<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 4, 1998
REGISTRATION NO. 333-62679
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ACCREDO HEALTH, INCORPORATED
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8099 62-1642871
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
------------------------
1640 CENTURY CENTER PARKWAY, SUITE 101
MEMPHIS, TN 38134
(901) 385-3688
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
DAVID D. STEVENS
CHIEF EXECUTIVE OFFICER
ACCREDO HEALTH, INCORPORATED
1640 CENTURY CENTER PARKWAY, SUITE 101
MEMPHIS, TN 38134
(901) 385-3688
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVEN L. POTTLE, ESQ. JOHN J. EGAN III, ESQ.
ALSTON & BIRD LLP GOODWIN, PROCTER & HOAR LLP
ONE ATLANTIC CENTER EXCHANGE PLACE
1201 WEST PEACHTREE STREET BOSTON, MA 02109-2881
ATLANTA, GA 30309-3424 (617) 570-1000
(404) 881-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable on or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of this prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. / /
------------------------
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1998
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 AN 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.
<PAGE>
PROSPECTUS
SHARES
[LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby (the "Offering") are
being sold by the Company. Prior to this Offering, there has been no public
market for the Common Stock of the Company. It is currently estimated that the
initial public offering price for the Common Stock will be between $ and
$ per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied to have the Common Stock quoted on the Nasdaq National Market under the
symbol ACDO.
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-------------
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>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share...................... $ $ $
Total(3)....................... $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $750,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover over-allotments, if
any. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $
, respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY SECURITIES LLC
SUNTRUST EQUITABLE SECURITIES
, 1998
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Common Stock
offered hereby. As permitted by the rules and regulations of the Commission,
this Prospectus, which is part of the Registration Statement, omits certain
information, exhibits, schedules and undertakings set forth in the Registration
Statement. For further information pertaining to the Company and the Common
Stock, reference is made to such Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents or
provisions of any documents referred to herein are not necessarily complete, and
in each instance where a copy of the document has been filed as an exhibit to
the Registration Statement reference is made to the exhibit filed. The
Registration Statement may be inspected without charge at the office of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60611. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the Internet's World Wide Web,
located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR.
Accredo Health, Incorporated-SM- is a service mark of the Company and Nova
Factor-Registered Trademark- is a trademark of the Company. All other service
marks, trademarks and trade names referred to in this Prospectus are the
property of their respective owners.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
THE COMPANY
Accredo Health, Incorporated ("Accredo" or the "Company") provides
specialized contract pharmacy and related services beneficial to patients with
certain costly, chronic diseases. Because of the unique needs of patients
suffering from chronic diseases, biotechnology drug manufacturers have
recognized the benefits of customized treatment programs to facilitate alternate
site drug administration, ensure compliance with treatment regimens, provide
reimbursement assistance and capture valuable clinical and patient demographic
information. The Company addresses the needs of the manufacturers by providing
specialized services that facilitate product launch and patient acceptance,
including timely drug utilization and patient compliance information, patient
education and monitoring, reimbursement expertise and overnight drug delivery.
The Company believes that its ability to accelerate market penetration and
increase revenues for new biotechnology drugs makes it the partner of choice for
manufacturers as evidenced by its preferred relationships with Genzyme
Corporation ("Genzyme"), Biogen, Inc. ("Biogen"), Genentech, Inc. ("Genentech")
and Centocor Inc. ("Centocor").
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic and
potentially life threatening diseases; (ii) are expensive, with an annual
therapy cost as high as $200,000 per patient; (iii) are administered through
injection; and (iv) require temperature control or other specialized handling as
part of their distribution process. Currently, the Company provides services
that address the needs of patients with the following diseases: Gaucher Disease,
a hereditary liver enzyme deficiency; hemophilia, a hereditary bleeding
disorder; Multiple Sclerosis, a debilitating disease of the central nervous
system; and growth hormone-related disorders. In addition, the Company has
recently entered into an agreement with Centocor to provide its services to
patients with Crohn's Disease, a chronic inflammatory disease affecting the
gastrointestinal tract. These diseases generally require life-long therapy,
except for growth hormone-related disorders which typically require treatment
for six to ten years.
The Company believes that it is well positioned to take advantage of a large
drug development pipeline and is at the forefront of an increasing trend toward
specialized outsourcing by the biotechnology drug industry. Biotechnology
products represent the most expensive and rapidly growing part of the new drug
pipeline, with an estimated 240 products in late-stage clinical trials as of
mid-1998. The Company continuously monitors biotechnology drugs in various
phases of clinical development with a particular focus on identifying potential
new drugs for the treatment of costly, chronic diseases. Unlike many traditional
drugs, these products often possess specific characteristics that make
utilization and compliance increasingly difficult. They are often composed of
unstable proteins which must be taken by injection and require timely,
temperature maintained distribution, dosage monitoring, and controlled inventory
management. In addition, expert reimbursement management is crucial as a result
of their high cost. When addressing chronic diseases, the challenges facing
biotechnology drug manufacturers are often heightened by small patient
populations and the need for patients to remain on therapy for extended periods.
In response to the challenges facing biotechnology drug manufacturers, which
include often limited resources, the unpredictability of the drug approval
process and the onset of significant competition, many manufacturers have sought
to outsource various stages of product development in order to realize a return
on investment prior to the expiration of any patent or orphan drug status
exclusivity. This has included discovery research by outsourcing genomics and
screening functions and clinical development through the use of contract
research organizations (CROs) and site management organizations (SMOs). This
trend has also extended to product commercialization and launch through the
outsourcing of manufacturing, sales and marketing, product detailing, pharmacy
and distribution services and patient support programs.
The Company's objective is to be the leading provider of specialized
contract pharmacy and related services. Key elements of the Company's strategy
include: (i) expanding the number of chronic diseases served; (ii) leveraging
its expertise to expand its service offerings; (iii) establishing additional
relationships with academic medical centers and children's hospitals that treat
patients with costly, chronic diseases; (iv) increasing its number of payor
contracts; and (v) pursuing acquisitions of similar or complementary businesses.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company...................... shares
Common Stock to be outstanding after the Offering........ shares(1)
Use of proceeds.......................................... To repay certain indebtedness, redeem the
Company's outstanding Series A Cumulative
Preferred Stock and for working capital
and other general corporate purposes,
including possible acquisitions.
Proposed Nasdaq National Market symbol................... ACDO
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance under the
Company's stock option and employee stock purchase plans, of which
shares are subject to outstanding options at a weighted average
exercise price of $ per share. See "Capitalization."
------------------------------
UNLESS THE CONTEXT SUGGESTS OTHERWISE, REFERENCES IN THIS PROSPECTUS TO THE
"COMPANY" OR "ACCREDO" MEAN ACCREDO HEALTH, INCORPORATED AND ITS SUBSIDIARIES
AND PREDECESSOR ENTITIES. EXCEPT WHERE OTHERWISE INDICATED, ALL INFORMATION IN
THIS PROSPECTUS: (I) GIVES EFFECT TO A RECAPITALIZATION TO BE EFFECTIVE PRIOR TO
COMPLETION OF THE OFFERING PURSUANT TO WHICH A FOR STOCK SPLIT WILL BE
EFFECTED AND PURSUANT TO WHICH SHARES OF COMMON STOCK HELD BY THE COMPANY'S
PRINCIPAL STOCKHOLDER, WELSH, CARSON, ANDERSON AND STOWE VII, L.P. ("WCAS VII"),
WILL BE EXCHANGED FOR SHARES OF NON-VOTING COMMON STOCK OF THE COMPANY (THE
"RECAPITALIZATION"); (II) GIVES EFFECT TO THE REDEMPTION OF ALL OUTSTANDING
SHARES OF THE COMPANY'S SERIES A CUMULATIVE PREFERRED STOCK (THE "SERIES A
PREFERRED STOCK") AT A REDEMPTION PRICE OF $100 PER SHARE (PLUS ACCRUED AND
UNPAID DIVIDENDS) USING A PORTION OF THE NET PROCEEDS FROM THE OFFERING; AND
(III) ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. UNLESS THE
CONTEXT SUGGESTS OTHERWISE, REFERENCES IN THIS PROSPECTUS TO "COMMON STOCK"
INCLUDE THE NON-VOTING COMMON STOCK TO BE ISSUED AS PART OF THE
RECAPITALIZATION.
4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PREDECESSOR(1) COMPANY(1)
-------------------------- ---------------------------------
JULY 1, MAY 24,
1995 1996 YEARS ENDED
YEAR ENDED THROUGH THROUGH JUNE 30,
JUNE 30, MAY 31, JUNE 30, --------------------
1995 1996 1996 1997 1998
------------- ----------- ----------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues:
Net patient service revenue......................... $ 71,513 $ 68,585 $ 6,647 $ 106,143 $ 170,002
Other revenue....................................... 6,710 6,346 597 8,049 9,806
Equity in net income (loss) of joint ventures....... 646 (139) 49 1,017 1,150
------------- ----------- ----------- --------- ---------
Total revenues.................................. 78,869 74,792 7,293 115,209 180,958
Operating expenses:
Cost of services.................................... 68,273 65,867 6,450 101,081 154,046
General and administrative.......................... 2,714 2,753 627 5,939 12,351
Bad debts........................................... 1,322 1,860 251 2,977 3,165
Depreciation and amortization....................... 76 104 126 1,599 2,528
Corporate overhead allocation(2).................... 1,900 4,206 -- -- --
------------- ----------- ----------- --------- ---------
Total operating expenses........................ 74,285 74,790 7,454 111,596 172,090
------------- ----------- ----------- --------- ---------
Operating income (loss)................................. 4,584 2 (161) 3,613 8,868
Interest expense, net................................... 943 266 106 983 3,552
------------- ----------- ----------- --------- ---------
Income (loss) before income taxes....................... 3,641 (264) (267) 2,630 5,316
Income tax expense (benefit)............................ 1,387 (72) (29) 1,508 2,495
------------- ----------- ----------- --------- ---------
Net income (loss)....................................... $ 2,254 $ (192) (238) 1,122 2,821
------------- -----------
------------- -----------
Mandatorily redeemable cumulative preferred stock
dividends............................................. (170) (2,043) (2,043)
----------- --------- ---------
Net income (loss) attributable to common stockholders... $ (408) $ (921) $ 778
----------- --------- ---------
----------- --------- ---------
Net income (loss) per share attributable to common
stockholders--Diluted................................. $ () $ () $
----------- --------- ---------
----------- --------- ---------
Weighted average shares and dilutive equivalents
outstanding...........................................
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
ACTUAL AS ADJUSTED(3)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 5,087
Working capital..................................................................... 23,377
Total assets........................................................................ 118,990
Long-term debt...................................................................... 36,418
Mandatorily redeemable cumulative preferred stock................................... 29,792
Stockholders' equity................................................................ 17,671
</TABLE>
- ------------------------
(1) The Company was incorporated on May 24, 1996. On May 31, 1996, the Company
acquired Southern Health Systems, Inc. ("SHS"), a holding company, and its
wholly-owned subsidiary, Nova Factor, Inc. ("Nova Factor" or the
"Predecessor"). Since the Company was newly formed at May 24, 1996, and
because the Predecessor had been in existence for several years, the Company
is considered the successor to the Predecessor's operations. The balance
sheet data of the Predecessor represents the historical cost basis of the
Predecessor's assets and liabilities prior to its acquisition by the
Company. The acquisition of the Predecessor by the Company resulted in a new
basis of accounting such that the Predecessor's assets and liabilities were
recorded at their fair value in the Company's consolidated balance sheet
upon consummation of the acquisition. Additionally, the Company acquired
Horizon Health Systems, Inc. ("HHS") on June 1, 1997. Accordingly, the
Summary Financial Data are not strictly comparable for the periods
presented. See Notes 1 and 3 of Notes to the Company's Consolidated
Financial Statements.
(2) The Predecessor has been allocated expenses for certain services provided by
its parent, SHS, including cash management, tax reporting, risk management
and executive management services. Charges for these services were based
upon a general allocation methodology determined by SHS (used to allocate
all corporate overhead expenses to SHS subsidiaries), and were not
necessarily allocated based on specific identification of expenses.
Management believes the allocation methodology is reasonable. See Note 6 of
Notes to the Nova Factor, Inc. Financial Statements.
(3) As adjusted to reflect the sale of the Common Stock offered hereby at an
assumed initial public offering price of $ per share and the receipt
and application of the estimated net proceeds therefrom as if such
transactions had occurred on June 30, 1998. See "Use of Proceeds" and
"Capitalization."
5
<PAGE>
RISK FACTORS
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. IN ADDITION
TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE INVESTORS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN EVALUATING THE COMPANY, ITS
BUSINESS AND AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS (WHICH MAY BE IDENTIFIED BY
WORDS SUCH AS "ANTICIPATE," "BELIEVE," "ESTIMATE," "EXPECT," "INTEND" AND
SIMILAR EXPRESSIONS) INCLUDE, WITHOUT LIMITATION, THE COMPANY'S BELIEFS
CONCERNING THE AVAILABILITY OF NEW DRUGS, THE DEMAND FOR ITS SERVICES, ITS
ABILITY TO EXPAND THROUGH JOINT VENTURES AND ACQUISITIONS, ITS ABILITY TO
MAINTAIN ITS PRICING ARRANGEMENTS WITH SUPPLIERS THAT PRESERVE ITS MARGINS, THE
IMPACT OF EXISTING AND NEW GOVERNMENT REGULATIONS, THE IMPACT OF YEAR 2000
ISSUES, ITS NEED FOR ADDITIONAL CAPITAL, THE SEASONALITY AND VARIABILITY OF ITS
OPERATING RESULTS AND ITS ABILITY TO IMPLEMENT THE STRATEGIES DESCRIBED HEREIN
AND ACHIEVE ITS OBJECTIVES. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, MANY
OF WHICH CANNOT BE PREDICTED WITH ACCURACY AND SOME OF WHICH MIGHT NOT EVEN BE
ANTICIPATED. FUTURE EVENTS AND ACTUAL RESULTS, FINANCIAL AND OTHERWISE, COULD
DIFFER MATERIALLY FROM THOSE SET FORTH IN OR CONTEMPLATED BY THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN. IMPORTANT FACTORS THAT COULD CONTRIBUTE TO SUCH
DIFFERENCES ARE SET FORTH BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS, INCLUDING IN "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS".
DEPENDENCE ON RELATIONSHIPS WITH LIMITED NUMBER OF BIOTECHNOLOGY DRUG
MANUFACTURERS. The Company's revenue and profitability are highly dependent on
its relationships with a limited number of biotechnology drug companies that
manufacture and supply drugs for the specific chronic diseases served by the
Company. The Company derives a substantial portion of its total revenue from its
relationships with its three largest suppliers, Genzyme, Biogen and Genentech.
For the fiscal year ended June 30, 1998, the Company derived approximately 46%,
23% and 6%, respectively, of its total revenue from its relationships with such
suppliers and approximately 64%, 14% and 9%, respectively, for the fiscal year
ended June 30, 1997. Due to the Company's focus on a limited number of chronic
diseases, the Company is likely to continue to experience a high degree of
concentration of business with several suppliers, which concentration may
increase from continuing consolidation in the biotechnology industry. The
Company's agreements with these suppliers generally limit the Company's ability
to supply competing drugs during (and in some cases for up to five years after)
the term of the agreement, allow the supplier to distribute directly or through
other parties, are generally short term and may be canceled by either party,
without cause, upon between 60 and 90 days prior notice. The Company and its
suppliers periodically adjust the Company's purchase price and other terms for
the drugs covered by such contracts as well as the scope and pricing of services
provided by the Company under such contracts. Any termination, adverse
adjustment of purchase price or other terms, change in the supplier's
distribution methods or adverse change in the Company's relationship with any of
its suppliers (including as a result of consolidation among drug suppliers)
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Disease Markets and
Manufacturer Relationships" and "--Suppliers."
CONCENTRATION OF DRUGS AND CHRONIC DISEASES. The Company currently focuses
almost exclusively on a limited number of complex and expensive drugs that treat
certain specific chronic diseases: Gaucher Disease, for which the Company offers
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- supplied by
Genzyme; Multiple Sclerosis, for which the Company primarily offers Biogen's
Avonex-Registered Trademark- (Interferon Beta-1a)
("Avonex-Registered Trademark-"); growth hormone-related disorders, for which
the Company primarily offers Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark- supplied by
Genentech; and hemophilia, for which the Company offers all currently approved
clotting factor products. In addition, the Company recently entered into a
contract with Centocor to offer Remicade-TM- for the treatment of Crohn's
Disease. For the fiscal year ended June 30, 1998, the Company derived
approximately 46%, 23%, 6% and 23% of its total revenue from providing its
pharmacy services in respect of drugs for Gaucher Disease, Multiple Sclerosis,
growth hormone-related disorders and hemophilia, respectively, and approximately
64%, 14%, 9% and 9%, respectively, for the fiscal year ended June 30, 1997. The
drugs offered by the Company are complex (generally requiring injection, special
handling and patient education), are expensive (with small numbers of patients
representing large amounts of revenue), serve small patient populations in the
United States
6
<PAGE>
and, other than drugs for hemophilia and growth hormone-related disorders, are
available only from single sources that generally restrict the Company from
offering competing drugs. As a result, the Company could be materially and
adversely affected by a variety of factors, such as the development of a new
treatment modality not requiring the Company's specialty pharmacy services, an
adverse reaction to or recall of a drug, the expiration of or challenge to a
drug patent, the loss of orphan drug status, the availability of a competing
treatment through a new drug or a new indication for an existing drug, the loss
of a managed care or other payor relationship covering a number of high revenue
patients, a disease cure or the death of a high revenue patient. For example, in
July 1996, Berlex Laboratories, Inc. ("Berlex") filed suit against Biogen
alleging patent infringement by Biogen in the production of
Avonex-Registered Trademark- and seeking, among other things, a permanent
injunction restraining Biogen from such alleged infringement. The granting of a
permanent injunction that restrains Biogen from manufacturing
Avonex-Registered Trademark- or the inability of Biogen to continue to supply
Avonex-Registered Trademark- on terms favorable to the Company could have a
material adverse effect on the Company's business, financial condition and
results of operations. Furthermore, due to the small patient populations of the
diseases serviced by the Company, future growth is highly dependent on the
Company expanding the base of drugs for which it provides its services,
expanding its relationships with its current suppliers and establishing
relationships with new suppliers, none of which can be assured. See
"Business--Disease Markets and Manufacturer Relationships" and "--Suppliers."
DEPENDENCE ON MEDICAL CENTER RELATIONSHIPS. The Company has certain joint
venture or business management relationships, as applicable, with eight medical
centers (or their affiliates) that involve services related to hemophilia and
growth hormone-related disorders. For the fiscal years ended June 30, 1998 and
1997, the Company derived an aggregate of approximately 22% and 39%,
respectively, of its income before income taxes from its equity in the net
income of these joint ventures, and, in particular, 12% and 24%, respectively,
from the Company's joint venture with Alternative Care Systems, Inc. located in
Dallas, Texas. The Company and each of the medical centers with which it has a
joint venture typically share in the profits and losses of the venture in
proportion to their respective capital contributions, with neither party having
voting control. The agreements with these medical centers are short-term,
ranging between one and five years in duration, and may be cancelled by either
party without cause with between one and twelve months prior notice. Any
termination, adjustment to terms or adverse change in the Company's
relationships with these medical centers, including as a result of consolidation
within the hospital industry, regulatory uncertainties inherent in the structure
of the relationships or restrictive changes to regulatory requirements, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Strategic Relationships with Medical
Centers" and "--Government Regulation."
DEPENDENCE ON BIOTECHNOLOGY DRUG INDUSTRY. The Company's business is highly
dependent on research, development, manufacturing and marketing expenditures of
biotechnology drug companies and the ability of such companies to develop,
supply and generate demand for drugs that meet the Company's service model. The
Company has benefited to date from the willingness of such companies to
outsource specialty pharmacy services such as those offered by the Company, but
there can be no assurance that this trend will continue. Furthermore, the
Company would be materially and adversely affected by unfavorable developments
in the biotechnology drug industry generally, such as, among other things,
supply shortages, adverse drug reactions, drug recalls, increased competition
among biotechnology drug companies, the inability of drug companies to obtain
capital needed to finance product development, governmental or private market
initiatives to reduce the retail price of drugs, changes in the United States
Food and Drug Administration ("FDA") approval process or governmental or private
initiatives to regulate the manner in which drug manufacturers, health care
providers or pharmacies promote or sell their products and services. Any of
these factors could result in a decline in the development of drugs, a general
decline in research, development and marketing expenditures, a reduction in the
retail price of drugs sold by the Company, a shortage of drugs sold by the
Company or a reduction in the use by drug companies of the specialty pharmacy
services offered by the Company, any of which could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business-- Industry Overview."
7
<PAGE>
DEPENDENCE ON PAYORS AND REIMBURSEMENT RELATED RISKS. The profitability of
the Company depends on payment and reimbursement from governmental and
nongovernmental third-party payors. The primary trend in the United States
health care industry is toward cost containment. The increasing prevalence of
managed care, centralized purchasing decisions, consolidation among and
integration of health care providers and competition for patients is continuing
to affect pricing, purchasing and usage patterns in health care. Decisions
regarding the use of a particular drug treatment are increasingly influenced by
large private payors, managed care organizations, group purchasing
organizations, pharmacy benefits management companies, regional integrated
delivery systems and similar organizations, and are becoming more economically
focused, with decisions taking into account product cost and whether a product
reduces the overall cost of treatment. For the fiscal years ended June 30, 1998
and 1997, the Company derived approximately 80% and 83%, respectively, of its
gross patient service revenue from private payors (including self-pay), which
included 7% and 10%, respectively, from sales to private physician practices
whose ultimate payor is typically Medicare. Furthermore, many private payors,
including large managed care organizations and some private physician practices,
have recently experienced financial difficulty. There can be no assurance that
the Company will not be adversely affected by cost containment measures exerted
by its third party payors, the influence of such organizations over decisions
regarding the use of drug treatments or the financial inability of any such
payors, including private physician practices, to satisfy their payment
obligations to the Company. See "Business--Payors."
The Company also derives a significant portion of its revenue from
governmental programs such as Medicare and Medicaid. For the fiscal years ended
June 30, 1998 and 1997, the Company received reimbursement payments from federal
and state programs that accounted for approximately 20% and 17%, respectively,
of the Company's gross patient service revenue, excluding sales to private
physician practices whose ultimate payor is typically Medicare. Such programs
are highly regulated and subject to frequent and substantial changes and cost
containment measures. In recent years, changes in these programs have limited
and reduced reimbursement to providers and Congress recently enacted the
Balanced Budget Act of 1997 which establishes a plan to balance the federal
budget by fiscal year 2002 and which includes significant additional reductions
in spending levels for these programs. This legislation also replaced and
relaxed the federal Medicaid payment standard, thereby increasing state
discretion over the financial administration of Medicaid programs. Furthermore,
federal and state proposals are pending that would impose further limitations on
governmental payments and that would increase patient co-payments and
deductibles. Additionally, a number of states are considering legislation
designed to reduce their Medicaid expenditures and provide universal coverage
and additional care for certain populations, including proposals to impose
additional taxes on providers to help finance or expand such programs. Any of
these changes could result in significant reductions in payment levels for drugs
handled and services provided by the Company, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Payors."
VARIATION IN QUARTERLY OPERATING RESULTS; SEASONALITY. The Company's
results of operations historically have fluctuated on a quarterly basis and can
be expected to continue to be subject to quarterly fluctuations. In particular,
the Company typically increases its operating expenses in anticipation of the
launch of a new drug, and if the new drug does not generate the levels of sales
during the periods anticipated by management, the Company's results in that and
future quarters could be adversely affected. Quarterly results can also
fluctuate as a result of the timing of periodic adjustments to prices and other
terms with the Company's drug suppliers, the accuracy of estimates of resources
required for ongoing programs, the timing and integration of acquisitions,
changes in regulations related to biotechnology companies, physician prescribing
patterns, and general economic conditions, none of which can be adequately
predicted by the Company. Quarterly operating results also fluctuate as a result
of the annual renewal (on a calendar year basis) of deductible and co-payment
requirements, thereby affecting patient ordering patterns in a manner that
creates a seasonal reduction in revenue from existing drug programs for the
Company's third fiscal quarter ending March 31. The Company believes that
quarterly comparisons of its financial results may not necessarily be meaningful
and should not be relied upon as an indication of future performance. In
addition, fluctuations in quarterly results could affect the market price of the
Common Stock in a manner unrelated to the longer term operating performance of
the Company. See
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Fluctuations and Seasonality."
JOINT VENTURE AND ACQUISITION RISKS. As part of its strategy, the Company
continually evaluates joint venture and acquisition opportunities. Such
transactions involve numerous risks, including difficulties in the assimilation
of operations, costs incurred in connection with the transaction, diversion of
management's attention from other business concerns, potential loss of key
employees of an acquired company and delays to address regulatory requirements.
There can be no assurance that the Company will complete any future acquisitions
or joint ventures, or that such transactions, if completed, will be integrated
successfully or will contribute favorably to the Company's operations and
financial condition. In addition, acquisitions and joint ventures can expose the
Company to unknown or contingent liabilities of acquired businesses, including
liabilities for failure to comply with health care or reimbursement laws. In May
1996 the Company acquired all of the outstanding capital stock of SHS, which had
four subsidiaries (including Nova Factor), each of which had prior operating
histories in one or more health care businesses. Prior to closing the
acquisition, SHS divested all of its subsidiaries other than Nova Factor.
However, there can be no assurance that the Company will not be held liable for
matters relating to the operations of the divested subsidiaries for periods
prior to the divestiture. In addition, in June 1997, the Company acquired all of
the outstanding capital stock of HHS, which had an extensive operating history.
Liabilities relating to the prior operations of these and other acquired
companies could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, future acquisitions
or joint ventures may result in dilutive issuances of equity securities,
incurrence of additional debt, amortization of expenses related to acquired
goodwill and intangible assets and exposure to unknown or contingent
liabilities, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. See "The Company."
GOVERNMENT REGULATION. The conduct of marketing, selling and purchasing
drugs and medical supplies by and among manufacturers, distributors, health care
providers and patients is extensively regulated and periodically scrutinized by
state and federal governments for compliance with laws and regulations
regarding, among other things, inducements for referrals, prohibited financial
relationships with physicians, joint venture and management arrangements,
product discounts, incentives to patients and professional licensure. This
regulatory framework is complex and the laws are very broad in scope, subject to
differing interpretations and lack substantive court decisions addressing many
arrangements under which the Company has conducted and expects to conduct its
business. Any failure to comply or alleged failure to comply with applicable
laws and regulations could have a material adverse effect on the Company's
business, financial conditions and results of operations. See
"Business--Government Regulation."
In particular, federal and state governments enforce a federal statute that
prohibits the offer, payment, solicitation or receipt of any remuneration,
directly or indirectly, overtly or covertly, to induce or in exchange for the
referral of patients covered by certain governmental programs, or the leasing,
purchasing, ordering or arranging for or recommending the lease, purchase or
order of any item, good, facility or service covered by such programs (the
"Anti-Kickback Law"). The Health Insurance Portability and Accountability Act of
1996 ("HIPAA") greatly expanded the prohibitions of the Anti-Kickback Law by
applying them to almost all health care programs that receive federal funding,
creating new violations for certain fraudulent activity applicable to both
public and private "health care benefit programs" and prohibiting inducements to
Medicare or Medicaid eligible patients. The Company is also subject to the
Ethics in Patient Referrals Act of 1989, as amended, commonly referred to as the
"Stark Law," which prohibits physician referrals for certain health-related
items, including those offered by the Company, to entities with which the
physician or an immediate family member has a "financial relationship," and
prohibits the recipient of any such referral from billing for the referred item.
Violations of these laws are punishable by civil sanctions, including
significant monetary penalties and exclusion from participation in the Medicare
and Medicaid programs, and criminal sanctions in the case of the Anti-Kickback
Law and HIPAA. Due to the breadth and complexity of these laws, there can be no
assurance that the Company, any of its personnel, or any significant customer or
business partner of the Company, will not become subject to sanctions that could
have a material adverse effect on the Company's business, financial condition
and
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results of operations. Additionally, the sanctioning or exclusion of a
manufacturer or recipient of the Company's products or services, even for
activities unrelated to those of the Company, could also have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Government Regulation."
In an attempt to clarify which arrangements are not subject to prosecution
under the Anti-Kickback Law, the Department of Health and Human Services
("DHHS") adopted certain "safe harbor" regulations and continues to publish
clarifications to such safe harbors. Arrangements that comply with all the
requirements of all applicable safe harbors are deemed not to violate the
Anti-Kickback Law. Several of the Company's business arrangements, such as joint
venture and management arrangements with medical centers, service arrangements
with physicians and product discount arrangements with its suppliers, do not
satisfy all of the requirements necessary to fall within the applicable safe
harbor. Furthermore, the Office of the Inspector General ("OIG") of DHHS has
published certain proposed regulations under HIPAA outlining certain permissible
patient incentives designed to promote preventative care or that are DE MINIMIS
under the HIPAA prohibition against beneficiary inducements. The Company
routinely provides certain items and services to its patients that may not fit
within the proposed regulation. It is possible that some of the Company's
practices could be challenged. Although failure of a transaction or arrangement
to fit within a specific safe harbor provision or the proposed regulation for
beneficiary inducements does not necessarily mean that the transaction or
arrangement is illegal or that prosecution will be pursued, there can be no
assurance that the Company's practices will not be challenged, or that the
Company will not be subject to sanctions or be required to alter or discontinue
certain of its practices, any of which could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business--Government Regulation."
State laws prohibit the practice of medicine, pharmacy and nursing without a
license. For example, many states interpret the practice of nursing to include
health teaching, health counseling, the provision of care supportive to or
restorative of life and well being and the administration of medical regimens
prescribed by a physician. Accordingly, to the extent that the Company assists
patients and providers in helping patients to comply with prescribed treatment
programs, such activities could be deemed by a state to be the practice of
medicine, pharmacy or nursing. There can be no assurance that the Company's
operations will not be challenged as constituting the unlicensed practice of
medicine or nursing or being outside the scope of its licensed pharmacists or
pharmacy licenses. If such a challenge were made successfully in any state, the
Company and its personnel could be subject to civil and criminal penalties under
such state's law and the Company could be required to reduce, restructure,
outsource or cease its business in that state. See "Business--Government
Regulation."
Significant public attention recently has been focused on the health care
industry due to ongoing federal and state investigations related to among other
things joint ventures, referral and billing practices, product discount
arrangements, home health care services, dissemination of confidential patient
information, clinical drug research trials and gifts for patients. In addition,
state and federal agencies have initiated billing review projects in certain
states and are expected to extend such projects to additional states, including
states in which the Company does business. These enforcement actions increase
the likelihood of governmental investigations of the Company, its affiliates and
their respective predecessors and personnel, and parties with whom it conducts
business, and there can be no assurance that governmental investigators will not
take positions that are inconsistent with industry practices, including the
Company's or such other parties' practices. In addition to investigations and
enforcement actions by governmental agencies, QUI TAM (or "whistleblowers")
actions may be brought under the False Claims Act by private individuals on
behalf of the government. Because the health care industry will continue to be
subject to substantial regulation, there can be no assurance that the Company's
activities will not be challenged or that the Company will not be subject to
sanctions or be required to alter or discontinue certain of its practices, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
POSSIBLE HEALTH CARE REFORM. Health care reform measures have been
considered by Congress and other federal and state bodies during recent years.
The intent of the proposals generally has been to reduce health care
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costs and the growth of total health care expenditures, to expand health care
coverage for the uninsured and to eliminate fraud, waste and financial abuse.
Although comprehensive health care reform has been considered, only limited
proposals have been enacted. Comprehensive health care reform may be considered
again and efforts to enact reform bills are likely to continue. Implementation
of government health care reform may adversely affect development and marketing
expenditures by biotechnology companies, which could decrease the business
opportunities available to the Company or the demand for its specialty services.
The Company is unable to predict the likelihood of such legislation or similar
legislation being enacted into law or the effects that any such legislation
would have on the Company.
MANAGEMENT OF GROWTH. The Company's business has grown rapidly in its last
two fiscal years with total revenue increasing from $115.2 million in fiscal
year 1997 to $181.0 million in fiscal year 1998. This growth has resulted in a
substantial increase in the number of its employees (from 203 at June 30, 1997
to 271 at June 30, 1998), the size of its programs and the scope of its
operations. This growth has placed and, if such growth continues, will continue
to place a strain on operational, human and financial resources. The Company's
ability to manage such growth effectively will depend upon its ability to
enhance its management team and its ability to attract and retain skilled
employees. The Company's success will also depend on the ability of its officers
and key employees to continue to implement and improve its operational,
management information and financial control systems, and to expand, train and
manage its work force. There can be no assurance that the Company will be able
to manage any future growth successfully or provide the necessary resources to
successfully manage its business. Failure to manage growth effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.
COMPETITION; INDUSTRY CONSOLIDATION. The specialty pharmacy industry is
highly competitive and is experiencing both horizontal and vertical
consolidation. All of the drugs, supplies and services that the Company provides
are available from sources other than the Company. Current and potential
competitors of the Company include specialty pharmacy divisions of wholesale
drug distributors; specialty pharmacy distributors; pharmacy benefit management
companies; hospital-based pharmacies; retail pharmacies; home infusion therapy
companies; comprehensive hemophilia treatment centers; and other alternate site
health care providers. In addition, the Company's drug suppliers or their
competitors have developed and may continue to develop and implement their own
direct specialty pharmacy service programs in lieu of using the Company. In
addition, managed care companies, pharmacy benefit managers and other payors can
influence the source from which their enrollees may obtain drugs through
required formularies and may desire to use full-line providers on their provider
panels. Many of the Company's competitors and potential competitors have greater
financial, technical, marketing and managerial resources than the Company.
Furthermore, certain of the Company's competitors, such as hospitals and certain
hemophilia treatment centers, are eligible for federally mandated discounts for
drug purchases that are not available to the Company. There are relatively few
barriers to entry into the Company's specialty contract pharmacy service segment
and there can be no assurance that, as the segment continues to evolve,
additional competitors with greater resources than the Company will not enter
the market or that the Company's suppliers will not choose to provide such
specialty services directly or through other businesses that have a broader
range of sales, marketing and support services. There can be no assurance that
competitive pressures will not increase, including as a result of further
industry consolidation, or that such pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Competition."
RELIANCE ON TELEPHONE AND COMPUTER SYSTEMS; YEAR 2000 COMPLIANCE
RISK. Because the Company believes that its success depends, in part, upon its
services provided over the telephone on a real-time basis, any continuing
disruption in either its computer system or its telephone system could adversely
affect its ability to receive and process customer orders, provide its service
to patients and ship products on a timely basis, and could adversely affect the
Company's relations with its patients and suppliers.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. By the year 2000, these
date code fields will need to accept four-digit entries to
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distinguish 21st century dates from 20th century dates. Computer systems that do
not accept four-digit entries could fail or produce erroneous results and cause
disruptions of operations. As a result, many software and computer systems may
need to be upgraded or replaced in order to comply with such "year 2000"
requirements. The Company is in the process of obtaining written verification
from vendors to determine whether the Company's computer systems and software
products are year 2000 compliant. Also, the Company is upgrading its pharmacy
management systems, including its billing and accounts receivable systems, to
address year 2000 issues. The failure of the Company's systems to be year 2000
compliant could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Issue."
In addition, the Company has ongoing relationships with third-party payors,
suppliers, vendors, and others that may have computer systems with year 2000
problems that the Company does not control. There can be no assurance that the
Company's payors, including the fiscal intermediaries and governmental agencies,
with which the Company transacts business and which are responsible for payment
to the Company will not experience significant problems with year 2000
compliance. According to testimony before a U.S. House of Representatives
subcommittee, HCFA, which administers the Medicare and Medicaid programs, is far
behind in remedying year 2000 problems, which could delay payment of claims to
providers. The failure of third parties to remedy year 2000 problems could have
a material adverse effect on the Company's business, financial condition and
results of operations.
RISKS RELATED TO SHIPPING. The Company ships most of its orders by
overnight delivery, and typically bears the cost of shipment. Shipping is a
significant expense in the operation of the Company's business and principally
all of the Company's products are shipped by a single carrier, Federal Express
Corporation ("FedEx"). Accordingly, any significant increase in shipping rates
could have an adverse effect on the Company's results of operations. Similarly,
strikes or other service interruptions by FedEx, or by any other carrier that
may indirectly affect FedEx, would adversely affect the Company's ability to
deliver products on a timely basis and therefore its ability to generate
revenue. The drugs shipped by the Company require special handling, including
refrigeration to maintain temperatures within certain ranges. The Company does
not maintain insurance against product spoilage during shipment. Due to their
high cost, even small shipments of the Company's products can represent
significant dollar amounts of inventory. Accordingly, the spoilage of one or
more shipments of the Company's products could have a material adverse effect on
the Company's results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company depends on a number of key
executives, the loss of the services of which could have a material adverse
effect on the Company. The Company does not maintain "key person" life insurance
policies on any of its executives. The Company also depends on its ability to
attract and retain qualified professional (including pharmacists) and technical
operating staff. There can be no assurance that the Company will be able to
continue to attract and retain such personnel, and its inability to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
NEED FOR FINANCING. In order to implement its growth strategy, the Company
will require substantial capital resources and will need to maintain its
existing capital resources and incur, from time to time, additional short- and
long-term indebtedness, including purchasing terms from its suppliers. The
Company also may need to issue, in public or private transactions, equity or
debt securities, the terms of which will depend on market and other conditions.
There can be no assurance that existing or additional financing will be
available on terms acceptable to the Company, if at all. As a result, the
Company may not be able to implement fully its growth strategy. In addition, any
such financing may result in dilutive issuances of equity securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RISKS RELATED TO INTANGIBLE ASSETS. The formation of the Company by WCAS
VII and certain of its affiliates (collectively, "Welsh Carson") and the
subsequent acquisitions by the Company of SHS and HHS have resulted in the
recording of a significant amount of goodwill on the Company's financial
statements. As of June 30, 1998, the Company had goodwill, net of accumulated
amortization, of approximately $56.7 million, or 48% of total assets. Goodwill
arises when an acquiror pays more for a business than the fair value of the
tangible
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and separately measurable intangible net assets. Generally accepted accounting
principles require that goodwill and all other intangible assets be amortized
over the period benefited by such assets. Management has determined that period
to be no less than 40 years for goodwill and, therefore, the Company amortizes
goodwill on a straight line basis over a period of 40 years. In addition, the
Company's growth strategy will likely result in additional goodwill on the
Company's financial statements. There can be no assurance that the value of
goodwill will ever be realized by the Company. On an on-going basis, the Company
makes an evaluation to determine whether events and circumstances indicate that
all or a portion of the carrying value of goodwill may no longer be recoverable,
in which case a charge to earnings may be necessary to write off unrecoverable
goodwill. Any future determination requiring the write-off of a significant
portion of goodwill could have a material adverse effect on the Company's
business, financial condition and results of operations. See Note 3 of Notes to
the Company's Consolidated Financial Statements.
POTENTIAL LIABILITY; AVAILABILITY OF INSURANCE. The Company's business
exposes it to risks inherent in the provision of drugs and related services.
Although the Company currently maintains professional liability insurance, there
can be no assurance that the scope of coverage or limits of such insurance will
be adequate to protect it against future claims. In addition, there can be no
assurance that the Company will be able to maintain adequate liability insurance
in the future on acceptable terms or with adequate coverage against potential
liabilities.
CONTROL BY AND USE OF PROCEEDS TO BENEFIT EXISTING STOCKHOLDERS. Upon the
completion of this Offering, the Company's directors and executive officers and
their affiliates as a group (including shares held by Welsh Carson) will
beneficially own approximately % of the outstanding voting Common Stock (or
approximately % if the Underwriters' over-allotment option is exercised in
full). As a result, these stockholders, if acting together, will have effective
control over the Company through their ability to control the election of
directors and all other matters that require a vote by the Company's
stockholders. Such control by the existing stockholders may have the effect of
preventing a change in control of the Company. The existing stockholders'
ability to prevent such a change in control of the Company may have an adverse
effect on the market price of the Common Stock. See "Management--Directors and
Executive Officers," "Principal Stockholders," and "Description of Capital
Stock."
The Company will use a portion of the net proceeds from this Offering to
redeem all outstanding shares of Series A Preferred Stock and to prepay in full
all principal and accrued interest on the Company's outstanding 10% Senior
Subordinated Notes due June 1, 2004 (the "Senior Subordinated Notes"). Welsh
Carson owns approximately 97% of the outstanding shares of Series A Preferred
Stock and substantially all outstanding Senior Subordinated Notes. In addition,
certain executive officers and directors of the Company own, in the aggregate,
approximately 2% of the outstanding shares of Series A Preferred Stock. See "Use
of Proceeds" and "Certain Transactions."
NO PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market for the Common Stock will develop or,
if one does develop, that it will be maintained. The initial public offering
price, which will be established by negotiations between the Company and the
representatives of the Underwriters, may not be indicative of prices that will
prevail in the trading market for the Common Stock. The market price of the
Common Stock could be subject to wide fluctuations in response to variations in
operating results from quarter to quarter, changes in earnings estimates by
analysts, market conditions in the industry and general economic conditions.
Furthermore, the stock market has experienced significant price and volume
fluctuations unrelated to the operating performance of particular companies.
These market fluctuations may have an adverse effect on the market price of the
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of Common
Stock in the public market, or the perception that such sales might occur, could
have a material adverse effect on the market price of the Common Stock.
Immediately following the Offering, the Company will have outstanding
shares of Common Stock ( shares if the Underwriters' over-allotment option
is exercised in full), excluding shares reserved
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for issuance upon the exercise of outstanding stock options. The shares of
Common Stock offered hereby ( if the Underwriters' over-allotment option is
exercised in full) will be eligible for public sale without restriction under
the Securities Act by persons other than affiliates (as that term is defined in
Rule 144 under the Securities Act) of the Company. All of the remaining
shares of Common Stock outstanding will be "restricted" within the meaning
of Rule 144 and may not be resold in the absence of registration under the
Securities Act or the availability of an exemption from such registration,
including the exemption provided by Rule 144. Taking into consideration the
effect of the 180-day "lock-up" agreements described herein (covering an
aggregate of shares and options to purchase an additional shares held
by executive officers, directors and certain existing stockholders of the
Company), approximately restricted shares of Common Stock will be eligible
for sale in the public market immediately after the Offering and all
remaining restricted shares will be eligible for sale upon the expiration of the
180-day lock-up agreements, in each case subject to certain volume and other
limitations of Rule 144. Holders of restricted shares of Common Stock have
contractual rights to have those shares registered for resale to the public. If
such holders, by exercising their registration rights after the 180-day lockup
period, cause a large number of shares to be registered and sold in the public
market, the market price of the Common Stock might be adversely affected.
The Company intends to register on Form S-8 under the Securities Act, as
soon as practicable on or after the effective date of the Offering, shares
of Common Stock reserved for issuance under the Company's stock option and
employee stock purchase plans. This registration statement will be effective
upon filing. Shares registered and issued pursuant to such registration
statement will be freely tradable except to the extent that the holders thereof
are deemed to be affiliates of the Company, in which case the transferability of
such shares will be subject to the volume limitations of Rule 144. Options for
the purchase of shares of Common Stock are currently outstanding under the
Company's stock option plans. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER, BYLAW AND OTHER
PROVISIONS. Certain provisions of the Company's Amended and Restated
Certificate of Incorporation and Amended and Restated Bylaws, including the
classification of the Board of Directors into three classes, could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of the Company.
Such provisions could limit the price that certain investors might be willing to
pay in the future for shares of the Common Stock. Certain of such provisions
allow the Company to issue preferred stock with rights senior to those of the
Common Stock and impose various procedural and other requirements which could
make it more difficult for stockholders to effect certain corporate actions. In
addition, the Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law ("DGCL"), which restricts certain business
combinations with any "interested stockholder" and may delay, defer or prevent a
change in control of the Company. See "Description of Capital Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION. The purchasers of shares of Common
Stock pursuant to the Offering will experience immediate and substantial
dilution of the net tangible book value per share of Common Stock from the
initial public offering price. At an assumed initial public offering price of
$ per share, purchasers in the Offering will incur dilution of $
per share. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has not and does not expect to declare or
pay any cash dividends in the foreseeable future. The Company intends to retain
all earnings, if any, in order to expand its operations. Furthermore, the
Company's bank credit agreement presently prohibits the payment of cash
dividends. The payment of cash dividends, if any, in the future is within the
discretion of the Company's Board of Directors and will depend upon the
Company's earnings, if any, capital requirements, financial condition, credit
agreements and other relevant factors. See "Dividend Policy."
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THE COMPANY
Accredo provides specialized contract pharmacy and related services
beneficial to patients with certain costly, chronic diseases. Accredo's business
was founded in 1985 by Le Bonheur Health Systems, Inc., the former parent of a
not-for-profit children's hospital in Memphis, Tennessee ("Le Bonheur"). Le
Bonheur operated the business through its subsidiary, Southern Health Systems,
Inc. ("SHS"), and through Nova Factor, Inc., one of four subsidiaries of SHS
("Nova Factor"). In May 1996, Accredo (formerly known as Nova Holdings, Inc.)
was formed to acquire SHS and Nova Factor following the divestiture by SHS of
all of its subsidiaries other than Nova Factor. Accredo continues to own SHS as
a wholly owned subsidiary, and SHS continues to own Nova Factor as a wholly
owned subsidiary. In June 1997, Accredo acquired all of the outstanding stock of
Horizon Health Systems, Inc. (d/b/a Hemophilia Health Services) ("HHS"), which
became and continues to be a wholly owned subsidiary of Accredo. See "Risk
Factors--Joint Venture and Acquisition Risks" and Note 3 of Notes to the
Consolidated Financial Statements of the Company.
The Company's principal executive offices are located at 1640 Century Center
Parkway, Suite 101, Memphis, Tennessee 38134, and its telephone number is (901)
385-3688.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered hereby at an assumed initial public offering price of $ per
share, after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, are estimated to be $ ($ if
the Underwriters' over-allotment option is exercised in full).
The Company expects to use the net proceeds it receives from the Offering as
follows: (i) approximately $ million will be used to repay a portion of the
Company's outstanding indebtedness under its existing Loan and Security
Agreement with NationsBank of Tennessee, N.A. and First Tennessee Bank National
Association (the "Credit Agreement"); (ii) approximately $11.0 million will be
used to prepay in full all principal and accrued interest on the Company's
outstanding Senior Subordinated Notes; (iii) approximately $31.0 million will be
used to redeem all outstanding shares of Series A Preferred Stock, including all
accrued dividends thereon; and (iv) the balance will be used for working capital
and other general corporate purposes, including possible acquisitions. Pending
such uses, the balance of the net proceeds will be invested in short term,
investment grade, interest bearing obligations. The Company from time to time
considers various acquisition proposals, but currently has no commitments or
agreements with respect to any material acquisitions.
The Credit Agreement provides that borrowings thereunder will bear interest
at the prime rate or the London Interbank Offered Rate ("LIBOR") plus, in each
case, a margin depending on the Company's ratio of funded debt to cash flow. The
Company has entered into an interest rate swap agreement with NationsBank of
Tennessee, N.A. to hedge against floating rate interest risk with respect to
amounts of up to $15.0 million outstanding under the Credit Agreement.
Accordingly, as of June 30, 1998, the effective interest rate on the first $15.0
million outstanding under the Credit Agreement was 8.15% per annum, and the
effective interest rate on borrowings in excess of $15.0 million under the
Credit Agreement was 7.625% per annum. All outstanding principal and interest on
borrowings under the Credit Agreement must be paid in full by October 31, 1999.
The Senior Subordinated Notes bear interest at 10.0% per annum and mature on
June 1, 2004. The Series A Preferred Stock accrues dividends at an annual rate
of $8.00 per share. Such dividends are cumulative and accrue from the date of
issue. The mandatory redemption date of the Series A Preferred Stock is May 31,
2004.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company intends to retain any future earnings to finance the growth
and development of its business and therefore does not anticipate paying any
cash dividends in the forseeable future. The payment of cash dividends in the
future will be at the discretion of the Board of Directors and will depend upon
factors such as the Company's earnings levels, capital requirements, financial
condition and other factors deemed relevant by the Board of Directors. There can
be no assurance that the Company will pay any dividends in the future.
15
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1998 (i) the actual
capitalization of the Company and (ii) the pro forma capitalization of the
Company as adjusted to give effect to (a) the exchange by WCAS VII of
shares of Common Stock for shares of Non-Voting Common Stock pursuant to
the Recapitalization and (b) the sale by the Company of shares of Common
Stock in the Offering at an assumed initial public offering price of $
per share and the application of the estimated net proceeds therefrom (after
deducting underwriting discounts and commissions and estimated offering expenses
payable by the Company). This table should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------
<S> <C> <C>
PRO FORMA
ACTUAL AS ADJUSTED
----------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Long-term notes payable.......................................... $ 27,498 $
----------- -------
Senior Subordinated Notes payable................................ 8,920
----------- -------
Mandatorily redeemable cumulative preferred stock, at redemption
amount, 300,000 shares authorized, and 255,361 shares issued
and outstanding................................................ 29,792
----------- -------
Stockholders' equity:
Non-Voting Common Stock, $.01 par value; shares
authorized; no shares issued and outstanding, actual;
shares issued and outstanding, pro forma as adjusted... --
Common Stock, $.01 par value; shares authorized;
shares issued and outstanding, actual;
shares issued and outstanding, pro forma as adjusted(1).... 56
Common Stock subscribed-- shares...................... 204
Additional paid-in capital................................... 16,837
Retained earnings............................................ 778
Subscription receivable...................................... (204)
----------- -------
Total stockholders' equity............................... 17,671
----------- -------
Total capitalization................................. $ 83,881 $
----------- -------
----------- -------
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance under the
Company's stock option and employee stock purchase plans, of which
shares were subject to outstanding options as of June 30, 1998 at a
weighted average exercise price of $ per share.
