence or
toleration by one party of a breach of any provision hereof
<PAGE> 22
20
by the other be taken or held to be a waiver, indulgence or toleration of any
succeeding breach of such provision or as a waiver, indulgence or toleration of
the breach of any other provision hereof. The termination for any reason or
expiration of this Agreement shall be without prejudice to the rights of either
party to receive all payments accrued and unpaid at the effective date of such
termination or expiration and to any remedies of a party in respect of any
previous breach of any of the covenants herein contained.
25. REMEDIES.
Except as may otherwise be specifically provided herein, the rights and
remedies of the parties hereunder are cumulative and are not exclusive of any
rights or remedies which the parties hereto would otherwise have. Each party
acknowledges and agrees that the other party would be irreparably damaged in the
event any of the provisions of this Agreement were not performed by it in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that each party hereto shall be entitled to an injunction or
injunctions to prevent breaches of such provisions and specifically to enforce
such provisions, in addition to any other remedy to which such party may be
entitled, at law or in equity.
26. HEADINGS.
The headings before each paragraph of this Agreement are inserted
merely for convenience and as an aid in locating paragraphs. They are not part
of this Agreement
<PAGE> 23
and are not to be used as an aid in the interpretation of this Agreement.
IN WITNESS WHEREOF the parties hereto haves caused this Agreement to be
duly executed as of the date first written above.
WARNER-LAMBERT COMPANY
by /s/
---------------------------
Name:
Title:
GLAXO WELLCOME INC.
by /s/
---------------------------
Name:
Title:
<PAGE> 24
SCHEDULE 1A
-----------
MIXED-USE TRADEMARKS
--------------------
<TABLE>
<CAPTION>
APPLICATION/ PRODUCT IN NON-
TRADEMARK REGISTRATION NO. PRESCRIPTION FIELD
--------- ---------------- ------------------
<S> <C> <C>
</TABLE>
<PAGE> 25
SCHEDULE 1B
-----------
MIXED-USE TRADEMARKS
--------------------
<TABLE>
<CAPTION>
PRODUCT IN
APPLICATION/ PRESCRIPTION
TRADEMARK REGISTRATION NO. FIELD (1)
--------- ---------------- ---------
<S> <C> <C>
NEOSPORIN 572,764 Neosporin
NEOSPORIN 75-009,285 Neosporin
POLYSPORIN 546,132 Polysporin
</TABLE>
- ------------------------
(1) Sold as of the date hereof.
<PAGE> 26
SCHEDULE 2A
-----------
MIXED-USE PATENTS
-----------------
<TABLE>
<CAPTION>
PATENT PRODUCT IN NON-
------ PRESCRIPTION FIELD
------------------
Application Grant
----------- -----
Number Date Number Date
- ------ ---- ------ ----
<S> <C> <C> <C> <C>
</TABLE>
- --------------------
(1) Designated in a PCT Application.
<PAGE> 27
SCHEDULE 2B
-----------
MIXED-USE PATENTS
-----------------
<TABLE>
<CAPTION>
PATENT (1) PRODUCT IN
---------- PRESCRIPTION FIELD
------------------
Application Grant
----------- -----
Number Date Number Date Neosporin
------ ---- ------ ----
<S> <C> <C> <C> <C>
415142 03/28/95 Polysporin
971766 02/12/93
182104 07/29/92
TBN (2) 06/14/94
892830 06/05/92 351795 10/25/94
002766 12/30/92 346102 03/l9/94
003802 01/15/93
</TABLE>
- -------------------
(1) Each of the Patents listed below can be used with respect to each
of the Products listed in the column to the right and which Products are sold as
of the date hereof or permitted Line Extensions.
(2) Designated in a PCT Application.