16
<PAGE>
DILUTION
As of June 30, 1998, the Company's net deficit in tangible book value was
$ , or $ per share of Common Stock. Net deficit in tangible book value
per share represents the amount of the Company's total tangible assets, less
total liabilities and mandatorily redeemable cumulative preferred stock, divided
by the number of shares of Common Stock outstanding. After giving effect to the
sale by the Company of shares of Common Stock in the Offering at an assumed
initial public offering price of $ per share and after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, the pro forma net tangible book value of the Company as of June 30,
1998 would have been approximately $ , or $ per share. This represents
an immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $ per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $
Net deficit in tangible book value per share as of June 30,
1998(1)..................................................... $
Increase per share attributable to new investors..............
---------
Pro forma net tangible book value per share after the
Offering(1)...................................................
---------
Dilution per share to new investors(2).......................... $
---------
---------
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1998,
the differences between the existing stockholders and the new investors with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid to the Company and the average price per share paid
(based upon an assumed initial public offering price of $ per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).... % $ % $
New investors
--------- ----- ---------- -----
Total............... 100.0% $ 100.0%
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
- ------------------------
(1) Excludes shares of Common Stock reserved for issuance under the
Company's stock option and employee stock purchase plans, of which shares
are subject to outstanding options at a weighted average exercise price of
$ per share. To the extent that options are exercised, there could be
further dilution to new investors.
(2) Dilution per share to new investors is determined by subtracting pro forma
net tangible book value per share after the Offering from the assumed
initial public offering price per share. Dilution per share to new investors
will be $ if the Underwriters' over-allotment option is exercised in
full.
17
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize certain selected financial data, which are
qualified by and should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Predecessor's
and the Company's Financial Statements and the Notes thereto included elsewhere
in this Prospectus. The following table sets forth selected financial data with
respect to (a) Nova Factor (Predecessor) as of and for the fiscal years ended
June 30, 1994 and 1995, and as of May 31, 1996 and for the period July 1, 1995
through May 31, 1996, and (b) the Company as of June 30, 1996 and for the period
from inception (May 24, 1996) through June 30, 1996, and as of and for the
fiscal years ended June 30, 1997 and 1998. The selected financial data of the
Predecessor and the Company have been derived from the audited financial
statements of the Predecessor and the Company. The information set forth below
is not necessarily indicative of the results of future operations.
<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY(1)
--------------------------------- ---------------------------------
MAY 24,
JULY 1, 1996
YEARS ENDED 1995 (INCEPTION) YEARS ENDED JUNE 30,
JUNE 30, THROUGH THROUGH
-------------------- MAY 31, JUNE 30, --------------------
1994 1995(2) 1996 1996 1997 1998
--------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net patient service revenue....................... $ 5,442 $ 71,513 $ 68,585 $ 6,647 $ 106,143 $ 170,002
Other revenue..................................... 756 6,710 6,346 597 8,049 9,806
Equity in net income (loss) of joint ventures..... 126 646 (139) 49 1,017 1,150
--------- --------- ----------- ----------- --------- ---------
Total revenues................................ 6,324 78,869 74,792 7,293 115,209 180,958
Operating expenses:
Cost of services.................................. 4,016 68,273 65,867 6,450 101,081 154,046
General and administrative........................ 694 2,714 2,753 627 5,939 12,351
Bad debts......................................... 74 1,322 1,860 251 2,977 3,165
Depreciation and amortization..................... 11 76 104 126 1,599 2,528
Corporate overhead allocation(3).................. 413 1,900 4,206 -- -- --
--------- --------- ----------- ----------- --------- ---------
Total operating expenses...................... 5,208 74,285 74,790 7,454 111,596 172,090
--------- --------- ----------- ----------- --------- ---------
Operating income (loss)............................... 1,116 4,584 2 (161) 3,613 8,868
Interest expense, net................................. -- 943 266 106 983 3,552
--------- --------- ----------- ----------- --------- ---------
Income (loss) before income taxes..................... 1,116 3,641 (264) (267) 2,630 5,316
Income tax expense (benefit).......................... 428 1,387 (72) (29) 1,508 2,495
--------- --------- ----------- ----------- --------- ---------
Net income (loss)..................................... $ 688 $ 2,254 $ (192) (238) 1,122 2,821
--------- --------- -----------
--------- --------- -----------
Mandatorily redeemable cumulative preferred stock
dividends........................................... (170) (2,043) (2,043)
----------- --------- ---------
Net income (loss) attributable to common
stockholders........................................ $ (408) $ (921) $ 778
----------- --------- ---------
----------- --------- ---------
Net income (loss) per share attributable to common
stockholders--Diluted............................... $ $ $
----------- --------- ---------
----------- --------- ---------
Weighted average shares and dilutive equivalents
outstanding.........................................
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
-------------------- MAY 31, ---------------------------------
1994 1995 1996 1996 1997 1998
--------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 572 $ 645 $ 1,995 $ 3,576 $ 3,676 $ 5,087
Working capital........................... 1,234 13,523 1,148 1,384 16,894 23,377
Total assets(4)........................... 4,135 44,808 27,538 72,366 116,917 118,990
Long-term debt............................ -- 4,000 -- -- 35,195 36,418
Mandatorily redeemable cumulative
preferred stock......................... -- -- -- 25,706 27,749 29,792
Stockholders' equity...................... 1,476 11,315 3,327 14,913 16,393 17,671
</TABLE>
- ------------------------------
(1) The Company was incorporated on May 24, 1996. On May 31, 1996, the Company
acquired SHS, a holding company, and its wholly-owned subsidiary, Nova
Factor (the "Predecessor"). Since the Company was newly formed at May 24,
1996, and because the Predecessor had been in existence for several years,
the Company is considered the successor to the Predecessor's operations. The
balance sheet data of the Predecessor represents the historical cost basis
of the Predecessor's assets and liabilities prior to its acquisition by the
Company. The acquisition of the Predecessor by the Company resulted in a new
basis of accounting such that the Predecessor's assets and liabilities were
recorded at their fair value in the Company's consolidated balance sheet
upon consummation of the acquisition. Additionally, the Company acquired HHS
on June 1, 1997. Accordingly, the Selected Financial Data are not strictly
comparable for the periods presented. See Notes 1 and 3 of Notes to the
Company's Consolidated Financial Statements.
(2) On July 1, 1994, the Predecessor was assigned contractual rights from a
subsidiary of SHS relating to the distribution of certain drugs.
(3) The Predecessor has been allocated expenses for certain services provided by
its parent, SHS, including cash management, tax reporting, risk management
and executive management services. Charges for these services were based
upon a general allocation methodology determined by SHS (used to allocate
all corporate overhead expenses to SHS subsidiaries), and were not
necessarily allocated based on specific identification of expenses.
Management believes the allocation methodology is reasonable. See Note 6 of
Notes to the Nova Factor, Inc. Financial Statements.
(4) In May 1996, the Predecessor settled various intercompany accounts with
subsidiaries of SHS.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND THE PREDECESSOR'S AND THE COMPANY'S FINANCIAL
STATEMENTS AND THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE
DISCUSSION IN THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS
PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN.
OVERVIEW
Accredo provides specialized contract pharmacy and related services for the
treatment of patients with certain costly, chronic diseases. The Company derives
revenues primarily from the sale of biotechnology drugs to patients.
Historically, the majority of the Company's revenues have been derived from
products and services provided with respect to four diseases: Gaucher Disease,
hemophilia, Multiple Sclerosis and growth hormone-related disorders. The
products provided by the Company are purchased directly from biotechnology drug
manufacturers pursuant to preferred relationship agreements in the case of
Gaucher Disease, Multiple Sclerosis, and growth hormone-related disorders and
purchase agreements in the case of hemophilia. Approximately 46%, 23% and 6% of
Accredo's total revenues in fiscal 1998 were generated from sales and services
provided with respect to Gaucher Disease, Multiple Sclerosis and growth
hormone-related disorders, respectively, and which sales and services were (and
will continue to be) dependent upon the Company's preferred relationships with
Genzyme, Biogen and Genentech, respectively. Sales and services provided with
respect to hemophilia represented approximately 23% of the Company's total
revenues in 1998.
The Company's preferred relationship agreements describe certain services to
be provided by the Company, including contract pharmacy, information, clinical,
reimbursement and customized delivery services. The agreements generally limit
the Company's ability to supply competing drugs during (and in some cases for up
to five years after) the term of the agreement, allow the manufacturer to
distribute directly or through other parties, are generally short term and may
be cancelled by either party, without cause, upon between 60 and 90 days prior
notice. The agreements vary in level of exclusivity and scope of services
provided. The Company typically purchases products at prices below the
manufacturers' average wholesale sales prices, and the Company's resulting
contribution margins vary for each product line. Pricing is customized to
reflect specific services to be provided by Accredo and is subject to periodic
adjustments to reflect changing market conditions.
The Company recognizes revenue at the time the biotechnology drug is
dispensed or when the contractual service has been performed. While the Company
may experience some revenue changes from price fluctuations on its existing
product lines, its revenue growth will depend principally on the introduction of
new drugs and to a lesser extent on volume growth in existing drug lines. In May
1996, the Company entered into a preferred relationship with Biogen and
initiated sales and services with respect to Avonex-Registered Trademark- for
the treatment of Multiple Sclerosis. In August 1998, the Company entered into a
preferred relationship with Centocor and will initiate sales and services with
respect to Remicade-TM- for the treatment of Crohn's Disease. Although the
introduction of new drugs is dependent on the regulatory approval process,
management believes the pipeline of biotechnology drugs for which the Company's
services may be utilized will continue to expand.
In response to growing demand, the Company has expanded its existing
relationships with biotechnology manufacturers through the development of new or
complementary services that fit the specialized needs of the manufacturer and
the patients they serve. For example, the Company recently implemented a
referral triage service to provide a convenient single source for prescribing
physicians and help manufacturers increase market penetration. These services
have provided an additional source of revenue for the Company in fiscal 1998 and
19
<PAGE>
1997, and management believes that the need for additional services will
continue to expand and will constitute an increasing percentage of the Company's
revenues in the future.
In addition to new services, Accredo may also grow through strategic
acquisitions and joint ventures. The acquisition of HHS in June 1997 enabled the
Company to significantly increase its presence in the hemophilia market.
Subsequent to the acquisition, the Company consolidated its existing hemophilia
operations into HHS to take advantage of volume purchasing discounts, disease
management systems and increased access to certain state Medicaid and managed
care relationships.
Accredo has four joint venture agreements with various medical centers (or
their affiliates) in which the Company owns 50% or less of the venture. Many of
the Company's patient populations have diseases that are discovered before or
during adolescence and require on-going care from physician specialists, many of
whom are based at pediatric, academic and other acute care medical centers. To
date, these ventures have primarily derived revenues from the treatment of
patients with hemophilia and growth hormone-related disorders. The Company and
its joint venture partners share profits and losses in equal proportion to their
respective equity ownership. The Company accounts for its interests in the net
income or loss in these joint ventures under the equity method of accounting.
The Company's equity interest in the net income of these joint ventures
represented approximately 22% of the Company's income before income taxes for
fiscal 1998. In addition to joint venture relationships, the Company has
management agreements with four medical centers (or their affiliates) for the
provision of specialized contract pharmacy services. The Company receives a
management fee for these services which is classified as other revenue.
Cost of services include drug acquisition costs, pharmacy and warehouse
personnel costs, freight and other direct costs associated with the delivery of
the products and costs of clinical services provided. General and administrative
expenses include the personnel costs of the reimbursement, sales, marketing,
administrative and support staffs as well as corporate overhead and other
general expenses. Bad debts include the Company's provision for patient accounts
receivable which prove to be uncollectable after routine collection efforts have
been exhausted. The Company typically hires personnel and incurs legal,
recruiting, marketing and other expenses in anticipation of the commercial
launch of a new biotechnology drug. In certain instances, a portion of these
expenses are reimbursed to the Company by the biotechnology drug manufacturer.
The Company historically has not capitalized any of these start up expenses.
Due to the increasing sensitivity to drug cost within governmental and
private payors, the Company is continuously susceptible to reimbursement and
operating margin pressures. In recent years, pharmacy benefit managers and other
private payors have aggressively attempted to discount their reimbursement rates
for the Company's products. While this aggressive discounting has resulted in
some reduced margins for the Company's services, its preferred agreements with
biotechnology manufacturers typically provide for terms which allow the Company
to compensate for much of these discounts through negotiated adjustments in
product acquisition cost. These relationships have allowed the Company to remain
price competitive while maintaining relatively stable product margins in recent
quarters.
20
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentages of
total revenues represented by the respective financial items:
<TABLE>
<CAPTION>
MAY 24, 1996
(INCEPTION) YEARS ENDED JUNE 30,
THROUGH --------------------------
JUNE 30, 1996 1997 1998
--------------------- ----------- -------------
<S> <C> <C> <C>
Revenues:
Net patient service revenue.................... 91.1% 92.1% 94.0%
Other revenue.................................. 8.2 7.0 5.4
Equity in net income of joint ventures......... 0.7 0.9 0.6
----- ----- -----
Total revenues............................. 100.0 100.0 100.0
Operating expenses:
Cost of services............................... 88.5 87.7 85.1
General and administrative..................... 8.6 5.2 6.8
Bad debts...................................... 3.4 2.6 1.7
Depreciation and amortization.................. 1.7 1.4 1.4
----- ----- -----
Total operating expenses................... 102.2 96.9 95.0
----- ----- -----
Operating income (loss)............................ (2.2) 3.1 5.0
Interest expense, net.............................. 1.5 0.8 2.0
----- ----- -----
Income (loss) before income taxes.................. (3.7) 2.3 3.0
Income tax expense (benefit)....................... (0.4) 1.3 1.4
----- ----- -----
Net income (loss).................................. (3.3%) 1.0% 1.6%
----- ----- -----
----- ----- -----
</TABLE>
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR 1997
REVENUES. Total revenues increased from $115.2 million to $181.0 million,
or 57%, from fiscal 1997 to fiscal 1998. Approximately $25.1 million, or 38%, of
this increase was attributed to increased sales volume of
Avonex-Registered Trademark-, which was launched in May 1996. Approximately
$30.0 million, or 46%, of the increase was attributed to the increased
hemophilia revenue associated with the acquisition of HHS in June 1997 and
increased patient volume. The remaining $10.7 million, or 16%, of the revenue
increase was attributable primarily to growth in the Company's
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- drug sales and
associated service fees. The Company's equity in net income of joint ventures
increased from approximately $1.0 million to approximately $1.2 million from
fiscal 1997 to fiscal 1998.
COST OF SERVICES. Cost of services increased from $101.1 million to $154.0
million, or 52%, from fiscal 1997 to fiscal 1998. This increase was attributable
primarily to the expanded revenue volume of Avonex-Registered Trademark-,
hemophilia clotting factor and Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- along with personnel and other direct expenses
associated with this growth. As a percentage of revenues, cost of services
decreased from 87.7% to 85.1% from fiscal 1997 to fiscal 1998 primarily as a
result of the increasing revenue growth in drugs with lower product acquisition
costs as a percentage of revenue.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $5.9 million to $12.4 million, or 108%, from fiscal 1997 to fiscal 1998.
Approximately $4.2 million, or 66%, of this increase was associated with the
acquisition of HHS in June 1997. The remaining $2.3 million of this increase was
primarily the result of increased salaries and benefits associated with the
expansion of the Company's reimbursement, sales, marketing, administrative and
support staffs in anticipation of revenue growth and new strategic sales and
marketing efforts. As a percentage of revenues, general and administrative
expenses increased from 5.2% to
21
<PAGE>
6.8% from fiscal 1997 to fiscal 1998 primarily as a result of the acquisition of
HHS which involves a more cost intensive service model than that of the
Company's other drug therapies.
BAD DEBTS. Bad debts increased from $3.0 million to $3.2 million from
fiscal 1997 to fiscal 1998. As a percentage of revenue, bad debt expense
decreased from 2.6% to 1.7% from fiscal 1997 to fiscal 1998 primarily as a
result of the increased percentage of the Company's revenues being reimbursed by
prescription benefit managers and other payors which reduces the Company's
exposure to the uncollectability of patient co-payments.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased from $231,000
to $430,000 from fiscal 1997 to fiscal 1998. Of this increase, $94,000 was
attributable to the assets acquired as a result of the acquisition of HHS in
June 1997. The remaining increase is a result of approximately $992,000 of
capital expenditures made in fiscal 1998 for the purchases of property and
equipment associated with the Company's revenue growth and expansion of its
leasehold facility improvements. Amortization expense increased from $1.4
million to $2.1 million from fiscal 1997 to fiscal 1998, primarily as a result
of the acquisition of HHS, which resulted in approximately $24.4 million of
goodwill and other intangible assets. Approximately $628,000 of the increase was
attributable to the amortization of those intangibles.
INTEREST EXPENSE, NET. Interest expense, net increased from $984,000 to
$3.6 million, from fiscal 1997 to fiscal 1998 primarily as a result of the
issuance of $27.5 million of long-term notes payable and $10.0 million of Senior
Subordinated Notes payable issued as part of the acquisition of HHS in June
1997. The Company generated interest income of approximately $169,000 in fiscal
1998 and $100,000 in fiscal 1997 resulting from cash management programs which
utilized the Company's increased short-term excess cash balances.
INCOME TAX EXPENSE. The Company's effective tax rate decreased from 57.3%
to 46.9% from fiscal 1997 to fiscal 1998 as a result of increased income before
income taxes while nondeductible amortization expense remained constant. The
difference between the recognized effective tax rate and the statutory tax rate
is primarily attributed to approximately $1.3 million of nondeductible
amortization expense and state income taxes.
PERIOD FROM INCEPTION (MAY 24, 1996) TO JUNE 30, 1996
Accredo was formed on May 24, 1996, for the purpose of acquiring SHS and its
wholly owned subsidiary Nova Factor, the Company's predecessor. This acquisition
was completed on May 31, 1996. Because the financial statements for the period
from inception (May 24, 1996) to June 30, 1996 reflect only one month of the
Company's operations, a comparison of the Company's financial statements for
that period to the Company's financial statements for fiscal year 1997 would not
be meaningful.
PERIOD FROM JULY 1, 1995 THROUGH MAY 31, 1996 (PREDECESSOR) COMPARED TO FISCAL
YEAR 1995 (PREDECESSOR)
The results of operations for the period July 1, 1995 through May 31, 1996
(eleven-months) and for the fiscal year ended June 30, 1995 (fiscal year 1995)
are reflective of the operations of Nova Factor, the Company's predecessor. Due
primarily to the differences in the length of the reporting periods, the
comparison of the operating results may not be meaningful. In addition, the
results of operations for these periods may not be indicative of the results of
operations had the Predecessor been operated on a stand alone basis.
REVENUES. Total revenues were $74.8 million for the eleven-month period
ended May 31, 1996, and were $78.9 million for fiscal year 1995.
COST OF SERVICES. Cost of services were $65.9 million for the eleven-month
period ended May 31, 1996, and were $68.3 million for fiscal year 1995.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $2.8
million for the eleven-month period ended May 31, 1996, and were $2.7 million
for fiscal year 1995.
22
<PAGE>
BAD DEBTS. Bad debts were $1.9 million for the eleven-month period ended
May 31, 1996, and were $1.3 million for fiscal year 1995.
DEPRECIATION EXPENSE. Depreciation expense was $104,000 for the
eleven-month period ended May 31, 1996, and was $76,000 for fiscal year 1995.
CORPORATE OVERHEAD ALLOCATION. Corporate overhead allocation was $4.2
million for the eleven-month period ended May 31, 1996, and was $1.9 million for
fiscal year 1995.
INTEREST EXPENSE, NET. Interest expense, net was $266,000 for the
eleven-month period ended May 31, 1996, and was $943,000 for fiscal year 1995.
INCOME TAX EXPENSE. The effective tax rate used to record the tax benefit
for the eleven-month period ended May 31, 1996 was approximately 27%, and was
approximately 38% for fiscal year 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998 and 1997, the Company had working capital of $23.4
million and $16.9 million, respectively. The increase in working capital at June
30, 1998, as compared to June 30, 1997, resulted principally from the increase
in patient accounts receivable resulting from the Company's revenue growth. The
Company's net cash provided by operating activities was approximately $1.9
million for the fiscal year ended June 30, 1998, which was due primarily to the
timing of receivables, inventory purchases and payables resulting from the
Company's continued growth. Net cash used in investing activities was $967,000
for the fiscal year ended June 30, 1998. Such cash was used primarily for the
purchase of property and equipment.
For the period from inception (May 24, 1996) through June 30, 1996, the
Company used cash in the amount of approximately $37.7 million to purchase the
outstanding stock of SHS. In fiscal year 1997, the Company used cash in the
amount of approximately $29.7 million to purchase the outstanding stock of HHS.
During fiscal 1997, the Company's cash distributions from its joint ventures in
excess of its equity in the net income from these joint ventures was $378,000.
During the fiscal year ended June 30, 1998, the Company received cash
distributions from its joint ventures of approximately $1.2 million while its
associated equity in the net income of these joint ventures increased
approximately $1.2 million.
For the period from inception (May 24, 1996) to June 30, 1996, the Company
received $40.0 million from the issuance of common and preferred stock. For the
fiscal year ended June 30, 1997, the Company received approximately $27.5
million from the issuance of long-term notes payable and $10.0 million from the
issuance of the Senior Subordinated Notes which were used to refinance
approximately $7.2 million of long-term debt and to fund the acquisition of HHS.
The Company issued shares of Common Stock to the purchasers of the
Senior Subordinated Notes. During fiscal year 1998, the Company elected to issue
additional Senior Subordinated Notes of approximately $1.0 million which
represented the accrued interest on the Senior Subordinated Notes then
outstanding. The Company also received $500,004 from the sale of shares
of Common Stock during 1998.
Historically, the Company has funded its operations and continued internal
growth through cash provided by operations. The Company anticipates its capital
expenditures for the year ending June 30, 1999 will consist primarily of
additional leasehold improvements and equipment for the continuing expansion of
the Company's leasehold to accommodate personnel necessary to manage the
Company's growth. Upon consummation of the Offering, the Company plans to retire
a portion of its long-term senior debt, redeem all outstanding shares of Series
A Preferred Stock and retire the Senior Subordinated Notes. In connection with
the retirement of debt with the Offering proceeds, the Company will incur an
extraordinary charge of approximately $2.1 million to its operations for early
extinguishment of its debt.
The Company's Credit Agreement consists of a $40.0 million revolving credit
facility, which includes a subfacility for letters of credit. The Credit
Agreement contains a $20.0 million sublimit for working capital loans and
letters of credit and is subject to a borrowing base limit that is based on the
Company's cash flow. All
23
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outstanding principal and interest on loans made under the Credit Agreement is
due and payable on October 31, 1999. Interest on loans under the Credit
Agreement accrues at a variable rate index, at the Company's option, based on
the prime rate or LIBOR for one, two, three or six months (as selected by the
Company), plus an applicable margin. The Company has entered into an interest
rate swap agreement with NationsBank of Tennessee, N.A. to hedge against
floating rate interest risk. The swap agreement relates to borrowings under the
Credit Agreement of up to $15.0 million and expires on October 29, 1999.
Accordingly, as of June 30, 1998, the effective interest rate on the first $15.0
million outstanding under the Credit Agreement was 8.15% per annum, and the
effective interest rate on borrowings in excess of $15.0 million under the
Credit Agreement was 7.625% per annum. The Company's obligations under the
Credit Agreement are secured by a lien on substantially all of the assets of the
Company, including a pledge of all of the common stock of each direct or
indirect wholly owned subsidiary of the Company. Each wholly owned subsidiary
has also guaranteed all of the obligations of the Company under the Credit
Agreement, which guarantee obligations are secured by a lien on substantially
all of the assets of each such subsidiary. See Note 5 of Notes to the Company's
Consolidated Financial Statements.
The Credit Agreement contains operating and financial covenants, including
requirements to maintain a certain debt to equity ratio and certain leverage and
debt service coverage ratios. In addition, the Credit Agreement includes
customary affirmative and negative covenants, including covenants relating to
transactions with affiliates, use of proceeds, restrictions on subsidiaries,
limitations on indebtedness, limitations on liens, limitations on capital
expenditures, limitations on certain mergers, acquisitions and sales of assets,
limitations on investments, prohibitions on payment of dividends and stock
repurchases, and limitations on certain debt payments (including payment of
subordinated indebtedness) and other distributions. The Credit Agreement also
contains customary events of default, including certain events relating to
changes in control of the Company.
While the Company anticipates its cash from operations, along with the short
term use of the Credit Agreement and the net proceeds to be received from the
Offering, will be sufficient to meet its internal operating requirements and
growth plans for at least the next 12 months, the Company expects that
additional funds may be required in the future to successfully continue its
growth beyond that 12-month period or in the event that the Company grows more
than expected within such period. The Company may be required to raise
additional funds through sales of equity or debt securities or seek additional
financing from financial institutions. There can be no assurance, however, that
financing will be available on terms that are favorable to the Company or, if
obtained, will be sufficient for the Company's needs.
SELECTED QUARTERLY FINANCIAL RESULTS
The following table presents selected unaudited quarterly statements of
operations items, and the percentages of total revenues represented by those
respective items, for each of the eight quarters beginning July 1, 1996 and
ending June 30, 1998. This information has been prepared on the same basis as
the audited financial statements appearing elsewhere in this Prospectus, and
includes all adjustments, consisting only of normal recurring adjustments, that
the Company considers necessary for a fair presentation of the information when
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read in conjunction with the Company's Consolidated Financial Statements and
Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1997 1997(1) 1997 1997 1998
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:........................
Total revenues........... $ 24,543 $ 27,659 $ 28,538 $ 34,468 $ 40,886 $ 44,701 $ 44,813
Operating income......... 663 817 859 1,274 1,892 2,051 2,246
Income before income
taxes.................. 452 642 686 849 1,000 1,162 1,325
Net income............... 153 276 299 395 492 570 698
AS A PERCENTAGE OF TOTAL REVENUES:
Total revenues........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating income......... 2.7 3.0 3.0 3.7 4.6 4.6 5.0
Income before income
taxes.................... 1.8 2.3 2.4 2.5 2.4 2.6 3.0
Net income............... 0.6 1.0 1.0 1.1 1.2 1.3 1.6
<CAPTION>
<S> <C>
JUNE 30,
1998
-----------
<S> <C>
STATEMENT OF OPERATIONS
DATA:........................
Total revenues........... $ 50,559
Operating income......... 2,680
Income before income
taxes.................. 1,830
Net income............... 1,061
AS A PERCENTAGE OF TOTAL REVE
Total revenues........... 100.0%
Operating income......... 5.3
Income before income
taxes.................... 3.6
Net income............... 2.1
</TABLE>
- ------------------------------
(1) On June 1, 1997, the Company acquired all of the stock of HHS.
QUARTERLY FLUCTUATIONS AND SEASONALITY
The Company's results of operations historically have fluctuated on a
quarterly basis and can be expected to continue to be subject to quarterly
fluctuations. In particular, the Company typically increases its operating
expenses in anticipation of the launch of a new drug, and if the new drug does
not generate the levels of sales during the periods anticipated by management,
the Company's results in that and future quarters could be adversely affected.
Quarterly results can also fluctuate as a result of the timing of periodic
adjustments to prices and other terms with the Company's drug suppliers, the
accuracy of estimates of resources required for ongoing programs, the timing and
integration of acquisitions, changes in regulations related to biotechnology
companies, physician prescribing patterns, and general economic conditions, none
of which can be adequately predicted by the Company. Quarterly operating results
also fluctuate as a result of the annual renewal (on a calendar year basis) of
deductible and co-payment requirements, thereby affecting patient ordering
patterns in a manner that creates a seasonal reduction in revenue from existing
drug programs for the Company's third fiscal quarter ending March 31. The
Company believes that quarterly comparisons of its financial results may not
necessarily be meaningful and should not be relied upon as an indication of
future performance. In addition, fluctuations in quarterly results could affect
the market price of the Common Stock in a manner unrelated to the longer term
operating performance of the Company.
THE YEAR 2000 ISSUE
INTRODUCTION. The term "year 2000 issue" is a general term used to describe
the various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. These problems arise from hardware and software unable
to distinguish dates in the "2000's" from dates in the "1900's" and from other
sources such as the use of special codes and conventions in software that make
use of a date field.
THE COMPANY'S STATE OF READINESS. The Company's efforts in addressing the
year 2000 issue are focused in the following three areas: (i) implementing
procedures to determine whether the Company's software systems and hardware
platforms are year 2000 compliant; (ii) communicating with suppliers and third
party payors to determine whether there will be any interruption in their
systems that could affect the Company's ability to receive timely shipments of
inventory or payment for services as a result of the year 2000 issue; and (iii)
25
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evaluating and making necessary modifications to other systems that contain
imbedded chips, such as phone systems, which process dates and date sensitive
material.
The Company is in the process of obtaining written verification from vendors
to the effect that the Company's software applications and hardware platforms
acquired from such vendors will correctly manipulate dates and date-related data
as the year 2000 is approached and reached. By March 31, 1999, the Company
expects to have completed upgrades on its pharmacy management systems, including
its billing and accounts receivable systems, in order to address the year 2000
issue. Nevertheless, there can be no assurance that the software applications
and hardware platforms on which the Company's business relies will correctly
manipulate dates and date-related data as the year 2000 is approached and
reached. Such failures could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's business relies heavily upon its ability to obtain
pharmaceuticals from a limited number of biotechnology manufactures and from its
ability to obtain reimbursement from third party payors, including Medicare and
Medicaid. The Company is in the process of obtaining written verification from
each of its suppliers, and certain significant third party payors, to determine
whether there will be any interruption in the provision of pharmaceuticals or
receipt of payment resulting from the year 2000 issue. The Company expects to
complete this process by March 31, 1999. At this time HCFA has testified to a
committee of the U.S. House of Representatives that it is far behind in
remedying year 2000 problems. The failure of HCFA or any of the Company's other
significant third party payors to remedy year 2000 related problems could result
in a delay in the Company's receipt of payments for services which could have a
material adverse impact on the Company's business, financial condition and
results of operations. Furthermore, a delay in receiving pharmaceuticals from
certain key biotechnology manufacturers could hinder the Company's ability to
provide services to its customers which could have a material adverse impact on
the Company's business, financial condition and results of operations.
The Company is aware that certain of its systems, such as phone systems,
facsimile machines, heating and air conditioning, security systems and other
non-data processing oriented systems may include imbedded chips which process
dates and date sensitive material. These imbedded chips are both difficult to
identify in all instances and difficult to repair; often, total replacement of
the chips is necessary. The Company intends to perform an evaluation of its
systems to determine whether the Company needs to repair or replace any chips to
avoid year 2000 problems. Failure of the Company to identify or remediate any
embedded chips (either on an individual or an aggregate basis) on which
significant business operations depend, such as phone systems, could have a
material adverse impact on the Company's business, financial condition and
results of operations.
COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Based on current
information, the Company has budgeted $100,000 for the cost of repairing,
updating or replacing software and equipment. Because additional funds may be
required as a result of future findings, the Company is not currently able to
estimate the final aggregate cost of addressing the year 2000 issue. The Company
expects to fund the costs of addressing the year 2000 issue from cash flows
resulting from operations and does not expect such costs to have a material
effect on the financial condition of the Company or its results of operations.
RISKS PRESENTED BY YEAR 2000 ISSUES. The Company is still in the process of
evaluating potential disruptions or complications that might result from year
2000 related problems. However, at this time the Company has not identified any
specific business functions that will suffer material disruption as a result of
year 2000 related events. It is possible, however, that the Company may identify
business functions in the future that are specifically at risk of year 2000
disruption. The absence of any such determination at this point represents only
the Company's current status of evaluating potential year 2000 related problems
and facts presently known to the Company, and should not be construed to mean
that there is no risk of year 2000 related disruption. Moreover, due to the
unique and pervasive nature of the year 2000 issue, it is impracticable to
anticipate each of the wide variety of year 2000 events, particularly outside of
the Company, that might arise in a worst case scenario which might have a
material adverse impact on the Company's business, financial condition and
results of operations.
26
<PAGE>
THE COMPANY'S CONTINGENCY PLANS. The Company intends to develop contingency
plans for significant business risks that might result from year 2000 related
events. Since the Company has not identified any specific business function that
will be materially at risk of significant year 2000 related disruptions, and
because a full assessment of the Company's risk from potential year 2000
failures is still in process, the Company has not yet developed detailed
contingency plans specific to year 2000 problems. Development of these
contingency plans is currently scheduled to occur before March 31, 1999 and as
otherwise appropriate.
IMPACT OF INFLATION
Changes in prices charged by the biotechnology drug manufacturers for the
drugs dispensed by the Company, along with increasing labor costs, freight and
supply costs and other overhead expenses, affects the Company's cost of services
and general and administrative expenses. Historically, the Company has been able
to pass all, or a portion, of the effect of such increases to the biotechnology
drug manufacturers pursuant to negotiated adjustments made under its preferred
distribution agreements. As a result, changes due to inflation have not had
significant adverse effects on the Company's operations.
27
<PAGE>
BUSINESS
OVERVIEW
Accredo provides specialized contract pharmacy and related services
beneficial to patients with certain costly, chronic diseases. Because of the
unique needs of these patients, biotechnology drug manufacturers have recognized
the benefits of customized treatment programs to facilitate alternate site drug
administration, ensure compliance with treatment regimens, provide reimbursement
assistance and capture valuable clinical and patient demographic information.
The Company addresses the needs of the manufacturers by providing specialized
services that facilitate product launch and patient acceptance, including timely
drug utilization and patient compliance information, patient education and
monitoring, reimbursement expertise and overnight drug delivery. The Company
believes that its ability to accelerate market penetration and increase revenues
for new biotechnology drugs makes it the partner of choice for drug
manufacturers as evidenced by its preferred relationships with Genzyme, Biogen,
Genentech and Centocor.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic and
potentially life threatening diseases; (ii) are expensive, with an annual
therapy cost as high as $200,000 per patient; (iii) are administered through
injection; and (iv) require temperature control or other specialized handling as
part of their distribution process. Currently, the Company provides services
that address the needs of patients with the following diseases: Gaucher Disease,
a hereditary liver enzyme deficiency; hemophilia, a hereditary bleeding
disorder; Multiple Sclerosis, a debilitating disease of the central nervous
system; and growth hormone-related disorders. In addition, the Company has
recently entered into an agreement with Centocor to provide its services to
patients with Crohn's Disease, a chronic inflammatory disease affecting the
gastrointestinal tract. These diseases generally require life-long therapy,
except for growth hormone-related disorders which typically require treatment
for six to ten years.
INDUSTRY BACKGROUND
The pace of drug discovery has accelerated in recent years due to
significant advances in disciplines such as molecular biology, genomics and
high-throughput screening. As a result, opportunities to develop therapies for
previously unmet needs are greater than ever before. Biotechnology products
represent the most expensive and rapidly growing part of the new drug pipeline,
with an estimated 240 new biotechnology products in late stage clinical trials
as of mid-1998. Unlike many traditional drugs, these products often possess
specific characteristics which make utilization and compliance increasingly
difficult. They are often composed of unstable proteins which must be taken by
injection and require timely, temperature maintained distribution, dosage
monitoring, and controlled inventory management. In addition, expert
reimbursement management is crucial as a result of the high cost and significant
support services associated with these products.
As a result of increasing competitive pressure to introduce new drugs to
market quickly and the unpredictability of the approval and launch process for
new drugs, many drug manufacturers have sought to preserve often limited
internal resources by outsourcing various stages of product development. This
has included discovery research by outsourcing genomics and screening functions
and clinical development through the utilization of contract research
organizations (CROs) and site management organizations (SMOs). This trend has
also extended beyond development to product commercialization and launch through
the outsourcing of manufacturing, sales and marketing, product detailing,
pharmacy and distribution services and patient support programs.
When addressing chronic diseases, the challenges facing biotechnology drug
manufacturers are often heightened by small patient populations, increased
difficulties in ensuring patient compliance and persistence with treatment
programs, the need to realize a return on investment prior to the expiration of
any patent or orphan drug status exclusivity and the onset of significant
competition. In addition, many traditional distribution channels including
wholesalers, hospitals, pharmacies and pharmacy benefit managers do not want to
maintain an inventory of expensive biotechnology products and lack the
specialized knowledge often needed to manage chronic disease patients. The
Company believes that it is well positioned to take advantage of a large drug
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<PAGE>
development pipeline and is at the forefront of an increasing trend toward
specialized outsourcing by the biotechnology drug industry.
ACCREDO STRATEGY
Accredo's objective is to be the leading provider of specialized contract
pharmacy and related services. Key elements of the Company's strategy include:
EXPAND NUMBER OF CHRONIC DISEASES SERVED. The Company closely monitors
biotechnology drugs in development and seeks to increase the number of chronic
diseases for which it provides its services by developing new relationships with
additional manufacturers and leveraging its existing relationships to include
new drugs and new FDA indications for existing drugs. For example, the Company
has recently established a new preferred relationship with Centocor in which the
Company will provide its specialized services with respect to Remicade-TM- for
use in treating patients with Crohn's Disease.
LEVERAGE EXPERTISE TO EXPAND SERVICE OFFERINGS. The Company continually
seeks to develop new or complementary services that meet the specialized needs
of biotechnology drug manufacturers and the patients who use their products. The
Company believes that it is uniquely positioned to identify these needs and
develop customized solutions through its close relationships with leading drug
manufacturers. For example, the Company recently implemented a referral triage
service to provide a convenient single source for prescribing physicians and
help manufacturers increase market penetration. The Company believes that
biotechnology drug manufacturers will increasingly recognize the benefits of
outsourcing product development, launch and specialized pharmacy services as the
biotechnology market matures and competition increases.
ESTABLISH ADDITIONAL RELATIONSHIPS WITH MEDICAL CENTERS. The Company
intends to pursue additional strategic relationships with medical centers
through joint ventures and management contracts. Many of the Company's patient
populations have diseases that are discovered before or during adolescence and
require on-going care from physician specialists, who are often based at
pediatric, academic or other acute care medical centers. By establishing
strategic relationships with these centers, the Company believes it can obtain
access to a large number of patients and introduce them to the Company's
specialized services during the initial stages of their treatment program.
INCREASE NUMBER OF PAYOR CONTRACTS. The Company intends to pursue contracts
with additional payors, including managed care companies and employers, in order
to access and provide services to a greater number of patients. Because most
third party payor beneficiaries are restricted to using pharmacy providers
included in their plan's panel of providers, the Company is eligible to receive
reimbursement only for services provided to patients who are enrolled in plans
with which the Company maintains provider contracts. The Company maintains a
dedicated team of sales and marketing personnel that work exclusively on
pursuing additional payor relationships and has a variety of payor education
programs aimed at increasing awareness of the Company's specialized services
among private payors.
PURSUE ACQUISITIONS OF SIMILAR OR COMPLEMENTARY BUSINESSES. The Company
intends to pursue acquisitions that offer attractive growth opportunities and
that involve businesses that are similar to or that complement the Company's
present operations. For example, in June 1997 the Company significantly expanded
the scope of its hemophilia operations with the acquisition of HHS in Nashville,
Tennessee.
SERVICES
The Company believes that its specialized services make it the partner of
choice for manufacturers of biotechnology drugs used in treating certain costly,
chronic diseases and the provider of choice for patients with these diseases.
These services include specialized contract pharmacy, clinical, reimbursement
and delivery services.
29
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CONTRACT PHARMACY SERVICES. The Company offers customized services to
biotechnology drug manufacturers designed to meet specific needs that arise at
various stages in the life cycles of their products. During the pre-launch stage
of product development, the Company provides consulting services related to
strategic pricing decisions and the impact those decisions may have on private
insurance and Medicaid and Medicare reimbursement policies. The Company also
offers analyses and information to assist manufacturers in evaluating payor mix
and pricing strategies for their new drugs. The Company will test a
manufacturer's packaging to assess maintenance of product temperatures and to
determine whether the packaging system will maintain product integrity during
normal shipping conditions. In addition, the Company offers advice on ancillary
injection and infusion supplies and assists in procuring supplies and customized
packaging for infusion supply kits. The Company provides clinical protocols that
assist nurses and caregivers in learning how to safely and effectively
administer a drug, including aseptic techniques, supplies needed and infusion
time required. The Company also has extensive experience with patient assistance
programs for uninsured or underinsured patients and offers consulting services
that assist manufacturers in determining appropriate admission criteria for such
programs.
Following product launch, the Company offers: (i) clinical hotlines that
allow the physician or patient caregiver to inquire about product usage, adverse
drug reactions and other clinical questions; (ii) reimbursement hotlines for
patients and health care professionals; (iii) support for manufacturers' patient
assistance programs for patients without the financial ability to otherwise
acquire needed drugs and services; (iv) replacement drug and supply programs
that replenish patients' inventory of products or supplies that become damaged;
(v) home care coordination programs that provide patient assistance in training,
the identification of home care providers and the transfer of clinical
information to all caregivers; and (vi) triage services that refer patients to
the appropriate provider based on the patients' insurance provider network.
Results of the Company's interaction with patients are coded and tracked to
compile valuable information, including side effects, drug interactions,
administration problems, supply issues, changes to new products, and reasons for
therapy discontinuation and non-compliance. The Company will also report on
adverse drug reactions, log the occurrence, and complete an initial preliminary
report of the occurrence to assist manufacturers in completing adverse event
reports in a timely manner. The Company can also create a wide variety of
additional reports that can be custom tailored to meet specific manufacturers'
needs. Examples of reports include sales by physician, sales by zip code, sales
trending, first time patient orders, Medicaid and Medicare sales, inventory
status and reasons for patient discontinuations. Due to the nature of the data
it collects, the Company has established procedures designed to ensure
compliance with laws regarding confidentiality of patient information.
CLINICAL SERVICES. At the initiation of service, the Company works with the
patient and the patient's physician to implement the prescribed plan of care.
Each patient is assigned to a team consisting of a pharmacist, a customer
service representative and a reimbursement specialist. Generally, each patient's
team members specialize only in that patient's disease and work only with payors
and providers in that patient's geographic region. In order to assist patients
with their complicated treatment program, the Company provides clinical
consultation and education regarding the patient's disease and treatment
program, helps patients set realistic expectations for their drug therapy, helps
coordinate backup care in the event of an acute episode, provides current
information on advances in technology and treatment regimens, coordinates
medication during travel and helps patients establish an inventory management
and record keeping system. Due to their limited stability, the drugs currently
handled by the Company are not mixed or reconstituted prior to shipment.
Accordingly, the Company does not mix or reconstitute any pharmaceuticals. This
makes the Company's patient education services particularly important for
patients just beginning drug therapy because they generally must learn to
reconstitute and administer products themselves. The Company maintains frequent
communication with patients to monitor and encourage compliance with the
prescribed plan of care and persistence in staying on therapy for the entire
course of treatment. The Company also helps patients understand their medication
and manage the potential side effects and adverse reactions that can occur so
that patients are less likely to discontinue therapy. In addition, the Company
assists patients and their families in coping with a variety of difficult social
and emotional challenges presented by their disease, participates in national,
state and local patient advocacy organizations, assists in the formation of
patient support groups, advocates legislation to advance specific patient
interests and publishes newsletters containing information relevant to its
patients.
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REIMBURSEMENT SERVICES. By focusing on specific chronic diseases, the
Company has developed significant expertise in managing reimbursement issues
related to the patient's condition and treatment program. Due to the long
duration and high cost of therapy generally required to treat chronic disorders,
the availability of adequate health insurance is a continual concern for
chronically ill patients and their families. Generally, the Company contacts the
payor prior to each shipment to determine the patient's health plan coverage and
the portion of costs that the payor will reimburse. The Company's reimbursement
specialists review such issues as pre-certification or other prior approval
requirements, lifetime limits, pre-existing condition clauses and the
availability of special state programs. By identifying coverage limitations as
part of its initial consultation, the Company can assist the patient in planning
for alternate coverage, if necessary. From time to time, the Company negotiates
with payors to facilitate or expand coverage for the chronic diseases served by
the Company. In addition, the Company accepts assignment of benefits from
numerous payors, which substantially eliminates the claims submission process
for many patients.
DELIVERY SERVICES. The Company provides timely delivery of drugs and
ancillary supplies directly to the patient in packaging specially designed to
maintain appropriate temperatures and which typically contains all of the
supplies required for reconstitution and administration in the patient's home or
in other alternate sites. Substantially all products are shipped from the
Company's two primary pharmacy locations in Memphis and Nashville, Tennessee.
The Company also maintains satellite pharmacy locations in Dallas-Ft. Worth,
Texas and Birmingham, Alabama. The Company ships its products via FedEx and
believes that its proximity to FedEx's principal "hub" location in Memphis
provides the Company with a competitive advantage in meeting the time-sensitive
needs of its patients.
DISEASE MARKETS AND MANUFACTURER RELATIONSHIPS
Generally, as part of the Company's preferred relationships, the
biotechnology drug manufacturers: (i) undertake promotional and marketing
efforts to generate prescriptions for their products, including direct marketing
to physicians and clinics, and then recommend the Company's services; (ii)
provide customized pricing that reflects the scope of services provided by the
Company; and (iii) review and adjust pricing periodically based on fluctuating
market conditions and changes in desired services. Currently, the Company
provides its specialty services with respect to the following diseases:
GAUCHER DISEASE. Type I Gaucher Disease is the most common form of Gaucher
Disease, affecting about 90% of all Gaucher patients. Type I Gaucher Disease is
a seriously debilitating, sometimes fatal, genetic disorder caused by a
deficiency of an important enzyme in the body called glucocerebrosidase ("GCR").
This deficiency results in the accumulation of the glucocerebroside lipid in the
cells of organs in the body. The disease is characterized by an enlarged liver
or spleen, anemia, bleeding problems, fatigue, bone and joint pain and other
orthopedic complications such as repeated fractures and bone erosion. Genzyme's
Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- products are
the only FDA approved products used for treating Gaucher Disease.
The Company (including former affiliates) has had a preferred relationship
with Genzyme relating to Ceredase-Registered Trademark- since its commercial
launch in 1994 and relating to Cerezyme-Registered Trademark- since its
commercial launch in 1994. Ceredase-Registered Trademark- is a modified form of
human GCR in which glycoprotein remodeling technology has been used to target
GCR to the cells where the lipid accumulation occurs.
Cerezyme-Registered Trademark- is a recombinant form of GCR which has been
remodeled in a similar manner. Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- are generally administered by intravenous
infusion. Dosing frequencies vary, but a typical dosing regimen involves
administration once every two weeks. The annual revenue to the Company during
its 1998 fiscal year from patients receiving this therapy was predominantly
within the range of $150,000 to $200,000 per patient depending on a patient's
weight, stage in the therapy cycle and severity of condition. As part of its
preferred relationship with Genzyme, the Company and Genzyme have entered into
two agreements (the "Genzyme Agreements"), pursuant to which the Company
dispenses Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- in
the United States and pursuant to which the Company provides various information
and other services to Genzyme. The pricing of Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark- under the Genzyme Agreements, as well as the
scope and pricing of services provided by the Company under such agreements, are
subject to periodic adjustment. The Genzyme Agreements automatically renew on an
annual basis unless either
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party provides 90 days prior notice of non-renewal, and are terminable by either
party for any reason with 60 days prior notice. In addition, the Genzyme
Agreements provide that during the term of the agreements and for a period of
five years after termination, the Company may not sell any prescription drug for
the treatment of Gaucher Disease other than Ceredase-Registered Trademark- and
Cerezyme-Registered Trademark-. The Company does not have exclusive rights to
sell Ceredase-Registered Trademark- or Cerezyme-Registered Trademark-, and
Genzyme has reserved the right under the Genzyme Agreements to sell these
products directly or to appoint other distributors of these products.
HEMOPHILIA. Hemophilia is an inherited, genetic, lifelong bleeding disorder
caused by the absence or inactivity of an essential blood clotting protein or
"factor." Two major disease categories exist, hemophilia A, or Factor VIII
deficiency, and hemophilia B, or Factor IX deficiency. Hemophilia occurs almost
exclusively in males and severe cases are often diagnosed at birth or early
childhood. It is estimated that there are approximately 17,000 people with
hemophilia in the United States, and presently there is no known cure.
Individuals with hemophilia are susceptible to bleeding episodes which can occur
spontaneously or as a result of physical activity or trauma. While small surface
cuts can usually be treated with a pressure bandage, the most frequent
complication of hemophilia is internal bleeding into muscles and joints which
can cause arthritis and debilitating orthopedic problems. More serious
complications include internal bleeding in the head, neck, spinal cord or
internal organs which can cause death.
Hemophilia is generally treated by infusing anti-hemophilic factor
concentrates intravenously when the symptoms of a bleed are detected. Products
are dispensed as freeze-dried factor concentrates which are reconstituted with
sterile water prior to use and dosage is determined by the patient's weight.
This therapy is generally administered by the patient or his or her family
members, without the assistance of a nurse, in response to bleeding episodes.
Approximately 60% of the persons with hemophilia in the United States have a
severe form of the disorder as measured by the level of factor naturally present
in the body. In general, the more severe the factor deficiency, the more
frequently the bleeding episodes may occur. On average, someone with severe
hemophilia will need to infuse factor weekly. In many individuals with severe
hemophilia, factor therapy is administered prophylactically to maintain high
enough circulating factor levels to minimize the risk of bleeding. The annual
revenue to the Company during its 1998 fiscal year from patients receiving this
therapy generally ranged from $50,000 to $100,000 per patient depending on a
patient's weight, severity of condition and the presence of complications such
as inhibitors.
Today, with proper treatment, people with hemophilia can live relatively
long and healthy lives. However, in the recent past, many patients contracted
hepatitis or human immunodeficiency virus ("HIV") as a result of contaminated
plasma derivative therapies they received prior to the mid-1980's. Since then,
manufacturers of plasma-derived products have used advanced screening procedures
and viral inactivation methods. While such procedures and methods have
significantly reduced, if not eliminated, the risk of transmission of hepatitis
and HIV in current plasma-derived factor products, it is estimated that
approximately one-half of the hemophilia population who received anti-hemophilic
factor prior to the mid-1980's was exposed to HIV and is at risk of developing
acquired immune deficiency syndrome ("AIDS"). The Company offers medications
used in treating AIDS as a convenience to its hemophilia patients that have
contracted the HIV virus. In the early 1990's, recombinant clotting factor, a
biotechnological alternative to plasma-derived factor, was introduced and to
date has proved to be as effective as the plasma-derived products with virtually
no risk of viral transmission. Current utilization reflects increased use of
recombinant and monoclonal products by physicians because of the advantages of
increased purity. Issues related to the development of inhibitors, or antibodies
to the infused factor products, may influence future utilization of these
products.
As one of the largest purchasers of clotting factor in the United States,
the Company has supply contracts with all major suppliers of factor in order to
maintain availability of adequate quantities of factor products and competitive
pricing. There are currently six major suppliers of FDA approved products used
for treating hemophilia. The Company purchases Kogenate-Registered Trademark-
from Bayer Corporation and Recombinate-Registered Trademark- from Baxter
Healthcare Corporation in the largest quantities, but no supplier is responsible
for a majority of the Company's hemophilia product purchases. In addition, the
Company purchases factor products from Alpha Therapeutic Corporation, Centeon
LLC, Genetics Institute, Inc. and the American Red Cross.
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MULTIPLE SCLEROSIS. Multiple Sclerosis is a debilitating neurological
disease of the central nervous system that is characterized by episodic symptoms
followed by fixed neurologic deficits, increasing disability and physical
decline over a period of 30 to 40 years. The disease is believed to be caused by
the destruction of myelin sheaths by the body's own immune system. Myelin is the
fatty tissue that surrounds and protects the nerve fibers of the central nervous
system and facilitates the flow of nerve impulses to and from the brain. The
loss of myelin disrupts the conduction of nerve impulses, producing the symptoms
of Multiple Sclerosis including vision loss, incontinence, short-term memory
loss, fatigue, slurred speech, poor coordination, loss of balance, depression
and partial or complete paralysis. It is estimated that Multiple Sclerosis
affects between 250,000 and 350,000 people in the United States, approximately
two-thirds of whom are women. Ninety-five percent of the patients are caucasian
and the disease is more prevalent in the northern latitudes with the highest
rates in the Midwest and Northeast areas of the United States. The geography
risk for Multiple Sclerosis appears to be associated with where an individual
lived their first fifteen years of life. Disease onset typically occurs in young
adults between the ages of 20 and 40. Of the patients diagnosed with Multiple
Sclerosis in the United States, about 90% of patients initially have relapsing
Multiple Sclerosis and about half of those patients go on to develop a
progressive form of the disease. About 10% of patients exhibit a progressive
form of the disease at onset. There are currently three FDA approved products
used for treating relapsing Multiple Sclerosis: Avonex-Registered Trademark-,
which is manufactured by Biogen; Betaseron-Registered Trademark-, which is
manufactured by Chiron Corporation; and Copaxone-Registered Trademark-, which is
manufactured by Teva Pharmaceutical Industries Limited. Biogen's
Avonex-Registered Trademark- product is the only FDA approved product shown to
slow the accumulation of disability in patients with relapsing forms of Multiple
Sclerosis and, as a result, Avonex-Registered Trademark- is used by a majority
of such patients in the United States currently on drug therapy. The annual
revenue to the Company during its 1998 fiscal year from patients receiving this
therapy generally ranged from $10,000 to $11,000 per patient.
The Company has had a preferred relationship with Biogen relating to
Avonex-Registered Trademark- since its commercial launch in 1996.
Avonex-Registered Trademark-, is a recombinant form of a protein produced by
fibroblast cells in response to viral infection. Avonex-Registered Trademark- is
generally administered via a single intramuscular injection once per week. As
part of its preferred relationship with Biogen, the Company and Biogen have
entered into an agreement (the "Biogen Agreement"), pursuant to which the
Company dispenses Avonex-Registered Trademark- and pursuant to which the Company
provides various services and information to Biogen. The scope of services
provided by the Company to Biogen has increased over the course of the Company's
relationship with the manufacturer as the Company has worked with Biogen to
further develop customized service offerings. The pricing of
Avonex-Registered Trademark- under the Biogen Agreement, as well as the scope
and pricing of services provided by the Company under such agreement, are
subject to periodic adjustment. The Biogen Agreement has an initial term of
three years ending May 1999 and is terminable by either party for any reason
with 90 days prior notice. In addition, the Biogen Agreement provides that as
long as the Company is the only preferred home delivery service provider
approved by Biogen (other than providers to Medicaid patients in certain
states), the Company may not without Biogen's approval sell any products that
compete with Avonex-Registered Trademark- for the treatment of Multiple
Sclerosis. The Company does not have any exclusive rights to sell
Avonex-Registered Trademark-, and Biogen has reserved the right under the Biogen
Agreement to sell Avonex-Registered Trademark- directly or to appoint other
providers of home delivery pharmacy services for Avonex-Registered Trademark-,
but such action would eliminate the Company's exclusivity obligations.
GROWTH HORMONE-RELATED DISORDERS. While growth delay in children may be
caused by a number of factors, including malnutrition, systemic illness,
psychosocial stress or endocrine deficiency, a major treatable cause of growth
delay is growth hormone deficiency. Growth hormone deficiency may result from
damage to or malfunction of the hypothalamus or pituitary gland. Growth hormone
has been used in a variety of conditions associated with short stature,
including growth retardation due to renal insufficiency and Turner's syndrome,
but the major indication for growth hormone therapy is growth hormone
deficiency. It is estimated that there are approximately 20,000 patients in the
United States who are candidates for growth hormone therapy. The use of growth
hormone to treat disorders caused by growth hormone deficiency has been
commercially available since 1985 and, therefore, the market for growth hormone
products is relatively mature. The annual revenue to the Company during its 1998
fiscal year from patients receiving this therapy generally ranged from $15,000
to $25,000 per patient depending on a patient's weight and severity of
condition. Currently, five manufacturers sell
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nine FDA-approved growth hormone products for a variety of indications. However,
a majority of patients currently being treated with growth hormone products use
one of Genentech's growth hormone products, Protropin-Registered Trademark-,
Nutropin-Registered Trademark- or Nutropin AQ-Registered Trademark-.
The Company has purchasing relationships with all five manufacturers of
growth hormone products used in the United States, including a preferred
relationship with Genentech that dates back (through former affiliates of the
Company) to the launch of Genentech's original growth hormone product,
Protropin-Registered Trademark-, in 1985. Growth hormone products are
administered by injection several times per week, and in some cases daily.
Typically, patients or family members are trained to administer the medication
at home without the presence of a nurse. As part of its preferred relationship
with Genentech, the Company and Genentech have entered into a distribution
agreement (the "Genentech Agreement"), pursuant to which the Company dispenses
Genentech's human growth hormone products, Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark-, in the
United States and pursuant to which the Company provides various information and
other services to Genentech. The pricing of Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark- under the
Genentech Agreement, as well as the scope and pricing of the services provided
by the Company under such agreement, are subject to periodic adjustment. The
Genentech Agreement has an initial term expiring on December 31, 1999, unless
extended by mutual agreement, and may only be terminated by either party for
cause following a 60-day right to cure or in the event of bankruptcy, insolvency
or similar events affecting the other party. In addition, the Genentech
Agreement provides that during the term of the agreement, the Company can
(subject to certain conditions) sell human growth hormone products other than
Protropin-Registered Trademark-, Nutropin-Registered Trademark- and Nutropin
AQ-Registered Trademark-. The Company does not have any exclusive rights to
distribute Protropin-Registered Trademark-, Nutropin-Registered Trademark- and
Nutropin AQ-Registered Trademark-.
CROHN'S DISEASE. Crohn's Disease is a chronic and debilitating disorder
involving inflammation of the gastrointestinal tract. Symptoms include abdominal
pain, diarrhea, fever, general fatigue and weight loss. Some patients develop
draining fistulae. Remicade-TM-, a drug developed by Centocor, has recently been
approved by the FDA for commercialization for the treatment of moderately to
severely active Crohn's Disease for the reduction of its signs and symptoms in
patients who have an inadequate response to conventional therapy. It has also
been approved as a treatment for patients with fistulizing Crohn's Disease for
reduction in the number of draining fistulae. It is believed that Remicade-TM-
reduces intestinal inflammation in patients with Crohn's Disease by binding to
and neutralizing TNF-A on the cell membrane and in the blood and by destroying
TNF-A producing cells. TNF-A is a key biologic response mediator implicated in
the inflammation process.
Crohn's Disease is estimated to affect approximately 400,000 patients in the
United States, of which as many as 140,000 patients have moderate to severe
Crohn's Disease. Of those with moderate to severe Crohn's Disease, more than
40,000 suffer from fistulizing disease.
The Company has recently established a preferred relationship with Centocor
relating to Remicade.-TM- Under an agreement between the Company and Centocor
(the "Centocor Agreement"), the Company will dispense Remicade-TM- and will
provide various information and other services to Centocor. The pricing of
Remicade-TM- under the Centocor Agreement, as well as the scope and pricing of
the services provided by the Company under such agreement, are subject to
periodic adjustment. The Centocor Agreement also contemplates extending the
Company's relationship with Centocor to an additional indication for
Remicade-TM- if the additional indication receives all required approvals. This
additional indication is currently in Phase III clinical trials. The Centocor
Agreement has an initial term of three years ending August 2001, with a renewal
provision, and it is terminable by either party for any reason with 90 days
prior notice. In addition, the Centocor Agreement provides that during the term
of the agreement and for a period of 90 days after termination of the agreement,
the Company may not sell any other company's treatment for inflammatory bowel
disease or any other indication for which the FDA has approved the use of
Remicade-TM-. The Company does not have any exclusive rights to sell
Remicade-TM-, and Centocor has reserved the right under the Centocor Agreement
to sell Remicade-TM- directly or to appoint distributors or other providers of
pharmacy services for Remicade-TM-. Centocor's decision to appoint other
providers of pharmacy services would eliminate the Company's exclusivity
obligations.
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BUSINESS DEVELOPMENT
The Company has 23 full time sales and marketing personnel who sell the
Company's therapies and services to physicians, patients and private payors. The
Company also creates special direct marketing programs to potential referral
sources who specialize in care and support of patients with chronic disorders.
The Company's sales and support personnel also work closely with each of the
referral sources with the goal of addressing the clinical and reimbursement
needs of their patients. The Company assists in clinical studies, professional
training seminars, distribution of patient support material, development of
patient support groups, and other programs designed to assist patients, payors,
manufacturers and physicians in enhancing the quality of care and quality of
life for patients and their families.
The Company continually seeks to obtain contracts with additional payors,
including managed care companies and employers, in order to access and provide
services for a greater number of patients. Because most third party payor
beneficiaries are restricted to using pharmacy providers included in their
payor's provider panel, the Company is eligible to receive reimbursement only
for services provided to patients covered by payors with whom the Company
maintains provider contracts. The Company maintains a dedicated team of sales
and marketing personnel that work exclusively on pursuing additional payor
relationships and has a variety of payor education programs aimed at increasing
awareness of the Company's specialized services among private payors.
In addition, the Company has a full time director of business development
whose responsibilities include tracking biotechnology drugs in development,
determining whether these drugs meet the Company's service criteria and are a
strategic fit for the Company, introducing the Company's services to the
manufacturers of these drugs and assisting in the development of customized
services for these manufacturers. There were an estimated 240 biotechnology
drugs in late stage development as of mid-1998. The Company targets
biotechnology drug manufacturers that have a need to outsource specialized
contract pharmacy and related services to an experienced provider of such
services rather than develop the capabilities internally.
SUPPLIERS
Substantially all of the biotechnology drugs sold by the Company, other than
clotting factor products, are available only from single sources: Genzyme, with
respect to Ceredase-Registered Trademark- and Cerezyme-Registered Trademark-;
Biogen, with respect to Avonex-Registered Trademark-; Genentech, with respect to
Protropin-Registered Trademark-, Nutropin-Registered Trademark- and Nutropin
AQ-Registered Trademark-; and Centocor, with respect to Remicade-TM-. Although
there are four other manufacturers of FDA approved growth hormone products,
Genentech's products collectively enjoy a market share that exceeds the
aggregate of all other individual manufacturers of growth hormone products.
Accordingly, in the event that one or more of its current suppliers of products
(other than hemophilia products) were to cease selling products to the Company,
the Company's business, financial condition and results of operations would be
materially and adversely affected. Approximately 14% and 23% of the Company's
total revenues in the fiscal years ended June 30, 1997 and 1998, respectively,
were derived from sales of Avonex-Registered Trademark- and related services. In
addition, approximately 64% and 46% of the Company's total revenues in the
fiscal years ended June 30, 1997 and 1998, respectively, were derived from sales
of Ceredase-Registered Trademark- and Cerezyme-Registered Trademark- and related
services. The Company has supply contracts with all five major suppliers of
clotting factor in the United States, and no supplier is responsible for a
majority of the Company's hemophilia product purchases.
The Company's agreements with its key suppliers (including Genzyme, Biogen,
Genentech and Centocor) generally may be canceled by either party, without
cause, upon between 60 and 90 days prior notice. Furthermore, the Company and
its suppliers periodically adjust the acquisition cost and other terms for the
drugs and related supplies covered by such contracts. In addition, the Company's
agreements with its suppliers generally provide that during the term of the
agreements (and in certain instances for as much as five years after termination
of the agreements), the Company may not distribute any competing products. The
Company does not have any exclusive rights to distribute its products, and its
suppliers have generally reserved the right under their agreements with the
Company to distribute their products directly or to appoint other distributors
of their
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products. See "Risk Factors--Dependence on Relationships with Limited Number of
Biotechnology Drug Manufacturers" and "Business--Disease Markets and
Manufacturer Relationships."
STRATEGIC RELATIONSHIPS WITH MEDICAL CENTERS
Many of the patients served by the Company have diseases that are discovered
before or during adolescence and require on-going care from specialist
physicians, who are often based at pediatric, academic or other acute care
medical centers. In order for the Company to obtain access to additional
patients and introduce them to the Company's specialized services during the
initial stages of their treatment program, the Company seeks to establish
strategic relationships, including joint ventures and management contracts, with
such medical centers.
The Company currently has joint ventures with four medical centers (or their
affiliates): Zale Lipshy
University Hospital located in Dallas, Texas; Alternative Care Systems, Inc.
located in Dallas, Texas; Cook Childrens Medical Center located in Ft. Worth,
Texas; and Children's Memorial Hospital located in Chicago, Illinois. In the
typical joint venture arrangement, the Company and a medical center (or its
affiliate) form a joint venture entity that then enters into a management
agreement with the Company to obtain specialized contract pharmacy services.
Under the terms of the joint venture agreement, the Company manages the sales,
marketing and provision of specialty pharmacy services in exchange for a monthly
management fee and the reimbursement of certain expenses. Generally, the Company
and the medical center share in the profits and losses of the joint venture
entity in proportion to their respective capital contributions. The agreements
generally have initial terms of between one and five years and contain certain
restrictive covenants and rights of first refusal.
In addition to joint venture relationships, the Company has entered into
management agreements with medical centers (or their affiliates) to provide
specialized contract pharmacy services. The Company currently has contract
management relationships with four medical centers (or their affiliates):
Egleston Children's Hospital at Emory University located in Atlanta, Georgia;
duPont Hospital for Children located in Wilmington, Delaware; Children's
National Medical Center located in Washington D.C.; and Childrens Hospital of
Los Angeles located in Los Angeles, California. Pursuant to these management
agreements, the Company provides goods and services used in the medical center's
specialized pharmacy business, including drugs and related supplies, patient
education, clinical consultation and certain reimbursement services. While the
payment terms under such management agreements vary, the Company is generally
reimbursed for its costs and is paid a monthly management fee from the sale of
those products and services. These agreements usually have terms of between one
and five years and are terminable by either party, with or without cause, with
between one and twelve months prior notice. See "Risk Factors--Dependence on
Medical Center Relationships."
PAYORS
The following are the approximate percentages of the Company's gross patient
service revenue attributable to various payor categories for the fiscal year
ended June 30, 1998:
<TABLE>
<S> <C>
Private payors (including self pay)(1)................................ 80%
Medicaid and other state programs..................................... 17%
Medicare and other federal programs................................... 3%
--
Total............................................................. 100%
--
--
</TABLE>
- ------------------------------
(1) Includes sales to private physician practices, whose ultimate payor is
typically Medicare, which accounted for approximately 7% of gross patient
service revenue for fiscal 1998.
The Company typically agrees to furnish drugs and services to substantially
all patients recommended to the Company by its referral sources. The Company
believes this approach is important to maintain the confidence, support, and
loyalty of referral sources. The Company acts on behalf of the patients it
serves to assist them in obtaining reimbursement from third-party payors,
including managed care companies. Generally, the Company contacts third-party
payors before the commencement of services or delivery of product in order to
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determine the patient's coverage and the percentage of costs that the payor will
cover. The Company's reimbursement staff reviews issues such as lifetime limits,
pre-existing condition clauses, the availability of special state programs, and
other reimbursement-related matters. The Company often will negotiate with
third-party payors on the patient's behalf to obtain or extend coverage. The
Company typically obtains assignment of benefits from patients that enable it to
file claims for its services and be paid directly for the covered amounts of its
charges. Due to the high cost of the products distributed by the Company and the
complexity of payor systems, claims often cannot be submitted electronically,
which increases labor costs associated with obtaining reimbursement. As with
most health care providers, the Company can experience lengthly collection
periods as a result of third party payment systems and, consequently, management
of accounts receivable through patient registration, billing, collection and
reinbursement procedures is critical to the Company.
The primary trend in the United States health care industry is toward cost
containment. The increasing prevalence of managed care, centralized purchasing
decisions, consolidation among and integration of health care providers and
competition for patients has and continues to affect pricing, purchasing and
usage patterns in health care. Decisions regarding the use of a particular drug
treatment are increasingly influenced by large private payors, including managed
care organizations, pharmacy benefit managers, group purchasing organizations,
regional integrated delivery systems and similar organizations and are becoming
more economically focused, with decisions taking into account product cost and
whether a product reduces the cost of treatment. Efforts by payors to eliminate,
contain or reduce costs through coverage exclusions, lower reimbursement rates,
greater claims scrutiny, closed provider panels, restrictions on required
formularies, claim delays or denials and other similar measures could adversely
affect the Company's revenues, profitability and cash flow. Certain payors set
lifetime limits on the amount reimbursable to patients for medical costs.
Certain of the Company's patients may reach these limits because of the high
cost of their medical treatment and associated pharmaceutical regimens. To date,
the Company has not had significant experience with patients reaching lifetime
limits. Certain payors may attempt to further control costs by selecting certain
firms to be their exclusive providers of pharmaceutical or other medical product
benefits. If any such arrangements were with the Company's competitors, the
Company would be unable to be reimbursed for purchases made by such patients.
The Company derives a significant portion of its revenue from governmental
programs such as Medicare and Medicaid. Such programs are highly regulated and
subject to frequent and substantial changes and cost containment measures. In
recent years, changes in these programs have limited and reduced reimbursement
to providers and Congress recently enacted the Balanced Budget Act of 1997
(which establishes a plan to balance the federal budget by fiscal year 2002)
that includes significant additional reductions in spending levels for these
programs. This legislation also replaced and relaxed the federal Medicaid
payment standard thereby increasing state discretion over administration of
Medicaid programs. Furthermore, federal and state proposals are pending that
would impose further limitations on governmental payments and that would
increase patient co-payments and deductibles. Additionally, a number of states
are considering legislation designed to reduce their Medicaid expenditures and
provide universal coverage and additional care for certain populations,
including proposals to impose additional taxes on providers to help finance or
expand such programs. Any of these changes could result in significant
reductions in payment levels for drugs handled and services provided by the
Company, which would have a material adverse affect on the Company's business,
financial condition and results of operations. In addition, the Company may be
required to maintain a licensed pharmacy in certain states in order to qualify
for reimbursement under state administered reimbursement plans. See "Risk
Factors--Dependence on Payors and Reimbursement Risks."
Certain of the medical centers with which the Company has a joint venture or
management relationship have hemophilia treatment centers ("HTC") that are
eligible to purchase factor from manufacturers at a discount pursuant to a
provision of the Public Health Service Act as enacted by the Veteran's Health
Care Act of 1992 ("PHS Pricing"). Manufacturers that sell outpatient drugs to
eligible entities sign an agreement with DHHS under which they agree to not
charge a price for covered outpatient drugs in excess of a statutorily set
amount. The Company does not directly own or operate an HTC that is eligible for
PHS Pricing, which may place it at a competitive disadvantage as a provider of
factor, except in the limited circumstances where its affiliated medical
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centers are eligible for PHS Pricing. Under DHHS contract pharmacy guidelines,
an eligible HTC may obtain factor at PHS Pricing, and dispense it to patients of
the HTC through a contract pharmacy. However, eligible centers which fail to
comply with the contract pharmacy guidelines, or divert PHS Pricing factor to
non-patients of the HTC in violation of DHHS guidelines, may incur civil
penalties, or liability to drug manufacturers for the amount of discount
provided.
COMPETITION
The specialty pharmacy services industry is highly competitive and is
experiencing both horizontal and vertical consolidation. The industry is
fragmented, with many public and private companies focusing on different product
or customer niches. Some of the Company's current and potential competitors
include specialty pharmacy divisions of national wholesale drug distributors;
specialty pharmacy distributors, such as Caremark Therapeutic Services (a
subsidiary of MedPartners, Inc.) and Olsten Corporation; pharmacy benefit
management companies; hospital-based pharmacies; retail pharmacies; home
infusion therapy companies; certain manufacturers that sell their products both
to distributors and directly to users, including clinics and physician offices;
and hospital-based comprehensive hemophilia care centers and other alternate
site health care providers. Some of the Company's competitors have greater
financial, technical, marketing and managerial resources than the Company.
While competition is often based primarily on price and quality of care and
service, it can also be affected by the ability to develop and maintain
relationships with patients and referral sources, depth of product line,
technical support systems, specific patient requirements and reputation. There
can be no assurance that competitive pressures will not have a material adverse
effect on the Company's business, financial condition and results of operations.
Through federal legislation such as the Social Security Act, as amended, the
Veterans Health Care Act of 1992, and the Public Health Services Act, and the
rules and regulations thereunder, manufacturers of certain types of outpatient
drugs, including clotting factor, are required to provide price discounts for
such drugs to various types of federally funded hemophilia treatment centers,
which is a competitive advantage to such providers not available to the Company.
COMPLIANCE PROGRAM
The Company adopted a new corporate compliance program, entitled "Code of
Ethics and Business Conduct," in February 1998 (the "Compliance Program"). Upon
accepting a job with the Company, employees receive a written copy of the
Compliance Program and are asked to read the document prior to their first day
of employment. A training session is conducted during new employee orientation
and all employees are required to sign a written acknowledgment that he or she
has read and understands the Compliance Program and will adhere to the standards
set forth therein. The Company has a corporate compliance officer and a
compliance committee with representation from each operating subsidiary. The
compliance officer is responsible for administering the program, which includes
training, internal audits and reviews, and responding to reported issues with
the assistance of the compliance committee. Employees are encouraged to ask
questions or reveal potential compliance issues to either their supervisor or
their compliance committee member or via a toll free hotline number. These calls
can be made anonymously, if so desired. Employees also receive corporate
compliance training twice a year with respect to potential compliance issues.
Issues that are reported to the committee will normally be handled at the
committee level unless the compliance officer believes that the Company's Board
of Directors should be involved. At least once a year, the corporate compliance
officer will meet with or submit a written report to the Company's Board of
Directors. While there is not a standing compliance committee of the Board of
Directors, an outside director, Kenneth R. Masterson, has been designated as a
liaison from whom the compliance officer may seek advice.
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<PAGE>
GOVERNMENT REGULATION
The conduct of marketing, selling and purchasing drugs and medical supplies
by and among manufacturers, distributors, health care providers and patients is
extensively regulated and periodically scrutinized by state and federal
governments for compliance with laws and regulations regarding, among other
things, inducements for referrals, prohibited financial relationships with
physicians, joint venture and management arrangements, product discounts,
incentives to patients and professional licensure. This regulatory framework is
complex and the laws are very broad in scope, subject to differing
interpretations and lack substantive court decisions addressing many
arrangements under which the Company has and expects to conduct its business.
Because civil and criminal sanctions may be imposed for violations of these
laws, compliance is a significant operational requirement for the Company.
Because of the nature of this regulatory framework, there can be no assurance
that all of the Company's business practices would be construed to comply with
these laws in all respects, and any violation or alleged violation of these laws
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company is unable to predict the future course of federal, state and
local regulation, legislation or enforcement, and changes in this complex
regulatory framework or in the interpretation of these laws, rules and
regulations could have a material adverse effect on the Company's business,
financial condition and results of operations.
LICENSURE AND REGISTRATION. In general, the Company's pharmacy operations
are regulated by the statutes and regulations of Tennessee, where it is licensed
as a retail pharmacy and wholesale distributor of pharmaceuticals, as well as
the states of of Alabama, and Texas, where it operates satellite retail
pharmacies. In addition, the Company currently delivers prescription products
from its licensed pharmacies to patients in other states in which the Company
does not operate a pharmacy. Many of these states have laws or regulations
requiring out-of-state pharmacies to be licensed as a condition to the delivery
of prescription products to patients in such states. The Company believes that
it is in substantial compliance with such laws as are applicable.
Various federal and state pharmacy associations and some boards of pharmacy
have attempted to promote laws or regulations directed at restricting the
activities of out-of-state pharmacies, thereby benefiting local pharmacies with
which the Company competes from time to time. In addition, a number of states
have laws or regulations which, if successfully enforced, would effectively
limit some of the financial incentives available to third-party payors that
offer managed care prescription drug programs. To the extent such laws or
regulations are found to be applicable to the Company, there is no assurance the
Company could comply, and noncompliance could adversely affect the Company's
pharmacy service operations.
The federal and state controlled substances laws and regulations govern
manufacturers, distributors and dispensers of controlled substances. Any person
who manufactures, distributes, or dispenses controlled substances must obtain a
registration from the United States Attorney General and, where required, from
the appropriate state agency. A separate registration is required at each
principal place of business where the applicant manufactures, distributes, or
dispenses controlled substances. The laws and regulations also specify label and
packaging requirements for manufacturers and distributors and record-keeping and
reporting requirements for all registrants. Although the Company maintains
federal and applicable state regulations under these laws, it handles small
amount of inventory that are subject to controlled substances laws.
PROFESSIONAL PRACTICE. State laws prohibit the practice of pharmacy without
a license. Accordingly, the Company's pharmacists are all licensed in Tennessee,
and other states where required. The Company monitors the professional aspects
of their practice. However, to the extent that the Company's employees assist
patients and providers in helping patients comply with prescribed treatment
programs, such activities could be deemed by a state to be the practice of
medicine, nursing, or outside the scope of permitted pharmacy practice.
PHARMACY COUNSELING LAW. Federal support of state Medicaid programs for
covered outpatient drugs is conditioned on the state having a drug use review
("DUR") program. The DUR program must consist of prospective drug review,
retrospective drug use review, the application of predetermined standards, and
an
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<PAGE>
educational program. The purpose of the DUR program is to improve the quality of
pharmaceutical care by ensuring that prescriptions are appropriate and medically
necessary, and that they are not likely to result in adverse medical effects. As
part of the program, the state must develop standards containing the minimum
specified requirements for the counseling by pharmacists of patients or their
caregivers. The standards must address special situations where the patient or
the patient's representative is not readily available to receive an offer to
counsel, such as prescriptions delivered through the mail. The Company believes
that its pharmacists monitor these requirements and provide the requisite
counseling in the ordinary course of their activities.
FEDERAL MAIL ORDER. In addition to state regulations of pharmacies and
pharmacists, federal statutes and regulations establish standards for the
labeling, packaging, repackaging, advertising and adulteration of prescription
drugs and the dispensing of "controlled" substances and prescription drugs. To
the extent that the Company were to use the federal postal service, Federal
Trade Commission and United States Postal Service regulations require mail order
sellers to engage in truthful advertising, to stock a reasonable supply of
drugs, to fill mail orders within thirty days and, if that is impossible, to
inform the consumer of his or her right to a refund. The Company believes that
it is in substantial compliance with the above requirements.
THE PRESCRIPTION DRUG MARKETING ACT. The federal Prescription Drug
Marketing Act ("PDMA") provides that certain drugs and devices, generally those
requiring a prescription by a physician, are exempted from the federal labeling
and packing requirements, upon the condition that such drugs are not adulterated
or misbranded. The PMDA also generally prohibits the selling, purchasing, or
trading of any drug sample, which is not intended to be sold or intended to
promote the sale of the drug. The PMDA imposes certain documentation and record
keeping requirements, as well as proper drug storage and maintenance
requirements, in connection with the distribution of drug samples. In those
instances where the PMDA applies to drugs or services provided by the Company,
the Company believes that it complies with the PMDA through its ordinary course
of documentation, record keeping and storage procedures.
ANTI-KICKBACK AND SELF-REFERRAL. As a health care company, the Company is
subject to various federal laws that regulate the relationship between providers
of health care services and referral sources such as physicians and hospitals.
Under the Medicare, Medicaid and other programs of government payment and
reimbursement of health-related costs, the federal and state governments enforce
a federal statute that prohibits the offer, payment, solicitation or receipt of
any remuneration, directly or indirectly, overtly or covertly, in cash or in
kind to induce or in exchange for (i) the referral of patients covered by the
programs, or (ii) the leasing, purchasing, ordering or arranging for or
recommending the lease, purchase or order of any item, good, facility or service
covered by the programs (the "Anti-Kickback Law"). Penalties include criminal
fines, civil monetary penalties, and imprisonment, and the exclusion of anyone,
including an individual or an entity who has committed any of the prohibited
acts, from participation in the Medicare and Medicaid programs whether such
individual or entity participates in such governmental programs directly or
indirectly. If applied to the Company, any of its personnel, or any significant
customer or business partner of the Company, such sanctions could have a
material adverse effect on the Company's business, financial condition and
results of operations. Additionally, the sanctioning or exclusion of a
manufacturer or a recipient of the Company's services from those programs, for
activities unrelated to those of the Company, could also have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, numerous states have existing or proposed laws that prohibit
financial arrangements among health care providers. These state laws are not
necessarily limited to items or services for which payment is made by Medicare
or Medicaid. Violations of these laws include civil and criminal penalties, as
well as the suspension or termination of a provider's ability to continue to
provide services in the state. Federal and state court decisions interpreting
these federal and state statutes are limited, but some courts have construed the
statutes to apply if "one purpose" of remuneration is to induce referrals or
other conduct within the proscriptions of the statute.
In an effort to curb health care fraud, Congress included several anti-fraud
measures in the Health Insurance Portability and Accountability Act of 1996
("HIPAA"). HIPAA, among other things, amends existing
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<PAGE>
crimes and criminal penalties for Medicare fraud and enacts new federal health
care fraud crimes. HIPAA also expands the federal Anti-Kickback Law to apply to
all federal health care programs, which is any plan or program that provides
health benefits through insurance funded by the federal government. Under HIPAA,
the Secretary of the Department of Health and Human Services ("the Secretary")
may exclude from the Medicare program any individual who has a direct or
indirect ownership or control interest in a health care entity that has been
convicted of a health care fraud crime or that has been excluded from the
Medicare program, if the individual knew or should have known of the action
constituting the basis for the conviction or exclusion of the entity. HIPAA
directs the Secretary to establish a program to collect information on health
care fraud and abuse to encourage individuals to report information concerning
fraud and abuse against the Medicare program and provides for payment of a
portion of amounts collected to such individuals. HIPAA mandates the
establishment of a Fraud and Abuse Program, among other programs, to control
fraud and abuse with respect to health plans and to conduct investigations,
audits, evaluations, and inspections relating to the delivery of and payment for
health care in the United States.
HIPAA prohibits any person or entity from knowingly and willfully committing
a federal health care offense relating to a health care benefit program. Under
HIPAA, a "health care benefit program" broadly includes "any public or private
plan or contract, affecting commerce, under which any medical benefit, item, or
service is provided to any individual." Among the "federal health care offenses"
prohibited by HIPAA are health care fraud and making false statements relative
to health care matters. Any person or entity that knowingly and willfully
defrauds or attempts to defraud a health care benefit program or obtains by
means of false or fraudulent pretenses, representations, or promises, any of the
money or property of any health care benefit program in connection with the
delivery of health care services is subject to a fine and/or imprisonment. In
addition, HIPAA provides that any person or entity that knowingly and willfully
falsifies or conceals or covers up a material fact or makes any materially false
or fraudulent statements in connection with the delivery of or payment of health
care services by a health care benefit plan is subject to a fine and/or
imprisonment. These provisions of HIPAA represent the criminalization of
situations which previously would have been handled civilly through the
administrative processes of repayments of overpayments, offsets, and fines.
The Anti-Kickback Law and similar state statutes are broad in scope, subject
to frequent modification and differing interpretations. In an attempt to clarify
which arrangements are not subject to prosecution under the Anti-Kickback Law,
the Department of Health and Human Services ("DHHS") adopted a set of "safe
harbor" regulations and continues to publish clarifications to such safe
harbors. Arrangements that comply with all the requirements of all applicable
safe harbors are deemed not to violate the Anti-Kickback Law. The Company has
several business arrangements such as, without limitation, joint venture and
management arrangements with medical centers, service arrangements with
physicians and product pricing arrangements with suppliers, do not satisfy all
of the requirements necessary to fall within the safe harbors, and there is not
safe harbor protection for each and every Company arrangement. Due to the
breadth and complexity of these laws and regulations, and the absence in many
instances of court decisions addressing arrangements by which the Company has
conducted and expects to conduct its business, it is possible that some of the
Company's practices could be challenged. Although failure of a transaction or
arrangement to fit within a specific safe harbor provision does not necessarily
mean that the structure of the transaction is illegal or that prosecution under
the Anti-Kickback Law will be pursued, there can be no assurance that the
Company's practices will not be challenged, or that the Company will not be
subject to sanctions or be required to alter or discontinue certain of its
practices, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations.
OIG FRAUD ALERTS. The Office of Inspector General ("OIG") has issued "Fraud
Alerts" identifying certain arrangements and practices which it believes may
implicate the federal fraud and abuse laws. The OIG has issued a Fraud Alert
providing its views on certain joint venture and contractual arrangements
between health care providers. The OIG has issued a Fraud Alert concerning
prescription drug marketing practices that could potentially violate federal
fraud and abuse laws. Pharmaceutical marketing activities may implicate the
federal fraud and abuse laws because drugs are often paid for by Medicare and
the Medicaid program. According to the
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Fraud Alert, examples of practices that may implicate the fraud and abuse laws
include arrangements under which remuneration is made to pharmacists to
recommend the use of a particular pharmaceutical product. In addition, a number
of states have recently undertaken enforcement actions against pharmaceutical
manufacturers involving pharmaceutical marketing programs, including programs
containing incentives for pharmacists to dispense one particular product rather
than another. These enforcement actions arise under state consumer protection
laws which generally prohibit false advertising, deceptive trade practices and
the like. Further, a number of the states involved in these enforcement actions
have requested that the FDA exercise greater regulatory oversight in the area of
pharmaceutical promotional activities by pharmacists. It is not possible to
determine whether the FDA will act in this regard or what effect, if any, FDA
involvement would have on the Company's operations.
THE STARK LAW. The Company and any physician (or the physician's immediate
family members) with whom the Company may have business dealings are also
subject to the Ethics in Patient Referrals Act of 1989, commonly called the
"Stark Law." Unless excepted, the Stark Law prohibits physicians from making a
referral for the rendering of certain health-related items or services if such
practitioner or his or her family member has a financial relationship with the
entity receiving the referral. Correspondingly, such entity cannot bill for a
service or item provided pursuant to a prohibited referral. The prohibitions of
the Stark Law apply to the products and services provided by the Company. Among
other sanctions, a civil monetary penalty may be levied for each product or
service provided pursuant to a prohibited referral upon both the person making
the referral and the provider rendering the service. Such persons or entities
are also subject to exclusion from Medicare and Medicaid. The prohibitions of
the Stark Law apply to the Company's products and services. Due to the breadth
and complexity of the Stark Law and the absence of court decisions construing
such law, it is possible that some of the Company's practices could be
challenged and there can be no assurance that the Company will not be subject to
sanctions or be required to alter or discontinue certain of its practices, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations.
BENEFICIARY INDUCEMENT. HIPAA created new civil monetary penalties for
individuals and entities that offer remuneration or other inducements to the
beneficiaries of federal health care programs, such as Medicare, Medicaid and
CHAMPUS, which the provider knows or should know will influence the
beneficiaries' decision to seek specific governmentally reimbursable items or
services or to choose a particular provider to provide those items or medical
services. HIPAA provides an exception to this prohibition by excluding items
provided to promote the delivery of preventive care. Under the statutory
exemption, it would not be considered impermissible remuneration for a provider
to give certain types of incentives to a beneficiary to encourage the
beneficiary to receive preventive care. The statutory exception would apply
where "such care is provided or directly supervised by the medical provider that
has provided the incentive."
The OIG has issued proposed regulations concerning the HIPAA prohibition
against inducements to beneficiaries (the "Proposed Regulations"). In contrast
to the statute, the OIG has taken the position that the statutory exception for
incentives to promote preventive care does not include the "direct rendering of
preventive medical care." The Preamble of the Proposed Regulations provides
examples of the type of preventive care incentives the OIG would consider
permissible under this statutory exemption: (i) transportation to and from
preventive care services; (ii) car seats, formula and other items for those
participating in prenatal or postnatal classes; (iii) tee shirts, videos and
water bottles for those participating in post-cardiac care fitness programs. The
OIG has indicated that items and services related to general health promotion
such as health club memberships, vitamins, nutritional supplements and the like
would not be permissible incentives under the statutory exception. The OIG has
also stated that permissible incentives would not include cash or cash
equivalents. As the OIG noted in the Preamble, the committee report on these
provisions had stated that the provision of items and services of nominal value
was permissible, offering as examples, "refreshments, medical literature,
complimentary local transportation services, or participation in free health
fairs." The OIG has interpreted this statement restrictively to mean that the
aggregate value of such services is nominal and that the provision of even
nominally priced incentives on a frequent basis would be impermissible. The
Company from time to time provides certain items at no charge to its patients in
connection with their drug therapies. Although the
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<PAGE>
Company believes these items fall within the scope of the statutory preventive
care exception, or are otherwise of nominal value, there can be no assurance
regarding the scope of any final regulations, or that the Company will not be
challenged on its practices and suffer applicable sanctions or be required to
alter or discontinue its "no charge" practices, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
THE FALSE CLAIMS ACT. The Company is also subject to federal and state
laws, including the federal False Claim Act, prohibiting an individual or entity
from knowingly and willfully presenting claims for payment (by Medicare,
Medicaid, or other third party payors) that contain false or fraudulent
information. These laws also provide for both criminal and civil penalties.
Furthermore, providers found to have submitted claims which they knew or should
have known were false, fraudulent, or for items or services that were not
provided as claimed, may be excluded from Medicare and Medicaid participation,
required to repay previously collected amounts, and subject to substantial civil
monetary penalties.
GOVERNMENT INVESTIGATIONS. There is increasing scrutiny by law enforcement
authorities, the OIG, the courts, and Congress of arrangements between health
care providers and potential referral sources to ensure that the arrangements
are not designed as a mechanism to exchange remuneration for patient care
referrals and opportunities. Investigators have demonstrated a willingness to
look behind the formalities of a business transaction to determine the
underlying purpose of payments between health care providers and potential
referral sources. Enforcement actions have increased, as evidenced by recent
highly publicized enforcement investigations. Although, to its knowledge, the
Company is not currently the subject of any investigation, there can be no
assurance that the Company will not be the subject of investigations or
inquiries in the future nor that any such investigation would not have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition to investigations and enforcement actions initiated by
governmental agencies, health care companies may also be the subject of qui tam
actions brought under the False Claims Act by private individuals on behalf of
the government. Furthermore, actions under the False Claims Act, commonly known
as "whistleblower" lawsuits are generally filed under seal to allow the
government adequate time to investigate and determine whether it will intervene
in the action, and defendant health care providers are often without knowledge
of such actions until the government has completed its investigation and the
seal is lifted.
CONFIDENTIALITY. Various federal and state laws establish minimum standards
for the maintenance of medical records and protect the confidentiality of
patient medical information. In the course of its business, the Company
maintains medical records for each patient to whom it dispenses drugs. As a
result, it is subject to one or more of these medical record and patient
confidentiality laws. In addition, the Company may become subject to new rules
recently mandated by the HIPAA, and proposed by the Health Care Financing
Administration ("HCFA") to ensure the integrity and confidentiality of patient
data by creating mandatory security standards for entities which maintain or
transmit health information electronically. Unauthorized disclosure of
confidential patient information, or other failure to comply with any applicable
laws and regulations regarding the maintenance of patient records and the
confidentiality of medical information, could have a material adverse effect on
the Company's business, financial condition and results of operation.
BALANCED BUDGET ACT. Each state has its own Medicaid program that is funded
jointly by the state and Federal government. Federal law governs how each state
manages its Medicaid program, but there is wide latitude for states to customize
Medicaid programs to fit the needs and resources to their citizens. As a result,
each state Medicaid plan has its own payment formula and recipient eligibility
criteria. In recent years, changes in Medicare and Medicaid programs have
resulted in limitations on, and reduced levels of, payment and reimbursement for
a substantial portion of health care goods and services. Congress recently
enacted the Balanced Budget Act of 1997, which establishes a plan to balance the
federal budget by fiscal year 2002, and includes significant additional
reductions in spending levels for the Medicare and Medicaid programs.
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<PAGE>
The Medicare, Medicaid, CHAMPUS and other governmental programs are subject
to statutory and regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and new governmental funding
restrictions, all of which may materially increase or decrease program payments
as well a affect the cost of providing services and the timing of payments. The
final determination of amounts earned under the programs often requires many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical provisions. The Company
believes adequate provision has been made for such adjustments. Until final
adjustment, however, significant issues remain unresolved and payments received
could be recouped.
REFORM. Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. A variety of
new approaches have been proposed, including mandated basic health care
benefits, controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, and the
creation of large purchasing groups. In addition, some of the states in which
the Company operates have adopted or are considering various health care reform
proposals. The Company anticipates that Congress and state legislatures will
continue to review and assess alternative health care delivery systems and
payment methods and that public debate of these issues will likely continue in
the future. Because of uncertainty regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, of such reform proposals will be adopted, when they may be
adopted, or what impact they may have on the Company.
FACILITIES
The Company's corporate headquarters is located in Memphis, Tennessee and
its primary pharmacy locations are in Memphis and Nashville, Tennessee. In
addition, the Company has a satellite pharmacy location in the Birmingham,
Alabama area and two satellite pharmacy locations in the Dallas/Ft. Worth, Texas
area.
MEMPHIS, TENNESSEE. The Company currently leases an aggregate of
approximately 42,000 square feet of space in an office/warehouse business park
in Memphis, Tennessee pursuant to two lease agreements that expire in 2003, each
with an option to extend the lease term for one additional five year period.
NASHVILLE, TENNESSEE. The Company currently leases approximately 24,000
square feet of space in Nashville, Tennessee pursuant to a lease agreement that
expires in October 1999, with an option to extend the lease term for one
additional five year period.
BIRMINGHAM, ALABAMA. The Company currently leases approximately 2,400
square feet of space in the Birmingham, Alabama area pursuant to a lease
agreement that expires in February 2000.
DALLAS/FORT WORTH, TEXAS. The Company currently leases an aggregate of
approximately 1,800 square feet of space in two locations in the Dallas/Ft.
Worth, Texas area pursuant to two lease agreements that expire in May 1999, each
with an option to extend the lease term for one additional three year period.
EMPLOYEES
The Company had 242 full-time and 29 part-time employees at June 30, 1998.
None of the Company's employees are represented by a labor union, and management
considers its relations with its employees to be good.
LIABILITY INSURANCE
Providing health care services and products entails an inherent risk of
liability. In recent years, participants in the health care industry have become
subject to an increasing number of lawsuits, many of which involve large claims
and significant defense costs. The Company may from time to time be subject to
such suits as a result of the nature of its business. The Company maintains
general liability insurance, including professional and product liability, in an
amount deemed adequate by management. There can be no assurance, however, that
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claims in excess of, or beyond the scope of, the Company's insurance coverage
will not arise. In addition, the Company's insurance policies must be renewed
annually. Although the Company has not experienced difficulty in obtaining
insurance coverage in the past, there can be no assurance that it will be able
to do so in the future on acceptable terms or at all.
LEGAL PROCEEDINGS
The Company is involved in various lawsuits and claims arising in the normal
course of business. In the opinion of Company management, although outcomes of
these lawsuits and claims are uncertain, in the aggregate they should not have a
material adverse effect on the Company's business, financial condition or
results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
executive officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
David D. Stevens.......................... 45 Chairman of the Board of Directors and
Chief Executive Officer
John R. ("Randy") Grow.................... 50 President and Director
Joel R. Kimbrough......................... 40 Senior Vice President, Chief Financial
Officer, Secretary and Treasurer
Kyle J. Callahan.......................... 32 Senior Vice President and Director
Thomas W. Bell, Jr........................ 47 Senior Vice President and General Counsel
Kenneth R. Masterson(1)................... 54 Director
Kenneth J. Melkus(1)...................... 52 Director
Andrew M. Paul(2)......................... 52 Director
Patrick J. Welsh(2)....................... 54 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
DAVID D. STEVENS has served as Chief Executive Officer and Director of
Accredo since it was acquired from Le Bonheur in 1996. Previously, Mr. Stevens
served as Chief Operating Officer of SHS since its inception in 1983. Mr.
Stevens has served as President of SHS since 1993 and Director since 1996. He
has served as Chief Executive Officer of Nova Factor since 1996 and as a
Director since 1990.
JOHN R. ("RANDY") GROW has served as President and Director of Accredo since
it was acquired from Le Bonheur in 1996. Mr. Grow has also served as President
of Nova Factor since 1996, and Chief Operating Officer and Director since 1990.
Previously, Mr. Grow was employed in the home infusion industry as President of
Curaflex Health Services, Inc. from 1988 to 1989 and as Area Vice President of
Caremark, Inc. from 1985 to 1988.
JOEL R. KIMBROUGH has served as Senior Vice President and Chief Financial
Officer, Secretary and Treasurer of Accredo since it was acquired from Le
Bonheur in 1996. He has also served as Chief Financial Officer and Director of
Nova Factor since its inception in 1990, as Chief Financial Officer of SHS since
1989, and as a Director of SHS since 1996. Previously, Mr. Kimbrough, a
certified public accountant, was employed by the accounting firm of Ernst &
Young LLP from 1980 to 1989.
KYLE J. CALLAHAN has served as Senior Vice President and a Director of
Accredo since HHS was acquired by the Company in June 1997. Mr. Callahan has
served as President of HHS since June 1997. From HHS's inception in 1990 until
June 1997, Mr. Callahan served in several management and executive positions
with HHS, including Vice President of Operations.
THOMAS W. BELL, JR. joined Accredo as Senior Vice President and General
Counsel in July 1998. Prior to joining the Company, Mr. Bell practiced law from
1976 to 1998 as a member of the firm of Armstrong Allen Prewitt Gentry Johnston
& Holmes, PLLC in Memphis, Tennessee, where Mr. Bell represented Nova Factor and
SHS since their inception in 1990 and 1983, respectively.
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<PAGE>
KENNETH R. MASTERSON has been a Director of Accredo since April 1998. Mr.
Masterson joined FedEx in 1980 and in 1996 he became Executive Vice President,
General Counsel and Secretary of FedEx. In 1998, Mr. Masterson assumed the same
duties for FDX Corporation, a transportation holding company and the parent
company of FedEx. Mr. Masterson is also a director of Thomas & Betts
Corporation.
KENNETH O. MELKUS has been a Director of Accredo since October 1997. Mr.
Melkus currently serves as a consultant to WCA Management Corporation, an
affiliate of WCAS VII. From its founding in 1993 to its sale in 1996, Mr. Melkus
served as Chairman of the Board and Chief Executive Officer of HealthWise of
America, Inc., an operator of health maintenance organizations. From 1986 until
1993, Mr. Melkus served as Vice Chairman and President of Surgical Care
Affiliates, Inc., an operator of outpatient surgery centers. Mr. Melkus is also
a director of Quorum Health Group, Inc.