<PAGE> 28
SCHEDULE 3A
-----------
MIXED-USE COPYRIGHTS
--------------------
<TABLE>
<CAPTION>
COPYRIGHT REGISTRATION NO. PRODUCT IN NON-
--------- ---------------- PRESCRIPTION FIELD
------------------
<S> <C> <C>
</TABLE>
<PAGE> 29
SCHEDULE 3B
-----------
MIXED-USE COPYRIGHTS
--------------------
<TABLE>
<CAPTION>
COPYRIGHT REGISTRATION NO. PRODUCT IN NON-
--------- ---------------- PRESCRIPTION FIELD
------------------
<S> <C> <C>
None
Unregistered
- ------------
Copyrights
- ----------
Neosporin
Polysporin
</TABLE>
<PAGE> 30
SCHEDULE 4A
-----------
MIXED-USE KNOW-HOW
------------------
PRODUCT IN
PRESCRIPTION FIELD
------------------
<PAGE> 31
SCHEDULE 4B
-----------
MIXED-USE KNOW-HOW
------------------
PRODUCT IN
PRESCRIPTION FIELD
------------------
Neosporin
Polysporin
<PAGE> 32
SCHEDULE 5
----------
EXCLUDED KNOW-HOW
-----------------
None
<PAGE> 33
SCHEDULE 6
----------
PRE-EXISTING RIGHTS
-------------------
<PAGE> 1
EXHIBIT 11.1
King Pharmacuticals, Inc.
Computation of Per Share Earnings
(Amount in thousands, except for share amounts)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Weighted average common shares outstanding(1) 5,210,225 13,201,117 14,511,045 14,444,785 19,467,406
Common shares issued within one year of filing
of registration statement in accordance with
Staff Accounting Bulletin Topic 4D
1,386,230 common shares issued to management
and shareholders in October 1996 adjusted
for a 2.8 share split and a 15% stock
dividend 4,463,661 4,463,661 4,463,661 4,463,661 -
3,047,355 common shares issued to United
Company in March 1997 adjusted for a
2.8 stock split 8,532,594 8,532,594 8,532,594 8,532,594 8,532,594
Common stock equivalents related
to 400,000 shares of convertible
preferred stock issued December 1994
and excercised October 1995,
adjusted for a 2.8 stock split and a 15%
stock dividend 6,925 966,000 - - -
---------- ----------- ------------ ----------- -----------
Weighted average number of common and
common stock equivalents 18,213,405 27,163,372 27,507,300 27,441,040 28,000,000
========== =========== ============ =========== ===========
Net income 917 9,334 (240) (703) 4,555
Preferred dividends (8) (8) - - -
---------- ----------- ------------ ----------- -----------
Net income available
to common shareholders 909 9,326 (240) (703) 4,555
---------- ----------- ------------ ----------- -----------
Net income (loss) per share $ .05 $ .34 $ (.01) $ (.03) $ .16
========== =========== ============ =========== ===========
</TABLE>
- --------------------
(1) Reflects a 2.8 to 1 stock split issued in November 1997 and a 15% stock
dividend declared in December 1996.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
King Pharmaceuticals, Inc.
We consent to the inclusion in this pre-effective amendment No. 5 to the
registration statement on Form S-1 (Registration No. 333-38753) of our reports
on:
- - Our audits of the consolidated financial statements of King Pharmaceuticals,
Inc. dated October 22, 1997, except for Notes 6 and 17, which are dated
December 15, 1997 and November 26, 1997, respectively.
- - Our audits of the statement of Product Contribution for the Cortisporin
Product Line dated October 20, 1997.
- - Our audits of the Combined Statement of Product Contribution for the
Neosporin, Polysporin, Septra, Proloprim, Mantadil and Kemadrin Product
Lines dated November 17, 1997.
We also consent to the reference of our firm under the captions "Experts" and
"Selected Consolidated Financial Data."
Coopers & Lybrand L.L.P.
Greensboro, North Carolina
January 8, 1998
Coopers & Lybrand L.L.P. is a member of Coopers & Lybrand International,
a limited liability association incorporated in Switzerland.
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated November 26, 1997,
relating to the statement of brand contribution for each of the two years in the
period ended December 31, 1996 and the nine months ended September 30, 1997 and
the statement of fixed assets as of December 31, 1996 and September 30, 1997 of
Warner-Lambert Company's Sterile Products Operations, which appears in such
Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Morristown, New Jersey
January 8, 1998