ANDREW M. PAUL has been a Director of the Accredo since 1996. Mr. Paul
joined Welsh Carson in 1984 and is a general partner of the sole general partner
of WCAS VII and an affiliated entity that are stockholders of the Company. Mr.
Paul also is a director of Lincare, Inc. and several privately held companies.
PATRICK J. WELSH has been a Director of Accredo since 1996. Mr. Welsh was a
founder of Welsh Carson in 1979 and is a general partner of the sole general
partner of WCAS VII and an affiliated entity that are stockholders of the
Company. Prior to 1979, Mr. Welsh was president and a Director of Citicorp
Venture Capital, Ltd., an affiliate of Citicorp engaged in venture capital
investing. Mr. Welsh also serves as a director of several private companies.
The Board of Directors is divided into three classes, each consisting of
approximately one-third of the total number of directors. There are currently
seven directors. Class I directors, consisting of Messrs. Stevens and Melkus,
will hold office until the 1999 annual meeting of stockholders; Class II
directors, consisting of Messrs. Paul and Callahan, will hold office until the
2000 annual meeting of stockholders; and Class III directors, consisting of
Messrs. Welsh, Grow and Masterson, will hold office until the 2001 annual
meeting of stockholders. See "Description of Capital Stock--Special Provisions
of the Certificate of Incorporation, Bylaws and Delaware Law."
Mr. Callahan was elected to the Board of Directors in connection with the
Company's acquisition of HHS in 1997. Mr. Callahan's employment agreement
provides that he may terminate his employment for "good reason" (as defined in
the employment agreement) if he is willing to serve but is not elected to the
Board of Directors of the Company while WCAS VII owns a majority of the
outstanding Common Stock of the Company and the Company has not consummated an
initial public offering. Pursuant to a letter dated June 3, 1997, WCAS VII
agreed to vote its shares of Common Stock to elect Mr. Callahan to the Board of
Directors of the Company, and Mr. Callahan was elected to the Board on June 30,
1997.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently includes a Compensation Committee and an
Audit Committee. The Compensation Committee, which is composed of Messrs. Welsh
and Paul, is responsible for the approval of compensation arrangements for
executive officers of the Company and administers the Company's stock option and
employee stock purchase plans. The Audit Committee, which is composed of Messrs.
Masterson and Melkus, reviews the scope and results of audits and other services
performed by the independent public accountants of the Company and reviews the
adequacy of the Company's internal controls.
COMPENSATION OF DIRECTORS
Employees of the Company who are members of the Board of Directors do not
receive any compensation for serving on the Board of Directors. Each
non-employee member of the Board of Directors receives a fee of $1,500 for each
meeting attended. All directors of the Company, including members who are
employees, receive reimbursement of out-of-pocket expenses incurred in
connection with attending meetings. In addition, all
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<PAGE>
directors of the Company are eligible to receive grants of stock options or
other awards pursuant to the Company's stock option plans. During the fiscal
year ended June 30, 1998, Messrs. Welsh, Paul, Melkus and Masterson each
received a grant of a ten-year non-qualified stock option for shares of Common
Stock at an exercise price of $ per share. All of such options vest at an
annual rate of 25%, with the first 25% vesting on the first anniversary of the
date of grant.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company for
services rendered for the fiscal year ended June 30, 1998 with respect to the
Company's Chief Executive Officer and the Company's other executive officers
whose total salary and bonus for the fiscal year ended June 30, 1998 exceeded
$100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ----------------------------
------------------------------------------ RESTRICTED SECURITIES
NAME AND PRINCIPAL FISCAL OTHER ANNUAL STOCK UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($)(1) AWARD(S)($) OPTIONS(#)
- -------------------------- ----------- ---------- --------- ------------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David D. Stevens.......... 1998 $ 250,938 $ 41,580 -- -- --
Chairman of the Board
and
Chief Executive Officer
John R. Grow.............. 1998 167,269 28,050 -- -- --
President
Joel R. Kimbrough......... 1998 159,306 26,978 -- -- --
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
Kyle J. Callahan.......... 1998 160,621 26,978 -- -- --
Senior Vice President
<CAPTION>
NAME AND PRINCIPAL ALL OTHER
POSITION COMPENSATION($)(2)
- -------------------------- -------------------
<S> <C>
David D. Stevens.......... $ 4,657
Chairman of the Board
and
Chief Executive Officer
John R. Grow.............. 4,525
President
Joel R. Kimbrough......... 3,587
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
Kyle J. Callahan.......... 3,740
Senior Vice President
</TABLE>
- ------------------------
(1) Excludes perquisites and other personal benefits which for each Named
Executive Officer during any such year did not exceed the lesser of $50,000
or 10% of such individual's salary plus annual bonus.
(2) Includes contributions by the Company under its 401(k) Plan on behalf of
Messrs. Stevens, Grow, Kimbrough and Callahan in the amount of $3,749;
$3,192; $2,909; and $3,592, respectively. Also includes insurance premiums
paid by the Company with respect to term life insurance for the benefit of
Messrs. Stevens, Grow, Kimbrough and Callahan in the amount of $908; $1,333;
$678; and $148, respectively.
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<PAGE>
OPTION GRANTS
The following table sets forth certain information regarding options granted
by the Company to the Named Executive Officers during the fiscal year ended June
30, 1998.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------
NUMBER OF PERCENT OF TOTAL
SHARES OPTIONS GRANTED TO EXERCISE GRANT DATE
UNDERLYING EMPLOYEES IN PRICE EXPIRATION PRESENT
NAME OPTIONS GRANTED(#) FISCAL YEAR ($/SHARE) DATE VALUE($)(1)
- ----------------------------- ------------------- --------------------- ------------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
David D. Stevens............. -- -- -- -- --
John R. Grow................. -- -- -- -- --
Joel R. Kimbrough............ -- -- -- -- --
Kyle J. Callahan(2).......... 28.2% 9/1/07 $ 97,950
9.4% 2/9/08 32,300
</TABLE>
- ------------------------
(1) These values were determined using the Black-Scholes methodology and the
assumptions described in Note 10 to the Company's Consolidated Financial
Statements included in this Prospectus.
(2) Mr. Callahan was granted an incentive stock option to purchase shares
of Common Stock (divided into Tranche A option shares and Tranche
B option shares) and an incentive stock option to purchase shares of
Common Stock (divided into Tranche A option shares and Tranche B
option shares) on September 3, 1997 and February 9, 1998, respectively. The
exercise price per share of each option was equal to the fair market value
of the Common Stock on the respective dates of grant, as determined by the
Board of Directors. Pursuant to each option, the option shares subject to
Tranche A will vest at an annual rate of 25%, and the option shares subject
to Tranche B will vest in 2002 (or at an annual rate of 25% in the event the
Company meets certain performance goals based upon target earning levels).
The options will vest immediately upon certain changes in control of the
Company. The term of each option expires ten years from the date of grant
(or earlier, in the event the optionee ceases to be employed by the Company
or any subsidiary or parent thereof).
OPTION EXERCISES AND YEAR END OPTION VALUES
The following table provides information with respect to options exercised
by the Named Executive Officers during the fiscal year ended June 30, 1998 and
the value of unexercised options held by the Named Executive Officers as of June
30, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
NUMBER OF SHARES UNDERLYING AT
NUMBER OF SHARES UNEXERCISED OPTIONS FISCAL YEAR END
ACQUIRED ON VALUE AT FISCAL YEAR END 1998(#) 1998($)(1)
NAME EXERCISE(#) REALIZED($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------- --------------------- ----------------- ------------------------------ ---------------------
<S> <C> <C> <C> <C> <C>
David D. Stevens......... -- --
John R. Grow............. -- --
Joel R. Kimbrough........ -- --
Kyle J. Callahan......... -- --
<CAPTION>
NAME
- -------------------------
<S> <C>
David D. Stevens.........
John R. Grow.............
Joel R. Kimbrough........
Kyle J. Callahan.........
</TABLE>
- ------------------------
(1) For purposes of this calculation, value is based upon the difference between
the exercise price and the assumed initial public offering price of $
per share.
49
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Welsh and Paul, who presently serve as members of the Compensation
Committee of the Board of Directors, served on the Compensation Committee during
the fiscal year ended June 30, 1998. Neither Messrs. Welsh or Paul, nor any
executive officer of the Company, serves as a member of a board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of the Company's Board of Directors.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Stevens,
Grow and Kimbrough as of May 31, 1996, and with Mr. Bell as of July 10, 1998.
HHS, a wholly owned subsidiary of the Company, entered into an employment
agreement with Mr. Callahan as of June 5, 1997. The terms of such employment
agreements expire on May 31, 1999 (with respect to Messrs. Stevens, Grow and
Kimbrough), June 1, 2000 (with respect to Mr. Callahan), and June 30, 2001 (with
respect to Mr. Bell), although each employment agreement is subject to automatic
one-year renewals. The Company may terminate the employment agreements at any
time. Each employment agreement provides that in the event the Company
terminates the executive's employment without "cause" (as defined therein) and
other than by reason of his death or disability, or in the event the executive
terminates his or her employment for "good reason" (as defined therein), the
executive shall continue to receive his or her salary as a severance payment for
a certain period of time (one year, with respect to Messrs. Stevens, Grow,
Kimbrough and Bell, and 18 months, with respect to Mr. Callahan). In addition,
upon such termination, Messrs. Stevens, Grow, Kimbrough and Bell would be
entitled to continue to participate in the Company's benefit plans for a period
of one year (or until the commencement of other full-time employment, whichever
is earlier).
The employment agreements entitle Messrs. Stevens, Grow, Kimbrough, Bell and
Callahan to annual base salaries presently set at $252,000, $170,000, $163,500,
$168,000 and $163,500, respectively. Each employment agreement also provides for
the payment of an annual bonus of up to 50% of salary with respect to Messrs.
Stevens, Grow, Kimbrough and Callahan and up to 40% of salary with respect to
Mr. Bell, based upon the extent to which the Company achieves certain
performance goals based upon target earning levels established by the Board.
Each of the employment agreements entitles the executive to all benefits
provided by the Company for its senior executives. In addition, the Company has
agreed to maintain $500,000 in term life insurance for each of Messrs. Stevens,
Grow, Kimbrough and Bell, payable to their respective named beneficiaries.
Each of the employment agreements prohibits the executive's disclosure and
use of confidential information and restricts, for certain periods of time
following termination of employment (12 months, with respect to Messrs. Stevens,
Grow, Kimbrough and Bell, and 36 months, with respect to Mr. Callahan), his
solicitation of certain employees of the Company, conduct of certain business
with the Company's five largest suppliers, or competition with the Company.
LONG-TERM INCENTIVE PLAN
The Accredo Health, Incorporated 1998 Long-Term Incentive Plan (the
"Incentive Plan"), was adopted by the Board of Directors of the Company on
, and was approved by the Company's stockholders on . A summary of the
Incentive Plan is set forth below. The summary is qualified in its entirety by
reference to the full text of the Incentive Plan, a copy of which is included as
an exhibit to the Registration Statement of which this Prospectus is a part.
The purpose of the Incentive Plan is to promote the success, and enhance the
value, of the Company by linking the personal interests of employees, officers,
consultants and directors to those of the stockholders, and by providing such
persons with an incentive for outstanding performance. As of , there were
approximately persons eligible to participate in the Incentive Plan.
50
<PAGE>
The Incentive Plan authorizes the granting of awards ("Awards") to
employees, officers, consultants and directors of the Company or its
subsidiaries in the following forms: (i) options to purchase shares of Common
Stock ("Options"), which may be incentive stock options that meet the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") ("ISOs") or non-qualified stock options ("NQSOs"), (ii) stock
appreciation rights ("SARs"); (iii) performance units ("Performance Units");
(iv) restricted stock ("Restricted Stock"); (v) dividend equivalent rights; and
(vi) other stock-based awards. Subject to adjustment as provided in the
Incentive Plan, the aggregate number of shares of Common Stock reserved and
available for Awards or which may be used to provide a basis of measurement for
or to determine the value of an Award (such as with a SAR or Performance Share)
is . The maximum number of shares of Common Stock with respect to one or
more Options and/or SARs that may be granted during any one calendar year under
the Incentive Plan to any one participant is . The maximum fair market
value of any Awards (other than Options and SARs) that may be received by a
participant (less any consideration paid by the participant for such Award)
during any one calendar year under the Incentive Plan is $ .
The Incentive Plan is administered by the Compensation Committee, which has
the power, authority and discretion to designate participants; determine the
type or types of Awards to be granted to each participant and the terms and
conditions thereof; establish, adopt or revise any rules and regulations as it
may deem necessary or advisable to administer the Incentive Plan; and make all
other decisions and determinations that may be required under, or as it deems
necessary or advisable to administer, the Incentive Plan. The Board or the
Compensation Committee may, at any time and from time to time, terminate, amend
or modify the Incentive Plan without stockholder approval. No termination,
amendment, or modification of the Incentive Plan may adversely affect any Award
previously granted under the Incentive Plan, without the consent of the
participant.
Upon the participant's death or disability during his or her employment or
his or her service as a director, all outstanding Options, SARs, and other
Awards in the nature of rights that may be exercised will become fully vested
and exercisable and all restrictions on outstanding Awards will lapse. In
addition, in the event of a Change in Control of the Company (as defined in the
Incentive Plan), all outstanding Options, SARs, and other Awards in the nature
of rights that may be exercised will become fully vested and exercisable and all
restrictions on all outstanding Awards will lapse. Unexercised or restricted
Awards generally will not be assignable or transferable by a participant other
than by will or the laws of descent and distribution or, except in the case of
an ISO, pursuant to a qualifying domestic relations order.
Pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"), the Company may not deduct compensation in excess of $1.0 million
paid to the Chief Executive Officer and the four next most highly compensated
executive officers of the Company. The Incentive Plan is designed to comply with
Code Section 162(m) so that the grant of Options and SARs under the Incentive
Plan, and other Awards, such as Performance Shares, that are conditioned on the
performance goals described in the Incentive Plan, will be excluded from the
calculation of annual compensation for purposes of Code Section 162(m) and will
be fully deductible by the Company.
STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
The Nova Holdings, Inc. and its Subsidiaries Stock Option and Restricted
Stock Purchase Plan, as amended and restated (the "Option Plan"), became
effective as of May 31, 1996, the date of its original adoption by the Board of
Directors of the Company. The amendment and restatement of the Option Plan was
approved by the Company's stockholders on June 30, 1997. A summary of the Plan
is set forth below. The summary is qualified in its entirety by reference to the
full text of the Plan, a copy of which is included as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Option Plan authorizes the granting of options to purchase shares of
Common Stock, which may be ISOs or NQSOs, and other related awards, to
employees, officers, and directors of the Company or its subsidiaries. Subject
to adjustment as provided in the Option Plan, the aggregate number of shares of
Common
51
<PAGE>
Stock for which Options or awards may be granted under the Option Plan is .
As of July 31, 1998, there were approximately 30 persons eligible to participate
in the Plan.
The Option Plan is administered by the Compensation Committee, which has the
power, authority and discretion to designate participants, determine the type or
types of awards to be granted to each participant and the terms and conditions
thereof, and establish any other terms, restrictions and conditions applicable
to any option or award not inconsistent with the provisions of the Option Plan.
The Board or the Compensation Committee may, at any time and from time to time,
terminate, amend or modify the Option Plan without stockholder approval;
provided that stockholder approval shall be required in the case of an amendment
to increase the aggregate number of shares issuable subject to the Option Plan,
to decrease the minimum exercise price in respect of ISOs, or to change the
class of employees eligible to receive ISOs under the Option Plan. No
termination, amendment, or modification of the Option Plan may adversely affect
any option or award previously granted under the Option Plan, without the
consent of the participant.
EMPLOYEE STOCK PURCHASE PLAN
The Accredo Health, Incorporated 1998 Employee Stock Purchase Plan (the
"ESPP") was adopted by the Board of Directors of the Company on , and was
approved by the Company's stockholders on . The purpose of the ESPP, which
is intended to qualify as an employee stock purchase plan under Section 423 of
the Code, is to enhance the proprietary interest among the employees of the
Company and its participating subsidiaries through ownership of Common Stock of
the Company. A summary of the ESPP is set forth below. The summary is qualified
in its entirety by reference to the full text of the ESPP, a copy of which is
included as an exhibit to the Registration Statement of which this Prospectus is
a part.
Pursuant to the ESPP, eligible employees make contributions, through payroll
deductions, to a plan account during a six-month "offering period." The offering
periods commence and end on or about January 1 to June 30 and July 1 to December
31 of each year. On the first business day of each offering period, the Company
will grant to each participant in the ESPP an option to purchase, on the last
day of such offering period, a maximum of shares of Common Stock. No option
will be granted to a participant if such option, when combined with all other
options granted under all of the Code Section 423 employee stock purchase plans
of the Company, its parents and its subsidiary corporations, would permit such
participant to purchase shares of Common Stock of the Company having a fair
market value in excess of $25,000 per year.
The participant will be entitled to exercise such option to the extent of
the participant's accumulated payroll deductions on the last day of such
offering period; provided, however, that if the participant's accumulated
payroll deductions on the last day of the offering period would enable the
participant to purchase more than shares, the excess of the amount of the
accumulated payroll deductions over the aggregate purchase price of the shares
will be refunded to the participant, without interest. The option price for each
offering period will be the lesser of (i) 85% of the fair market value of the
Common Stock on the first business day of the offering period, or (ii) 85% of
the fair market value of the Common Stock on the last business day of the
offering period. Employees may authorize payroll deductions in amounts not less
than one percent (1%) but not more than ten percent (10%) of their respective
total compensation, including base pay or salary and any bonuses or commissions.
Each employee of the Company and each employee of any participating
subsidiary is eligible to participate in the ESPP, provided such employee: (i)
is regularly scheduled to work at least 20 hours each week and at least five
months in the calendar year, and (ii) immediately after the grant of an option
to him or her under the ESPP would own less than five percent of the total
combined voting power or value of all classes of stock of the Company or any of
its subsidiaries. As of , there were approximately employees
eligible to participate in the ESPP.
Shares subject to the ESPP may be authorized but unissued shares or shares
that were once issued and subsequently reacquired by the Company. The total
number of shares of Common Stock for which options may be granted under the ESPP
is shares, subject to adjustment in accordance with the ESPP.
52
<PAGE>
The ESPP will be administered by the Compensation Committee or the Board of
Directors, which will have authority to interpret and administer the ESPP. The
ESPP may be terminated at any time by the Board, but such termination will not
affect options then outstanding. The ESPP will terminate in any case when all or
substantially all of the unissued shares of stock reserved for the purposes of
the ESPP have been purchased. If at any time shares of stock reserved for the
ESPP remain available for purchase but not in sufficient number to satisfy all
then unfilled purchase requirements, the available shares will be apportioned
among participants in proportion to their options and the ESPP will terminate.
Upon termination, all payroll deductions not used to purchase stock will be
refunded. The Committee or the Board may from time to time amend the ESPP
provided that, without the approval of the stockholders, no amendment may (i)
materially affect the eligibility requirements or the definition of "Employer,"
(ii) increase the number of shares of Common Stock subject to any options issued
to participants, or (iii) materially increase the benefits to participants under
the Plan.
An employee's rights under the ESPP will terminate when he or she ceases to
be an employee for any reason, and the cash balance in his or her contribution
account will be distributed to such employee (or his or her designated
beneficiary). An employee's rights under the ESPP may not be transferred other
than by will or the laws of descent and distribution. Any option granted under
the ESPP to an employee may be exercised, during the employee's lifetime, only
by the employee.
401(K) PLAN
The Company sponsors a defined contribution plan (the "401(k) Plan") for
eligible employees of the Company under Section 401(k) of the Code. Participants
may contribute up to 18% of their annual compensation to the 401(k) Plan,
subject to certain limitations. All contributions made by participants are fully
vested and are not subject to forfeiture. The Company makes matching
contributions to the 401(k) Plan on behalf of each eligible participant based
upon the participant's total years of service with the Company. The Company
matches 25% of "eligible contributions" (as defined in the 401(k) Plan) made by
participants with less than five years of service, and 50% of eligible
contributions made by participants with five or more years of service.
53
<PAGE>
CERTAIN TRANSACTIONS
INITIAL FORMATION, CAPITALIZATION AND ACQUISITION OF SHS.
In May 1996, the Company (formerly known as Nova Holdings, Inc.) was formed
for the purpose of acquiring all of the outstanding equity securities of SHS,
then a subsidiary of Le Bonheur. In connection with the initial capitalization
of the Company, Welsh Carson purchased an aggregate of shares of the
Company's Common Stock for $14,917,602 and an aggregate of 248,624 shares of
Series A Preferred Stock for $24,862,400. Additional investors purchased a total
of shares of the Company's Common Stock for $82,398 and 1,376 shares of
Series A Preferred Stock for $137,600. In connection with the Recapitalization,
Welsh Carson will exchange shares of Common Stock for shares of
Non-Voting Common Stock. All outstanding shares of Series A Preferred Stock will
be redeemed by the Company with a portion of the net proceeds from the Offering.
On May 31, 1996, the Company acquired all of the outstanding Class A Common
Stock and Class B Common Stock of SHS (the "SHS Common Stock"). Prior to the
Company's purchase of the SHS Common Stock, SHS spun-off its three subsidiaries
other than Nova Factor and repurchased certain shares of SHS Common Stock held
by persons other than Le Bonheur. In addition, Messrs. Grow, Kimbrough and
Stevens (in addition to certain other holders of SHS Common Stock) exchanged
their shares of SHS Common Stock for , and shares of the
Company's Common Stock, respectively, and 978 shares, 611 shares and 3,056
shares of Series A Preferred Stock, respectively.
REGISTRATION RIGHTS AGREEMENT
In connection with the formation of the Company in May 1996, Welsh Carson
entered into a Registration Rights Agreement with the Company (the "Registration
Rights Agreement"). The Registration Rights Agreement provides for demand
registration rights that may be exercised on up to two occasions by the holders
of Restricted Stock (as defined therein, which definition includes substantially
all shares of Common Stock outstanding prior to the Offering) constituting at
least a majority of the total Restricted Stock outstanding at the time of
exercise. The Registration Rights Agreement also provides unlimited demand
registration rights to holders of Restricted Stock for registrations on Form
S-3, so long as the reasonably anticipated aggregate price to the public of such
offering is at least $1.0 million; provided, however, that such demand
registrations may not be exercised more than once every 180 days. No
registration effected pursuant to these unlimited demand registration rights on
Form S-3 will be counted toward the limit of two demand registration rights
referred to above.
The Registration Rights Agreement also provides that, subject to certain
limitations including the discretion of the managing underwriter in an
underwritten offering, holders of Restricted Stock may request inclusion of
their shares in a registration of securities initiated by the Company. The
Company is required to pay all costs of any registration pursuant to the
Registration Rights Agreement, subject to certain limitations provided in the
agreement. All of the parties to the Registration Rights Agreement have waived
any right to participate in this Offering.
All shares of Common Stock owned by the executive offices and directors of
the Company are shares of Restricted Stock as such term is defined in the
Registration Rights Agreement and are, therefore, subject to the above described
registration rights.
ACQUISITION OF HHS
In June 1997, the Company purchased all of the outstanding shares of common
stock of HHS for an aggregate purchase price of approximately $29,996,000.
Dianne R. Griffith, one of the two stockholders of HHS and the mother of Mr.
Callahan, has received approximately $20,302,000 in connection with the sale of
her HHS stock to the Company. In addition, approximately $3,395,000 of
additional consideration to Ms. Griffith is currently being held in escrow
pending settlement of certain liabilities. Upon such settlement, any remaining
54
<PAGE>
amounts in escrow will be paid to Ms. Griffith. Ms. Griffith also entered into a
three month consulting agreement with the Company pursuant to which she provided
certain consulting services to the Company in exchange for a total of $21,875
plus a percentage of the base salary of Sara Meyers, a former employee of HHS,
for each of those three months.
Ms. Griffith leases approximately 24,000 square feet of office space located
in Nashville, Tennessee to HHS pursuant to a lease that expires on October 31,
1999. The Company is obligated under the lease to make annual rent payments to
Ms. Griffith in the amount of $302,277.
Also in connection with the acquisition of HHS, the Company entered into an
employment agreement and a stock option agreement with Mr. Callahan. See
"Management--Executive Compensation" and "--Employment Agreements." Mr.
Callahan's employment agreement permits him to terminate his employment for
"good reason", including if he is willing to serve and he is not elected to the
Board of Directors of the Company while WCAS VII owns a majority of the
outstanding Common Stock and the Company has not consummated an initial public
offering. Pursuant to a letter dated June 3, 1997, WCAS VII agreed to vote its
shares of Common Stock to elect Mr. Callahan to the Board of Directors of the
Company, and Mr. Callahan was elected to the Board on June 30, 1997. Also, on
October 1, 1997, Mr. Callahan purchased shares of Common Stock for a total
purchase price of $250,002 and was granted registration rights covering those
shares with the same terms and conditions as those granted to Welsh Carson in
the Registration Rights Agreement.
10% SENIOR SUBORDINATED NOTES DUE JANUARY 1, 2004
On June 4, 1997, Welsh Carson purchased $10.0 million of the Company's
Senior Subordinated Notes. The Senior Subordinated Notes bear interest at 10%
and are due and payable in full on June 1, 2004, with interest payable thereon
quarterly in arrears on the first day of March, June, September and December of
each year commencing on September 1, 1997. At the option of the Company, the
amount of interest due and payable through June 1, 1999 may be added to the
unpaid principal balance of the Senior Subordinated Notes.
Upon the Company's prior written notice to the holders of the Senior
Subordinated Notes, the Company may prepay all or any portion of the Senior
Subordinated Notes. The Company is required to make certain mandatory
prepayments of the Senior Subordinated Notes in full if at any time while the
Senior Subordinated Notes are outstanding: (i) the Company merges or
consolidates with or into another entity (subject to certain exceptions); (ii)
the Company sells or otherwise disposes of substantially all of its assets to a
third-party; or (iii) the Company consummates a public offering of equity
securities pursuant to an effective registration statement under the Securities
Act of 1933. The Company intends to prepay in full the entire principal balance
of the Senior Subordinated Notes and all accrued interest thereon with a portion
of the net proceeds of this Offering. See "Use of Proceeds."
In connection with the issuance of the Senior Subordinated Notes, the
Company also issued to purchasers of the Senior Subordinated Notes shares
of Common Stock for each $25 principal amount of Senior Subordinated Notes
purchased, for a total of shares of Common Stock.
COMMON STOCK PURCHASES BY AFFILIATES
In connection with the appointment of Mr. Melkus to the Company's Board of
Directors, his daughter, Lauren Melkus, acquired shares of Common Stock for
$250,002 on October 27, 1997. In addition, Mr. Masterson, upon his appointment
to the Company's Board of Directors, acquired shares of Common Stock for
$204,000 on July 24, 1998 pursuant to a subscription agreement entered into by
Mr. Masterson in April 1998. Both Ms. Melkus and Mr. Masterson were granted
registration rights covering those shares with the same terms and conditions as
those granted to Welsh Carson in the Registration Rights Agreement. See "--
Registration Rights Agreement."
55
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 31, 1998, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by (i) each
person known to the Company to beneficially own more than 5% percent of the
outstanding Common Stock, (ii) each of the Company's directors, (iii) each of
the Company's Named Executive Officers, and (iv) all directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
SHARES ------------------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED(1) OFFERING OFFERING
- ---------------------------------------------------- ------------- --------------- -------------------
<S> <C> <C> <C>
Welsh, Carson, Anderson & Stowe VII, L.P. (2)(3)....
David D. Stevens....................................
Joel R. Kimbrough...................................
Kyle J. Callahan....................................
John R. ("Randy") Grow..............................
Thomas W. Bell, Jr..................................
Kenneth R. Masterson................................
Kenneth O. Melkus(4)................................
Andrew W. Paul(2)(5)................................
Patrick J. Welsh(2)(6)..............................
All directors and executive officers as a group (9
persons)..........................................
</TABLE>
- ------------------------------
* Less than one percent.
(1) The percentages shown are based on shares of Common Stock outstanding
prior to the Offering and shares of Common Stock (including Non-Voting
Common Stock) outstanding after the Offering. Pursuant to the rules of the
Commission, shares of Common Stock which a person has the right to acquire
within 60 days pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage ownership of such
person but are not deemed outstanding for the purpose of computing
percentage ownership of any other person. Accordingly, the totals for the
following persons include the following shares represented by options
exercisable within 60 days of August 31, 1998: Mr. Stevens, shares; Mr.
Kimbrough, shares; Mr. Callahan, shares; Mr. Grow, shares;
Mr. Bell, shares; Mr. Masterson, shares; Mr. Melkus, shares;
Mr. Paul, shares; Mr. Welsh, shares; and all directors and
executive officers as a group, shares.
(2) The business address of the named person is One World Financial Center,
Suite 3601, New York, New York 10281.
(3) Includes shares of Common Stock owned by WCAS Healthcare Partners, L.P.
, shares of Non-Voting Common Stock held by WCAS VII and shares of
Common Stock held by individual general partners of WCAS VII. WCAS
Healthcare Partners, L.P. is a limited partnership with two general
partners: Russell L. Carson and Patrick J. Welsh. WCAS VII is a limited
partnership with twelve general partners, including Messrs. Carson, Welsh
and Paul.
(4) Includes shares of Common Stock held by Mr. Melkus' daughter, Lauren
Melkus.
(5) Includes those shares held directly and indirectly by WCAS VII except for
shares owned by the individual general partners of WCAS VII other then Mr.
Paul. See footnote (3) above. Mr. Paul is a director of the Company and a
general partner of WCAS VII. Mr. Paul disclaims beneficial ownership of the
shares owned by WCAS VII.
(6) Includes those shares held directly and indirectly by WCAS VII except for
shares owned by the individual general partners of WCAS VII other than Mr.
Welsh. See footnote (3) above. Mr. Welsh is a director of the Company and a
general partner of WCAS VII. Mr. Welsh disclaims beneficial ownership of the
shares owned by WCAS VII.
56
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary is a description of certain provisions of the
Company's Amended and Restated Certificate of Incorporation (the "Certification
of Incorporation"). Such summary does not purport to be complete and is subject
to, and is qualified in its entirety by, all of the provisions of the
Certificate of Incorporation, a copy of which is included as an exhibit to the
Registration Statement of which this Prospectus is a part.
Upon completion of the Offering, the Company's authorized capital stock will
consist of ,000,000 shares of Common Stock, $0.01 par value per share,
shares of Non-Voting Common Stock, $0.01 par value per share ("Non-Voting Common
Stock"), and ,000,000 shares of preferred stock, $1.00 par value per share
("Preferred Stock"), Currently, there are outstanding shares of Common
Stock and 255,361 shares of Series A Preferred Stock. All outstanding shares of
Series A Preferred Stock will be redeemed by the Company using a portion of the
net proceeds from the Offering. Upon completion of the Offering and, the Company
will have outstanding shares of Common Stock (including shares of
Non-Voting Common Stock) and no shares of Preferred Stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders and are not entitled to cumulative voting
in the election of directors. The holders of Common Stock are entitled to share
ratably in dividends, if any, as may be declared from time to time by the Board
of Directors in its discretion out of funds legally available therefor. The
Company currently anticipates that all of its earnings will be retained to
finance the growth and development of its business and, therefore, does not
anticipate that any cash dividends will be declared on the Common Stock in the
foreseeable future. See "Dividend Policy". The holders of Common Stock are
entitled to share ratably in any assets remaining after satisfaction of all
prior claims upon liquidation of the Company. The Certificate of Incorporation
gives holders of Common Stock no preemptive or other subscription or conversion
rights, and there are no redemption provisions with respect to such shares. All
outstanding shares of Common Stock are, and the shares offered hereby will be,
when issued and paid for, fully paid and nonassessable. The rights, preferences,
and privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future.
NON-VOTING COMMON STOCK
The shares of Non-Voting Common Stock to be issued to WCAS VII pursuant to
the Recapitilization will be fully paid and nonassessable. Subject to the prior
rights of the holders of any Preferred Stock, and on a pro rata basis with the
holders of Common Stock, the holders of outstanding shares of Non-Voting Common
Stock are entitled to receive dividends out of assets legally available therefor
at such time and in such amounts as the Board of Directors may from time to time
determine. The shares of Non-Voting Common Stock are convertible into Common
Stock at any time provided that WCAS VII will not own 50% or more of the Common
Stock after such conversion. In the event WCAS VII sells any Non-Voting Common
Stock to third parties, such shares shall automatically convert to Common Stock.
The holders of Non-Voting Common Stock have no preemptive or subscription rights
to purchase any securities of the Company. Upon liquidation, dissolution or
winding up of the Company, and on a pro rata basis with the holders of Common
Stock, the holders of Non-Voting Common Stock are entitled to receive pro rata
the assets of the Company that 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. Holders of outstanding shares
of Non-Voting Common Stock will not be entitled to vote such shares on any
matter submitted to a vote of stockholders.
PREFERRED STOCK
Subject to conditions specified in the Certificate of Incorporation, the
Delaware General Corporation Law ("DGCL") and other applicable law, the Board of
Directors has the authority to issue undesignated Preferred
57
<PAGE>
Stock in one or more class or series and to determine the dividend rights,
dividend rate, conversion rights, voting rights, redemption rights and terms,
liquidation preferences, sinking fund provisions, number of shares constituting
any class or series, and designations of such class or series without any
further vote or action by the stockholders of the Company. The Company has no
present intention to issue any shares of Preferred Stock.
One of the effects of undesignated Preferred Stock is to enable the Board of
Directors to render more difficult or to discourage an attempt to obtain control
of the Company by means of a tender offer, proxy contest, merger or otherwise,
and thereby to protect the continuity of the Company's management. For example,
the Company could issue a series of Preferred Stock having characteristics that
would make a takeover prohibitively expensive. The issuance of shares of the
Preferred Stock pursuant to the Board of Directors' authority described above
may adversely affect the rights of the holders of Common Stock. For example,
Preferred Stock issued by the Company may rank senior to the Common Stock as to
dividend rights, liquidation preference or both, may have full or unlimited
voting rights and may be convertible into shares of Common Stock. Accordingly,
the issuance of shares of Preferred Stock may discourage bids for the Common
Stock or may otherwise adversely affect the market price of the Common Stock.
SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
Certain provisions of the Certificate of Incorporation and the Company's
Amended and Restated Bylaws (the "Bylaws") may be deemed to have an
anti-takeover effect or may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in such stockholder's best interest,
including those attempts that might result in a premium over the market price
for the shares held by such stockholder.
DELAWARE ANTI-TAKEOVER LAW. Section 203 of the DGCL ("Section 203") applies
to the Company and generally provides that a person who, together with
affiliates and associates owns, or within three years did own, 15% or more of
the outstanding voting stock of a corporation subject to the statute (an
"Interested Stockholder"), but less than 85% of such stock, may not engage in
certain business combinations with the corporation for a period of three years
after the date on which the person became an Interested Stockholder unless (i)
prior to such date, the corporation's board of directors approved either the
business combination or the transaction in which the stockholder became an
Interested Stockholder, (ii) the Interested Stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes such person an Interested Stockholder (excluding shares owned by persons
who are both officers and directors of the corporation, and shares held by
certain employee stock ownership plans), or (iii) subsequent to such date, the
business combination is approved by the corporation's board of directors and
authorized at a stockholders' meeting by a vote of at least two-thirds of the
corporation's outstanding voting stock not owned by the Interested Stockholder.
Section 203 defines the term "business combination" to encompass a wide variety
of transactions with or caused by an Interested Stockholder, including mergers,
asset sales, and other transactions in which the Interested Stockholder receives
or could receive a benefit on other than a pro rata basis with other
stockholders.
The Company's stockholders, by adopting an amendment to the Certificate of
Incorporation, may elect not to be governed by Section 203, which election would
be effective 12 months after such adoption. Neither the Certificate of
Incorporation nor the Bylaws presently exclude the Company from the restrictions
imposed by Section 203, and the restrictions imposed by Section 203 apply to the
Company. The provisions of Section 203 could delay or frustrate a change in
control of the Company, deny stockholders the receipt of a premium on their
Common Stock and have a depressing effect on the market price of the Common
Stock. The provisions also could discourage, impede or prevent a merger, tender
offer or proxy contest, even if such event would be favorable to the interests
of stockholders.
CLASSIFIED BOARD OF DIRECTORS. The Certificate of Incorporation provides
for the Board of Directors to be divided into three classes of directors serving
staggered three-year terms. A director may be removed from office prior to the
expiration of his or her term only "for cause," so any person acquiring control
of the Company would need three annual meetings to replace all of the members of
the Board of Directors. The classified board provision of the Certificate of
Incorporation could have the effect of making the removal of incumbent directors
58
<PAGE>
more time-consuming and difficult, and, therefore discouraging a third party
from making a tender offer or otherwise attempting to obtain control of the
Company, even though such an attempt might be beneficial to the Company and its
stockholders. Thus, the classified board provision could increase the likelihood
that incumbent directors will retain their positions. The Company believes that
a classified Board of Directors will help to assure the continuity and stability
of the Board of Directors and of the business strategies and policies of the
Company as determined by the Board of Directors. See "Management."
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES. The Certificate of
Incorporation and Bylaws provide that the number of directors will be fixed from
time to time with the consent of two-thirds of the Board of Directors. Moreover,
the Certificate of Incorporation provides that directors may only be removed
with cause by the affirmative vote of the holders of at least a majority of the
outstanding shares of capital stock of the Company then entitled to vote at an
election of directors. This provision prevents stockholders from removing any
incumbent director without cause and allows two-thirds of the incumbent
directors to add additional directors without approval of stockholders until the
next annual meeting of stockholders at which directors of that class are
elected.
ADVANCE NOTICE OF NOMINATIONS AND STOCKHOLDER PROPOSALS. The Bylaws contain
a provision requiring at least 60 but no more than 90 days' advance notice by a
stockholder of a proposal or director nomination that such stockholder desires
to present at any annual or special meeting of stockholders, which would prevent
a stockholder from making a proposal or a director nomination at a stockholder
meeting without the Company having advance notice of the proposal or director
nomination. This provision could make a change in control more difficult by
providing the directors of the Company with more time to prepare an opposition
to a proposed change in control.
VOTE REQUIREMENT FOR CALLING SPECIAL MEETING. The Bylaws also contain a
provision requiring the vote of the holders of two-thirds of the outstanding
Common Stock in order to call a special meeting of stockholders. This provision
would prevent a stockholder with less than a two-thirds interest from calling a
special meeting to consider a merger unless such stockholder had first garnered
adequate support from a sufficient number of other stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
LIMITATIONS OF DIRECTOR LIABILITY. Section 102 (b) (7) of the DGCL
authorizes corporations to limit or to eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for breach
of directors' fiduciary duty of care. Although Section 102(b) of the DGCL does
not change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Certificate
of Incorporation limits the liability of directors to the Company or its
stockholders to the full extent permitted by such Section 102(b). Specifically,
directors of the Company are not to be personally liable for monetary damages
for breach of a director's fiduciary duty as a director, except for liability:
(i) for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
INDEMNIFICATION. To the maximum extent permitted by law, the Certificate of
Incorporation provides for mandatory indemnification of directors and officers
of the Company against any expense, liability or loss to which they may become
subject, or which they may incur as a result of being or having been a director
or officer of the Company. In addition, the Company must advance or reimburse
directors and officers for expenses incurred by them in connection with
indemnifiable claims.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
shares of Common Stock ( shares, if the Underwriters' over-allotment option
is exercised in full, excluding shares reserved for issuance upon the
exercise of outstanding stock options). Of these shares, all of the shares
sold in the Offering ( shares, if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act, unless held by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act. The
remaining shares outstanding are "restricted securities" as that term is
defined under Rule 144 and were issued by the Company in one or more private
transactions in reliance upon one or more exemptions under the Securities Act.
Such restricted securities may not be resold in the public market in the absence
of registration under the Securities Act or the availability of an exemption
from such registration, including the exemption provided by Rule 144.
In general, under Rule 144 a person (or persons whose shares are
aggregated), including an affiliate of the Company, who has beneficially owned
restricted securities for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of the
average weekly trading volume during the four calendar weeks preceding such sale
or 1% of the then outstanding shares of Common Stock, provided certain manner of
sale and notice requirements and requirements as to the availability of current
public information about the Company are satisfied. In addition, affiliates of
the Company must comply with the restrictions and requirements of Rule 144,
other than the one-year holding period, to sell unrestricted shares of Common
Stock. A person who is deemed not to have been an "affiliate" of the Company at
any time during the 90 days preceding a sale by such person, and who has
beneficially owned such shares for at least two years, would be entitled to sell
such shares without regard to the limitations described above. Taking into
consideration the effect of the 180-day lock-up agreements described below,
approximately restricted shares of Common Stock will be eligible for sale
in the public market immediately after the Offering and all remaining
restricted shares will be eligible for sale upon the expiration of the 180-day
lock-up agreements, in each case subject to the volume and other limitations of
Rule 144.
In addition to the outstanding shares of Common Stock, the Company has
reserved for issuance shares of Common Stock pursuant to the Company's
stock option and employee stock purchase plans, under which options to purchase
shares will be outstanding upon completion of the Offering. The Company
intends to register on Form S-8 under the Securities Act as soon as practicable
on and after the effective date of the Offering all of the shares reserved
for issuance pursuant to these plans. This registration statement will be
effective upon filing. Shares registered and issued pursuant to this
registration statement will be freely tradable except to the extent that the
holders thereof are deemed to be affiliates of the Company, in which case the
transferability of such shares will be subject to the volume limitations of Rule
144, and except to the extent that the holders thereof are subject to the
lock-up agreements described below.
Subject to certain exceptions, the Company, its directors and executive
officers and certain holders of outstanding shares of Common Stock and optionees
holding options to purchase a total of shares of Common Stock have agreed,
subject to certain exceptions, with the Underwriters not to sell or otherwise
dispose of any shares of Common Stock, any options to purchase Common Stock or
any securities convertible into or exchangeable for shares of Common Stock for a
period of 180 days after the date of this Prospectus without the prior written
consent of Hambrecht & Quist LLC.
Following the consummation of the Offering and subject to the lock-up
agreements, certain stockholders will be entitled to require the Company to
register under the Securities Act a total of shares of outstanding Common
Stock (the "Registrable Shares"). In addition, in the event the Company proposes
to register any of its securities under the Securities Act, either for its own
account or for the account of a security holder, such stockholders may be
entitled to include the Registrable Shares in such registration, subject to
certain limitations on the number of shares to be included in the registration
by the underwriter of such Offering. See "Certain Transactions--Registration
Rights Agreement."
Sales of substantial amounts of shares of Common Stock in the public market,
or the perception that such sale might occur, could adversely affect the market
price of the Common Stock and could impair the Company's future ability to raise
capital through an offering of its equity securities. See "Risk Factors-Shares
Eligible for Future Sale."
60
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below through their Representatives, Hambrecht & Quist LLC,
NationsBanc Montgomery Securities LLC and SunTrust Equitable Securities have
severally agreed to purchase from the Company the following respective number of
shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ----------------------------------------------------------------- -----------
<S> <C>
Hambrecht & Quist LLC............................................
NationsBanc Montgomery Securities LLC............................
SunTrust Equitable Securities....................................
-----------
Total......................................................
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a 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 dealers. After
the initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives. The Representatives have informed
the Company that the Underwriters do not intend to confirm sales to accounts
over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the initial public offering price,
less the underwriting discount, set forth on the cover page of this Prospectus.
To the extent that the Underwriters exercise this option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the table above bears to the total number of shares of Common Stock
offered hereby. The Company will be obligated, pursuant to the option, to sell
shares to the Underwriters to the extent the option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of Common Stock offered hereby.
The Offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
61
<PAGE>
The executive officers and directors of the Company and certain
stockholders, have executed lock-up agreements in which they have agreed that
they will not, without the prior written consent of Hambrecht & Quist LLC,
directly or indirectly, offer, sell, pledge, contract to sell (including any
short sale), grant any option to purchase or otherwise dispose of any shares of
Common Stock (including, without limitation, shares of Common Stock which may be
deemed to be beneficially owned by the parties to the lock-up agreements in
accordance with the rules and regulations of the Securities and Exchange
Commission and shares of Common Stock which may be issued upon exercise of a
stock option or warrant or conversion of any convertible securities) or enter
into any short sale (whether or not against the box) or any purchase, sale or
grant of any right (including without limitation, any put or call option) with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from the
Common Stock (each of the foregoing referred to as a "Disposition") for a period
from the date hereof and continuing until 180 days after the effective date of
the registration statements relating to the initial Public Offering (the
"Lock-Up Period"). The lock-up agreements are intended to preclude the Company's
officers, directors and certain of its stockholders from engaging in any
transaction which is designed to or reasonably expected to lead to or result in
a Disposition during the Lock-Up Period even if the securities would be disposed
of by someone other than the parties to the lock-up agreements. Sales of such
shares in the future could adversely affect the market price of the Common
Stock. Hambrecht & Quist LLC may, in its sole discretion, release any of the
shares subject to the lock-up agreements at any time without notice.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation between the Company and the Representatives. Among the factors
considered in determining the initial public Offering price will be prevailing
market conditions, revenues and earnings of the Company, market valuations of
other companies engaged in activities similar to those of the Company, estimates
of the business potential and prospects of the Company, the present state of the
Company's business operations, the Company's management and other factors deemed
relevant.
Certain persons participating in this Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the Offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
Offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq Stock Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Alston & Bird LLP, Atlanta, Georgia. Certain other matters in connection with
this Offering will be passed upon for the Underwriters by Goodwin, Procter &
Hoar LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements and schedule of Accredo Health,
Incorporated as of and for the years ended June 30, 1997 and 1998, and for the
period May 24, 1996 through June 30, 1996; the statement of operations and
schedule of the Predecessor for the period July 1, 1995 through May 31, 1996;
the financial statements of Horizon Health Systems, Inc. as of and for the years
ended December 31, 1995 and 1996; the financial statements and schedule of Texas
Health Pharmaceutical Resources as and for the year ended June 30, 1997 included
in this Prospectus and in the Registration Statement have been audited by Ernst
& Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
62
<PAGE>
INDEX OF FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NO.
-----
<S> <C>
ACCREDO HEALTH, INCORPORATED
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheets--June 30, 1997 and 1998................................ F-3
Consolidated Statements of Operations--for the period from inception (May 24, 1996)
through June 30, 1996, for years ended June 30, 1997 and 1998.................... F-4
Consolidated Statements of Stockholder's Equity and Mandatorily Redeemable
Cumulative Preferred Stock--for the period from inception (May 24, 1996) through
June 30, 1996, for the years ended June 30, 1997 and 1998........................ F-5
Consolidated Statements of Cash Flows--for the period from inception (May 24, 1996)
through June 30, 1996, for the years ended June 30, 1997 and 1998................ F-6
Notes to Consolidated Financial Statements......................................... F-7
NOVA FACTOR, INC.
Report of Independent Auditors..................................................... F-18
Statement of Operations--for the period July 1, 1995 through May 31, 1996.......... F-19
Statement of Stockholder's Equity--for the period July 1, 1995 through May 31,
1996............................................................................. F-20
Statement of Cash Flows--for the period July 1, 1995 through May 31, 1996.......... F-21
Notes to Financial Statements--for the period July 1, 1995 through May 31, 1996.... F-22
HORIZON HEALTH SYSTEMS, INC.
Report of Independent Auditors..................................................... F-25
Statements of Income--for the years ended December 31, 1995 and 1996 and for the
three months ended March 31, 1996 (unaudited) and 1997 (unaudited)............... F-26
Statements of Stockholders' Equity--for the years ended December 31, 1995 and 1996
and for the three months ended March 31, 1997 (unaudited)........................ F-27
Statements of Cash Flows--for the years ended December 31, 1995 and 1996 and for
the three months ended March 31, 1996 (unaudited) and 1997 (unaudited)........... F-28
Notes to Financial Statements...................................................... F-29
TEXAS HEALTH PHARMACEUTICAL RESOURCES
Report of Independent Auditors..................................................... F-31
Balance Sheets as of June 30, 1997 and 1998 (unaudited)............................ F-32
Statements of Operations for the years ended June 30, 1996 (unaudited), 1997 and
1998 (unaudited)................................................................. F-33
Statements of Partners' Equity for the years ended June 30, 1996 (unaudited), 1997
and 1998 (unaudited)............................................................. F-34
Statements of Cash Flows for the years ended June 30, 1996 (unaudited), 1997 and
1998 (unaudited)................................................................. F-35
Notes to Financial Statements...................................................... F-36
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Accredo Health, Incorporated
We have audited the accompanying consolidated balance sheets of Accredo
Health, Incorporated (formerly Nova Holdings, Inc.) (the "Company") as of June
30, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity and mandatorily redeemable cumulative preferred stock, and
cash flows for the period from inception (May 24, 1996) through June 30, 1996,
and for the years ended June 30, 1997 and 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 financial position of Accredo
Health, Incorporated at June 30, 1997 and 1998, and the results of its
operations and its cash flows for the period from inception (May 24, 1996)
through June 30, 1996, and for the years ended June 30, 1997 and 1998, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Memphis, Tennessee
August 12, 1998, except for note 12,
as to which the date is , 1998
The foregoing report is in the form that will be signed upon completion of
the restatement of capital accounts described in Note 12 to the financial
statements. The share and per share information included in the accompanying
financial statements reflect the historical capitalization of the Company and
will be restated upon completion of the restatement of capital accounts.
/s/ Ernst & Young LLP
Memphis, Tennessee
September 1, 1998
F-2
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
------------------------
<S> <C> <C>
1997 1998
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 3,675,819 $ 5,087,135
Receivables:
Patient accounts............................................. 33,922,326 40,062,375
Allowance for doubtful accounts.............................. (3,802,326) (3,429,863)
----------- -----------
30,120,000 36,632,512
Due from affiliates.......................................... 414,272 321,487
Other........................................................ 2,077,950 2,921,672
----------- -----------
32,612,222 39,875,671
Recoverable income taxes....................................... -- 150,893
Inventories.................................................... 16,016,166 12,131,032
Prepaids and other current assets.............................. 452,093 309,587
Deferred income taxes.......................................... 1,488,227 323,986
----------- -----------
Total current assets............................................. 54,244,527 57,878,304
Property and equipment, net...................................... 1,565,682 2,127,749
Other assets:
Joint venture investments...................................... 652,374 627,728
Goodwill, net.................................................. 58,158,549 56,679,141
Other intangible assets, net................................... 2,296,181 1,677,005
----------- -----------
Total assets..................................................... $116,917,313 $118,989,927
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................... $33,420,517 $31,304,771
Accrued expenses............................................... 2,127,784 3,196,977
Income taxes payable........................................... 1,802,161 --
----------- -----------
Total current liabilities........................................ 37,350,462 34,501,748
Long-term notes payable.......................................... 27,497,725 27,497,725
Senior subordinated notes payable................................ 7,696,984 8,920,180
Deferred income taxes............................................ 230,131 607,161
Mandatorily redeemable cumulative preferred stock, at redemption
amount, 300,000 shares authorized, and 255,361 shares issued
and outstanding in 1997 and 1998............................... 27,749,221 29,792,109
Stockholders' equity:
Common Stock, $.01 par value; 7,000,000 shares authorized,
5,507,253 in 1997 and 5,590,587 in 1998 issued and
outstanding................................................ 55,073 55,906
Common stock subscribed--83,334 shares in 1997 and 34,000
shares in 1998............................................. 500,004 204,000
Additional paid-in capital................................... 16,337,717 16,836,888
Retained earnings............................................ -- 778,210
----------- -----------
16,892,794 17,875,004
Subscription receivable.......................................... (500,004) (204,000)
----------- -----------
Total stockholders' equity....................................... 16,392,790 17,671,004
----------- -----------
Total liabilities and stockholders' equity....................... $116,917,313 $118,989,927
----------- -----------
----------- -----------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 24,
1996) YEARS ENDED JUNE 30,
THROUGH ------------------------
JUNE 30, 1996 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Net patient service revenue..................... $6,647,165 $106,143,403 $170,001,733
Other revenue................................... 597,283 8,048,870 9,806,296
Equity in net income of joint ventures.......... 49,255 1,016,518 1,150,122
------------- ----------- -----------
Total revenues.................................... 7,293,703 115,208,791 180,958,151
Operating expenses:
Cost of services................................ 6,450,279 101,080,589 154,045,458
General and administrative...................... 626,688 5,938,874 12,350,717
Bad debts....................................... 251,538 2,976,718 3,165,292
Depreciation.................................... 17,300 230,887 429,702
Amortization.................................... 108,604 1,368,299 2,098,584
------------- ----------- -----------
Total operating expenses.......................... 7,454,409 111,595,367 172,089,753
------------- ----------- -----------
Operating income (loss)........................... (160,706) 3,613,424 8,868,398
Other expense (income):
Interest expense................................ 106,014 1,083,431 3,721,528
Interest income................................. -- (99,890) (169,398)
------------- ----------- -----------
106,014 983,541 3,552,130
------------- ----------- -----------
Income (loss) before income taxes................. (266,720) 2,629,883 5,316,268
Income tax expense (benefit)...................... (28,420) 1,507,430 2,495,170
------------- ----------- -----------
Net income (loss)................................. (238,300) 1,122,453 2,821,098
Mandatorily redeemable cumulative preferred stock
dividends....................................... (170,233) (2,042,888) (2,042,888)
------------- ----------- -----------
Net income (loss) attributable to common
stockholders.................................... $(408,533) $ (920,435) $ 778,210
------------- ----------- -----------
------------- ----------- -----------
Net income (loss) per share attributable to common
stockholders:
Basic........................................... $ (0.08) $ (0.18) $ 0.14
Diluted......................................... $ (0.08) $ (0.18) $ 0.13
Weighted average number of shares and dilutive
share equivalents outstanding
Basic........................................... 5,107,253 5,140,586 5,566,281
Diluted......................................... 5,107,253 5,417,721 5,875,275
</TABLE>
See accompanying notes.
F-4
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
<TABLE>
<CAPTION>
COMMON COMMON ADDITIONAL RETAINED TOTAL
STOCK COMMON STOCK SUBSCRIPTION PAID-IN EARNINGS STOCKHOLDERS'
SHARES STOCK SUBSCRIBED RECEIVABLE CAPITAL (DEFICIT) EQUITY
---------- --------- ---------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization..... 5,000,000 $ 50,000 $ -- $ -- $ 14,950,000 $ -- $ 15,000,000
Issuance of common stock
and mandatorily
redeemable preferred
stock for acquired
Company.................. 107,253 1,073 -- -- 320,685 -- 321,758
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... -- -- -- -- (170,233) -- (170,233)
Net loss................... -- -- -- -- -- (238,300) (238,300)
---------- --------- ---------- ----------- ------------- ------------ -------------
Balance at June 30, 1996... 5,107,253 51,073 -- -- 15,100,452 (238,300) 14,913,225
Issuance of common stock... 400,000 4,000 -- -- 2,396,000 -- 2,400,000
Common stock subscribed
(83,334 shares).......... -- -- 500,004 -- -- -- 500,004
Subscription receivable.... -- -- -- (500,004) -- -- (500,004)
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... -- -- -- -- (1,158,735) (884,153) (2,042,888)
Net income................. -- -- -- -- -- 1,122,453 1,122,453
---------- --------- ---------- ----------- ------------- ------------ -------------
Balance at June 30, 1997... 5,507,253 55,073 500,004 (500,004) 16,337,717 -- 16,392,790
Issuance of common stock... 83,334 833 (500,004) 500,004 499,171 -- 500,004
Common stock subscribed
(34,000 shares).......... -- -- 204,000 -- -- -- 204,000
Subscription receivable.... -- -- -- (204,000) -- -- (204,000)
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... -- -- -- -- -- (2,042,888) (2,042,888)
Net income................. -- -- -- -- -- 2,821,098 2,821,098
---------- --------- ---------- ----------- ------------- ------------ -------------
Balance at June 30, 1998... 5,590,587 $ 55,906 $ 204,000 $(204,000) $ 16,836,888 $ 778,210 $ 17,671,004
---------- --------- ---------- ----------- ------------- ------------ -------------
---------- --------- ---------- ----------- ------------- ------------ -------------
<CAPTION>
MANDATORILY
REDEEMABLE
CUMULATIVE
PREFERRED
STOCK
-------------
<S> <C>
Initial capitalization..... $ 25,000,000
Issuance of common stock
and mandatorily
redeemable preferred
stock for acquired
Company.................. 536,100
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... 170,233
Net loss................... --
-------------
Balance at June 30, 1996... 25,706,333
Issuance of common stock... --
Common stock subscribed
(83,334 shares).......... --
Subscription receivable.... --
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... 2,042,888
Net income................. --
-------------
Balance at June 30, 1997... 27,749,221
Issuance of common stock...
Common stock subscribed
(34,000 shares).......... --
Subscription receivable.... --
Accrued dividends on
mandatorily redeemable
cumulative preferred
stock.................... 2,042,888
Net income................. --
-------------
Balance at June 30, 1998... $ 29,792,109
-------------
-------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ACCREDO HEALTH, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MAY 24,
1996) YEARS ENDED JUNE 30,
THROUGH ----------------------
JUNE 30, 1996 1997 1998
------------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ (238,300) $1,122,453 $2,821,098
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 125,904 1,599,186 2,528,286
Original issue discount amortization............. -- 11,975 177,370
Interest added to long-term obligations.......... -- 85,009 1,045,826
Provision for losses on accounts receivable...... 251,538 2,976,718 3,165,292
Deferred income tax expense (benefit)............ (150,260) 116,865 1,541,271
Changes in operating assets and liabilities, net of
effect from purchase of companies:
Patient receivables and other.................. (900,707) (11,059,965) (10,521,526)
Due from affiliates............................ (39,392) 478,512 92,785
Inventories.................................... (5,349,168) (5,260,633) 3,885,134
Prepaids and other current assets.............. (26,480) (216,048) 142,506
Recoverable income taxes....................... 23,264 -- (150,893)
Accounts payable and accrued expenses.......... 7,230,569 9,378,288 (1,046,553)
Income taxes payable........................... 305,289 261,340 (1,802,161)
------------- ---------- ----------
Net cash provided by (used in) operating
activities......................................... 1,232,257 (506,300) 1,878,435
INVESTING ACTIVITIES
Purchases of property and equipment.................. (23,326) (349,049) (991,769)
Purchase of Horizon Health Systems, Inc. in 1997 and
Southern Health Systems, Inc. in 1996, net of cash
acquired........................................... (37,733,715) (29,721,000) --
Change in joint venture investments, net............. 100,745 378,482 24,646
------------- ---------- ----------
Net cash used in investing activities................ (37,656,296) (29,691,567) (967,123)
FINANCING ACTIVITIES
Proceeds from long-term obligations.................. -- 27,897,725 --
Issuance of preferred stock.......................... 25,000,000 -- --
Issuance of common stock............................. 15,000,000 2,400,000 500,004
------------- ---------- ----------
Net cash provided by financing activities............ 40,000,000 30,297,725 500,004
------------- ---------- ----------
Increase in cash and cash equivalents................ 3,575,961 99,858 1,411,316
Cash and cash equivalents at beginning of period..... -- 3,575,961 3,675,819
------------- ---------- ----------
Cash and cash equivalents at end of period........... $ 3,575,961 $3,675,819 $5,087,135
------------- ---------- ----------
------------- ---------- ----------
SUPPLEMENTARY CASH FLOW DISCLOSURES:
Income taxes paid.................................... $ 204,687 $ 858,840 $1,531,692
------------- ---------- ----------
------------- ---------- ----------
Cash paid for interest............................... $ 105,854 $ 567,999 $2,675,701
------------- ---------- ----------
------------- ---------- ----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Accredo Health, Incorporated (formerly Nova Holdings, Inc.) (the Company)
was incorporated on May 24, 1996. As more fully described in Note 3, on May 31,
1996, the Company acquired Southern Health Systems, Inc. (a holding company) and
its wholly-owned subsidiary, Nova Factor, Inc. Since the Company was newly
formed at May 24, 1996, and because Nova Factor, Inc. had been in existence for
several years, the Company is considered the successor to Nova Factor Inc.'s
operations.
The consolidated financial statements include the accounts and transactions
of the Company and its subsidiaries for the period from inception (May 24, 1996)
through June 30, 1998, and its subsidiary Horizon Health Systems, Inc. (HHS) for
the period from its acquisition, June 1, 1997, through June 30, 1998.
Significant intercompany accounts have been eliminated in consolidation.
DESCRIPTION OF BUSINESS
The Company provides specialized contract pharmacy and related services
beneficial to patients with certain costly chronic diseases. Because of the
unique needs of patients suffering from chronic diseases, biotechnology drug
manufacturers have recognized the benefits of customized programs to facilitate
alternate site drug administration, ensure compliance with treatment regimens,
provide reimbursement assistance and capture valuable clinical and patient
demographic information. The Company addresses the needs of the manufacturers by
providing specialized services that facilitate product launch and patient
acceptance including timely drug utilization and patient compliance information,
patient education and monitoring, reimbursement expertise and overnight drug
delivery.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic,
and potentially life threatening diseases; (ii) are expensive; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process. Currently, the
Company provides specialized contract pharmacy and related services that address
the needs of patients with the following diseases: Gaucher Disease, a hereditary
liver enzyme deficiency; hemophilia, a hereditary bleeding disorder; Multiple
Sclerosis, a debilitating disease of the central nervous system; and growth
hormone related disorders. These diseases generally require life-long therapy,
except for the treatment of growth hormone-related disorders which typically
require treatment for six to ten years.
Other revenues primarily consist of management fees from biotech
manufacturers and various management agreements with hospitals and joint
ventures.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity
of three months or less to be cash equivalents.
PATIENT ACCOUNTS RECEIVABLE
The Company's primary concentration of credit risk is patient accounts
receivable, which consists of amounts owed by various governmental agencies,
insurance companies and private patients. The Company manages the receivables by
regularly reviewing its accounts and contracts and by providing appropriate
F-7
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
allowances for uncollectible amounts. Significant concentrations of gross
patient accounts receivable consist of the following at June 30:
<TABLE>
<CAPTION>
1997 1998
--- ---
<S> <C> <C>
Medicare....................................................... 5% 3%
Medicaid....................................................... 17% 23%
</TABLE>
Concentration of credit risk relating to accounts receivable is limited to
some extent by the diversity and number of patients and payors and the
geographic dispersion of the Company's operations The Company grants credit
without collateral to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables, accounts payable and notes payable
approximates fair value of these financial instruments at June 30, 1997 and
1998.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Provisions for depreciation are
computed primarily by the straight-line method based on the estimated useful
lives of the related assets of 2 to 7 years.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the cost of businesses acquired over fair
value of net tangible and identifiable intangible assets at the date of
acquisition. The Company recorded $23,396,095 in goodwill and $1,000,000 in
non-compete agreements on June 1, 1997, and $35,780,242 in goodwill, $1,117,783
in non-compete agreements and $361,416 in other intangible assets on May 31,
1996, in connection with business acquisitions. These assets are being amortized
using the straight-line method over their estimated useful lives of 40 years for
goodwill, 3 and 10 years for the non-compete agreements, and 10 years for the
other intangible assets. Goodwill is net of accumulated amortization of
$1,017,788 and $2,497,196 at June 30, 1997 and 1998, respectively. Non-compete
agreements and other intangible assets are net of accumulated amortization of
$459,115 and $1,078,291 at June 30, 1997 and 1998, respectively.
VALUATION OF LONG-LIVED ASSETS
Management periodically evaluates carrying values of long-lived assets,
including property and equipment, strategic investments, goodwill and other
intangible assets, to determine whether events and circumstances indicate that
these assets have been impaired. An asset is considered impaired when
undiscounted cash flows to be realized from such asset are less than its
carrying value. In that event, a loss is determined based on the amount the
carrying value exceeds the fair market value of such asset.
F-8
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MANDATORILY REDEEMABLE CUMULATIVE PREFERRED STOCK
The Company is authorized to issue up to 300,000 shares of nonvoting
mandatorily redeemable cumulative preferred stock (Series A). In connection with
its formation, the Company issued, at the $100 redemption amount, 250,000 shares
of the preferred stock on May 31, 1996, and 5,361 shares on the same date in
connection with the acquisition (see note 3), for a total of $25,536,100. The
nonvoting mandatorily redeemable cumulative preferred stock is entitled to an $8
per share annual dividend. Accumulated unpaid dividends of $2,213,121 and
$4,256,009 at June 30, 1997 and 1998, respectively, are included in the
mandatorily redeemable cumulative preferred stock in the accompanying
consolidated balance sheets. Accumulated unpaid dividends are $16.67 per share
at June 30, 1998.
The Company may, at its option, redeem at any time a portion or all of the
preferred stock at the redemption price of $100 per share, plus any accrued but
unpaid dividends, with the consent of the bank holding the senior debt. On May
31, 2004, the Company must purchase and redeem, at the redemption price of $100
plus any accrued and unpaid dividends, all the then outstanding shares of the
redeemable preferred stock. If at any time the Company consummates a public
offering of its common stock, the Company shall apply any net cash proceeds of
such offering to redeem, at the redemption price, shares of the preferred stock.
STOCK-BASED COMPENSATION
The Company recognizes stock-based compensation using the intrinsic value
method as permitted by Financial Accounting Standards Board Statement No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION (Statement 123). Accordingly, no
compensation expense is recorded for stock-based awards issued at market value
at the date such awards are granted. The Company makes pro forma disclosures of
net income as if the market-value method was followed.
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Company has agreements with certain third-party payors that provide for
payments to the Company at amounts discounted from its established rates.
Approximately 18%, 17% and 20% of gross patient service revenues for the
periods ended June 30, 1996, 1997 and 1998, respectively, is from participation
in the Medicare and state-sponsored Medicaid programs.
INTEREST RATE SWAP AGREEMENTS
The Company enters into interest rate swap agreements as a means of managing
its interest rate exposure. The differential to be paid or received is
recognized over the life of the agreement as an adjustment to interest expense.
NET EARNINGS (LOSS) PER SHARE
In 1997, the Financial Accounting Standards Board (FASB) issued Statement
No. 128. Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously
F-9
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET EARNINGS (LOSS) PER SHARE (CONTINUED)
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to Statement 128 requirements.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. Estimates are used primarily in recording the allowance for
doubtful accounts.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The
Statement changes the way public companies report segment information in
financial statements and also requires those companies to report selected
segment information in interim financial reports to shareholders. The Statement
is effective for the Company beginning with its June 30, 1999, financial
statements. The Statement affects only disclosures presented in the financial
statements and will have no effect on consolidated financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is
required to be adopted in years beginning after June 15, 1999. Management of the
Company does not anticipate that the adoption of the new Statement will have a
significant effect on results of operations or the financial position of the
Company.
3. BUSINESS ACQUISITIONS
On May 31, 1996, the Company acquired all of the outstanding shares of
Southern Health Systems, Inc. (SHS) common stock. SHS was a holding company
whose wholly-owned operating subsidiary was Nova Factor, Inc. In connection with
the acquisition of SHS common stock, the Company paid cash of $39,169,291 and
issued 107,253 shares of the Company's common stock and 5,361 shares of the
Company's mandatorily redeemable preferred stock with a value of $857,858. Total
assets acquired and liabilities assumed were $27,537,936 and $24,210,786,
respectively. This transaction was recorded by the Company using the purchase
method of accounting. The excess of the total purchase price of $40,586,591,
including acquisition costs of $559,442, over the fair market value of the net
assets acquired of $3,327,150 was allocated to goodwill and other identifiable
intangible assets. The Company recorded $35,780,242 in goodwill, $1,117,783 in
non-compete agreements and $361,416 in other intangible assets which are
included in the accompanying consolidated balance sheet.
On June 1, 1997, the Company acquired substantially all the assets of HHS, a
Company engaged in the sale and distribution of blood clotting factors and
ancillary supplies to hemophilia patients, through an acquisition accounted for
using the purchase method of accounting. The consideration paid by the Company
related to this acquisition was $29,996,127. Total assets acquired and
liabilities assumed were $9,018,540 and $3,152,031, respectively. This
transaction was recorded by the Company using the purchase method of accounting.
The excess of the purchase price of $24,396,095, including acquisition costs of
$266,477, over the fair market value of the net assets acquired, was allocated
to goodwill and other identifiable intangible assets. The operating results of
HHS are included in the Company's consolidated statement of operations beginning
June 1, 1997.
F-10
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. BUSINESS ACQUISITIONS (CONTINUED)
Pro forma amounts for the periods ended June 30, 1996 and 1997, as if the
acquisition had occurred on May 24, 1996 (inception), are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- -----------
<S> <C> <C>
Pro forma total revenues........................... $8,971,000 $142,777,000
Pro forma net (loss) attributable to common
shareholders..................................... $(510,000) $(1,197,000)
Pro forma (loss) per share attributable to common
shareholders..................................... $ (0.10) $ (0.23)
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at June 30:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Equipment............................................ $ 817,142 $1,304,935
Furniture and fixtures............................... 996,727 1,487,585
--------- ---------
1,813,869 2,792,520
Accumulated depreciation............................. (248,187) (664,771)
--------- ---------
$1,565,682 $2,127,749
--------- ---------
--------- ---------
</TABLE>
5. NOTES PAYABLE
At June 30, 1998, the Company has a revolving line of credit agreement for
up to $40 million with banks, which expires October 31, 1999. The Company's
borrowing base, as defined in the agreement, was approximately $33,155,000 and
$39,843,000 at June 30, 1997 and 1998, respectively. Amounts outstanding under
the line of credit bear interest at varying rates based upon a LIBOR or prime
rate of interest at the periodic election of the Company plus a variable margin
rate based on the Company's debt to cash flow ratio as defined by the banks (the
combination of a 2% margin and LIBOR base rate resulted in effective rates of
7.69% at June 30, 1997 and 7.625% at June 30, 1998). The Company entered into an
interest rate swap agreement with a bank in October 1997 in order to fix a
portion of its interest rate exposure on this line of credit. The terms of the
agreement require the Company to pay a fixed interest rate of 6.15% on a $15
million notional amount and receive the 30 day LIBOR rate in exchange. The
interest rate swap agreement terminates October 29, 1999. The line of credit is
secured by substantially all assets of the Company. The bank's security interest
in a portion of the Company's inventory is subordinate to the liens on that
inventory under the terms of a security agreement between the Company and one of
its vendors. The same vendor has a security interest in certain accounts
receivable of the Company which is subordinate to the rights of the banks. At
June 30, 1998, the balance outstanding under this line of credit was
$27,497,725.
As defined in the credit agreements, the line of credit contains financial
covenants which require the Company to maintain certain levels of net worth,
tangible net worth, working capital, debt to net worth and liquidity ratios. The
credit agreement also restricts certain changes in management and ownership of
the Company.
During June 1997, the Company issued $10 million in senior subordinated
notes (the Notes) to certain stockholders of the Company in connection with the
purchase of HHS. The Notes, which are due June 1, 2004,
F-11
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE (CONTINUED)
have a stated interest rate of 10% and an effective rate of 16%. The Notes are
unsecured. Concurrently with the issuance of the Notes, the Company issued
400,000 shares of its common stock to the Note holders. The excess of the fair
market value of the 400,000 shares of common stock issued over the purchase
price of $4,000 was recorded as an original issue discount. This original issue
discount, which accretes over the life of the related obligation using the
effective interest method, is reflected as a reduction of the Notes in the
accompanying consolidated balance sheets.
At the option of the Company, the amount of interest due and payable
September 1, 1998; December 1, 1998; March 1, 1999 and June 1, 1999, may be
added to the unpaid principal balance of the Notes. During 1997 and 1998, the
Company added $85,009 and $1,045,826, respectively, of accrued interest due
during 1997 and 1998 to the unpaid principal balance of the Notes.
If at any time while the Notes are outstanding, the Company shall consummate
a public offering, as defined in the note purchase agreement, or merge or
consolidate, as defined in the note purchase agreement, the Company shall use
the net proceeds of such offering to repay the principal amount of the Notes,
plus accrued interest (see Note 12). On any interest payment date on or after
June 1, 2002, the Company shall pay an amount of accrued original issue discount
on the Notes as shall be necessary to ensure that such Notes shall not be
considered applicable high yield discount obligations as defined in the note
purchase agreement.
6. INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company is indemnified for income tax
liabilities arising prior to May 31, 1996, by its former parent.
Income tax expense (benefit) consist of the following for the periods ended
June 30:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................. $ 121,840 $1,159,425 $ 850,062
State.................................... -- 231,140 103,837
--------- --------- ---------
121,840 1,390,565 953,899
Deferred:
Federal.................................. (142,852) 100,172 1,303,935
State.................................... (7,408) 16,693 237,336
--------- --------- ---------
(150,260) 116,865 1,541,271
--------- --------- ---------
$ (28,420) $1,507,430 $2,495,170
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
The provision (benefit) for income taxes differed from the amount computed
by applying the statutory federal income tax rate of 34% for the periods ended
June 30 due to the following:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate.......... $ (90,685) $ 894,107 $1,807,496
State income tax expense (benefit), net of federal
income tax expense (benefit).......................... (4,889) 164,903 225,174
Goodwill amortization................................... 36,925 443,104 443,104
Other................................................... 30,229 5,316 19,396
--------- ---------- ----------
Income tax expense (benefit)............................ $ (28,420) $1,507,430 $2,495,170
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at June 30 are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves....................... $1,350,846 $1,197,657
Accrued expenses................................... 84,505 96,904
Joint venture investments.......................... 20,322 17,129
Other.............................................. 32,554 34,316
--------- ---------
1,488,227 1,346,006
Deferred tax liabilities:
Property and equipment............................. (99,863) (150,458)
Intangible assets.................................. (43,391) (372,606)
Joint venture investments.......................... (86,877) (84,097)
Accounts receivable................................ -- (1,022,020)
--------- ---------
(230,131) (1,629,181)
--------- ---------
Net deferred tax assets (liabilities)................ $1,258,096 $(283,175)
--------- ---------
--------- ---------
</TABLE>
7. OPERATING LEASES
The Company leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $24,000,
$429,000 and $758,000 for the periods ended June 30, 1996, 1997 and 1998,
respectively.
F-13
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OPERATING LEASES (CONTINUED)
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial terms of one year or more consist of the following
at June 30, 1998 (including executed lease extensions through August 12, 1998):
<TABLE>
<S> <C>
1999............................................................ $ 780,000
2000............................................................ 522,000
2001............................................................ 360,000
2002............................................................ 388,000
2003............................................................ 361,000
---------
$2,411,000
---------
---------
</TABLE>
8. INVESTMENT IN JOINT VENTURES
Texas Health Pharmaceutical Resources, Teddy Bear Home Care/Drug Therapies
and Children's Memorial Home Hemophilia Services are partnerships in which the
Company has a 50% ownership interest. Campus Home Health Care-Home Hemophilia is
a limited liability company in which the Company has a 25% ownership interest.
These joint ventures are accounted for by the Company under the equity method of
accounting. Amounts due from these joint ventures to the Company are classified
as due from affiliates in the accompanying consolidated balance sheets. The
portion of the Company's retained earnings at June 30, 1998, attributable to
undistributed earnings of these joint ventures is $628,000.
The Company provided management services to these joint ventures of $21,000,
$362,000 and $413,000 for the periods ended June 30, 1996, 1997 and 1998,
respectively, which are recorded as other revenues in the accompanying
consolidated statements of operations.
Summary financial information for affiliated joint ventures (20 percent to
50 percent owned) accounted for by the equity method is as follows as of and for
the periods ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Current assets.......................... $3,222,000 $2,629,000 $2,160,000
Property and equipment and other
assets................................ 96,000 84,000 78,000
Current liabilities..................... 1,260,000 1,392,000 971,000
Total revenues.......................... 729,000 12,736,000 10,215,000
Net income.............................. 99,000 2,050,000 2,315,000
</TABLE>
9. DEFINED CONTRIBUTION PLAN
The Company has a qualified defined contribution plan under Section 401(k)
of the Internal Revenue Code. Substantially all full time employees qualify for
participation in the plan. The Company matches employee contributions, as
defined in the plan. The Company made annual matching contributions of
approximately $2,000, $41,000 and $43,000 for the periods ended June 30, 1996,
1997 and 1998, respectively.
10. STOCK OPTION PLAN
The Company's Amended and Restated Stock Option and Restricted Stock
Purchase Plan has authorized the grant of options to selected employees,
officers, and directors for up to 965,000 shares of the Company's
F-14
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN (CONTINUED)
common stock. All options granted have 10-year terms and vest and become fully
exercisable over a period of 1 to 6 years of continued employment. Certain
options granted with up to 6-year vesting terms also have provisions for
accelerated vesting over the first 4 years if certain Company income targets are
achieved during that period. Otherwise, these options become fully exercisable
at the end of up to 6 years of continued employment.
Pro forma information regarding net income is required by Statement 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of Statement 123. Significant assumptions
used by the Company in the Black-Scholes option pricing model computations are
as follows for the periods ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Risk-free interest rates..... 6.25% to 6.40% 6.08% to 6.93% 5.48% to 6.22%
Dividend yield............... 0% 0% 0%
Volatility factor............ .60 .60 .60
Weighted-average expected 4.6 years 4.5 years 4.45 years
life.......................
</TABLE>
The Black-Scholes option model was developed for use in estimating the fair
value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the periods ended June 30 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss) "as reported"............ $(238,300) $1,122,453 $2,821,098
Pro forma net income (loss)................ $(253,387) $ 914,795 $2,515,336
</TABLE>
These pro forma disclosures are not necessarily representative of the
effects of stock options on reported pro forma net income for future years.
F-15
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLAN (CONTINUED)
A summary of the Company's stock option activity and related information for
the periods ended June 30 follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------------------------- -------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ------------- ----------- ------------- ----------- -------------
Outstanding at beginning of period.... -- $ -- 542,857 $ 3 670,858 $ 3
Granted............................... 542,857 3 130,001 3 186,428 6
Exercised............................. -- -- -- -- -- --
Forfeited............................. -- -- (2,000) 3 (857) 3
----------- ----- ----------- ----- ----------- -----
Outstanding at end of period.......... 542,857 $ 3 670,858 $ 3 856,429 $ 4.84
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
Exercisable at end of period.......... -- $ -- 116,000 $ 3 247,001 $ 3.17
----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- -----
Weighted-average fair value of options
granted during the year............. $ 1.64 $ 1.63 $ 2.61
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The range of exercise prices for the Company's stock options outstanding at
June 30, 1998, is $3.00 to $6.00. The weighted-average remaining contractual
life of those outstanding options is 8.3 years at June 30, 1998.
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data) for the periods ended June 30:
<TABLE>
<CAPTION>
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
Numerator for basic and diluted income (loss) per
share attributable to common stockholders:
Net income (loss).............................. $(238,300) $1,122,453 $2,821,098
Less preferred stock dividends................. (170,233) (2,042,888) (2,042,888)
--------- ---------- ----------
Net income (loss) attributable to common
stockholders................................. $(408,533) $ (920,435) $ 778,210
--------- ---------- ----------
--------- ---------- ----------
Denominator:
Denominator for basic income (loss) per share
attributable to common
stockholders--weighted-average shares........ 5,107,253 5,140,586 5,566,281
Effect of dilutive stock options............... -- 277,135 308,994
--------- ---------- ----------
Denominator for diluted income (loss) per share
attributable to common stockholders--adjusted
weighted-average shares...................... 5,107,253 5,417,721 5,875,275
--------- ---------- ----------
--------- ---------- ----------
Net income (loss) per share attributable to
common stockholders--basic..................... $ (0.08) $ (0.18) $ 0.14
--------- ---------- ----------
--------- ---------- ----------
Net income (loss) per share attributable to
common stockholders--diluted (1)............... $ (0.08) $ (0.18) $ 0.13
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
F-16
<PAGE>
ACCREDO HEALTH, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. EARNINGS PER SHARE (CONTINUED)
(1) Historical diluted loss per share amounts for 1996 and 1997 have been
calculated using the same denomination as used in the basic loss per share
calculation as the inclusion of dilutive securities in the denominator would
have an anti-dilutive effect.
12. SUBSEQUENT EVENTS
PUBLIC OFFERING
The Company is currently in the process of an initial public offering of its
common stock (the "Offering"). The net proceeds from the Offering are planned to
be used primarily to reduce outstanding indebtedness and redeem Series A
mandatorily redeemable cumulative preferred stock.
CHANGES IN COMMON STOCK
Immediately prior to the consummation of the anticipated Offering, the
Company intends to complete a recapitalization pursuant to which a for
stock split will be effected and pursuant to which shares of Common
Stock held by the Company's principal stockholder will be exchanged for
shares of Non-voting Common Stock of the Company. All share and per share
amounts have been retroactively restated to reflect the stock split.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Nova Factor, Inc.
We have audited the accompanying statements of operations, stockholder's
equity and cash flows for Nova Factor, Inc. (the "Company") for the period July
1, 1995 through May 31, 1996. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations, changes in stockholder's
equity and cash flows of Nova Factor, Inc. for the period July 1, 1995 through
May 31, 1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 30, 1996
F-18
<PAGE>
NOVA FACTOR, INC.
STATEMENT OF OPERATIONS
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
<TABLE>
<S> <C>
Revenues:
Net patient service revenue.................................................. $68,584,991
Other revenue................................................................ 6,346,546
Equity in net loss of joint ventures......................................... (138,970)
----------
Total revenues................................................................. 74,792,567
Operating expenses:
Cost of services............................................................. 65,867,240
General and administrative................................................... 2,753,353
Bad debts.................................................................... 1,860,253
Depreciation................................................................. 103,352
Corporate overhead allocation................................................ 4,206,274
----------
Total operating expenses....................................................... 74,790,472
----------
Operating income............................................................... 2,095
Other (expense) income:
Interest expense............................................................. (1,281,683)
Interest income.............................................................. 1,015,664
----------
(266,019)
----------
Loss before income tax benefit................................................. (263,924)
Income tax benefit: 72,090
----------
Net loss....................................................................... $ (191,834)
----------
----------
</TABLE>
See accompanying notes.
F-19
<PAGE>
NOVA FACTOR, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON COMMON PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1995........... 100 $ 1,000 $7,585,731 $3,728,265 $11,314,996
Dividend to SHS.................. -- -- (4,259,581) (3,536,431) (7,796,012)
Net loss for the period ended May
31, 1996....................... -- -- -- (191,834) (191,834)
----------- ----------- ---------- ---------- ----------
Balance at May 31, 1996............ 100 $ 1,000 $3,326,150 $ -- $3,327,150
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
</TABLE>
See accompanying notes.
F-20
<PAGE>
NOVA FACTOR, INC.
STATEMENT OF CASH FLOWS
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss........................................................................ $ (191,834)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation.................................................................. 103,352
Provision for losses on patient receivables................................... 1,860,253
Provision for deferred income taxes........................................... 78,778
Changes in operating assets and liabilities:
Patient receivables and other............................................... (720,568)
Recoverable income taxes.................................................... 23,264
Due to affiliates........................................................... 1,048,753
Inventories................................................................. 5,027,002
Prepaids and other current assets........................................... (59,462)
Accounts payable and accrued expenses....................................... (5,089,028)
Income taxes payable........................................................ (161,972)
----------
Net cash provided by operating activities....................................... 1,872,010
INVESTING ACTIVITIES
Purchases of property and equipment............................................. (880,057)
Increase in other assets........................................................ (12,346)
Change in joint venture investments, net........................................ 401,570
----------
Net cash used in investing activities........................................... (490,833)
FINANCING ACTIVITIES
Payments on notes payable....................................................... (30,883)
----------
Increase in cash................................................................ 1,350,294
Cash at beginning of period..................................................... 644,723
----------
Cash at end of period........................................................... $1,995,017
----------
----------
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest.......................................................... $ 366,000
----------
----------
Cash paid for income taxes...................................................... $ 193,000
----------
----------
</TABLE>
See accompanying notes.
F-21
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Nova Factor, Inc. (the Company) is a wholly-owned subsidiary of Southern
Health Systems, Inc. (SHS), a holding company. Prior to May 31, 1996, Le Bonheur
Health Systems, Inc. was the majority shareholder of SHS. On May 31, 1996,
Accredo Health, Incorporated (Accredo) (formerly Nova Holdings, Inc.) purchased
from Le Bonheur Health Systems, Inc. all of the outstanding shares of SHS common
stock. The financial statements reflect the historical cost-basis financial
statements of the Company, the predecessor to Accredo, prior to the acquisition.
DESCRIPTION OF BUSINESS
The Company provides specialized contract pharmacy and related services
beneficial to patients with certain costly chronic diseases. Because of the
unique needs of patients suffering from chronic diseases, biotechnology drug
manufacturers have recognized the benefits of customized programs to facilitate
alternate site drug administration, ensure compliance with treatment regimens,
provide reimbursement assistance and capture valuable clinical and patient
demographic information. The Company addresses the needs of the manufacturers by
providing specialized services that facilitate product launch and patient
acceptance including timely drug utilization and patient compliance information,
patient education and monitoring, reimbursement expertise and overnight drug
delivery.
The Company has designed its specialty services to focus primarily on
biotechnology drugs that: (i) are used on a recurring basis to treat chronic,
and potentially life threatening diseases; (ii) are expensive; (iii) are
administered through injection; and (iv) require temperature control or other
specialized handling as part of their distribution process.
Other revenues primarily consist of management fees from biotech
manufacturers and various management agreements with hospitals and joint
ventures.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Company has agreements with certain third party-payors that provide for
payments to the Company at amounts discounted from its established rates.
Approximately 18% of gross patient service revenue for the eleven-month
period ended May 31, 1996, is from participation in the Medicare and
state-sponsored Medicaid programs. The Company grants credit without collateral
to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
F-22
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEPRECIATION
Provisions for depreciation are computed by the straight-line method based
on the estimated useful lives of the related assets of 2 to 7 years.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Estimates are used primarily in recording the allowance for doubtful
accounts.
3. INCOME TAXES
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company is indemnified for income tax
liabilities arising prior to May 31, 1996, by Le Bonheur Health Systems, Inc.,
SHS's former parent.
SHS files a consolidated federal income tax return. Financial Accounting
Standards Board Statement 109, ACCOUNTING FOR INCOME TAXES, requires the
allocation of federal income tax expense to the members of a control group that
file a consolidated income tax return for federal income tax purposes.
Therefore, SHS allocated federal income tax benefits of $72,090 to the Company
for the eleven-month period ended May 31, 1996, as if a separate federal income
tax return were filed for the Company.
Income tax (expense) benefit consists of the following for the period ended
May 31, 1996:
<TABLE>
<S> <C>
Current federal benefit.......................................... $ 150,868
Deferred federal expense......................................... (78,778)
---------
$ 72,090
---------
---------
</TABLE>
The benefit for income taxes differed from the amount computed by applying
the statutory federal income tax rate of 34% for the eleven-month period ended
May 31, 1996, due to the following:
<TABLE>
<S> <C>
Income tax benefit at statutory rate.............................. $ 89,734
Nondeductible expenses............................................ (17,644)
---------
Income tax benefit $ 72,090
---------
---------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
4. OPERATING LEASES
The Company leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $162,000 for the
eleven-month period ended May 31, 1996.
F-23
<PAGE>
NOVA FACTOR, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ELEVEN-MONTH PERIOD ENDED MAY 31, 1996
4. OPERATING LEASES (CONTINUED)
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with terms of one year or more consist of the following for the
years ended June 30:
<TABLE>
<S> <C>
1997............................................................ $ 287,000
1998............................................................ 287,000
1999............................................................ 287,000
2000............................................................ 287,000
2001............................................................ 263,000
---------
$1,411,000
---------
---------
</TABLE>
5. DEFINED CONTRIBUTION PLAN
The Company participates in a qualified defined contribution plan of SHS,
under Section 401(k) of the Internal Revenue Code (IRC). Substantially all full
time employees qualify for participation in the plan. The Company makes matching
contributions to the employees' accounts, as defined in the plan. The Company
made matching contributions of approximately $7,500 in the eleven-month period
ended May 31, 1996.
6. RELATED PARTIES
In connection with the sale of SHS by Le Bonheur Health Systems, Inc. on May
31, 1996, the Company declared a non-cash dividend consisting of the amount owed
to the Company by SHS at May 31, 1996 of $7,796,012 by forgiving such amounts
due from SHS. This dividend was recorded as a reduction of stockholder's equity.
Dividends on a per share basis do not provide meaningful information and are not
disclosed herein.
The Company received certain services provided by SHS that include cash
management, tax reporting, risk management and executive management. Allocated
expenses for such services, amounting to $2,753,268 for the eleven-month period
ended May 31, 1996, have been included in the accompanying statement of
operations. Charges for these corporate services were based upon a general
allocation methodology determined by SHS (used to allocate all corporate
overhead expenses to SHS subsidiaries), and were not necessarily allocated based
on specific identification of expenses. Management believes the allocation
methodology is reasonable, and results in amounts that approximate the amounts
that would have been incurred on a stand-alone basis. Additionally, SHS
allocated expenses of $1,453,006 incurred in connection with the sale of the
Company to Accredo.
Texas Health Pharmaceutical Resources, Teddy Bear Home Care/Drug Therapies
and Children's Memorial Home Hemophilia Services are joint ventures in which the
Company has a 50% ownership interest. These joint ventures are accounted for by
the Company under the equity method of accounting.
The Company provided management services to these joint ventures of
approximately $342,000 for the eleven-month period ended May 31, 1996. The
management fees are recorded as other revenues in the accompanying statement of
operations.
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Horizon Health Systems, Inc.
We have audited the accompanying statements of income, stockholders' equity
and cash flows for Horizon Health Systems, Inc. (the "Company") for the years
ended December 31, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly,
in all material respects, the results of operations, changes in stockholders'
equity and cash flows of Horizon Health Systems, Inc. for the years ended
December 31, 1995 and 1996, in conformity with generally accepted accounting
principles.
Memphis, Tennessee /s/ Ernst & Young LLP
July 30, 1998
F-25
<PAGE>
HORIZON HEALTH SYSTEMS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------
------------------------- MARCH 31, MARCH 31,
1995 1996 1996 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net patient service revenues............ 2$3,834,480 $27,427,988 $6,311,473 $7,196,407
Operating expenses:
Cost of services...................... 16,820,301 19,757,939 4,514,174 5,141,500
General and administrative............ 4,138,634 4,595,068 911,187 1,062,323
Depreciation and amortization......... 101,866 82,086 22,759 21,079
----------- ------------ ----------- -----------
Total operating expenses................ 21,060,801 24,435,093 5,448,120 6,224,902
----------- ------------ ----------- -----------
Operating income........................ 2,773,679 2,992,895 863,353 971,505
Other expense (income):
Interest income....................... (19,532) (80,653) (17,281) (17,149)
Interest expense...................... 100,831 17,384 14,515 --
----------- ------------ ----------- -----------
81,299 (63,269) (2,766) (17,149)
----------- ------------ ----------- -----------
Income before income taxes.............. 2,692,380 3,056,164 866,119 988,654
State income taxes...................... 112,574 143,562 51,967 40,853
----------- ------------ ----------- -----------
Net income.............................. $2,579,806 $2,912,602 $ 814,152 $ 947,801
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
F-26
<PAGE>
HORIZON HEALTH SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
COMMON COMMON RETAINED STOCKHOLDERS'
SHARES STOCK EARNINGS EQUITY
------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995.................... 100 $ 150,100 $1,479,488 $1,629,588
Net income.................................. -- -- 2,579,806 2,579,806
Dividends paid.............................. -- -- (1,148,650) (1,148,650)
--
----------- ---------- ------------
Balance at December 31, 1995.................. 100 150,100 2,910,644 3,060,744
Net income.................................. -- -- 2,912,602 2,912,602
Dividends paid.............................. -- -- (1,800,000) (1,800,000)
--
----------- ---------- ------------
Balance at December 31, 1996.................. 100 150,100 4,023,246 4,173,346
Net income.................................. -- -- 947,801 947,801
Dividends paid.............................. -- -- (400,000) (400,000)
--
----------- ---------- ------------
Balance at March 31, 1997 (unaudited)......... 100 $ 150,100 $4,571,047 $4,721,147
--
--
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
See accompanying notes.
F-27
<PAGE>
HORIZON HEALTH SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, ------------------------
------------------------- MARCH 31, MARCH 31,
1995 1996 1996 1997
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income.............................. $2,579,806 $2,912,602 $ 814,152 $ 947,801
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 101,866 82,086 22,759 21,079
Loss on abandoned property............ -- 32,516 -- --
Changes in operating assets and
liabilities:
Patient receivables and other....... 596,058 (1,291,267) 734,136 577,996
Inventories......................... (625,878) (210,472) 36,206 133,674
Prepaids and other assets........... (55,039) (6,456) 44,482 28,388
Accounts payable and accrued
expenses.......................... 230,304 715,371 (580,217) (710,628)
Refunds payable..................... (33,523) 620,400 -- --
Income taxes payable................ 10,625 (61,655) (40,120) (64,997)
----------- ------------ ----------- -----------
Net cash provided by operating
activities............................ 2,804,219 2,793,125 1,031,398 913,313
INVESTING ACTIVITIES
Purchases of property and equipment..... (65,630) (70,981) (42,758) (112,317)
FINANCING ACTIVITIES
Proceeds from long term obligations..... 750,000 -- -- --
Net payments on line of credit.......... (1,768,000) -- -- --
Principal payments on long-term debt.... (125,000) (625,000) (37,500) --
Payment of dividends.................... (1,148,650) (1,800,000) (600,000) (400,000)
----------- ------------ ----------- -----------
Net cash used in financing activities... (2,291,650) (2,425,000) (637,500) (400,000)
----------- ------------ ----------- -----------
Increase in cash and cash equivalents... 446,939 297,144 351,140 400,996
Cash and cash equivalents at beginning
of period............................. 729,722 1,176,661 1,176,661 1,473,805
----------- ------------ ----------- -----------
Cash and cash equivalents at end of
period................................ $1,176,661 $1,473,805 $1,527,801 $1,874,801
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
SUPPLEMENTARY CASH FLOW DISCLOSURES:
Cash paid for interest.................. $ 100,831 $ 17,384 $ 14,515 $ --
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
Income taxes paid....................... $ 101,949 $ 113,130 $ 40,484 $ 105,851
----------- ------------ ----------- -----------
----------- ------------ ----------- -----------
</TABLE>
See accompanying notes.
F-28
<PAGE>
HORIZON HEALTH SYSTEM, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995 AND 1996
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Prior to June 1, 1997, Horizon Health Systems, Inc. d/b/a Hemophilia Health
Services (the Company) was organized as an S corporation. On June 1, 1997,
Accredo Health, Incorporated (formerly Nova Holdings, Inc.) acquired
substantially all of the assets of the Company and the Company became a
wholly-owned subsidiary of Accredo Health, Incorporated.
DESCRIPTION OF BUSINESS
The Company is engaged in the sale and distribution of clotting factors and
ancillary supplies to hemophilia patients located throughout the United States.
The Company provides value-added clinical and distribution services to patients
and payors such as insurance companies, health maintenance organizations, self
insured employers and through the federal Medicare and state-funded health care
programs.
2. SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Company has agreements with certain third-party payors that provide for
payments to the Company at amounts discounted from its established rates. The
Company grants credit without collateral to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
DEPRECIATION AND AMORTIZATION
Provisions for depreciation and amortization are computed principally by
accelerated and straight-line methods based on the estimated useful lives of the
related assets of 5 to 7 years.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. INCOME TAXES
The Company, with the consent of its shareholders, has elected to be an S
Corporation under the Internal Revenue Code. Instead of the Company paying
federal corporate income taxes, the stockholders are taxed individually on the
Company's taxable income. Therefore no provision for federal income taxes has
been made. The Company is liable for state franchise and excise taxes and,
accordingly, a provision has been made for such taxes.
F-29
<PAGE>
HORIZON HEALTH SYSTEM, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1995 AND 1996
4. OPERATING LEASES
The Company leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $274,000 and
$226,000 for the years ended December 31, 1995 and 1996, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with initial terms of one year or more consist of the following
at December 31, 1996:
<TABLE>
<S> <C>
1997.............................................................. $ 251,000
1998.............................................................. 226,000
1999.............................................................. 198,000
---------
$ 675,000
---------
---------
</TABLE>
5. RELATED PARTIES
The Company leased office space from the President and 79% owner of the
Company prior to June 1, 1997. Monthly payments on the lease, which expires
November 1999, are $17,988.
6. NOTES PAYABLE
At December 31, 1995, the Company had a promissory note with a bank for
$750,000. The note carried interest at the bank's prime rate plus an additional
amount based on the Company's leverage rate, ranging from 0.25% to 1.0% (9.5% at
December 31, 1995). The note was paid in full during 1996.
7. UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited financial statements for the three-month periods ended March
31, 1996 and 1997, have been prepared in accordance with generally accepted
accounting principles for interim financial information and Article 10 of
Regulation S-X. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
of recurring adjustments, necessary for a fair presentation have been included.
Operating results for the three-month periods ended March 31, 1996 and 1997, are
not necessarily indicative of the results that may be expected for the entire
year.
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Texas Health Pharmaceutical Resources
We have audited the accompanying balance sheet of Texas Health
Pharmaceutical Resources (the Partnership) as of June 30, 1997, and the related
statements of operations, partners' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Texas Health Pharmaceutical
Resources at June 30, 1997, and the results of its operations and cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 21, 1998
F-31
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 198,728 $ 53,979
------------ ------------
Receivables:
Patient accounts.................................................................. 602,827 520,806
Allowance for doubtful accounts................................................... (123,003) (170,160)
------------ ------------
479,824 350,646
Due from affiliates............................................................... 183,239 192,096
Other............................................................................. 39,515 124,765
------------ ------------
702,578 667,507
Inventories......................................................................... 413,371 252,731
Prepaids and other current assets................................................... 3,860 1,159
------------ ------------
Total current assets.................................................................. 1,318,537 975,376
Furniture and equipment, net of accumulated depreciation of $24,397 and $30,356 for
1997 and 1998, respectively......................................................... 56,575 55,385
------------ ------------
Total assets.......................................................................... $ 1,375,112 $ 1,030,761
------------ ------------
------------ ------------
LIABILITIES AND PARTNERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 583,026 $ 388,156
Accrued expenses.................................................................... 10,173 29,281
Due to partner...................................................................... 7,851 13,896
------------ ------------
Total current liabilities............................................................. 601,050 431,333
Partners' equity...................................................................... 774,602 599,428
------------ ------------
Total liabilities and partners' equity................................................ $ 1,375,112 $ 1,030,761
------------ ------------
------------ ------------
</TABLE>
See accompanying notes.
F-32
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Net patient service revenue............................. $7,465,691 $7,217,045 $3,840,253
Other revenue........................................... -- 43,315 718,469
--------- --------- ---------
Total revenues............................................ 7,465,691 7,260,360 4,558,722
Expenses:
Cost of services........................................ 5,480,648 5,300,908 2,771,129
General and administrative.............................. 144,005 162,534 166,626
Management, accounting and reimbursement fees........... 771,085 245,967 194,198
Bad debts............................................... 223,369 283,357 177,351
Depreciation............................................ 2,120 13,350 13,857
--------- --------- ---------
Total operating expenses.................................. 6,621,227 6,006,116 3,323,161
--------- --------- ---------
Operating income.......................................... 844,464 1,254,244 1,235,561
Other income (expense):
Interest income......................................... -- 19,691 14,268
Forgiveness of amounts due from affiliates.............. (1,635,143) -- --
--------- --------- ---------
(1,635,143) 19,691 14,268
--------- --------- ---------
Net income (loss)......................................... $(790,679) $1,273,935 $1,249,829
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-33
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
STATEMENTS OF PARTNERS' EQUITY
<TABLE>
<CAPTION>
<S> <C>
Balance at June 30, 1995 (unaudited)............................................ $2,240,806
Net loss (unaudited).......................................................... (790,679)
---------
Balance at June 30, 1996........................................................ 1,450,127
Distributions to partners..................................................... (1,950,000)
Net income.................................................................... 1,273,935
---------
Balance at June 30, 1997........................................................ 774,062
Distributions to partners (unaudited)......................................... (1,424,463)
Net income (unaudited)........................................................ 1,249,829
---------
Balance at June 30, 1998 (unaudited)............................................ $ 599,428
---------
---------
</TABLE>
See accompanying notes.
F-34
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)......................................... $(790,679) $1,273,935 $1,249,829
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation............................................ 2,120 13,350 13,857
Gain on sale of equipment............................... -- -- (2,000)
Forgiveness of amounts due from affiliates.............. 1,635,143 -- --
Provision for losses on patient accounts receivable..... 223,369 283,357 177,351
Changes in operating assets and liabilities:
Patient receivables and other......................... (612,037) 645,220 (133,423)
Due from affiliates................................... (485,375) (107,636) (8,857)
Inventories........................................... 310,329 (1,104) 160,640
Prepaids and other current assets..................... (10,551) 6,691 2,701
Accounts payable and accrued expenses................. (517,463) 333,754 (175,762)
Due to partner........................................ 425,652 (410,736) 6,045
--------- --------- ---------
Net cash provided by operating activities................. 180,508 2,036,831 1,290,381
INVESTING ACTIVITIES
Purchases of furniture and equipment...................... (62,276) (6,335) (12,667)
Proceeds from sale of equipment........................... -- -- 2,000
--------- --------- ---------
Net cash used in investing activities..................... (62,276) (6,335) (10,667)
FINANCING ACTIVITIES
Distributions to general partners......................... -- (1,950,000) (1,424,463)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents.......... 118,232 80,496 (144,749)
Cash and cash equivalents at beginning of year............ -- 118,232 198,728
--------- --------- ---------
Cash and cash equivalents at end of year.................. $ 118,232 $ 198,728 $ 53,979
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
F-35
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
1. ORGANIZATION AND NATURE OF OPERATIONS
ORGANIZATION
Texas Health Pharmaceutical Resources (the Partnership) is a general
partnership formed on July 1, 1994. The Partnership has two general partners,
Nova Factor, Inc. (NFI) and Alternative Care Systems, Inc. (ACS), each of which
has a 50% ownership interest and shares equally in the profits and losses of the
Partnership. Under the partnership agreement, the partnership term will end on
March 31, 1999, unless extended by mutual agreement of the partners.
DESCRIPTION OF BUSINESS
The purpose of the Partnership is to provide specialized contract pharmacy
services beneficial to patients with certain costly chronic diseases. The
Partnership markets, sells and distributes drugs such as growth hormone and
provides hemophilia therapy services and supplies.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Partnership considers all highly liquid investments with an initial
maturity of three months or less to be cash equivalents.
PATIENT ACCOUNTS RECEIVABLE
The Partnership's primary concentration of credit risk is patient accounts
receivable, which consists of amounts owed by various governmental agencies,
insurance companies and private patients. The Partnership manages the
receivables by regularly reviewing its accounts and contracts and by providing
appropriate allowances for uncollectible accounts. Significant concentrations of
gross patient accounts receivable are as follows at June 30:
<TABLE>
<CAPTION>
1997
--------- 1998
-----------
(UNAUDITED)
<S> <C> <C>
Medicare................................................................ 24% 14%
Medicaid................................................................ 29% 32%
</TABLE>
Concentration of credit risk relating to accounts receivable is limited to
some extent by the diversity and number of patients and payors, and could be
adversely affected by the geographic service area of the business which, under
the partnership agreement, is the area encompassed within the 50-mile radius of
Dallas, Texas, and within the city limits of Lubbock, Texas. The Partnership
grants credit without collateral to its patients.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of receivables and accounts payable approximates fair
value of these financial instruments.
F-36
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Provisions for depreciation are
computed by the straight-line method based on the estimated useful lives of the
related assets of three to seven years.
REVENUE RECOGNITION
Net patient service revenues are reported at the net amounts billed to
patients, third-party payors and others in the period the services are rendered.
The Partnership has agreements with certain third-party payors that provide for
payments to the Partnership at amounts discounted from its established rates.
Approximately 59% (unaudited), 63% and 63% (unaudited) of gross patient service
revenues for the years ended June 30, 1996, 1997 and 1998, respectively, are
from participation in the Medicare and state-sponsored Medicaid programs.
Other revenues primarily consist of management fees.
USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. Estimates are used primarily in recording the allowances for doubtful
accounts.
3. OPERATING LEASES
The Partnership leases office space and equipment under various operating
leases. Rent expense for all operating leases was approximately $1,700
(unaudited), $15,000 and $15,000 (unaudited), for the years ended June 30, 1996,
1997 and 1998, respectively.
Future minimum payments, by year and in the aggregate, under noncancelable
operating leases with terms of one year or more, consist of the following for
the years ended June 30:
<TABLE>
<S> <C>
1999............................................................... $ 14,000
2000............................................................... 13,000
---------
$ 27,000
---------
---------
</TABLE>
4. RELATED PARTIES
During 1996, the Partnership forgave $1,635,143 (unaudited) of amounts due
from affiliates in which ACS and an affiliate of NFI were each 50% partners. Due
from affiliates of $183,239 and $192,096 (unaudited) at June 30, 1997 and 1998,
respectively, consists of accounts receivable from other entities affiliated
with NFI.
The Partnership receives certain services provided by NFI that include cash
management, tax reporting, risk management, executive management, computer
processing, and accounting and reimbursement services. For these services, the
Partnership pays management, reimbursement and accounting fees to NFI.
Management, accounting and reimbursement fees were $771,085 (unaudited),
$245,967 and $194,198 (unaudited) for the years ended June 30, 1996, 1997 and
1998, respectively. The Partnership received management fees of approximately
$708,000 (unaudited) from an affiliate of ACS for the year ended June 30, 1998.
F-37
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED AS TO 1996 AND 1998)
YEARS ENDED JUNE 30, 1996, 1997 AND 1998
5. INCOME TAXES
No provision is made in the accounts of the Partnership for federal and
state income taxes, as such taxes are liabilities of the partners. The
Partnership's tax returns and amounts of allocable Partnership revenues and
expenses are subject to examination by federal and state taxing authorities. If
such examinations occur and result in changes, the portion of the Partnership's
income or loss reported by the partners may also change.
F-38
<PAGE>
- ---------------------------------------------------------
---------------------------------------------------------
- ---------------------------------------------------------
---------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE 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 OR THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS 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 THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY OR 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......................... 6
The Company.......................... 15
Use of Proceeds...................... 15
Dividend Policy...................... 15
Capitalization....................... 16
Dilution............................. 17
Selected Financial Information....... 18
Management's Discussion and
Analysis............................ 19
Business............................. 28
Management........................... 46
Certain Transactions................. 54
Principal Stockholders............... 56
Description of Capital Stock......... 57
Shares Eligible for Future Sale...... 60
Underwriting......................... 61
Legal Matters........................ 62
Experts.............................. 62
Index to Financial Statements........ F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
NATIONSBANC MONTGOMERY
SECURITIES LLC
SUNTRUST EQUITABLE
SECURITIES
, 1998
- ----------------------------------------------
----------------------------------------------
- ----------------------------------------------
----------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be borne by the
Company in connection with the issuance and distribution of the securities being
registered hereby, other than underwriting discounts and commissions. The
Company is paying all of these expenses in connection with the issuance and
distribution of the securities.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 25,774
NASD Filing Fee................................................. 7,000
Nasdaq Original Listing Fee.....................................
Accountants' Fees and Costs.....................................
Legal Fees and Costs............................................
Printing and Engraving Costs....................................
Blue Sky Fees and Costs.........................................
Transfer Agent and Registrar fees...............................
Miscellaneous...................................................
---------
Total....................................................... $ 750,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Certificate of Incorporation provides
that the Company shall, to the fullest extent permitted by Section 145 of the
DGCL, as amended from time to time, indemnify its officers and directors.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorney's fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of any action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
The Company's Amended and Restated Certificate of Incorporation contains a
provision which eliminates, to the fullest extent permitted by the DGCL,
director liability for monetary damages for breaches of the fiduciary duty of
care or any other duty as a director.
The Company intends to purchase a policy of director's and officer's
insurance that would in certain instances provide the funds necessary for the
Company to meet its indemnification obligations under its Amended and Restated
Certificate of Incorporation.
II-1
<PAGE>
Reference is hereby made to Section of the Underwriting Agreement, the form
of which is filed as Exhibit 1.1 hereto, in which the Company has agreed to
indemnify the Underwriters and certain other persons against certain
liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Company's original capitalization, on May 31, 1996
the Company sold to Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS VII") and
certain of its affiliates an aggregate of shares of Common Stock for
$14,917,602 and an aggregate of 248,624 shares of Series A Preferred Stock for
$24,862,400. In addition, certain other investors acquired shares of Common
Stock for $82,398 and 1,376 shares of Series A Cumulative Preferred Stock for
$137,600.
In connection with the Company's acquisition of Southern Health Systems,
Inc. ("SHS") on May 31, 1996, Messrs. Grow, Kimbrough and Stevens (in addition
to certain other holders of SHS common stock) exchanged their shares of SHS
common stock for , and shares of the Company's Common Stock,
respectively, and 978 shares, 611 shares and 3,056 shares of the Series A
Preferred Stock, respectively.
In order to finance the acquisition of Horizon Health Systems, Inc. ("HHS")
and to provide working capital, the Company issued $10.0 million in Senior
Subordinated Notes to WCAS VII and certain of its affiliates on June 4, 1997. In
connection with the issuance of the Senior Subordinated Notes, the Company
issued an aggregate of shares of Common Stock to the holders of the Senior
Subordinated Notes. Furthermore, as a condition to the acquisition of HHS and
the appointment of Kyle J. Callahan to the Company's Board of Directors, Mr.
Callahan acquired shares of the Company's Common Stock for $250,002 on
October 1, 1997.
In connection with the appointment of Kenneth O. Melkus to the Company's
Board of Directors, Lauren Melkus acquired shares of Common Stock for
$250,002 on October 27, 1997.
In connection with the appointment of Kenneth R. Masterson to the Company's
Board of Directors, the Company sold shares of Common Stock to Mr.
Masterson for $204,000 on July 24, 1998 pursuant to a subscription agreement
entered into by Mr. Masterson in April 1998.
Except as otherwise noted, all issuances of securities described above were
made in reliance on the exemption from registration provided by Section 4(2) of
the Securities Act of 1933, as amended, as transactions by an issuer not
involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Exhibits
<TABLE>
<C> <S>
*1.1 Underwriting Agreement
*3.1 Amended and Restated Certificate of Incorporation of the Registrant
*3.2 Amended and Restated Bylaws of the Registrant
*4.1 Form of Common Stock Certificate
*5.1 Opinion of Alston & Bird LLP with respect to validity of Common Stock
+10.1 Employment Agreement dated May 31, 1996 between the Company and David D. Stevens
+10.2 Employment Agreement dated May 31, 1996 between the Company and John R. Grow
+10.3 Employment Agreement dated May 31, 1996 between the Company and Joel R.
Kimbrough
+10.4 Employment Agreement dated June 5, 1997 between the Company and Kyle J. Callahan
+10.5 Employment Agreement dated July 10, 1998 between the Company and Thomas W. Bell
Jr.
*10.6 Accredo Health 1998 Long-Term Incentive Plan
*10.7 Accredo Health 1998 Employee Stock Purchase Plan
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
+10.8 Nova Holdings, Inc. and its Subsidiaries Stock Option and Restricted Purchase
Plan, as amended and restated
+10.9 Note Purchase Agreement dated June 4, 1997 among the Company, Welsh, Carson,
Anderson & Stowe VII, L.P. and certain other investors
+10.10 Registration Rights Agreement dated May 31, 1996 among the Company, Welsh,
Carson, Anderson & Stowe VII, L.P. and certain other investors
+10.11 Amendment Number One to the Registration Rights Agreement dated October 27, 1997
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors.
+10.12 Amendment Number Two to the Registration Rights Agreement dated July 24, 1998
among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. and certain other
investors.
+10.13 Subscription and Exchange Agreement dated May 31, 1996 among the Company and
certain purchasers and exchanging shareholders
+10.14 Stock Purchase Agreement dated May 31, 1996 among Le Bonheur Health Systems,
Inc., Southern Health Systems, Inc., the Company and Welsh, Carson, Anderson &
Stowe VII, L.P.
+10.15 Modification Agreement dated May 31, 1996 among Le Bonheur Health Systems, Inc.,
Southern Health Systems, Inc., Nova Holdings, Inc. and Welsh, Carson Anderson &
Stowe VII, L.P.
+10.16 Non-Disclosure and Non-Competition Agreement dated May 31, 1996 by and among Le
Bonheur Health Systems, Inc., PharmaThera, Inc., Welsh, Carson, Anderson & Stowe
VII, L.P., Southern Health Systems, Inc., Nova Factor, Inc. and Nova Holdings,
Inc.
+10.17 Stock Purchase Agreement dated as of June 5, 1997 among Dianne R. Martz, A.B.
Charlton, the Company and Horizon Health Systems, Inc.
+10.18 Non-Disclosure and Non-Compete Agreement dated as of June 5, 1997 by and among
Horizon Health Systems, Inc., the Company and Dianne R. Martz
+10.19 Grant Agreement dated as of June 5, 1997 by and between Kyle Callahan and the
Company
+10.20 Subscription and Restriction Agreement dated as of June 5, 1997 by and between
the Company and Kyle Callahan
+10.21 Consulting and Transition Agreement dated as of June 5, 1997 by and between
Dianne Martz and Horizon Health Systems, Inc.
+10.22 Letter Agreement dated as of June 3, 1997 from Andrew M. Paul to Kyle Callahan
regarding Mr. Callahan's election to the Board of Directors of the Company
+10.23 Lease Agreement dated September 1, 1994 between Dianne Martz and Horizon Health
Systems, Inc.
+10.24 Addendum to Lease Agreement dated September 1, 1994 amending the square footage
of Premises and annual rental payments
+10.25 Escrow Agreement dated June 5, 1997 among First American National Bank, Nova
Holdings, Inc. and Dianne Martz and A. B. Charlton, III
+10.26 Refunds Payable Escrow Agreement dated June 5, 1997 among First American
National Bank, Nova Holdings, Inc. and Dianne Martz and A. B. Charlton, III
10.27 Contract for the Sale and Distribution of Genentech Human Growth Hormone dated
March 1, 1997 by and between Genentech, Inc. and Nova Factor, Inc.
10.28 Distribution Agreement dated September 30, 1994 by and between Nova Factor, Inc.
and Genzyme Corporation
10.29 Amendment No. 1 to Distribution Agreement dated January 1, 1995 by and between
Nova Factor, Inc. and Genzyme Corporation
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.30 Second Amended and Restated Distribution Agreement dated July 1, 1994 by and
among PharmaThera, Inc., Nova Factor, Inc. and Genzyme Corporation
10.31 Amendment No. 1 to Second Amended and Restated Distribution Agreement dated
September 30, 1994 by and between PharmaThera, Inc., Nova Factor, Inc. and
Genzyme Corporation
10.32 Amendment No. 2 to Second Amended and Restated Distribution Agreement dated
January 1, 1995 by and between Nova Factor, Inc. and Genzyme Corporation
10.33 Distribution and Services Agreement dated November 1, 1995 by and between
Biogen, Inc. and Nova Factor, Inc.
10.34 Amendment No. 1 to Distribution and Services agreement dated May 17, 1996 by and
between Biogen, Inc. and Nova Factor, Inc.
10.35 Addendum and Amendment No. 2 to Distribution and Services Agreement dated May
21, 1997 by and between Biogen, Inc. and Nova Factor, Inc.
10.36 Addendum and Amendment No. 3 to Distribution and Services Agreement dated July
1, 1997 by and between Biogen, Inc. and Nova Factor, Inc.
10.37 Addendum and Amendment No. 4 to Distribution and Services Agreement dated
January 1, 1998 by and between Biogen, Inc. and Nova Factor, Inc.
*10.38 Loan and Security Agreement, dated as of June 5, 1997 among Nova Holdings, Inc.
and its Subsidiaries and NationsBank of Tennessee, N.A. and First Tennessee Bank
National Association.
*10.39 Swing Line Note, dated December 1, 1997, entered into by Nova Holdings, Inc.
with NationsBank of Tennessee, N.A.
+10.40 ISDA Master Agreement, dated August 7, 1997, between NationsBank of Tennessee,
N.A. and Nova Holdings, Inc.
10.41 Texas Health Pharmaceutical Resources Partnership Agreement dated July 1, 1994
10.42 Distribution Business Management and Service Agreement, dated July 1, 1994 by
and among Southern Health Systems, Inc. and Texas Health Pharmaceutical
Resources
10.43 Amendment No. 1 to Distribution Business Management and Service Agreement, dated
July 1, 1994 by and among Southern Health Systems, Inc. and Texas Health
Pharmaceutical Resources
10.44 Hemophilia Therapy Pharmacy Management Agreement, dated May 9, 1997, by and
among Texas Health Pharmaceutical Resources and Children's Medical Center of
Dallas
10.45 Amendment No. 1 to Hemophilia Therapy Pharmacy Management Agreement, dated
February 28, 1998, by and among Texas Health Pharmaceutical Resources and
Children's Medical Center of Dallas
+10.46 Incentive Stock Option Agreement of David Stevens dated May 31, 1996
+10.47 Incentive Stock Option Agreement of Joel R. Kimbrough dated May 31, 1996
+10.48 Incentive Stock Option Agreement of John R. Grow dated May 31, 1996
+10.49 Incentive Stock Option Agreement of Kyle Callahan dated September 3, 1997
+10.50 Non-Qualified Stock Option Agreement of Patrick J. Welsh dated February 9, 1998
+10.51 Non-Qualified Stock Option Agreement of Ken Melkus dated February 9, 1998
+10.52 Incentive Stock Option Agreement of Kyle Callahan dated February 9, 1998
+10.53 Non-Qualified Stock Option Agreement of Andrew M. Paul dated February 9, 1998
+10.54 Non-Qualified Stock Option Agreement of Kenneth R. Masterson dated April 30,
1998
+10.55 Incentive Stock Option Agreement of Thomas W. Bell, Jr. dated July 10, 1998
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Alston & Bird LLP (included in Opinion filed as Exhibit 5.1)
+23.2 Consent of Ernst & Young LLP
+24.1 Power of Attorney (included on the signature page)
+27.1 Financial Data Schedule
</TABLE>
(B) Financial Statement Schedules
Accredo Health, Incorporated
Schedule II--Valuation and Qualifying Accounts
Nova Factor, Inc.
Schedule II--Valuation and Qualifying Accounts
Texas Health Pharmaceutical Resources
Schedule II--Valuation and Qualifying Accounts
Schedules other than those listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
respective financial statements or notes thereto.
- ------------------------
* To be filed by amendment.
+ Previously filed.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company 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 Company 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 Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the
Representatives of the Underwriters at the closing specified in the underwriting
agreements certificates in such denominations and registered in such names as
required by the Representatives of the Underwriters to permit prompt delivery to
each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Memphis, State of
Tennessee, on September 3, 1998.
<TABLE>
<S> <C> <C>
ACCREDO HEALTH, INCORPORATED
By: /s/ DAVID D. STEVENS
-----------------------------------------
David D. Stevens
CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities indicated on September 3, 1998.
SIGNATURE TITLE
- ------------------------------ ---------------------------
/s/ DAVID D. STEVENS Chief Executive Officer and
- ------------------------------ Chairman of the Board of
David D. Stevens Directors
* President and Director
- ------------------------------
John R. Grow
Senior Vice President and
/s/ JOEL R. KIMBROUGH Chief Financial Officer
- ------------------------------ (principal financial and
Joel R. Kimbrough accounting officer)
* Senior Vice President and
- ------------------------------ Director
Kyle J. Callahan
* Director
- ------------------------------
Patrick J. Welsh
* Director
- ------------------------------
Andrew M. Paul
* Director
- ------------------------------
Kenneth O. Melkus
* Director
- ------------------------------
Kenneth R. Masterson
/s/ JOEL R. KIMBROUGH
------------------------------
Joel R. Kimbrough
By:ATTORNEY-IN-FACT
II-6
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Accredo Health, Incorporated
We have audited the consolidated financial statements of Accredo Health,
Incorporated as of June 30, 1997 and 1998, and for the period from inception
(May 24, 1996) through June 30, 1996, and for the years ended June 30, 1997 and
1998, and have issued our report thereon dated August 12, 1998, except for note
12, as to which the date is , 1998 (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule of the Company listed in Item 16(b) of this Registration Statement.
This Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Memphis, Tennessee
August 12, 1998, except for note 12,
as to which the date is , 1998
The foregoing report is the form that will be signed upon completion of the
restatement of capital accounts described in note 12 to the consolidated
financial statements.
/s/ Ernst & Young LLP
Memphis, Tennessee
September 1, 1998
S-1
<PAGE>
ACCREDO HEALTH, INCORPORATED
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
------------------------
ADDITIONS
COL. B ------------------------ COL. E
---------- CHARGED TO COL. D ----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- ------------------------------------- BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------- ---------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Period from inception (May 24, 1996)
through June 30, 1996:
Allowance for doubtful accounts.... $ -- $ 251,538 $2,749,847 (1) $291,370 (2) $2,710,015
Year ended June 30, 1997:
Allowance for doubtful accounts.... 2,710,015 2,976,718 -- 1,884,407 (2) 3,802,326
Year ended June 30, 1998:
Allowance for doubtful accounts.... 3,802,326 3,165,292 -- 3,537,755 (2) 3,429,863
</TABLE>
- --------------------------
(1) Allowance as a result of acquisition of Nova Factor, Inc.
(2) Uncollectible accounts written off, net of recoveries.
S-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Nova Factor, Inc.
We have audited the statements of operations, stockholder's equity and cash
flows of Nova Factor, Inc. for the period July 1, 1995 through May 31, 1996, and
have issued our report thereon dated August 30, 1996 (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule of the Company listed in Item 16(b) of this Registration Statement.
This Schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 30, 1996
S-3
<PAGE>
NOVA FACTOR, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
-----------------------
ADDITIONS
COL. B ----------------------- COL. E
---------- CHARGED TO COL. D ----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- --------------------------------------- BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- --------------------------------------- ---------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Period from July 1, 1995 through May
31, 1996:
Allowance for doubtful accounts...... $3,982,980 $1,860,253 $ -- 3$,093,386 (1) $2,749,847
</TABLE>
- --------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-4
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners
Texas Health Pharmaceutical Resources
We have audited the financial statements of Texas Health Pharmaceutical
Resources as of June 30, 1997, and for the year then ended, and have issued our
report thereon dated August 21, 1998 (included elsewhere in this Registration
Statement). Our audit also included the information for the year ended June 30,
1997, in the financial statement schedule of the Partnership listed in Item
16(b) of this Registration Statement. This Schedule is the responsibility of the
Partnership's management. Our responsibility is to express an opinion based on
our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein for
the year ended June 30, 1997.
/s/ Ernst & Young LLP
Memphis, Tennessee
August 21, 1998
S-5
<PAGE>
TEXAS HEALTH PHARMACEUTICAL RESOURCES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COL. C
------------------------
ADDITIONS
COL. B ------------------------ COL. E
----------- CHARGED TO COL. D -----------
COL. A BALANCE AT CHARGED TO OTHER ------------ BALANCE AT
- ------------------------------------------ BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ------------------------------------------ ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended June 30, 1996 (unaudited):
Allowance for doubtful accounts......... $ 248,912 $ 223,369 $ -- $358,995 (1) $ 113,286
Year ended June 30, 1997:
Allowance for doubtful accounts......... 113,286 283,357 -- 273,640 (1) 123,003
Year ended June 30, 1998 (unaudited):
Allowance for doubtful accounts......... 123,003 177,351 -- 130,194 (1) 170,160
</TABLE>
- --------------------------
(1) Uncollectible accounts written off, net of recoveries.
S-6
<PAGE>
Exhibit 10.27
CONTRACT FOR THE SALE AND DISTRIBUTION
OF GENENTECH HUMAN GROWTH HORMONE
This Contract for the Sale and Distribution of Genentech Human Growth
Hormone is entered into effective as of March 1, 1997 (the "Effective Date")
by and between Genentech, Inc., a Delaware corporation, of 460 Point San
Bruno Boulevard, South San Francisco, California, 94080-4990 ("Genentech")
and Nova Factor, Inc., a Tennessee corporation located at 1620 Century Center
Parkway, Suite 109, Memphis, Tennessee 38134 ("Nova Factor"). Genentech and
Nova Factor are collectively referred to hereinafter as the "Parties", or
individually as a "Party".
WHEREAS, Genentech manufactures the recombinant human growth hormones
Protropin-Registered Trademark- (somatrem for injection), Nutropin-Registered
Trademark- [somatropin (rDNA origin) for injection] and Nutropin
AQ-Registered Trademark- [somatropin (rDNA origin) injection]; and
WHEREAS, the Parties wish to enter into an agreement governing the sale of
Genentech HGH to Nova Factor and the distribution of such Genentech HGH (as
defined below) by Nova Factor; and
WHEREAS, Nova Factor is a biotech disease management company doing business
throughout the United States with respect to disease management and human
growth hormone products;
NOW, THEREFORE, the Parties agree as follows:
Section 1. Definitions
The following terms shall have the following meanings in this Agreement:
1.1 "Affiliate" shall mean any entity or person which controls, is
controlled by or is under common control with a Party, excluding Welsh,
Carson, Anderson & Stowe and Associated Funds. For purposes of this
definition, "control" shall mean (a) in the case of corporate entities, the
direct or indirect ownership of at least thirty percent (30%) of the stock or
participating shares entitled to vote; and (b) in the case of a partnership,
the power customarily held by a general partner to direct the management and
policies of such partnership.
1.2 "Appeal(s)" shall mean any and all reasonable appeals to a decision of a
third party payer to deny coverage for all or part of the pharmaceutical
costs of Genentech HGH.
1.3 "Coverage Interruption" shall mean the date an insurance change or
termination becomes effective, the date of therapy restart on a patient whose
drug was therapeutically interrupted, or the date of determination of lack of
medical necessity by a third party payer, as defined in Section 2.3(a) below.
<PAGE>
1.4 "Government Program(s)" shall mean Medicaid, Medicare, Children's
Medical Services or other government or similar program.
1.5 "Genentech HGH" shall mean Protropin-Registered Trademark-,
Nutropin-Registered Trademark- and Nutropin AQ-Registered Trademark- or any
other product which is comprised of human growth hormone sold by Genentech.
1.6 "Unit" shall mean a quantity of Genentech HGH equivalent to ten (10)
milligrams.
Section 2. Sale and Distribution of Genentech HGH
2.1 Sale Price. Genentech shall sell Genentech HGH to Nova Factor, at a
cost equal to the lower of (1) $350 per Unit less the Discounts defined and
described in Section 2.2 below and Exhibits A and B attached hereto, or (2)
Genentech's then-current list price for Genentech HGH (currently $350 per
Unit), for distribution by Nova Factor. This price does not include
applicable sales tax. In the event Genentech lowers its list price for
Genentech HGH, the Parties agree to discuss in good faith, within thirty (30)
days thereafter, a potential discount off such revised list price following a
written request by either Party.
2.2 Discount. The total "Discount" applicable to Nova Factor in each
calendar quarter shall equal the sum of the discount percentages described in
Sections 2.2(a) and (b) below and Exhibits A and B attached hereto.
(a) Genentech HGH Base Discounts. Commencing as of the Effective Date,
Genentech shall sell Genentech HGH to Nova Factor at the discounted
prices shown in Exhibit A for the contract year indicated ("Base
Discount"). These prices to not include applicable sales taxes. The NDC
codes, Genentech's published direct list prices, carton sizes offered
and minimum order requirements are also shown on Exhibit A.
(b) Performance Discount. As used in this Section 2.2(b) only "previous
calendar quarter" shall refer to the first two (2) months of the
previous calendar quarter and the last month of the next preceding
calendar quarter. For each performance standard set forth in Exhibit B
("Performance Standard") that was met or exceeded by Nova Factor in the
previous calendar quarter, the relevant additional discount amount shall
be added to the Base Discount for the current calendar quarter, up to a
maximum of * percentage * (*%). For each incentive standard set
forth in Exhibit B ("Incentive Standard") that was met or exceeded by
Nova Factor in the previous calendar quarter, the relevant additional
discount amount shall be added to the base
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
2
<PAGE>
Discount for the current calendar quarter, up to a maximum of *
percentage * (*%), for a maximum total addition under this Section
2.2 (b) of * percentage * (*%) in the aggregate. For each
Performance Standard set forth in Exhibit B that Nova Factor failed to
meet in the previous calendar quarter, the relevant discount amount for
a failure to meet such standard shall be deducted from the Base Discount
for the current calendar quarter, up to a maximum deduction of *
percentage * (*%) ("Reduced Performance Standard"). For each
Incentive Standard set forth in Exhibit B that Nova Factor failed to
meet in the previous calendar quarter, the relevant discount amount for
a failure to meet such standard shall be deducted from the Base Discount
for the current calendar quarter, up to a maximum deduction of *
percentage * (*%), for a maximum total deduction under this Section
2.2(b) of * percentage * (*%) in the aggregate. The maximum
combined Base Discount, additional Performance Standard discount and
additional Incentive Standard discount shall not exceed *% in any
calendar quarter through December 31, 1998, and shall not exceed *% in
any calendar quarter from January 1, 1999 through termination or
expiration of this Agreement.
(c) Changes to the Discounts. The Discounts shall be effective
throughout the term of this Agreement unless and until Genentech alters
its list price for Genentech HGH, in which case the Parties shall
discuss in good faith the level of discount, if any, applicable to the
new list prices. In the event of changes in any laws or regulations of
any jurisdiction relating to the promotion, sale or pricing of
prescription drugs, or in the interpretation or application of any such
laws or regulations, Genentech reserves the right to discontinue the
Discounts provided hereunder in such jurisdiction upon sixty (60) days
prior written notice to Nova Factor.
2.3 Shipment Replacement Requirements.
*
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
3
<PAGE>
2.4 Orders. All purchase orders for Genentech HGH shall be submitted by
Nova Factor to Genentech either in writing or by telephone or via facsimile
at least two (2) business days prior to the requested date of shipment. The
Discount applicable to such purchase order shall be the Discount in effect
upon the date such purchase order is accepted by Genentech. No order will be
binding upon Genentech until accepted by Genentech, and Genentech shall have
no liability to Nova Factor for purchase orders that are not accepted. Nova
Factor's purchase orders submitted to Genentech for purchase of Genentech HGH
shall be governed by the terms of this Agreement. Nothing contained in any
purchase order shall modify any terms herein stated or add any terms or
conditions not stated herein. All Genentech HGH delivered to Nova Factor
under this Agreement shall be suitably packed for air freight shipment in
Genentech's shipping cartons, marked for delivery to the address provided by
Nova Factor with the relevant purchase order, and shall be shipped to Nova
Factor, FOB Origin. Genentech shall ship Nutropin AQ to Nova Factor in
temperature-controlled, validated, insulated shipping containers. Genentech
HGH shall be delivered to Nova Factor via second day air freight with
shipping costs prepaid by Genentech. Shipping charges for overnight delivery
requested by Nova Factor for Genentech HGH in excess of the standard shipping
method chosen by Genentech, shall be borne by Nova Factor. Genentech HGH
purchased by Nova Factor shall be returned for credit only upon prior
authorization by Genentech. The Discount percentage applicable to such credit
will be the Discount in effect upon the date the returned Genentech HGH is
received by Genentech.
2.5 Payment to Genentech. Nova Factor shall pay Genentech in full,
including payment of applicable taxes, for Genentech HGH furnished to Nova
Factor within * (*) days from the date of the invoice from Genentech
for the Genentech HGH supplied to Nova Factor (the "Due Date"). All payments
will be made by check or wire transfer to Genentech's designated bank account
on or before the morning of the Due Date, and supporting documentation on the
payment will be provided separately to Genentech. Genentech's designated
account is as follows, subject to change by notice from Genentech:
If by wire transfer:
Bank: Mellon Bank
Pittsburgh, PA
ABA Number: 0430-00261
Account Name: Genentech, Inc.
Account Number: 005-9230
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
4
<PAGE>
If by check:
Bank: Mellon Bank
Pittsburgh, PA
Mail to: Genentech, Inc.
P.O. Box 360527
Pittsburgh, PA 15251-6527
2.6 Product Availability: Responsibility for Expired, Damaged or Defective
Product. Genentech shall maintain a sufficient inventory of Genentech HGH
available to Nova Factor pharmacies to assure delivery thereof to a
requesting Nova Factor pharmacy by courier or mail within two (2) business
days of acceptance of a telephonic or written purchase order. In accordance
with Genentech's stated return of goods policy in effect at the relevant
times, Genentech shall reimburse or credit Nova Factor for any unused
Genentech HGH that is expired or defective or that is damaged prior to or
during shipment by Genentech to a Nova Factor pharmacy, if it is returned to
Genentech by Nova Factor. In the event of a product recall, Genentech shall
reimburse or credit Nova Factor or any unused Genentech HGH returned to
Genentech as a result of said recall, for the reasonable shipping costs and,
upon mutual agreement, for the reasonable recall related administrative costs
associated with said return.
2.7 Nova Factor Reports and Audits.
(a) Nova Factor shall provide Genetech with a weekly and monthly report
as follows:
(1) The Nova Factor weekly reports shall utilize the form attached as
Exhibit I, and shall cover all patients for whom Nova Factor has
received a prescription or purchase order for Genentech HGH in such
week, all patients who have experienced a Coverage Interruption and
an interruption in a patient's insurance or third party payer
coverage for Genentech HGH due to a loss of employment or other event
beyond the reasonable control of the patient or the patient's
guardian; provided, however, that said reports shall not include
patient names.
(2) The Nova Factor monthly reports shall utilize the parameters and
information listed in Exhibit J attached hereto.
(3) Reports will be centrally generated by Nova Factor and will
contain transaction data from each of its distribution centers.
5
<PAGE>
(4) Reports will include any returns or negative transactions but
will not include inter-distribution center transfers.
(5) Nova Factor will retain sales transaction data for a four-year
period.
(6) The weekly sales reports shall be delivered to Genentech on the
second business day following the end of each week and the monthly
sales reports shall be sent to Genentech prior to the fifteenth
(15th) day following the close of a calendar month.
(7) The weekly and monthly sales report shall be reported in: (1)
tape transfer using 8 mm. cassette tape or 9-track reel-to-reel tape
in ASCII format, via overnight service, (2) hard copy, mailed, or (3)
on-line modem transfer from Nova Factor to Genentech in ASCII format;
provided however, that electronic formats only (formats (1) an (3)
above) shall be provided commencing no later than January 1, 1997.
Nova Factor in consultation with Genentech, will provide the hardware
and software necessary to maintain and report the weekly and monthly
sales transaction data described above. Written sales transaction
reports shall be sent to:
Genentech, Inc.
Attn: Sales Administration
460 Point San Bruno Blvd.
South San Francisco, CA 94080.
(8) Upon reasonable request by Genentech, Nova Factor agrees to
perform reconciliations of sales reports to verify or correct the
accuracy of the weekly and monthly reports.
(9) Genentech, at its expense may have an independent certified
public account perform such audits as may be reasonably required on
Nova Factor's business records and activities to ensure compliance
with the terms of the Agreement. Genentech shall provide Nova Factor
with at least fifteen (15) business days advance notice of such
audits, and Nova Factor shall cooperate fully with the persons
conducting the audit, including full access to the necessary
facilities and records at all reasonable times, and copies, at
Genentech's expense, of all relevant records, provided; however, that
Genentech's audit right shall be limited to (i) bi-annual audits or
(ii) such other audits as Genentech may deem necessary, in its
reasonable judgment, to investigate quality assurance problems that
constitute material trends.
6
<PAGE>
(10) Nova Factor shall maintain for a period of at least four (4)
years all weekly and monthly reports and all correspondence with
Genentech HGH patients and their physicians and third party payers,
including, without limitation copies of Statements of Medical
Necessity, Explanations of Benefit, financial assistance applications
and other Appeals correspondence. Nova Factor shall use its
commercially reasonable best efforts to remedy all discrepancies
identified by Genentech in its audits.
(11) Genentech agrees to return computer tapes to Nova Factor within
sixty (60) days of Genentech's receipt thereof.
(12) Nova Factor will furnish Genentech with un-audited quarterly
financial statements for Nova Factor and its Affiliates, within
forty-five (45) days of the end of the appropriate calendar quarter
and audited annual financial statements within ninety (90) days of
the end of the appropriate calendar year.
2.8 Nova Factor Services: Records; Handling; Control; Licensure. Nova
Factor shall:
(a) in the event of a recall, supply Genentech with a complete record of
accountability within one (1) business day of receiving Genentech's
request for such record; and
(b) store Genentech HGH at between 2deg. and 8deg. Celsius in a limited
access refrigeration unit which will be locked during non-working
hours and protected by a suitable alarm system, and dispense
Genentech HGH with due regard for the need to guard against
potential abuse or diversion; and
(c) monitor refrigeration unit temperature by physically recording the
temperature, at a minimum, twice each day or by utilizing a constant
temperature recording device; and
(d) maintain on a current basis all licenses and certifications as a
registered pharmacy as required by applicable federal, state or
local laws in all jurisdictions where Nova Factor delivers Genentech
HGH; and
(e) maintain in each branch involved in the distribution of Genentech
HGH, a minimum Genentech HGH inventory level sufficient to meet two
(2) weeks anticipated demand for
7
<PAGE>
Section 3. Distribution of Genentech HGH
3.1 Dispensing Obligation. Subject to Section 4.1 of this Agreement and to
the extent in accordance with applicable laws and regulations, Nova Factor
shall evaluate the reimbursement status of, and dispense Genentech HGH to,
all patients with a prescription for Genentech HGH who are referred by any
person or entity to Nova Factor. Within three (3) business days of Nova
Factor's receipt of each prescription or other appropriate shipment request,
Nova Factor shall dispense Genentech HGH to patients without regard to third
party payer coverage of such patient's Genentech HGH; provided, however, that
if the patient or physician specifically requests a delay in dispensing or if
prior authorization is required for a Government Program patient, both as
documented by written records of Nova Factor, said (3) day time frame
shall not apply, and Nova Factor shall use its commercially reasonable best
efforts to ship the requested Genentech HGH within thirty (30) days of such
prescription or shipment request.
3.2 Exceptions. Notwithstanding Section 3.1 above, Nova Factor shall not be
obligated to dispense Genentech HGH to patients:
(a) having no insurance or other third party payer coverage (or coverage
equal to an amount less than * percent (*%) of Nova Factor's
acquisition cost for Genentech HGH for such patient) for Genentech HGH
after a duly diligent evaluation by Nova Factor of such patient's
eligibility for all reasonable payer sources, including, without
limitation, a Government Program, or
(b) where the patient, physician or payer repeatedly and consistently
refuses to assist with the reimbursement process, to complete the
required documentation necessary to process the reimbursement request,
or to process a request for coverage, as demonstrated by: (i) a failure
to respond to at least three (3) consecutive Nova Factor contacts, at
least one (1) of which is a written contact and all of which are
documented in Nova Factor's written records; or (ii) a failure to
substantially comply with the material requirements of a contract
between the payer and the patient or physician; or (iii) a failure by
the patient to pay Nova Factor within a reasonable time frame. Nova
Factor agrees that it shall use its commercially reasonable best efforts
to remedy the refusal, including, without limitation, contacting and
cooperating with Genentech to resolve the issue with the patients, payer
or provider, and exhausting all legal options under the federal, state,
ERISA or other applicable reimbursement standards to resolve the
coverage or claim request; provided, however, that the number of
patients denied service by Nova Factor each calendar year under this
Section 3.2(b) shall not exceed two percent (2%) of the total number of
patients with prescriptions or
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
8
<PAGE>
statements of medical necessity for Genentech HGH who are referred to,
or dispensed or serviced by, Nova Factor during such year. In the event
that such number of patients exceeds or threatens to exceed two percent
(2%) because of factors beyond the reasonable control of the Parties,
then the Parties shall meet to discuss methods to remedy such problems.
3.3 Notice to Genentech. Promptly (which means Nova Factor shall use its
commercially reasonable best efforts to notify within three (3) business
days) after Nova Factor learns that a patient either lacks or is not
eligible for any third party payer coverage for Genentech HGH, or at least
fifteen (15) business days prior to Nova Factor terminating or electing not
to ship to a patient during Appeals or due to a refusal to cooperate or
otherwise, Nova Factor shall notify Genentech of such patient and the reasons
for such patient's non-eligibility or lack of coverage, or for Nova Factor's
refusal to service, as the case may be, and Genentech may provide Genentech
HGH to such patient through its Uninsured Patient's Program or in any other
manner Genentech chooses.
3.4 Delivery Obligations. Nova Factor shall deliver Genentech HGH to the
home of each patient or to such other delivery point as may be designated by
the patient. Nova Factor may distribute Genentech HGH through its Affiliates
and, with the prior written approval of Genentech, which approval may be
withheld at Genentech's sole discretion, other third parties; provided,
however, that Nova Factor hereby guarantees compliance by such Affiliates and
third parties with the terms of this Agreement.
3.5 Appeals and Collections. Nova Factor shall use its commercially
reasonable best efforts to obtain reimbursement from the patient and/or the
third party payer or other payer, including in the event of a denial of
insurance coverage, prosecuting all Appeals. Said Appeals shall include at
least the following steps unless such step is not available: (a) obtaining a
written denial of payment which sets forth the rationale for such denial; (b)
sending a written appeal to the third party payer setting forth
comprehensively the nature of the appeal and providing all relevant support
for the appeal; and (c) sending a written appeal to the next higher level of
appeal at that third party payer. As a general matter, Nova Factor will ship
on first level Appeals, and on second level Appeals when the clinical
information of the patient falls within reasonable medical review criteria
for treating growth hormone inadequacy. Nova Factor is not required to ship
on patients with pre-existing clauses, lack of coverage for injectables, or
no Rx coverage.
3.6 Government Programs and UPP. For each patient who does not have third
party payer coverage or for who insurance coverage is in doubt, Nova Factor
will promptly and diligently assess that patient's eligibility for coverage
of Genentech HGH under all appropriate Government Programs. Nova Factor shall
use its best
9
<PAGE>
efforts to inform patients about meeting, and for patients with Government
Program coverage, maintaining eligibility and coverage by Government
Programs. If third party payer or Government Program coverage for Genentech
HGH is not available, Nova Factor shall promptly contact such patient to
determine the patient's ability to pay for the Genentech HGH with his or her
individual funds. In the event that such patient is unable to pay for the
Genentech HGH individually, Nova Factor shall promptly advise Genentech so
that Genentech may consider the patient for Genentech's Uninsured Patients
Program.
3.7 Patient Assistance Program. Nova Factor shall develop and administer a
patient assistance program in accordance with applicable law and regulations
to assist patients financially unable to afford Genentech HGH therapy;
provided, however, that Nova Factor shall not have any obligation related to
patients having no third party payer coverage for Genentech HGH therapy as
described in Section 3.2(b), which patients may be eligible for Genentech's
Uninsured Patients Program. Nova Factor shall develop its own financial
criteria for patients and shall review each patient's financial status on a
case-by-case basis, all in conformance with applicable laws, rules and
regulations.
Section 4. Distribution Relationship
4.1 Exclusivity. In consideration of the benefits provided to Nova Factor
under this Agreement, Nova Factor agrees for itself not to sell and shall
cause its Affiliates not to sell during the term of this Agreement without
Genentech's prior written consent any product (other than Genentech HGH)
containing human growth hormone or an analog of human growth hormone, or
whose principal effect is that of human growth hormone, whether
naturally-occurring or manufactured by any process. Notwithstanding the
foregoing, Nova Factor shall have the right to distribute or sell any third
party's human growth hormone product measured in 2x5 mg unit cartons (or
their equivalent) (a "Third Party Unit") in a volume equal to * percent
(*%) of the combined Nova Factor and Affiliate sales volume, in 10 mg
equivalent units of Genentech HGH, for the preceding year. This sales volume
shall be adjusted, in a manner mutually agreed to by Genentech and Nova
Factor, to account for current and future Affiliate sales, in 10 mg
equivalent units of Genentech HGH, for the preceding year, payer formulary
restrictions, and sales of competitive product for indications for which
Genentech HGH does not have FDA approval. Said amount may be revised upward
or downward upon mutual agreement of Genentech and Nova Factor. At the end of
each calendar quarter, Nova Factor shall provide a statement to Genentech
setting forth the number of Third Party Units distributed by Nova Factor and
its Affiliates, which amount shall be subject to audit by Genentech in
accordance with Section 2.7(a)(9). In the event that in any year, based upon
such quarterly reports, Nova Factor and its Affiliates distribute Third Party
Units above the * percent (*%) limit described in
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
10
<PAGE>
the second sentence of this paragraph, Nova Factor shall pay to Genentech 85%
of Nova Factor's average purchase price of Genentech HGH during that year for
each Third Party Unit distributed by Nova Factor or its Affiliates during
such year in excess of said amount. Nova Factor also agrees and shall cause
its Affiliates not to distribute or sell Genentech HGH during the term of
this Agreement outside of the United States or its territories or possessions
without the prior written consent of Genentech, which consent shall be given
or withheld in Genentech's sole discretion.
4.2 Substitution and Counter-Detailing of Human Growth Hormone Products.
Except as may be required by applicable law, Nova Factor agrees that it shall
not substitute, generically or therapeutically, any other human growth
hormone product(s) for prescriptions written for Genentech HGH to patients
covered under this Agreement, but specifically excluding patients who are
covered under a Government Program. Nova Factor and its Affiliates shall not
counter-detail Genentech HGH. Nova Factor and its Affiliates agree not to (1)
promote against, counter-detail, or disparage the Genentech Single Point of
Contact system to be administered by Genentech or its subcontractor for
patients with prescriptions of Genentech HGH, (2) promote against,
counter-detail, or disparage the Genentech Managed Distribution System
operated by Healthcare Delivery Systems, Inc. and implemented by Genentech
for the distribution of Genentech HGH through a network of pharmacies
licensed to dispense Genentech HGH ("GMDS"), or (3) promote GMDS. Nova Factor
may inform its customers of its status as an authorized dispensing pharmacy
within GMDS; provided, however, that Nova Factor shall not so inform its
customers in writing unless Genentech has previously approved, in writing,
such written materials, which approval shall not be unreasonably withheld.
Nova Factor and its Affiliates shall not convert or attempt to convert
patients referred to Nova Factor as a GMDS provider to another delivery
option. Nova Factor agrees that it shall make no representation, guarantee or
warranty about Genentech HGH, whether in writing or orally, except as is
contained in written materials delivered to Nova Factor by Genentech for use
in promoting and selling Genentech HGH or as may otherwise be agreed to by
Genentech in writing. Genentech shall have the right to approve Nova Factor
promotional materials which contain pertinent facts relative to Genentech HGH
and all such materials shall comply with applicable regulatory requirements
and shall not contain misrepresentations, either about Genentech HGH or a
competitive product, or disparage a competitive product.
Section 5. Term; Termination
5.1 Term. The term of this Agreement shall commence as of the Effective Date
and continue through December 31, 1999, unless extended by mutual agreement
of the Parties for additional one-year periods.
11
<PAGE>
5.2 Termination Events. The foregoing notwithstanding, this Agreement may be
terminated by a Party: (a) upon any material breach of this Agreement by the
other Party which breach is not cured within sixty (60) days of notice by the
non-breaching Party; or (b) immediately upon giving notice (i) upon the
institution by or against the other Party of insolvency, receivership or
bankruptcy proceedings or any other proceedings for the settlement of the
other Party's debts, (ii) upon the other Party's making an assignment for the
benefit of its creditors, or (iii) upon the other Party's dissolution. This
Agreement may also be terminated upon mutual agreement of the Parties hereto.
5.3 Effect of Termination. Upon termination, if requested by Genentech, Nova
Factor shall return all unused Genentech HGH to Genentech and shall be
reimbursed by Genentech for the reasonable shipping expenses of the return
and the purchase price of the Genentech HGH returned if the purchase price
was previously paid by Nova Factor. If Genentech does not request such unused
Genentech HGH to be returned, Nova Factor may sell such unused Genentech HGH
to patients or return it to Genentech for credit. Nova Factor shall also
return, if so requested by Genentech, all sales aids and other associated
material supplied to Nova Factor by Genentech. Termination shall not relieve
either Party of obligations incurred prior to termination, including Nova
Factor's obligation to pay for Genentech HGH ordered by and delivered to it
under this Agreement, provided that Genentech has not requested return of
that Genentech HGH, and Genentech's obligations of reimbursements accrued as
of the termination date under the programs described in Section 2 above,
which obligations of reimbursement shall first be set off against obligations
of Nova Factor to Genentech, and if any reimbursement credits remain after
set-off after a reasonable period for reconciliation of all outstanding
claims, shall be paid in cash. The provisions of Sections 6.6 and 6.14 shall
survive any termination of this Agreement.
5.4 Change In Control. If Nova Factor or any of its Affiliates or all or
substantially all of either of their assets are to be acquired by whatever
means, including merger with or into, another entity, including an Affiliate
(the "Acquiring Entity") Nova Factor shall so notify Genentech in writing at
least ninety (90) days prior to the date of occurrence of such event, and
Genentech shall have the right to terminate this Agreement at any time until
ninety (90) days after Genentech's receipt of written notice from Nova
Factor. In addition Genentech shall have the right to terminate this
agreement if Nova Factor or its Affiliates acquires all or substantially all
of the assets of an entity or a division of any entity which in either case
sold Genentech HGH within one year preceding such purchase. Nova Factor shall
notify Genentech in writing at least sixty (60) days prior to the occurrence
of such event. If Genentech so
12
<PAGE>
terminates this Agreement, Nova Factor agrees for itself, its Affiliates and
for any such entity that, without Genentech's prior written consent, neither
it nor the Acquiring Entity nor any party affiliated with either of them
shall sell to any patient receiving Genentech HGH at the time of said
termination, for a period of two (2) years following the date of such
acquisition, a human growth hormone product or a product which can be
substituted for Genentech HGH using any of the assets or facilities or
programs developed or used by Nova Factor under this Agreement.
Section 6. Miscellaneous
6.1 Endowment. During the term of this Agreement, Genentech shall fund an
independent, non-profit endowment to assist financially and medically needy
patients, with prescriptions for Genentech HGH.
6.2 Relationship. Neither Party is in any way the legal representative or
agent of the other, nor authorized or empowered to assume any obligation of
any kind, implied or expressed, on behalf of the other Party, without the
express written consent of the other.
6.3 Force Majeure. Nonperformance of either Party shall be excused to the
extent that performance is rendered impossible by strike, fire, earthquake,
flood, governmental acts or orders or restrictions, failure of suppliers, or
any other reason where failure to perform is beyond the control and not
caused by the negligence of the nonperforming Party.
6.4 Entire Agreement. This Agreement is the entire agreement between the
Parties hereto, and supersedes any and all prior agreements between the
Parties (other than the Release Agreement), whether oral or written, relating
to the subject matter hereof. No amendments or modifications of the terms of
the Agreement shall be binding on either Party unless reduced to writing and
signed by both Parties.
6.5 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Parties hereto and their respective successors and assigns;
provided, however, that this Agreement shall not be assignable by either
Party without the other's written consent except to a wholly-owned subsidiary
of such Party, the corporate parent of such Party, or a corporation
controlled by the corporate parent of such Party.
6.6 Confidentiality. Nova Factor and Genentech shall take all reasonable
steps and do all things reasonably necessary to ensure that any information
relating to Genentech HGH, including the terms of this Agreement or to the
business of the disclosing Party ("Confidential Information") acquired by
virtue of the position of the receiving Party under this Agreement shall not
be
13
<PAGE>
disclosed or made use of outside this Agreement; provided, however, that the
foregoing shall not apply to information (a) which receiving Party can show
was known to it prior to disclosure by the disclosing Party; (b) which is or
becomes public knowledge through no fault of the receiving Party; (c) which
is lawfully disclosed to the receiving Party by a third party; (d) which is
required to be disclosed pursuant to court order; or (e) which in the written
opinion of mutually acceptable legal counsel is required to be disclosed
pursuant to federal or state law or regulation (including, without
limitation, securities laws); provided that, in the case of (d) and (e)
above, a reasonable opportunity is afforded the disclosing Party to challenge
the requirement for such disclosure and/or request confidential treatment.
This Section 6.6 shall survive any termination of this Agreement for a period
of five (5) years from disclosure to the receiving Party.
6.7 Publicity. Nova Factor shall not originate any news release or public
announcement, written or oral, to any person relating to this Agreement or to
Genentech HGH except as previously agreed to by Genentech in writing and as
in the written opinion of counsel to Nova Factor is required by law to be
made. Except as required by law, Genentech shall seek approval from Nova
Factor prior to utilizing Nova Factor's name in any written promotional
material.
6.8 Waiver. Neither the waiver by either Party hereto of any breach of or
default under any of the provisions of this Agreement, nor the failure of
either Party to enforce any of the provisions of this Agreement or to
exercise any right hereunder, shall be construed as a waiver of any
subsequent breach or default, or as a waiver of any such rights or provisions
hereunder.
6.9 Severability. If any part of this Agreement shall be invalid or
unenforceable under applicable law, such part shall be ineffective to the
extent of such invalidity or unenforceability only, without in any way
affecting the remaining parts of this Agreement.
6.10 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California. No provision of this
Agreement shall be applied or construed in a manner inconsistent with
applicable federal and state laws and regulations.
6.11 Enforceability. It is the explicit intention of the Parties hereto that
no person or entity other than the Parties hereto, except governmental
authorities to the extent required by law, is or shall be entitled to bring
any action to enforce any provision of this Agreement against either of the
Parties hereto.
6.12 Headings. The headings in this Agreement are intended
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<PAGE>
solely for convenience of reference and shall be given no effect in the
construction or interpretation of this Agreement.
6.13 Notices. Except as otherwise provided, all notices which may be
required pursuant to this Agreement (a) shall be in writing, (b) shall be
addressed, if to a Party, to the person and address set forth at the end of
this Agreement (or to such other person or address as either Party may so
designate from time to time), or addressed, if to a patient, to the patient's
last known address, (c) shall be deemed to have been given three (3) business
days from the date of postmark if sent by mail or on the date of delivery if
transmitted by courier or telegram or on the date of transmission if sent by
telex or telefacsimile, and (d) shall be mailed, postage prepaid, by
first-class mail, registered mail, or certified mail, return receipt
requested, or transmitted by courier for hand delivery, or by telegram, telex
or telefacsimile.
6.14 Limitation on Liability. If either Genentech or Nova Factor terminates
this Agreement in accordance with the provisions of Section 5 or if Genentech
or any governmental agency effects the nationwide withdrawal of the sale of
Genentech HGH for any reason, neither Party shall be liable to the other for
any special, incidental or consequential damages caused directly or
indirectly by such termination or withdrawal, whether arising under this
Agreement or relating to any injury or damage to business, earnings, profits
or goodwill suffered by that Party, including, without limitation any
liability for compensation, reimbursement or damages on the account of the
loss of prospective profits or anticipated sales or on account of
expenditures, inventory, investments, leases or commitments in connection
with the business or goodwill of either Party.
6.15 Affiliates. It is recognized and agreed that during the term of this
Agreement, Nova Factor may distribute Genentech HGH to patients through its
Affiliates and such distribution shall be construed as a distribution by Nova
Factor and all provisions of this Agreement shall apply to such distribution
and to the patients to whom Genentech HGH is distributed by Affiliates of
Nova Factor.
6.16 Records. To the extent required by Section 1861 (v)(1)(I) of the Social
Security Act, 42 U.S.C. Section 1395x(v)(1)(I), as amended, Genentech shall,
upon proper written request, allow the United States Department of Health and
Human Services, the Comptroller General of the United States and their duly
authorized representatives, access to this Agreement and to books, documents
and records necessary to verify the nature and extent of the costs incurred
pursuant to this Agreement at any time during the term of this Agreement and
for an additional period of four (4) years following the last date goods are
furnished under this Agreement.
6.17 Compliance with Laws. Each Party shall be responsible for
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<PAGE>
compliance with all state and federal laws, rules and regulations applicable
to its performance hereunder, including, without limitation, those of the Food
and Drug Administration and of Government Programs.
6.18 Government Reporting. All Parties acknowledge and agree that each is
required to comply with all of their respective reporting obligations pursuant
to Section 1128(b) of the Social Security Act and 42 C.F.R. Section 1001.952,
including the accurate and complete reporting of the value of the Discounts.
IN WITNESS WHEREOF, Genentech and Nova Factor have caused this Agreement
to be executed by their duly authorized representatives effective as of the
day and year first written above.
NOVA FACTOR, INC. GENENTECH, INC.
By: /s/ Randy Grow By: /s/ Kim Popovits
-------------------- --------------------------
Name: /s/ Randy Grow Name: /s/ Kim Popovits
-------------------- --------------------------
Title: President Title: Vice President, Sales
------------------ ------------------------
Address: Address:
1620 Century Center Parkway 460 Point San Bruno Boulevard
Suite 109 So. San Francisco, CA 94080-4990
Memphis, TN 38134 (415) 225-1000
(901) 385-3633
Notices to be Addressed to: Notices to be Addressed to:
Chief Executive Officer Vice President--
Sales and Marketing
With a copy to:
Corporate Secretary
16
<PAGE>
EXHIBIT A
---------
1. The contract term, Base Discount percentages and discounted prices per
vial are shown below:
<TABLE>
<CAPTION>
Base Discount Genentech HGH
Contract Year Percentage Price per 10mg vail
------------- ------------- -------------------
<S> <C> <C>
March 1, 1997 through *% *
June 30, 1997
July 1, 1997 through *% *
December 31, 1997
January 1, 1998 through *% *
June 30, 1998
July 1, 1998 through *% *
December 31, 1998
January 1, 1999 through *% *
December 31, 1999
</TABLE>
2. Following are the NDC codes, published direct list prices, carton sizes
offered and minimum order requirements for Genentech HGH:
a. One 5 mg carton of Protropin (somatrem for injection) (NDC
50242-015-02) or Nutropin [somatropin (rDNA origin) for injection]
(NDC 50242-072-02) contains two (2) 5 mg vials of Genentech HGH and
one (1) vial containing 10 mL of diluent (benzyl alcohol preserved
Bacteriostatic Water for injection). The current published list price
per carton is $350.00 (or $175.00 per 5 mg vial).
b. One 10 mg carton of Protropin (somatrem for injection) (NDC
50242-016-20) or Nutropin [somatrophin (rDNA origin) for injection]
(NDC 50242-018-20) contains two (2) 10 mg vials of Genentech HGH and
two (2) vials containing 10 mL of diluent (benzyl alcohol preserved
Bacteriostatic Water for injection). The current published list price
per carton is $700.00 (or $350.00 per 10 mg vial).
The minimum order for all Protropin and Nutropin is one carton
containing two 5 mg or two 10 mg vials.
c. Nutropin AQ (NDC 50242-0114-11) is supplied as 10 mg (approximately
30 IU) of sterile liquid somatropin per vial. Each carton contains
six single vial cartons containing one 2 mL vial of Nutropin AQ
[somatronpin (rDNA origin) injection] (5 mg/mL). The current published
list price per carton is $2,100 (or $350 per 10 mg vial). The minimum
order is one carton containing six 10 mg vial cartons of Nutropin AQ.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
<PAGE>
Exhibit 10.28
DISTRIBUTION AGREEMENT
THIS DISTRIBUTION AGREEMENT (hereinafter referred to as the
"Agreement") is made and entered into as of the 30th day of September, 1994,
by and between NOVA FACTOR, INC., a Tennessee corporation (hereinafter
referred to as "Nova Factor"), and GENZYME CORPORATION, a Massachusetts
corporation (hereinafter referred to as "Genzyme").
WITNESSETH:
WHEREAS, Genzyme is the manufacturer of the prescription drug
Cerezyme-TM- which has been approved by the United States Food and Drug
Administration for the treatment of Gaucher's disease;
WHEREAS, Nova Factor and Genzyme have previously entered into a
Distribution Agreement dated June 14, 1994 for the distribution of
Cerezyme-TM-, as amended by an Extension Agreement dated June 24, 1994, and a
second Extension Agreement dated September 28th, 1994 (collectively, the
"Original Distribution Agreement");
WHEREAS, in order to facilitate distribution of Cerezyme-TM- on a more
permanent basis, Nova Factor desires to purchase Cerezyme-TM- from Genzyme,
and Genzyme desires to sell Cerezyme-TM- to Nova Factor for resale, upon the
terms and subject to the conditions hereinafter set forth; and
WHEREAS, the Original Distribution Agreement has expired and the terms
and conditions of this Agreement shall govern all sales of Cerezyme-TM-
to Nova Factor by Genzyme, including sales pursuant to the Original
Distribution Agreement.
<PAGE>
NOW, THEREFORE, for an in consideration of the mutual promises contained
herein and for other good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DISTRIBUTORSHIP
1.1 Appointment. Genzyme hereby appoints Nova Factor at act as a
distributor of Cerezyme-TM- in all the states of the United States, and
Nova Factor hereby accepts such appointment. During the period of time that
this Agreement is in effect, Nova Factor shall sell Cerezyme-TM- to
third parties and perform the other obligations set out herein.
1.2 Territory. Subject to rights of Genzyme under this Section 1.2,
Nova Factor shall be a distributor of Cerezyme-TM- in all states of the
United States. The Parties further agree to acknowledge that (1) Genzyme may
distribute Cerezyme-TM- in all the states of the United States directly
through health care providers and pharmacies, and notwithstanding the grant of
a distributorship to Nova Factor, such direct distribution by Genzyme shall
not be construed to be a violation of this Agreement and (2) Genzyme may at its
option appoint additional distributors of Cerezyme-TM- in any or all of
the states of the United States. Genzyme will provide Nova Factor with notice
of the appointment of any additional distributors as of the effective date of
any such appointment.
1.8 Terms Applicable to Distributorship. Nova Factor shall have sole
responsibility and authority for determining the price at which it will
resell Cerezyme-TM- to its customers. Genzyme shall not be involved in that
determination in any way. In the event that Nova Factor determines to sell
Cerezyme-TM- at the price per unit at which it buys Cerezyme-TM- from
Genzyme, the distributorship shall be subject to the terms and conditions set
forth in Article III of this Agreement. In
2
<PAGE>
the event Nova Factor determines to sell Cerezyme-TM- at a price other
than the price per unit at which it buys Cerezyme-TM- from Genzyme,
the purchase and sale of Cerezyme-TM- shall be conducted in the manner
set forth in Article II of this Agreement. Immediately upon execution of this
Agreement, Nova Factor shall make an initial written election whether to be
subject to the terms of Article II or Article III of this Agreement. During
the term of this Agreement, Nova Factor may from time to time change this
election upon ninety (90) days prior written notice to Genzyme.
1.4 Security Interest. Nova Factor shall enter into a Security
Agreement, substantially in the form of Exhibit A attached hereto (the
"Security Agreement"), to secure Nova Factor's obligations to pay Genzyme for
Cerezyme-TM- provided to Nova Factor under this Agreement.
ARTICLE II
PURCHASE OF CEREZYME-TM- FOR RESALE
2.1 Election of Article II. This Article II shall govern the terms and
conditions of the sale of Cerezyme-TM- to Nova Factor by Genzyme, to
the exclusion of Article III at such times during the terms of this Agreement
as Nova Factor elects in accordance with Section 1.3 of this Agreement.
2.2 Orders for Cerezyme-TM-. Nova Factor shall order Cerezyme-TM- from
Genzyme, and Genzyme shall sell Cerezyme-TM- to Nova Factor; provided
however, that any portion of an order that remains unfilled * days after
receipt of such order by Genzyme may be cancelled at Nova Factor's option
upon notice to Genzyme. Genzyme shall ship Cerezyme-TM- at its cost to Nova
Factor in a sealed vial. Each vial shall contain 200 units of Cerezyme-TM-.
Each vial of Cerezyme-TM- shall be packaged in an individual box, containing
a package insert and United States Food Drug Administration ("FDA")-approved
labeling. Genzyme shall
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
3
<PAGE>
have the option of shipping several individual boxes in a larger shipping
container. Genzyme shall ship each order of Cerezyme-TM- to Nova Factor
at its warehouse in Memphis, Tennessee (the "Warehouse") or such other place
as the parties shall agree, at Genzyme's expense. Shipment shall be made by
common carrier, overnight courier or any other similar method of shipment in
Genzyme's discretion.
2.3 Title. Upon the shipment of Cerezyme-TM- to Nova Factor, title to
the Cerezyme-TM- shall pass to Nova Factor. Upon receipt by Nova Factor, Nova
Factor shall assume all responsibility for the marketing, storage, insurance,
delivery and billing of all Cerezyme-TM- provided to it under this Article
II. Upon receipt of each shipment of Cerezyme-TM- by Nova Factor, Nova Factor
shall immediately inspect the shipment for obvious damage to the shipping
container, and each box containing a vial of Cerezyme-TM-. Nova Factor shall
have no obligation to inspect the contents of the vials, nor shall Nova
Factor open or unseal the vials. Nova Factor shall also confirm whether the
number of vials received by Nova Factor equals the number of vials recorded
on the applicable shipping documents, and Nova Factor shall note any
discrepancies in the number of vials received by Nova Factor on the shipping
documents accompanying such shipment of Cerezyme-TM- and immediately notify
Genzyme of any such discrepancies. Nova Factor shall not manufacture, mix or
process any Cerezyme-TM-.
2.4 Billing. No earlier than the date of shipment to Nova Factor,
Genzyme shall invoice Nova Factor for each shipment of Cerezyme-TM- at
Genzyme's * price. Payment of the invoice shall
be due, net of approved returns, * (*) days from the date of the
invoice. In the event that Nova Factor fails to pay such invoice in full
within * (*) days from the date of the invoice. In the event that Nova
Factor fails to pay such invoice in full within * (*) days Nova Factor
shall pay Genzyme late payment charges of * percent (*%) per annum on all
unpaid amounts due under such invoice calculated form the end of that *
(*) day period. The parties hereto agree that should any provision of this
Section 2.4
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
4
<PAGE>
violate any law, rule or regulation pertaining to issuing or the contracting
for or charging of interest, then the excess of interest contracted for or
charged or collected over the maximum lawful rate of interest shall be
applied as a prepayment of future obligations due by Nova Factor to Genzyme
under this Article II, and if any amount so prepaid shall be unused upon
termination of Nova Factor's election to be subject to Article II, or upon
termination of this Agreement, whichever is earlier, the excess of the
prepaid amounts over the amounts actually due to Genzyme shall be immediately
returned to Nova Factor.
2.5 Compliance with Pharmacy Laws. Nova Factor shall dispense or ship
Cerezyme-TM- pursuant to a prescription or authorized purchase order
solely in compliance with applicable federal or state laws, regulations, and
orders including pharmacy laws.
2.6 Pharmacy Records. Nova Factor shall maintain such pharmacy
records as are required by applicable federal and state law, regulations and
orders. Such records shall remain the property of Nova Factor. However, Nova
Factor shall permit Genzyme access to, and the right to obtain copies of,
such records, except to the extent limited by law.
2.7 Packaging. Nova Factor shall pack Cerezyme-TM- in cold
packs, cartons or other packaging with such insulation or other packing
materials as required by the package insert or FDA-approved labeling, or as
otherwise agreed by the parties.
2.8 Recall information. Nova Factor shall generate such distribution,
sales, customer account and financial reports, including records necessary to
trace lot numbers to Cerezyme-TM- Patients to monitor shelf life and
trace shipments and such other data and information as the parties shall
agree.
5
<PAGE>
ARTICLE III
Coordinate Distribution
-----------------------
3.1 Election of Article III. This Article III shall govern the terms and
conditions of the sale of Cerezyme-TM- to Nova Factor by Genzyme, to the
exclusion of Article II, at such times during the term of this Agreement as
Nova Factor so elects in accordance with Section 1.3 of this Agreement.
3.2 Purchase and Maintenance of Inventory of Cerezyme-TM-.
------------------------------------------------------
(a) Sale of Cerezyme-TM-. Nova Factor shall order Cerezyme-TM-
from Genzyme, and Genzyme shall sell Cerezyme-TM- to Nova Factor. Genzyme
shall at its cost ship each order of Cerezyme-TM- to Nova Factor at its
warehouse in Memphis, Tennessee (the "Warehouse"). Title to each such order
of Cerezyme-TM- shipped to Nova Factor hereunder shall pass to Nova Factor at
the point of shipment to Nova Factor.
(b) Nova Factor Inventory. Nova Factor agrees that it will
purchase adequate amounts of Cerezyme-TM- so that such inventory, when added
to Nova Factor's inventory of Ceredase-Registered Trademark- enzyme (the
"Combined Inventory"), will result in an average of * days Combined
Inventory during each calendar quarter; provided that, Nova Factor agrees
that at the option of Genzyme it will purchase adequate amounts of
Cerezyme-TM- to bring the Combined Inventory to a *-day level prior to the
end of any such calendar quarter, however, in no event will such purchase
cause the inventory to exceed an average of * days for such calendar
quarter; provided further that in no event shall Nova Factor be required to
have on hand Combined Inventory in excess of * dollars. The
calculation of inventory will be based upon the average of the unit sales
volume for the previous month, the projected unit sales volume for the
current month, and the projected sales volume for the next month as described
in Exhibit B attached hereto. Genzyme shall use reasonable efforts to assure
that all Cerezyme-TM- shipped to Nova
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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<PAGE>
Factor by Genzyme will have a remaining shelf life of at least ninety (90)
days. At any time which is at least thirty (30) days prior to the expiration
date of Cerezyme-TM-, Nova Factor shall have the right to return to Genzyme
such Cerezyme-TM- that had a remaining shelf life of less than ninety (90)
days when it was received by Nova Factor. All such returns shall be made to
Genzyme for either replacement Cerezyme-TM- or for a credit to the amount
owed by Nova Factor to Genzyme equal to Nova Factor' purchase price of such
Cerezyme-TM- , as may be elected by Genzyme. The service fees earned by Nova
Factor for any Cerezyme-TM- returned to Genzyme pursuant to this Section
3.2(b) shall be credited against future service fees earned by Nova Factor,
or Genzyme may request that Nova Factor reimburse it for service fees paid to
Nova Factor for Cerezyme-TM- that is returned, as Genzyme may elect. Nova
Factor agrees to use the shortest dated Cerezyme-TM- first. Nova Factor
shall provide Genzyme weekly reports on inventory levels, which will be
subject to audit at Genzyme's expense.
(c) Billing. No earlier than the date of shipment of Cerezyme-TM-
to Nova Factor, Genzyme shall invoice Nova Factor for such shipment at
Genzyme's * price for Cerezyme-TM-. Payment
against the invoice, net of returns, will be due from Nova Factor within
* (*) days of the date of Genzyme's invoice. In the event that Nova
Factor fails to pay any such invoice in full within * (*) days, Nova
Factor shall pay Genzyme late payment charges of * percent (*%) per annum
on all unpaid amounts due under such invoice calculated from the end of that
* (*) day period. The parties hereto agree that should any provision of
this Section 3.2(c) violate any law, rule or regulation pertaining to usury
or the contracting for or charging of interest, then the excess of interest
contracted for or charged or collected over the maximum lawful rate of
interest shall be applied as a prepayment of future obligations due by Nova
Factor to Genzyme under this Article III, and if any amount so prepaid shall
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
7
<PAGE>
be unused upon termination of Nova Factor's election to be subject to Article
III, or upon termination of this Agreement whichever is earlier, the excess
of the prepaid amounts over the amounts actually due to Genzyme shall be
immediately returned to Nova Factor.
3.3 Shipment and Warehousing.
-------------------------
(a) Shipment to Nova Factor. Genzyme shall ship Cerezyme-TM- to
Nova Factor in a sealed vial. Each vial shall contain 200 units of
Cerezyme-TM-. Each vial of Cerezyme-TM- shall be packaged in an individual
box, containing a package insert and United States Food and Drug
Administration ("FDA")-approved labeling. Genzyme shall have the option of
shipping several individual boxes in a larger shipping container.
(b) Inspection of Shipment. Upon receipt of each shipment of
Cerezyme-TM- by Nova Factor, Nova Factor shall immediately inspect the
shipment for obvious damage to the shipping container and each box containing
a vial of Cerezyme-TM-. Nova Factor shall have no obligation to inspect the
contents of the vials, nor shall Nova Factor open or unseal the vials. Nova
Factor shall also confirm whether the number of vials received by Nova Factor
equals the number of vials recorded on the applicable shipping documents, and
Nova Factor shall note any discrepancies in the number of vials received by
Nova Factor on the shipping documents accompanying such shipment of
Cerezyme-TM- and immediately notify Genzyme of any such discrepancies.
(c) Storage. Nova Factor shall store all Cerezyme-TM- at the
Warehouse and shall not store Cerezyme-TM- at any other location without the
prior written consent of Genzyme. Nova Factor shall not manufacture, mix, or
process any Cerezyme-TM-. Nova Factor shall be responsible for inventory
control of Cerezyme-TM-, subject to Genzyme's determination of the
appropriate shelf life of Cerezyme-TM-. Nova Factor shall segregate
Cerezyme-TM- from any other item stored
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<PAGE>
by it and shall not commingle Cerezyme-TM- with any other item in its custody
or control. For so long as any Cerezyme-TM- is in Nova Factor's possession,
Nova Factor shall store Cerezyme-TM- in accordance with the requirements set
forth in the Cerezyme-TM- package insert and FDA-approved labeling, including
any requirements with respect to refrigeration.
(d) Risk of Loss. Nova Factor shall bear the risk of loss, theft,
destruction or damage of each vial of Cerezyme-TM- from receipt of each
shipment containing the vial from Genzyme until delivery of such vial of
Cerezyme-TM- to a patient (a "Patient"), physician, clinic or hospital (any
of a Patient, physician, clinic or hospital may thereafter be referred to as
a "Cerezyme-TM- Customer"). Genzyme shall, at its cost, insure all
Cerezyme-TM- against loss from the time of shipment until delivery to Nova
Factor. Nova Factor shall, at its cost, insure all Cerezyme-TM- in its
possession until the delivery of Cerezyme-TM- to a Cerezyme-TM- Customer for
its replacement (i.e., market) value against fire, theft, loss or
destruction, and such other risks as are customarily insured against by
prudent persons in a similar line of business, with an insurance carrier
qualified to do business (in the State of Tennessee or such other place as
Genzyme may authorize.) Nova Factor shall provide Genzyme with certificates of
such insurance prior to Nova Factor's election to be subject to the terms of
Article III.
3.4 Marketing and Sales. Genzyme covenants and agrees that it will
provide such marketing, sales and patient/physician educational materials as
shall be deemed necessary by Genzyme to adequately promote and market
Cerezyme-TM-. Nova Factor shall have no responsibility for undertaking any
sales efforts in connection with Cerezyme-TM- and all inquiries received by
Nova Factor concerning potential sales or prescriptions of Cerezyme-TM- shall
be referred to Genzyme by Nova Factor.
9
<PAGE>
3.5 Designation of Patients and Recipients.
---------------------------------------
(a) Patient Status. Nova Factor shall sell Cerezyme-TM- under
this Article III only to a patient previously approved by Genzyme (an
"Approved Patient") or to a physician, hospital or clinic for administration
to an Approved Patient (a "Cerezyme-TM- Customer"). No patient previously
approved to receive Ceredase-Registered Trademark- enzyme will be provided
Cerezyme-TM- without Genzyme's prior approval. If sale is made to an
Approved Patient, shipment may nonetheless be made to a physician, hospital
or clinic, which will dispense Cerezyme-TM- to the Approved Patient. Before
approving the initial shipment to, or on behalf of, a patient, Genzyme shall
make such inquires as Genzyme, in its sole discretion, deems appropriate to
determine whether Cerezyme-TM- is indicated for such patient, which inquiries
shall include obtaining a letter or summary of medical necessity signed by
such patient's physician where required by the third party payor and
determining the availability of insurance or other source for payment for
Cerezyme-TM-.
(b) Patient Tracking System. Nova Factor shall establish a
patient tracking system in a mutually acceptable format that tracks the
dose, dosage changes and frequency of administration of Cerezyme-TM-
prescribed by physicians for all Approved Patients. Nova Factor shall
provide Genzyme with data on all Approved Patients added each month.
(c) Transmission of Records. Genzyme shall promptly forward to
Nova Factor such documentation as is reasonably necessary for Nova Factor to
transmit the initial shipment of Cerezyme-TM- to any Approved Patient and to
permit Nova factor to file claims with a third party payor, if any, or to
submit invoices to the appropriate Cerezyme-TM- Customer.
3.6 Distribution and Pharmacy Services.
-----------------------------------
(a) Physician Authorization. following the inquiry provided for
in Section 3.5 of this Agreement, Genzyme shall notify Nova Factor that a
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<PAGE>
patient is an Approved Patient. Prior to dispensing Cerezyme-TM- to or on
behalf of, an Approved Patient, Nova Factor shall obtain:
(i) a prescription which is either (A) in proper form signed
by the Approved Patient's physician, which physician shall be duly licensed
to practice medicine and dispense drugs in accordance with applicable state
and federal law, or (B) communicated verbally by said physician if such
communication is valid under applicable state law; or
(ii) an authorized purchase order from an entity, such as a
clinic or hospital, authorized under applicable state law to dispense drugs
to the Approved Patient(s).
In the event that shipment of Cerezyme-TM- is to be made to a Cerezyme-TM-
Customer who wishes to designate Nova Factor as its billing agent, a signed
Sales and Billing Agency Agreement (the "Sales Agreement"), substantially in
the form of Exhibit C attached hereto, shall be obtained from such
Cerezyme-TM- Customer.
(b) Compliance with Pharmacy Laws. Nova Factor shall dispense or
ship Cerezyme-TM- pursuant to a prescription or authorized purchase order
solely in compliance with applicable federal and state laws, regulations, and
orders including pharmacy laws. Nova Factor may ship sufficient amounts of
Cerezyme-TM- to a physician, hospital or clinic to permit dispensing of
single or multiple doses, but only if such does(s) are to be administered to
an Approved Patient(s). Nova Factor shall not provide Cerezyme-TM- to any
Cerezyme-TM- Customer without the prior authorization of Genzyme.
(c) Pharmacy Records. Nova Factor shall maintain such pharmacy
records as are required by applicable federal and state laws, regulations and
orders. Such records shall remain the property of Nova Factor. However, Nova
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<PAGE>
Factor shall permit Genzyme access to, and the right to obtain copies of,
such records, except to the extent limited by law.
3.7 Shipment of Cerezyme-TM- to Cerezyme-TM- Customers.
---------------------------------------------------
(a) Confirmation of Information. Nova Factor shall, before
dispensing or shipping Cerezyme-TM-, (i) confirm with the Approved Patient's
third party payor, if any, the necessary billing forms and billing
procedures, including billing address, required to file any claim for the
Cerezyme-TM- on Nova Factor's or such Approved Patient's behalf, or, in the
event Nova Factor is acting as billing agent for a Cerezyme-TM- Customer
pursuant to an executed Sales Agreement, for such Cerezyme-TM- Customer and
(ii) make due inquiry whether it may lawfully dispense Cerezyme-TM- in the
state to which shipment has been directed.
(b) Inventory Availability. Nova Factor shall be required to ship
Cerezyme-TM- only from Cerezyme-TM- inventory which Genzyme has previously
delivered to Nova Factor.
(c) Packaging. Nova Factor shall pack Cerezyme-TM- in cold packs,
cartons or other packaging with such insulation or other packing materials as
required by the package insert or FDA-approved labeling, or as otherwise
agreed by the parties. Nova Factor shall, at its cost, cause Cerezyme-TM- to
be delivered to Cerezyme-TM- Customers by common carrier, overnight courier
or other similar method of shipment selected by Nova Factor.
(d) Return of Cerezyme-TM-. In the event that a shipment of
Cerezyme-TM- is refused or rejected by the Cerezyme-TM- Customer, Nova Factor
will cause the shipment of Cerezyme-TM- to be returned to the Warehouse at
Nova Factor's expense. Upon return, Genzyme will direct Nova Factor, at
Genzyme's cost, either to (i) return the refused shipment to Genzyme or (ii)
destroy the refused shipment.
12
<PAGE>
3.8 Billing Services.
(a) After compliance by Nova Factor with its obligations
under Section 3.7(a) hereof, upon delivery of Cerezyme-TM- to a Cerezyme-TM-
Customer, Nova Factor shall prepare and mail an invoice for such shipment
within * (*) business days after receipt by Nova Factor of the
documentation necessary for billing to be provided by Genzyme under Section
3.5 of this Agreement and thereafter to any third party payor. Each invoice,
as appropriate, shall be on a form agreed to by the parties or upon the
standardized form (such as HCFA - 1500 - Health Insurance Claim Form)
required by a third party payor or in such electronic billing format as may
be required. In the event Cerezyme-TM- is sold to an Approved Patient, Nova
Factor shall submit the invoice to the Approved Patient or, if authorized to
do so, to the applicable third party payor. If Nova Factor has sold
Cerezyme-TM- to a Cerezyme-TM- Customer, Nova Factor shall submit the invoice
to the Cerezyme-TM- Customer (except a Cerezyme-TM- Customer for which Nova
Factor acts as a billing agent). If Nova Factor has shipped Cerezyme-TM- to a
Cerezyme-TM- Customer for which Nova Factor acts as billing agent, Nova
Factor shall submit the invoice in the manner provided in the Sales Agreement.
(b) Nova Factor shall use reasonable efforts to comply with
all requirements for the submission of claims imposed by each third party
payor for an Approved Patient.
(c) Nova Factor shall comply with all applicable federal
and state laws, regulations and orders, including Medicare requirements, in
its capacity as billing agent for any Cerezyme-TM- Customer pursuant to the
Sales Agreement.
3.9 Collection. Nova Factor shall be responsible for the
collection of all monies due for the sale by Nova Factor of Cerezyme-TM- and
all such monies shall belong to Nova Factor.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
13
<PAGE>
3.10 Bad Debts and Delinquent Accounts. Nova Factor shall bear the
risk of loss on all uncollected accounts and bad debts resulting from sales
and shipments of Cerezyme-TM- by Nova Factor under this Article III.
3.11 Accounting and Financial Reporting. Nova Factor shall maintain
records and books of account, in the form of computer data or otherwise,
which will identify Nova Factor's inventory of Cerezyme-TM-, each sale and
shipment of Cerezyme-TM- by Nova Factor (showing recipient's name, amount of
drug dispensed, and charges for said drug), and all revenue collected from
the sale and distribution of Cerezyme-TM- by Nova Factor properly applied to
and against the invoices for said drug generated by Nova Factor. In addition
to these records, Nova Factor shall generate such distribution, sales,
customer, account and financial reports, including records necessary to trace
lot numbers to Cerezyme-TM- patients, to monitor shelf life and trace
shipments and such other data and information (collectively, "Accounting
Records") as the parties shall agree. Nova Factor agrees that on a monthly
basis, it will furnish Genzyme with an accounting of all Cerezyme-TM-
received, all Cerezyme-TM- shipped and all bills submitted and all revenues
collected in connection with Cerezyme-TM- sold and distributed, by Nova
Factor during the month.
3.12 Computer System Access
(a) Terms of Access. Nova Factor shall maintain an IBM AS400
computer system. Nova Factor shall establish a separate computer data base for
demographic, account and patient information regarding Cerezyme-TM- within
Nova Factor's IBM AS400 computer system, or any successor hardware. Genzyme
shall be given direct inquiry (read only) access to the computer data base
for Cerezyme-TM- maintained within Nova Factor's computer system; provided,
however, that Genzyme shall be responsible for obtaining at its cost all
compatible terminal hardware, modems, telephone access lines, and all other
hardware and
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<PAGE>
materials necessary to access Nova Factor's computer system. Nova Factor
shall also have full access to this data base. Nova Factor will make
available to Genzyme the necessary phone numbers, access codes and passwords
which shall provide Genzyme with direct inquiry access solely to the Nova
Factor computer data base concerning Cerezyme-TM-. Genzyme shall be
responsible for all long distance charges incurred by Genzyme in using dial
access to Nova Factor's computer system. Genzyme acknowledges that the entry
of data and information into the computer data base may be delayed, however,
Nova Factor will make reasonable efforts to ensure that the information is
current and will promptly notify Genzyme if the information in the data base
is not current.
(b) Confidentiality of Computer Data. The information
contained in the data base is considered by Nova Factor to be confidential.
Nova Factor shall provide Genzyme with a list of material in the database
considered confidential by Nova Factor in accordance with Section 4.5 hereof.
Genzyme shall deal with all such data designated as confidential by Nova
Factor, together with any computer access codes and passwords provided to
Genzyme by Nova Factor to permit Genzyme access to said database, in
accordance with Section 4.5 hereof.
3.13 Audit. Nova Factor shall allow Genzyme access to Nova Factor's
books and records related to its sale of Cerezyme-TM- under this Article III
for purposes of audit. Any such audit shall be at Genzyme's cost and shall be
conducted at Nova Factor's offices in Memphis, Tennessee during Nova Factor's
regular business hours, and upon Genzyme providing Nova Factor with
reasonable advance notice. Any amounts found from such audit to be due and
owing Genzyme but unpaid shall thereafter be paid in accordance with the
terms of this Agreement.
3.14 Personnel. Nova Factor shall designate certain Nova Factor
personnel to perform Nova Factor's obligations under this Article III,
including those with respect to inventory, storage, shipment, billing,
collections, accounting
15
<PAGE>
and recordkeeping. Nova Factor shall be solely responsible for its employees'
salaries, federal and state income tax withholding, Social Security tax
withholding, worker's compensation benefits and fringe benefits. When Nova
Factor determines that the volume of its distribution of Cerezyme-TM-
requires, Nova Factor shall dedicate certain of its personnel, which Nova
Factor shall select, exclusively to handle Nova Factor's obligations under
this Article III.
3.15 Compensation to Nova Factor.
(a) Service Fee. In consideration for the services provided
to Genzyme by Nova Factor under this Article III, Genzyme agrees to pay to
Nova Factor a service fee for each unit of Cerezyme-TM- purchased by Nova
Factor pursuant to this Article III. For Cerezyme-TM- purchased until and
including December 31, 1994, the amount of the service fee per unit shall be
$*. The amount of the service fee will be renegotiated for each calendar
year (or a portion thereof) thereafter in accordance with Section 3.17 hereof.
(b) Invoicing. Genzyme shall pay this service fee to Nova
Factor within * (*) days of the date that Genzyme invoices Nova Factor
for a shipment of Cerezyme-TM-. In the event that Genzyme fails to pay any
such service fee in full within * (*) days, Genzyme shall pay Nova
Factor late payment charges of * percent (*%) per annum on all unpaid
amounts due pursuant to this Section 3.15 calculated from the end of that
* (*) day period. The parties hereto agree that should any provision of
this Section 3.15 violate any law, rule or regulation pertaining to usury or
the contracting for or charging of interest, then the excess of interest
contracted for or charged or collected over the maximum lawful rate of
interest shall be applied as a prepayment of future obligations due by
Genzyme to Nova Factor under this Article III, and if any amount so prepaid
shall be unused upon termination of Nova Factor' election to be subject to
Article III, the
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
16
<PAGE>
excess of the prepaid fees over the fees actually due to Nova Factor shall be
immediately returned to Genzyme.
(c) Reimbursement for Expenses. Upon presentment of invoices
or other documentation of such expenses, Genzyme will reimburse Nova Factor
for any reasonable expenses which are the responsibility of Genzyme under
this Article III so long as such expenses are advanced by Nova Factor with
the prior approval of Genzyme. Genzyme will reimburse such expenses within
* (*) days of Genzyme's receipt of the documentation of any such
expenses. Notwithstanding this Section 3.15(c), Nova Factor shall be solely
responsible for expenses incurred by it in carrying out its obligations under
this Article III, including but not being limited to, shipping, obtaining
supplies, postage and printing necessary for the collection of accounts
receivable generated by Nova Factor's distribution of Cerezyme-TM-.
3.16 Taxes. Nova Factor shall prepare and file all sales and use
tax returns which are required by, and pay all taxes due to any state or
local governmental entity from, or as a result of, the sale or distribution of
Cerezyme-TM- by Nova Factor. To the extent directed by any Cerezyme-TM-
Customer for whom Nova Factor acts as billing agent, Nova Factor will include
the amount of such taxes on invoices submitted by Nova Factor on behalf of
said Cerezyme-TM- Customer if sales or use taxes are require to be collected
from said Cerezyme-TM- Customer. Nova Factor shall be liable for any personal
property taxes on inventory of Cerezyme-TM- held in Tennessee by Nova Factor,
any gross receipts or business taxes resulting from the sale or distribution
of Cerezyme-TM- by Nova Factor, and to the extent required, shall include
such inventories of Cerezyme-TM- held by Nova Factor, and sales of
Cerezyme-TM- distributed by Nova Factor, in Nova Factor's respective federal
and state income and franchise tax returns. To the extent that Nova Factor is
required to file tax returns with any governmental entity in regard to the
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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<PAGE>
distribution and sale of Cerezyme-TM- by Nova Factor pursuant to this Article
III and to remit taxes in connection therewith, other than income taxes for
service fee income pursuant to Section 3.15 hereof, Genzyme shall promptly
reimburse Nova Factor for such taxes upon presentation by Nova Factor of
evidence reasonably satisfactory to Genzyme that Nova Factor has paid such
taxes.
3.17 Renegotiation of Terms.
(a) Renegotiation of Terms of Article III. In the event that
Nova Factor elects to be subject to Article III during the first year of this
Agreement, and if, upon the first anniversary of the effective date of this
Agreement, either of the following shall have occurred: *, Nova Factor may,
within * (*) days after such anniversary, request in writing that Genzyme
renegotiate those terms of this Agreement specified in such request. Genzyme
shall have * (*) days from the receipt of such request to agree to renegotiate
the terms specified in the request, together with such terms as Genzyme shall
specify in its response, or to give notice of termination of this Agreement
under Section 4.2(b)(ii) hereof.
(b) Renegotiation of Service Fee. The service fee to be paid
by Genzyme to Nova Factor for services provided under this Agreement will be
renegotiated by the parties between January 1 and February 28 of each
calendar year, with changes in such fee, if any, to become effective with
respect to Cerezyme-TM- purchased after January 1 of the applicable calendar
year, subject at all times to the parties' rights of termination under
Section 4.2(b)(ii). The service fee to be paid with respect to Cerezyme-TM-
purchased during the time period the
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
18
<PAGE>
parties are negotiating such fee shall be paid at the rate in effect during
the preceding year, and once the parties agree upon a change in such fee, if
any, Genzyme shall promptly pay to Nova Factor the amount by which the new
service fee exceeds the previous service fee, or Nova Factor promptly shall
reimburse Genzyme the amount by which the new service is less than the
previous service fee, whichever is applicable. The parties agree to use
reasonable efforts to negotiate the service fee by February 28 of each
calendar year.
3.18 Effect of Termination. Upon termination of Nova Factor's
election to be subject to this Article III for any reason, Nova Factor shall
promptly provide Genzyme with a final accounting of units of Cerezyme-TM-
held in inventory at termination, units shipped, billings, collections and
such other information contained in the Accounting Records as is requested by
Genzyme. A copy of all computer and other records concerning Cerezyme-TM-,
including the Accounting Records, maintained by Nova Factor under this
Article III, shall be provided to Genzyme; however, Nova Factor shall
maintain the original of said records.
ARTICLE IV
Miscellaneous
4.1 Indemnity and Insurance.
(a) Indemnification. Nova Factor and Genzyme hereby agree
that:
(i) Nova Factor shall assume responsibility for and
shall indemnify and hold Genzyme harmless and defend Genzyme from
all losses (including claims for injuries to employees of Nova
Factor or Genzyme), expenses, attorneys' fees, damages, claims and
judgments resulting solely from (A) Nova Factor's breach of the
terms of this Agreement; (B) the negligent acts or omissions or
wrongful acts
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<PAGE>
of Nova Factor, its agents or employees; or (C) any
misrepresentation or breach of any representation or warranty made
herein by Nova Factor; provided, however, that Nova Factor shall
have no liability to Genzyme for loss of profits to Genzyme in the
event Nova Factor is unable, through no fault of Nova Factor's, to
ship Cerezyme-TM- to a Cerezyme-TM- Customer; and
(ii) Genzyme shall assume responsibility for and shall
indemnify and hold Nova Factor harmless and defend Nova Factor from
all losses (including claims for injuries to employees of Nova
Factor or Genzyme), expenses, attorneys' fees, damages, claims and
judgments resulting solely from (A) Genzyme's breach of the terms of
this Agreement; (B) the negligent acts or omissions or wrongful acts
of Genzyme, its agents or employees; (C) any misrepresentation or
breach of representation or warranty made herein by Genzyme; or (D)
any defect in the design, manufacture or condition of Cerezyme-TM-
supplied to Nova Factor by Genzyme.
(b) Insurance. During the term of this Agreement, Nova Factor and
Genzyme will each maintain a general public liability, products liability and
products property damage insurance, each policy with limits of not less than
$1,000,000.00 per incident, $3,000,000.00 in the aggregate. All policies
insuring against liability for bodily injury or death or damage to property
shall include coverage for claims resulting from the sale and distribution of
Cerezyme-TM- and in the case of Genzyme, claims resulting from the
manufacture of Cerezyme-TM-. Genzyme and Nova Factor will provide the other
party with certificates evidencing the insurance required hereunder, and all
such policies shall provide that notice of cancellation or termination or
reduction in the limits of or other material change to the coverage thereof
shall be provided in advance to the
20
<PAGE>
other party. In the event of such cancellation, termination, reduction or
change of the coverage described herein, the party maintaining such insurance
shall immediately obtain substitute or replacement coverage. Failure to
obtain substitute or replacement coverage shall be grounds for the
termination of this Agreement.
4.2 Term, Renewal and Termination.
(a) Initial Term. Unless otherwise terminated pursuant to
subsection (c) below, this Agreement shall be for an initial term expiring on
December 31, 1995 (the "Initial Term").
(b) Renewal. Unless otherwise terminated pursuant to
subsection (c) below, this Agreement will automatically renew at the
expiration of the Initial Term for an additional period of one year and shall
thereafter automatically renew from year to year for additional one-year
periods, unless either party shall give written notice of cancellation to the
other party at least 90 days prior to the end of the Initial Term or the
expiration of any extension.
(c) Termination. This Agreement shall automatically
terminate (i) upon the mutual agreement of the parties, (ii) at any time upon
sixty (60) days prior notice by either party hereto, (iii) upon the insolvency
or bankruptcy of either party, the making by either party of an assignment
for the benefit of creditors, the consent by either party to the appointment
of a trustee or receiver, or the appointment without its consent, of a
trustee or receiver for it or for a substantial part of its property, or (iv)
upon the institution by or against either party of bankruptcy,
reorganization, arrangement or insolvency proceedings. In addition, if either
party hereto shall breach the terms of this Agreement, the nonbreaching party
may give written notice of the breach to the breaching party, and if said
breach is not cured within 30 days following the giving of said notice, this
Agreement shall at the option of the nonbreaching party be terminated
21
<PAGE>
immediately upon the conclusion of such 30 day period. Late payment by Nova
Factor under the terms of Section 3.2(c) hereof shall not constitute a breach
of the terms of this Agreement sufficient to give rise to termination of this
Agreement.
(d) Return of Cerezyme-TM-. In the event of termination of
this Agreement, Nova Factor shall cause the inventory of Cerezyme-TM- then in
Nova Factor's possession to be returned to Genzyme, at Genzyme's cost. Each
unit of Cerezyme-TM- returned to Genzyme shall be credited in full payment
for the amount due from Nova Factor for that unit, except any units which are
destroyed or damaged for which Nova Factor shall bear the risk of loss in
accordance with Section 3.3(d) hereof. The services fees earned by Nova
Factor for any Cerezyme-TM- returned to Genzyme pursuant to this Section
4.2(c) shall be offset against such credit. To the extent the amount credited
to Nova Factor pursuant to this paragraph exceeds the amount owed by Nova
Factor to Genzyme at such time, such excess shall be promptly paid by Genzyme
to Nova Factor.
(e) Survival of Obligations. Termination of this Agreement
shall not relieve either party from any liability or obligation it had
incurred prior to the date of such termination including, but not limited to,
obligations to pay any outstanding unpaid amounts due pursuant to this
Agreement and to accept returns of Cerezyme-TM- in accordance with the
provisions of this Agreement. It is the express intention and agreement of
the parties hereto that all the covenants, agreements, warranties and
indemnities contained in Sections 4.1, 4.5 and 4.7 shall survive the
termination of this Agreement.
4.3 Force Majeure. Neither party shall be liable to the other for
failure or delay in the performance of any of its obligations under this
Agreement for the time, and to the extent, such failure or delay is caused by
riots, civil commotion, wars, hostilities between nations, embargoes, acts of
God, earthquakes, storms, fires, strikes, sabotage, explosions, shortages of
raw materials or power, or
22
<PAGE>
any other matter which is beyond the reasonable efforts of the party to
control. This provision shall not excuse, or apply to, obligations of a party
to make monetary payments hereunder.
4.4 Independent Contractor. Subject to the requirements herein,
Nova Factor shall determine the time spent and the methods employed in
carrying out its obligations hereunder, and Nova Factor shall be solely
responsible for the operation and management of its business. In entering
into and carrying out its obligations under this Agreement, Nova Factor is an
independent contractor. Nothing in this Agreement, or in the relationship
between the parties or in the activities of Nova Factor, its agents or
employees, an employee of, or joint venturer or partner with, Genzyme, or to
empower any of them to bind or obligate Genzyme in any way. Nova Factor
further agrees that it will make no representations with respect to its
relationship to Genzyme, except that it has contracted with Genzyme to act as
a distributor of Cerezyme-TM- and to perform the obligations set out herein.
It is further agreed and understood that Nova Factor is only contracting to
provide certain specified services to, and purchase Cerezyme-TM- from,
Genzyme. Genzyme shall be responsible for all costs incurred in operating
Genzyme's business, and Genzyme shall be solely responsible for the
management and operation of its business.
4.5 Confidentiality and Restrictive Covenant.
(a) Protection of Documents. Each party has developed or may
during the term hereof develop, certain formulae, products, methods of doing
business, and other proprietary information which that party deems to be
confidential and a trade secret. In the course of fulfilling each party's
respective obligations hereunder, some of these formulae, products, methods
and other proprietary information of one party will become known to the other
party hereto.
23
<PAGE>
Each party agrees that it will not duplicate, make use of, or disclose, in
any manner whatsoever, any information which is deemed to be confidential by
the other party (as provided in Section 4.5(b) hereof), either during or
after the term of this Agreement, without the express prior written consent
of the other party hereto.
(b) Designation of Materials. In the event that any
information deemed to be confidential by a party is provided to the other
party or its employees or agents in writing, the party providing same shall
mark the writing as confidential, prior to providing such information to the
other party. In the event that such information is provided in non-written
form such as orally, by audio tape, by direct telephonic access to computer
data bases, videotape or computer software or disc, the party claiming such
information to be confidential shall, at the time such information is
furnished to the other party or within fifteen (15) days thereafter, furnish
to the other party a written list containing a brief description of such item
and designating such item as confidential. Upon termination of this
Agreement, all such information, together with any copies thereof, of any
information hereunder deemed, or designated by a party as, confidential shall
be returned to the party who supplied the information. Notwithstanding the
preceding provision, the following types of information provided by a party
shall always be deemed confidential, whether or not so designated: patient
medical records; patient and physician names and addresses; hospitals;
clinics; number of patients on therapy; prescription files; costs of goods
and supplies; the formula and composition of Cerezyme-TM-; and financial
records of the party.
(c) Exceptions. The restrictions in this Section 4.5 shall
not apply (i) to any information which is not deemed confidential hereunder,
or which has not been designated as confidential in the manner specified
herein, (ii) to any information which was already known to the receiving
party prior to its disclosure by the other party, as can be proven by
competent evidence, (iii) to any information
24
<PAGE>
which is or becomes public knowledge through no fault or failure of a party
bound by this Agreement, (iv) to any information which is independently
developed by an employee of the receiving party who had no access to or
knowledge of the information disclosed hereunder or (v) to any information
which was rightfully obtained from a third-party who was not subject to any
restriction of confidentiality.
(d) Covenant. Nova Factor agrees that during the term of
this Agreement, and for a period of five years following the termination
hereof, Nova Factor will not undertake to distribute or supply any
prescription drug for the treatment of Gaucher's disease other than
Cerezyme-TM-, without the prior written consent of Genzyme. Furthermore,
during the same period, and whether or not otherwise prohibited by the
restrictions set out hereinabove, Nova Factor will not disclose to any other
person or entity, except as may be required by a lending institution that has
provided a loan to Nova Factor relating to its performance of its obligations
under this Agreement, or use for purposes of competing directly or indirectly
with the sale of Cerezyme-TM- by Genzyme: (i) the names of patients or
hospitals, clinics or physicians or number thereof provided Cerezyme-TM- by
Nova Factor pursuant to this Agreement, (ii) the volume of Cerezyme-TM-
supplied to Cerezyme-TM- Customers by Nova Factor, (iii) the addresses of
patients, (iv) the referral sources of Cerezyme-TM- Customers, (v) Genzyme's
price for Cerezyme-TM-, or (vi) the service fees, if any, paid to Nova Factor
pursuant to this Agreement. This provision shall not prohibit disclosure of
such information in the event that Nova Factor is requested or required by
law or governmental regulations or by litigation discovery requests, subpoena,
civil investigative demands or similar processes to disclose such
information, nor shall it prohibit disclosure and use by Nova Factor of such
information, if and as necessary, in any litigation between Nova Factor and
Genzyme.
4.6 Representations, Warranties and Covenants.
25
<PAGE>
(a) No Interference. Genzyme represents and warrants to Nova Factor
that Genzyme has the sole and exclusive right to manufacture and distribute
Cerezyme-TM- and that the distribution of Cerezyme-TM- and the other
activities to be performed by Nova Factor hereunder do not, and will not,
infringe upon or violate the rights of, any other party. Genzyme will
protect, indemnify and hold Nova Factor harmless from any claims of
infringement of patent, trademark, mark name or proprietary rights by third
parties relating to Nova Factor's distribution of Cerezyme-TM-.
(b) Government Approval. Genzyme further represents and warrants
to Nova Factor that all FDA and state approvals and permits required for
Genzyme's manufacture, sale and distribution of Cerezyme-TM- have been
obtained and that Genzyme has the corporate authority to authorize Nova
Factor to sell and distribute Cerezyme-TM-. Genzyme shall comply with all
applicable FDA and state laws and regulations in the manufacture, design,
testing, inspection, labeling, warning and instructions for use of
Cerezyme-TM- material to its performance under this Agreement.
(c) Compliance with Laws, Licensure. Nova Factor represents and
warrants to Genzyme that Nova Factor has materially complied with, shall
continue to comply with, and nothing in the transactions contemplated by this
Agreement would cause it not to be in compliance with, all federal and state
laws, regulations and orders applicable to it and its business as a pharmacy,
including all pharmacy laws. Nova Factor possesses all federal and state
governmental licenses and permits material to and necessary in its
performance of this Agreement. Such licenses and permits are, and shall
remain, in full force and effect, no violations are or have been recorded in
respect of any such licenses or permits and no proceeding is pending or, to
the knowledge of Nova Factor, threatened to revoke or limit any thereof. Nova
Factor shall promptly notify
26
<PAGE>
Genzyme in the event that a proceeding is threatened or commenced to revoke to
limit any such licenses or permits.
4.7 Trade Names and Trademarks
(a) Use of the Name Cerezyme-TM-. Genzyme grants to Nova Factor
the non-exclusive privilege to use, in connection with the stocking, sale and
distribution of Cerezyme-TM-, the various trade names, trademarks, service
marks and several other word and design marks which Genzyme associates with
Cerezyme-TM-. Nova Factor acknowledges that Genzyme is the exclusive owner of
the various trade names, trademarks, service marks and several other word and
design marks which Genzyme uses in connection with Cerezyme-TM- and the sales
thereof, and that all goodwill associated with such is the property of and
shall inure to the benefit of Genzyme. Nova Factor agrees that Genzyme has
the right to control the use or display thereof by Nova Factor. This
non-exclusive license is a limited license and may be terminated at any time
by Genzyme. Nova Factor agrees that it will initially display the trademark
"Cerezyme" as follows: Cerezyme-TM-. After the mark has been federally
registered and as soon as reasonably practicable after receipt of notice from
Genzyme, Nova Factor agrees to commence displaying the "Cerezyme" trademark
as follows: Cerezyme-Registered Trademark-. Nova Factor shall discontinue the
display or use of any such mark or name, or change the manner in which any
such name or mark is displayed or used, upon request by Genzyme. Nova Factor
further agrees that:
(i) No such name or mark will be used in such a manner that
is may become a generic word, causing a loss of its protected status
as such;
(ii) Nova Factor shall not use such names or marks, or any
variant thereof, as the whole or any part of its title or the name
of
27
<PAGE>
its business, except upon Genzyme's express written consent to
such use;
(iii) Nova Factor shall not use such names or marks in any
manner in connection with an effort to sell goods of others,
whether or not such goods are competitive with Cerezyme-TM-, and
shall not use such names or marks as part of its business name;
(iv) Nova Factor shall not use, or allow the use of, any name
or mark which is likely to cause confusion, mistake or deception
with respect to any of the trade names or trademarks of Genzyme;
and
(v) Nova Factor shall not assert, acquire or attempt to
acquire any rights or interest in or to, or consent or assist
others in contesting, said names or marks of Genzyme.
Upon Termination of this Agreement, Nova Factor shall discontinue any and
all use of Genzyme's trademarks, trade names and any other
identification with Genzyme and shall avoid any statement or
implication that it is a distributor of Cerezyme-TM-.
(b) Use of the Name Nova Factor-Registered Trademark- The parties
recognize that Nova Factor-Registered Trademark- is registered
trademark, and Nova Factor hereby grants to Genzyme the
non-exclusive privilege to use, in connection with the stocking and
sale of Cerezyme-TM- the various trade names, trademarks, service
marks and the several other word and design marks which are
associated with Nova Factor-Registered Trademark-. Genzyme
acknowledges that Nova Factor is the exclusive owner of the various
trade names, trademarks, service marks and the several other word
and design marks which are used in connection with the name Nova
Factor-Registered Trademark and that all good will associated with
such is the property of and shall inure to the benefit of Nova
Factor. Genzyme agrees that Nova Factor has the right to control the
use or display thereof by Genzyme. This non-exclusive license is a
limited license and may be terminated at any time by Nova Factor.
Genzyme shall discontinue the display or use of any such
28
<PAGE>
name or mark, or change the manner in which any such name or mark is
displayed or used, upon request by Nova Factor. Genzyme further agrees that:
(i) No such name or mark shall be used in such a manner that
it may become a generic word, causing the loss of its protected
status as such;
(ii) Genzyme shall not use such names or marks, or any variant
thereof, as the whole or any part of its title or the name of its
business, except upon Nova Factor's express written consent to such
use;
(iii) Genzyme shall not use such names or marks in any manner
in connection with an effort to sell goods of others and shall not
use such names or marks as part of its business name;
(iv) Genzyme shall not use, or allow the use of, any name or
mark which is likely to cause confusion, mistake or deception with
respect to any of the trade names or trademarks of Nova Factor; and
(v) Genzyme shall not assert, acquire or attempt to acquire
any rights or interest in or to, or context or assist others in
contesting, the names or marks of Nova Factor.
Upon termination of this Agreement, Genzyme shall discontinue any and all use
of Nova Factor's trademarks, trade names and any other identification with
Nova Factor, and shall avoid any statement or implication that it is
affiliated with Nova Factor.
4.8 Service to Other Businesses. Genzyme acknowledges that Nova
Factor offers it services to other businesses, and Genzyme agrees that no
provision contained herein shall restrict or prohibit Nova Factor from
providing services to others in addition to Genzyme as long as the
performance of said services does not
29
<PAGE>
violate the restrictions st out in Section 4.5 hereof, or interfere with the
performance of Nova Factor's obligations hereunder.
4.9 Records. To the extent required by Section 1861(b)(1)(I) of
the Social Security Act, Nova Factor shall, upon proper request, allow the
United States Department of Health and Human Services, the Comptroller
General of the United States and their duly authorized representatives,
access to this Agreement and to all books, documents and records necessary to
verify the nature and extent of the costs of the services provided by Nova
Factor under this Agreement at any time during the term of this Agreement
and for an additional period of four (4) years following the last date
services are furnished under this Agreement.
4.10 Specific Performance. The parties acknowledge that violation
of Sections 4.5 and 4.7 hereof could cause irreparable damage to the party
against whom the violation is committed which would not adequately be
remedied by an action at law for damages. The parties agree that, in the
event of a breach or threatened breach of either of these sections, the party
alleging such breach shall be entitled to injunctive relief prohibiting such
breach or threatened breach in any court of the United States or of any
state or other political subdivision thereof.
4.11 Remedies Cumulative. The remedies provided herein shall be
cumulative and shall not preclude any party from asserting any other rights
or seeking any other remedies against the other party, or such other party's
successors or permitted assigns, pursuant to this Agreement, as provided
under other agreements and as provided by law. Nothing contained herein shall
preclude a party from seeking equitable relief, where appropriate.
4.12 Nonassignability and Subcontracting. This Agreement and the
rights, duties and responsibilities of the parties hereto shall not be
assigned without the prior expresss written consent of the other party,
except that no prior consent shall be required in the event of acquisition of
all or substantially all of the assets of
30
<PAGE>
a party by an acquirer. The parties to this Agreement acknowledge that for a
limited period of time, it may be necessary for Nova Factor to arrange for
the performance of certain of its obligations under this Agreement by a third
party pursuant to an agreement between Nova Factor and such third party. Nova
Factor shall not enter into such agreement without the prior written consent
of Genzyme, which shall not be unreasonably withheld, provided that Nova
Factor may enter into such an agreement with PharmaThera, Inc. without the
consent of Genzyme.
4.13 Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of Tennessee (excluding the choice of
law rules thereof), and the laws of the State of Tennessee shall govern the
rights, duties, liabilities and responsibilities created hereunder.
4.14 Headings. All headings used herein are for ease of reference
only and shall in no way be construed as interpreting, decreasing or
enlarging the provisions of this Agreement.
4.15 Effect. Subject to any provisions hereof restricting
assignment, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, their successors, administrators, trustees and
permitted assigns.
4.16 Modification. This Agreement and the Security Agreement
constitute the entire agreement and understanding between the parties hereto
in respect to the transactions contemplated herein and supersede all prior
written or oral agreements, arrangements and understanding relating to the
subject matter hereof. This Agreement may be amended, changed or modified
only with the written consent of both parties.
4.17 Notices. All notices, demands, request, consents, reports,
approvals or other communications which may be or are required to be given
served or sent pursuant to this Agreement shall be in writing and shall be
hand delivered, or mailed by first class, registered or certified mail,
return receipt
31
<PAGE>
requested, postage prepaid, or transmitted by telegram, facsimile or by
overnight courier addressed to the party at its business address and to the
attention of the individual set out following the signatures of the parties
on the last page of this Agreement. Each party may designate by notice in
writing a different person, or new address, to which any notice, demand,
request, consent, report, approval or other communication may thereafter be
given, served or sent. Each notice, demand, request, consent, report,
approval or other communication mailed in the manner described above or
delivered to a telegraph company or to an overnight courier, or by facsimile
transmission, shall be deemed sufficiently given, served, sent or received
for all purposes at such time as it is delivered to the addressee (with the
return receipt or delivery receipt or machine report, in the case of
facsimile transmission, being deemed conclusive evidence of such delivery) or
at such time as delivery is refused by the addressee upon presentation.
4.18 Waivers. No waiver of the breach of any provision of this
Agreement shall be deemed a waiver of any other breach of or default under
the same or any other provision hereof, nor will any waiver constitute a
continuing waiver. No term or provision of this Agreement shall be waived
except by a written instrument executed by a duly authorized officer of the
waiving party hereto and no course of dealing, act or omission to act shall
operate as a waiver of any right, power or privilege granted to a party
hereunder.
4.19 Accreditation Standards. The services provided hereunder are
designed to meet the applicable requirements stated in PH.1 through PH.11.3
of the Standards for the Accreditation of Home Care-Pharmaceutical Services
of the Joint Commission on Accreditation of Healthcare Organizations
("JCAHO"). In the performance of this Agreement the parties shall conform to
the policies, standards and requirements of JCAHO, to the extent applicable.
32
<PAGE>
4.20 Severability. If any one or more of the provisions of this
Agreement shall for any reason be held illegal or invalid, such illegality or
invalidity shall not affect any other provision of this Agreement and this
Agreement shall be enforced as if such illegal or invalid provision had not
been contained herein.
33
<PAGE>
IN WITNESS WHEREOF, the undersigned parties hereto have caused this
Agreement to be executed as of the day and year first above written.
GENZYME CORPORATION
By:
-------------------------
Title: President Therapeutics
----------------------
Address: One Kendall Square
Cambridge, Massachusetts 02139
Attention: William Aliski
NOVA FACTOR, INC.
BY: Randy Grow
------------------------
Title: President
---------------------
Address: Suite 114
1785 Nonconnah Blvd.
Memphis, Tennessee 38132
Attention: Randy Grow
34
<PAGE>
Exhibit B
Section 3.2(b)
Basis for Calculating Inventory
*
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
<PAGE>
Exhibit 10.29
AMENDMENT NO. 1 TO
DISTRIBUTION AGREEMENT
THIS AMENDMENT NO. 1 TO DISTRIBUTION AGREEMENT (the "Amendment") is made
and entered into as of the 1st day of Jan, 1995 by and between NOVA FACTOR,
INC., a Tennessee corporation ("Nova Factor"), and GENZYME CORPORATION, a
Massachusetts corporation ("Genzyme").
WHEREAS, Genzyme and Nova Factor entered into that certain Distribution
Agreement, dated as of September 30, 1994 pursuant to which Genzyme agreed to
sell to Nova Factor and Nova Factor agreed to purchase, the prescription drug
Cerezyme -TM- (the "Cerezyme -TM- Distribution Agreement");
WHEREAS, Genzyme, Pharmthera, Inc., a Tennessee corporation ("PTI") and
Nova Factor entered into that certain Second Amendment and Restated
Distribution Agreement dated as of July 1, 1994, as amended, pursuant to
which Genzyme agreed to sell to PTI and/or Nova Factor, and PTI and/or Nova
Factor agreed to purchase, the prescription drug Ceredase -Registered
Trademark- enzyme (the "Ceredase -Registered Trademark- enzyme Distribution
Agreement");
WHEREAS, PTI assigned all of its rights and liabilities under the
Ceredase -Registered Trademark- enzyme Distribution Agreement to Nova Factor,
which accepted that assignment, and Genzyme consented to such assignment; and
WHEREAS, the parties hereto wish to modify certain provisions of the
Cerezyme -TM- Distribution Agreement requiring Nova Factor to maintain a
certain level of inventory of Ceredase -Registered Trademark- enzyme and
Cerezyme -TM-.
NOW, THEREFORE, for and in consideration of the foregoing and for
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. Section 3.2(b) of the Cerezyme -TM- Distribution Agreement is hereby
amended such that the first sentence thereof shall be deleted and the
following shall be substituted therefor:
"Nova Factor agrees that it will purchase adequate amounts
of Cerezyme -TM- so that such inventory, when added to Nova
Factor's inventory of Ceredase -Registered Trademark- enzyme
(the "Combined Inventory"), will result in an average of *
days Combined Inventory during each calendar quarter; provided
that, Nova Factor agrees that at the option of Genzyme it will
purchase adequate amounts of
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
<PAGE>
Cerzyme -TM- to bring the Combined Inventory to a *-day level
prior to the end of any such calendar quarter, however, in no
event will such purchase cause the Combined Inventory to exceed
an average of * days for such calendar quarter; provided further,
that in no event shall Nova Factor be required to have on hand
Combined Inventory in excess of * dollars."
2. Except as specifically amended by this Amendment, the terms and
provisions of the Cerezyme -TM- Distribution Agreement shall continue on full
force and effect and shall be unaffected hereby.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment
to be executed on its behalf as of the date first set forth above.
GENZYME CORPORATION
By: /s/ [illegible]
-------------------
Title:
-------------------
NOVA FACTOR, INC.
By: /s/ Randy Grow
-------------------
Title President
-------------------
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
<PAGE>
Exhibit 10.30
SECOND AMENDED AND RESTATED DISTRIBUTION AGREEMENT
THIS SECOND AMENDED AND RESTATED DISTRIBUTION AGREEMENT (hereinafter
referred to as the "Agreement") is made and entered into as of July 1, 1994,
by and among PHARMATHERA, INC -Registered Trademark-, a Tennessee corporation
(hereinafter referred to as "PTI"), NOVA FACTOR, INC., a Tennessee corporation
(hereinafter referred to as "Nova Factor") and GENZYME CORPORATION, a
Massachusetts corporation (hereinafter referred to as "Genzyme").
W I T N E S S E T H :
WHEREAS, Genzyme is the manufacturer of the prescription drug
Ceredase -Registered Trademark- enzyme which has been approved by the United
States Food and Drug Administration for the treatment of Gaucher's disease;
WHEREAS, in order to facilitate the national distribution of the
drug, PTI and Nova Factor, as PTI's successor in interest from and after July
1, 1994, desire to purchase Ceredase -Registered Trademark- enzyme from
Genzyme, and Genzyme desires to sell Ceredase -Registered Trademark- enzyme
to PTI or Nova Factor, as applicable, for resale, upon the terms and subject
to the conditions hereinafter set forth;
WHEREAS, PTI and Genzyme have entered into a Distribution Agreement
dated April 18, 1991 (the "Unamended Distribution Agreement") and an Amended
and Restated Distribution Agreement dated February 15, 1993 (the "Amended
Distribution Agreement");
WHEREAS, pursuant to that certain Assignment and Assumption
Agreement (the "Assignment") between PTI and Nova Factor dated as of July 1,
1994, PTI assigned to Nova Factor, and Nova Factor assumed all of PTI's
rights, duties, responsibilities and liabilities in and under the Unamended
Distribution Agreement, the Amended Distribution Agreement, the Security
<PAGE>
Agreement (as hereinafter defined) and the Amended and Restated Security
Agreement (as hereinafter defined);
WHEREAS, PTI, Nova Factor and Genzyme desire to further amend and
restate the terms of the Unamended Distribution Agreement and the Amended
Distribution Agreement as set forth in this Agreement;
WHEREAS, the terms and conditions of this Agreement shall govern
certain sales of Ceredase -Registered Trademark- enzyme made by PTI during
the period commencing on April 1, 1994 and ending on June 30, 1994, and the
terms and conditions of this Agreement shall govern all sales of Ceredase
- -Registered Trademark- enzyme made by Nova Factor from and after July 1, 1994;
WHEREAS, PTI has entered into a Security Agreement and Subordination
Agreement, each dated April 18, 1991 (the "Security Agreement"), to secure
its obligations under the Unamended Distribution Agreement, and the terms and
conditions of such Security Agreement and Subordination Agreement remain in
full force and effect with respect to the Unamended Distribution Agreement
(subject, however, to the effect of the Assignment from and after July 1,
1994);
WHEREAS, PTI has entered into an Amended and Restated Security
Agreement, dated February 15, 1993 (the "Amended and Restated Security
Agreement"), to secure its obligations under the Amended Distribution
Agreement, and the terms and conditions of such Amended and Restated Security
Agreement remain in full force and effect with respected to the Amended
Distribution Agreement (subject, however, to the effect of the Assignment
from and after July 1, 1994); and
WHEREAS, the parties desire that PTI's and Nova Factor's
obligations to Genzyme under this Agreement shall also be secured by the
Amended and Restated Security Agreement.
2
<PAGE>
NOW, THEREFORE, for and in consideration of the mutual promises
contained herein and for other good and valuable consideration, the receipt
and adequacy of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
Distributorship
1.1 Appointment. Genzyme hereby appoints (1) PTI, for the period
commencing on April 1, 1994 and ending on June 30, 1994, to act as a
preferred distributor of Ceredase -Registered Trademark- enzyme in all the
states of the United States, and (2) Nova Factor, from and after July 1,
1994, to act as a preferred distributor of Ceredase -Registered Trademark-
enzyme in all the states of the United States (each of PTI and Nova Factor,
during the period that the foregoing appointment is in effect with respect to
such party, is hereinafter referred to as the "Distributor"), and the
Distributor hereby accepts such appointment. During the period of time that
this Agreement is in effect, the Distributor shall sell Ceredase -Registered
Trademark- enzyme to third parties, and perform the other obligations set out
herein.
1.2 Territory. Subject to the rights of Genzyme under this Section
1.2, the Distributor shall be a distributor of Ceredase -Registered
Trademark- enzyme in all the states of the United States. The parties further
agree and acknowledge that (1) Genzyme may distribute Ceredase -Registered
Trademark- enzyme in all the states of the United States directly through
health care providers and pharmacies and notwithstanding the grant of a
distributorship to the Distributor, such direct distribution by Genzyme shall
not be construed to be a violation of this Agreement and (2) Genzyme may at
its option appoint additional distributors of Ceredase -Registered Trademark-
in any or all of the states of the United States. Genzyme will
3
<PAGE>
provide the Distributor with notice of the appointment of any additional
distributors as of the effective date of any such appointment.
1.3 Terms Applicable to Distributorship. The Distributor shall
have sole responsibility and authority for determining the price at which it
will resell Ceredase -Registered Trademark- enzyme to its customers. Genzyme
shall not be involved in that determination in any way. In the event that the
Distributor determines to sell Ceredase -Registered Trademark- enzyme at the
price per unit at which it buys Ceredase -Registered Trademark- enzyme from
Genzyme, the distributorship shall be subject to the terms and conditions set
forth in Article III of this Agreement. In the event PTI determines to sell
Ceredase -Registered Trademark- enzyme at a price other than the price per
unit at which it buys Ceredase -Registered Trademark- enzyme from Genzyme,
the purchase and sale of Ceredase -Registered Trademark- enzyme shall be
conducted in the manner set forth in Article II of this Agreement. At or
prior to the time of execution of this Agreement, the Distributor shall make
an initial written election to be subject to the terms of Article II or
Article III or this Agreement. After the date hereof, the Distributor may,
from time to time, change this election upon ninety (90) days prior written
notice to Genzyme.
1.4 Applicability of Unamended Distribution Agreement. The terms
and conditions of the Unamended Distribution Agreement (subject, however, to
the effect of the Assignment from and after July 1, 1994) shall govern all
inventory of Ceredase -Registered Trademark- enzyme located at the
Distributor's Warehouse (as defined below) prior to or on October 31, 1992,
all accounts receivable generated from sales of Ceredase -Registered
Trademark- enzyme prior to November 1, 1992, and all accounts receivable
generated from the sale of the inventory of Ceredase -Registered Trademark-
enzyme located at the Distributor's Warehouse on or prior to October 31, 1992.
1.5 Applicability of Amended Distribution Agreement. The terms and
conditions of the Amended Distribution Agreement shall govern all
4
<PAGE>
inventory of Ceredase -Registered Trademark- enzyme received at the
Distributor's Warehouse between November 1, 1992 and March 31, 1994, all
accounts receivable generated from sales of Ceredase -Registered Trademark-
between November 1, 1992 and March 31, 1994, and all accounts receivable
generated from the sale of the inventory of Ceredase -Registered Trademark-
enzyme received at the Distributor's Warehouse between November 1, 1992 and
March 31, 1994. The terms and conditions of this Agreement shall otherwise
govern the sales of Ceredase -Registered Trademark- enzyme by the Distributor.
1.6 Security Interest. PTI and Nova Factor each acknowledge and
agree that the Security Agreement secures the obligations of PTI and, by
virtue of the Assignment, Nova Factor, to Genzyme under the Unamended
Distribution Agreement and that the Amended and Restated Security Agreement
secures the obligations of PTI and, by virtue of the Assignment, Nova Factor,
to Genzyme under the Amended Distribution Agreement. In addition to the
foregoing, PTI and Nova Factor each hereby agree that all of the
Distributor's obligations to Genzyme under this Agreement also shall be
secured by the Amended and Restated Security Agreement. In connection
therewith, PTI, Nova Factor and Genzyme agree to amend the Security Agreement
such that all references therein to PTI, effective July 1, 1994, shall be
deemed references to Nova Factor, and PTI, Nova Factor and Genzyme agree to
amend the Amended and Restated Security Agreement as follows:
(a) The definition of Secured Obligations in the Amended and
Restated Security Agreement is hereby amended to include the following: (i)
all amounts payable by PTI and, by virtue of the Assignment, Nova Factor, to
Genzyme under the Amended Distribution Agreement or this Agreement, (ii) all
other obligations of PTI and, by virtue of the Assignment, Nova Factor, under
the Amended Distribution Agreement or this Agreement, and (iii) all
obligations of PTI
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<PAGE>
and by virtue of the Assignment, Nova Factor, under the Amended and Restated
Security Agreement, as amended hereby.
(b) Paragraphs (a), (b), and (c) of Section 1.1 of the Amended and
Restated Security Agreement are hereby amended to read in their entirety as
follows:
"(a) All Ceredase -Registered Trademark- enzyme sold by
Secured Party to PTI from time to time pursuant to the
Amended and Restated Distribution Agreement or the
Second Amended and Restated Distribution Agreement,
dated as of July 1, 1994, among PTI, Nova Factor, Inc.
and Secured Party (collectively, the "Inventory");
(b) All accounts, chattel paper, instruments and general
intangibles (as such terms are defined in Article 9 of
the Uniform Commercial Code as enacted in the State of
Tennessee), accounts receivable and other obligations of
any kind, whether or not evidenced by an instrument or
chattel paper (collectively, the "Accounts") or PTI of
representing or arising from the sale of Ceredase
-Registered Trademark- enzyme by PTI from the Inventory;
and
(c) Any and all additions to any of the foregoing, and any
and all replacements, products and
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<PAGE>
proceeds (including insurance proceeds) of any of the
foregoing."
(c) All references in the Amended and Restated Security Agreement
to the Amended Distribution Agreement or to a section or sections thereof,
shall be deemed to include a reference to this Agreement or the appropriate
section or sections hereof.
(c) All references in the Amended and Restated Security Agreement
to PTI, effective July 1, 1994, shall be deemed references to Nova Factor.
ARTICLE II
Purchase of Ceredase -Registered Trademark- Enzyme for Resale
2.1 Election of Article II. This Article II shall govern the terms
and conditions of the sale of Ceredase -Registered Trademark- enzyme to the
Distributor by Genzyme, to the exclusion of Article III, at such times during
the term of this Agreement as the Distributor elects in accordance with
Section 1.3 of this Agreement.
2.2 Orders for Ceredase -Registered Trademark- Enzyme. The
Distributor shall order Ceredase -Registered Trademark- enzyme from Genzyme,
and Genzyme shall sell Ceredase -Registered Trademark- enzyme to the
Distributor; provided however, that any portion of an order that remains
unfilled 30 days after receipt of such order by Genzyme may be cancelled at
the Distributor's option upon notice to Genzyme. Genzyme shall ship Ceredase
- -Registered Trademark- enzyme at its cost to the Distributor in a sealed
vial. Each vial shall contain either 50 or 400 International Units of
Ceredase -Registered Trademark- enzyme. Each vial of Ceredase -Registered
Trademark- enzyme shall be packaged in an individual box, containing a
package insert and United States Food and Drug Administration
("FDA")-approved labeling. Genzyme shall have the option of shipping several
individual boxes in a larger shipping container. Genzyme shall ship each
order of Ceredase -Registered Trademark- to the
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<PAGE>
Distributor at its warehouse in Memphis, Tennessee (the "Warehouse") or such
other place as the parties shall agree, at Genzyme's expense. Shipment shall
be made by common carrier, overnight courier or any other similar method of
shipment in Genzyme's discretion.
2.3 Title. Upon the shipment of Ceredase -Registered Trademark- to
the Distributor, title to Ceredase -Registered Trademark- enzyme shall pass
to the Distributor. Upon receipt by the Distributor, , the Distributor shall
assume all responsibility for the marketing, storage, insurance, delivery and
billing of all Ceredase -Registered Trademark- enzyme provided to it under
this Article II. Upon receipt of each shipment of Ceredase -Registered
Trademark- enzyme by the Distributor, the Distributor shall immediately
inspect the shipment for obvious damage to the shipping container, and each
box containing a vial of Ceredase -Registered Trademark- enzyme. The
Distributor shall have no obligation to inspect the contents of the vials,
nor shall the Distributor open or unseal the vials. The Distributor shall
also confirm whether the number of vials received by the Distributor equals
the number of vials recorded on the applicable shipping documents, and the
Distributor shall note any discrepancies in the number of vials received by
the Distributor on the shipping documents accompanying such shipment of
Ceredase -Registered Trademark- enzyme and immediately notify Genzyme of any
such discrepancies. The Distributor shall not manufacture, mix or process any
Ceredase -Registered Trademark- enzyme.
2.4 Billing. No earlier than the date of shipment to the
Distributor, Genzyme shall invoice the Distributor for each shipment of
Ceredase -Registered Trademark- enzyme at Genzyme's then current price.
Payment of the invoice shall be due, net of returns, * (*) days from the
date of the invoice. In the event that the Distributor fails to pay such
invoice in full within * (*) days, the Distributor shall pay Genzyme
late payment charges of * percent (*%) per annum on all unpaid amounts
due under such invoice calculated from the
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
8
<PAGE>
end of that * (*) day period. The parties hereto agree that should any
provision of this Section 2.4 violate any law, rule or regulation pertaining
to issuing or the contracting for or charging of interest, then the excess of
interest contracted for or charged or collected over the maximum lawful rate
of interest shall be applied as a prepayment of future obligations due by the
Distributor to Genzyme under this Article II, and if any amount so prepaid
shall be unused upon termination of the Distributor's election to be subject
to Article II, the excess of the prepaid amounts over the amounts actually
due to Genzyme shall be immediately returned to the Distributor.
2.5 Compliance with Pharmacy Laws. The Distributor shall dispense
or ship Ceredase -Registered Trademark- enzyme pursuant to a prescription or
authorized purchase order solely in compliance with applicable federal or
state laws, regulations, and orders including pharmacy laws.
2.6 Pharmacy Records. The Distributor shall maintain such pharmacy
records as are required by applicable federal and state law, regulations and
orders. Such records shall remain the property of the Distributor. However,
the Distributor shall permit Genzyme access to, and the right to obtain
copies of, such records, except to the extent limited by law.
2.7 Packaging. The Distributor shall pack Ceredase -Registered
Trademark- enzyme in cold packs, cartons or other packaging with such
insulation or other packing materials as required by the package insert or
FDA-approved labeling, or as otherwise agreed by the parties.
2.8 Recall Information. The Distributor shall generate such
distribution, sales, customer, account and financial reports, including
records necessary to trace lot numbers to Ceredase -Registered Trademark-
enzyme Patients to monitor shelf life and trace shipments and such other data
and information as the parties shall agree.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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<PAGE>
ARTICLE III
Coordinate Distribution
3.1 Election of Article III. This Article III shall govern the
terms and conditions of the sale of Ceredase-Registered Trademark- enzyme to
the Distributor by Genzyme, to the exclusion of Article II, at such times
during the term of this Agreement as the Distributor so elects in accordance
with Section 1.3 of this Agreement.
3.2 Purchase and Maintenance of Inventory of Ceredase-Registered
Trademark- Enzyme.
(a) Sale of Ceredase-Registered Trademark- Enzyme. The
Distributor shall order Ceredase-Registered Trademark- from Genzyme, and
Genzyme shall sell Ceredase-Registered Trademark- enzyme to the Distributor.
Genzyme shall at its cost ship each order of Ceredase-Registered Trademark-
enzyme to the Distributor at its warehouse in Memphis, Tennessee (the
"Warehouse"). Title to each such order of Ceredase-Registered Trademark-
enzyme shipped to the Distributor hereunder shall pass to the Distributor at
the point of shipment to the Distributor.
(b) Inventory. The Distributor agrees that it will purchase
adequate amounts of Ceredase-Registered Trademark- enzyme to maintain an
average of * days inventory during each calendar quarter; provided that, the
Distributor agrees that at the option of Genzyme it will purchase adequate
amounts to bring the inventory up to a *-day level prior to the end of any
such calendar quarter, however, in no event will such purchase cause the
inventory to exceed an average of * days for such calendar quarter; provided
further that in no event shall the Distributor be required to have inventory
of Ceredase-Registered Trademark- enzyme on hand in excess of *
dollars. The calculation of inventory will be based upon the average of the
unit sales volume for the previous month, the projected unit sales volume for
the current month, and the projected
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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<PAGE>
unit sales volume for the next month as described in Exhibit A attached
hereto. Genzyme shall use reasonable efforts to assure that all
Ceredase-Registered Trademark- enzyme shipped to the Distributor by Genzyme
will have a remaining shelf life of at least * (*) days. At any time
which is at least * (*) days prior to the expiration date of
Ceredase-Registered Trademark-, the Distributor shall have the right to
return to Genzyme such Ceredase-Registered Trademark- enzyme that had a
remaining shelf life of less than * (*) days when it was received by
the Distributor. All such returns shall be made to Genzyme for either
replacement Ceredase-Registered Trademark- enzyme or for a credit to the
amount owed by the Distributor to Genzyme equal to the Distributor's purchase
price of such Ceredase-Registered Trademark- enzyme, as may be elected by
Genzyme. The service fees earned by the Distributor for any
Ceredase-Registered Trademark- enzyme returned to Genzyme pursuant to this
Section 3.2(b) shall be credited against future service fees earned by the
Distributor, or Genzyme may request that the Distributor reimburse it for
service fees paid to the Distributor for Ceredase-Registered Trademark-
enzyme that is returned, as Genzyme may elect. The Distributor agrees to use
the shortest dated Ceredase-Registered Trademark- enzyme first. The
Distributor shall provide Genzyme weekly reports on inventory levels, which
will be subject to audit at Genzyme's expense.
(c) Billing. No earlier than the date of shipment of
Ceredase-Registered Trademark- enzyme to the Distributor, Genzyme shall
invoice the Distributor for such shipment at its then current average
wholesale price for Ceredase-Registered Trademark- enzyme. Payment against
the invoice, net of returns, will be due from the Distributor within *
(*) days of the date of Genzyme's invoice. In the event that the Distributor
fails to pay any such invoice in full within * (*) days, the Distributor
shall pay Genzyme late payment charges of * percent (*%) per annum on all
unpaid amounts due under such invoice calculated from the end of that *
(*) day period. The parties hereto agree that should any provision of
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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<PAGE>
this Section 3.2(c) violate any law, rule or regulation pertaining to usury
or the contracting for or charging of interest, then the excess of interest
contracted for or charged or collected over the maximum lawful rate of
interest shall be applied as a prepayment of future obligations due by the
Distributor to Genzyme under this Article III, and if any amount so prepaid
shall be unused upon termination of the Distributor's election to be subject
to Article III, the excess of the prepaid amounts over the amounts actually
due to Genzyme shall be immediately returned to the Distributor.
3.3 Shipment and Warehousing.
(a) Shipment to the Distributor. Genzyme shall ship
Ceredase-Registered Trademark- enzyme to the Distributor in a sealed vial.
Each vial shall contain either 50 or 400 International Units of
Ceredase-Registered Trademark- enzyme. Each vial of Ceredase-Registered
Trademark- enzyme shall be packaged in an individual box, containing a
package insert and United States Food and Drug Administration
("FDA")-approved labeling. Genzyme shall have the option of shipping several
individual boxes in a larger shipping container.
(b) Inspection of Shipment. Upon receipt of each shipment of
Ceredase-Registered Trademark- enzyme by the Distributor, the Distributor
shall immediately inspect the shipment for obvious damage to the shipping
container and each box containing a vial of Ceredase-Registered Trademark-
enzyme. The Distributor shall have no obligation to inspect the contents of
the vials, nor shall the Distributor open or unseal the vials. The
Distributor shall also confirm whether the number of vials received by the
Distributor equals the number of vials recorded on the applicable shipping
documents, and the Distributor shall note any discrepancies in the number of
vials received by the Distributor on the shipping documents accompanying such
shipment of Ceredase-Registered Trademark- enzyme and immediately notify
Genzyme of any such discrepancies.
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<PAGE>
(c) Storage. The Distributor shall store all Ceredase-Registered
Trademark- enzyme at the Distributor's Warehouse and shall not store
Ceredase-Registered Trademark- enzyme at any other location without the prior
written consent of Genzyme. The Distributor shall not manufacture, mix, or
process any Ceredase-Registered Trademark- enzyme. The Distributor shall be
responsible for inventory control of Ceredase-Registered Trademark- enzyme,
subject to Genzyme's determination of the appropriate shelf life of
Ceredase-Registered Trademark- enzyme. The Distributor shall segregate
Ceredase-Registered Trademark- enzyme from any other item stored by it and
shall not commingle Ceredase-Registered Trademark- enzyme with any other item
in its custody or control. For so long as any Ceredase-Registered Trademark-
enzyme is in the Distributor's possession, the Distributor shall store
Ceredase-Registered Trademark- enzyme in accordance with the requirements set
forth in Ceredase-Registered Trademark-'s enzyme package insert and
FDA-approved labeling, including any requirements with respect to
refrigeration.
(d) Risk of Loss. The Distributor shall bear the risk of loss,
theft, destruction or damage of each vial of Ceredase-Registered Trademark-
enzyme from receipt of each shipment containing the vial from Genzyme until
delivery of such vial of Ceredase-Registered Trademark- enzyme to a patient
(a "Patient)", physician, clinic or hospital (any of a Patient, physician,
clinic or hospital may hereafter be referred to as a "Ceredase-Registered
Trademark- Enzyme Customer"). Genzyme shall, at its cost, insure all
Ceredase-Registered Trademark- enzyme against loss from the time of shipment
until delivery to the Distributor. The Distributor shall, at its cost, insure
all Ceredase-Registered Trademark- enzyme in its possession until the
delivery of Ceredase-Registered Trademark- enzyme to a Ceredase-Registered
Trademark- Enzyme Customer for its replacement (i.e., market) value against
fire, theft, loss or destruction, and such other risks as are customarily
insured against by prudent persons in a similar line of business, with an
insurance carrier qualified to do business (in the State of Tennessee or such
other place as Genzyme may authorize.) The Distributor shall provide Genzyme
with certificates of such
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<PAGE>
insurance prior to the Distributor's election to be subject to the terms of
Article III.
3.4 Marketing and Sales. Genzyme covenants and agrees that it
will provide such marketing, sales and patient/physician educational
materials as shall be deemed necessary by Genzyme to adequately promote and
market Ceredase-Registered Trademark- enzyme. The Distributor shall have no
responsibility for undertaking any sales efforts in connection with
Ceredase-Registered Trademark- enzyme and all inquiries received by the
Distributor concerning potential sales or prescriptions of
Ceredase-Registered Trademark- enzyme shall be referred to Genzyme by the
Distributor.
3.5 Designation of Patients and Recipients.
(a) Patient Status. The Distributor shall sell
Ceredase-Registered Trademark- enzyme under this Article III only to a
Patient previously approved by Genzyme (an "Approved Patient") or to a
physician, hospital or clinic for administration to an Approved Patient. If
sale is made to an Approved Patient, shipment may nonetheless be made to a
physician, hospital or clinic, which will dispense Ceredase-Registered
Trademark- enzyme to the Approved Patient. Before approving the initial
shipment to, or on behalf of, a Patient, Genzyme shall make such inquiries as
Genzyme, in its sole discretion, deems appropriate to determine whether
Ceredase-Registered Trademark- enzyme is indicated for such Patient, which
inquiries shall include obtaining a letter or summary of medical necessity
signed by Patient's physician where required by the third party payor and
determining the availability of insurance or other source for payment for
Ceredase-Registered Trademark- enzyme.
(b) Patient Tracking System. The Distributor shall establish a
patient tracking system in a mutually acceptable format that tracks the dose,
dosage changes and frequency of administration of Ceredase-Registered
Trademark- enzyme prescribed by physicians for all Approved Patients. The
Distributor shall provide Genzyme with data on all Approved Patients added
each month.
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<PAGE>
(c) Transmission of Records. Genzyme shall promptly forward to
the Distributor such documentation as is reasonably necessary for the
Distributor to transmit the initial shipment of Ceredase-Registered
Trademark- enzyme, and to permit the Distributor to file claims with a third
party payor, if any, or to submit invoices to the appropriate
Ceredase-Registered Trademark- Enzyme Customer.
3.6 Distribution and Pharmacy Services.
(a) Physician Authorization. Following the inquiry provided for
in Section 3.5 of this Agreement, Genzyme shall notify the Distributor that a
Patient is an Approved Patient. Prior to dispensing Ceredase-Registered
Trademark- enzyme to, or on behalf of, an Approved Patient, the Distributor
shall obtain:
(i) a prescription which is either (A) in proper form
signed by the Approved Patient's physician, which physician shall be duly
licensed to practice medicine and dispense drugs in accordance with
applicable state and federal law, or (B) communicated verbally by said
physician if such communication is valid under applicable state law; or
(ii) an authorized purchase order from an entity, such as a clinic
or hospital, authorized under applicable state law to dispense drugs to the
Approved Patient(s).
In the event that shipment of Ceredase-Registered Trademark- enzyme
is to be made to a Ceredase-Registered Trademark- Enzyme Customer who wishes
to designate the Distributor as its billing agent, a signed Sales and Billing
Agency Agreement (the "Sales Agreement"), substantially in the form of
Exhibit B hereto shall be obtained from such Ceredase-Registered Trademark-
Enzyme Customer.
(b) Compliance with Pharmacy Laws. The Distributor shall dispense
or ship Ceredase-Registered Trademark- enzyme pursuant to a prescription or
authorized purchase order solely in compliance with applicable federal and
state laws, regulations, and orders including pharmacy laws. The Distributor
may ship
15
<PAGE>
sufficient amounts of Ceredase-Registered Trademark- enzyme to a
physician, hospital or clinic to permit dispensing of single or multiple
doses, but only if such dose(s) are to be administered to an Approved
Patient(s). The Distributor shall not provide Ceredase-Registered Trademark-
enzyme to any Ceredase-Registered Trademark- Enzyme Customer, without the
prior authorization of Genzyme.
(c) Pharmacy Records. The Distributor shall maintain such
pharmacy records as are required by applicable federal and state law,
regulations and orders. Such records shall remain the property of the
Distributor. However, the Distributor shall permit Genzyme access to, and the
right to obtain copies of, such records, except to the extent limited by law.
3.7 Shipment of Ceredase-Registered Trademark- Enzyme to
Ceredase-Registered Trademark- Enzyme Customers.
(a) Confirmation of Information. The Distributor shall, before
dispensing or shipping Ceredase-Registered Trademark- enzyme, (i) confirm
with the Approved Patient's third party payor, if any, the necessary billing
forms and billing procedures, including billing address, required to file any
claim for the Ceredase-Registered Trademark- enzyme on the Distributor's or
such Approved Patient's behalf, or, in the event the Distributor is acting as
billing agent for a Ceredase-Registered Trademark- Enzyme Customer pursuant
to an executed Sales Agreement, for such Ceredase-Registered Trademark- Enzyme
Customer and (ii) make due inquiry whether it may lawfully dispense
Ceredase-Registered Trademark- enzyme in the state to which shipment has been
directed.
(b) Inventory Availability. The Distributor shall be required to
ship Ceredase-Registered Trademark- enzyme only from Ceredase-Registered
Trademark- enzyme inventory which Genzyme has previously delivered to the
Distributor.
(c) Packaging. The Distributor shall pack Ceredase-Registered
Trademark- enzyme in cold packs, cartons or other packaging with such
insulation or other packing materials as required by the package insert or
FDA-approved labeling, or as
16
<PAGE>
otherwise agreed by the parties. The Distributor shall, at its cost, cause
Ceredase-Registered Trademark- enzyme to be delivered to Ceredase-Registered
Trademark- Enzyme Customers by common carrier, overnight courier or other
similar method of shipment selected by the Distributor.
(d) Return of Ceredase-Registered Trademark- Enzyme. In the event
that a shipment of Ceredase-Registered Trademark- enzyme is refused or
rejected by the Ceredase-Registered Trademark- Enzyme Customer, the
Distributor will cause the shipment of Ceredase-Registered Trademark- Enzyme
to be returned to the Distributor's Warehouse at the Distributor's expense.
Upon return, Genzyme will direct the Distributor, at Genzyme's cost, either
to (i) return the refused shipment to Genzyme or (ii) destroy the refused
shipment.
3.8 Billing Services.
(a) After compliance by the Distributor with its obligations
under Section 3.7(a), upon delivery of Ceredase-Registered Trademark- enzyme
to a Ceredase-Registered Trademark- Enzyme Customer, the Distributor shall
prepare and mail an invoice for such shipment within * (*) business days
after receipt by the Distributor of the documentation necessary for billing
to be provided by Genzyme under Section 3.5 of this Agreement and thereafter
to any third party payor. Each invoice, as appropriate, shall be on a form
agreed to by the parties or upon the standardized form (such as HCFA - 1500 -
Health Insurance Claim Form) required by a third party payor or in such
electronic billing format as may be required. In the event
Ceredase-Registered Trademark- enzyme is dispensed to an Approved Patient,
the Distributor shall submit the invoice to the Approved Patient or, if
authorized to do so, to the applicable third party payor. If the Distributor
has shipped Ceredase-Registered Trademark- enzyme to a Ceredase-Registered
Trademark- Enzyme Customer which is not an Approved Patient, the Distributor
shall submit the invoice to the Ceredase-Registered Trademark- Enzyme
Customer (except a Ceredase-Registered Trademark- Enzyme Customer for which
the Distributor acts as a billing agent). If the Distributor has shipped
Ceredase-Registered Trademark-
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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<PAGE>
enzyme to a Ceredase-Registered Trademark- Enzyme Customer for which the
Distributor acts as billing agent, the Distributor shall submit the invoice
in the manner provided in the Sales Agreement.
(b) The Distributor shall use reasonable efforts to comply with
all requirements for the submission of claims imposed by each third party
payor for an Approved Patient.
(c) The Distributor shall comply with all applicable federal and
state laws, regulations and orders, including Medicare requirements, in its
capacity as billing agent for any Ceredase-Registered Trademark- Enzyme
Customer pursuant to the Sales Agreement.
3.9 Collection. The Distributor shall be responsible for the
collection of all monies due for the sale by the Distributor of
Ceredase-Registered Trademark- enzyme and all such monies shall belong to the
Distributor.
3.10 Bad Debts and Delinquent Accounts. The Distributor shall
bear the risk of loss on all uncollected accounts and bad debts resulting
from sales and shipments of Ceredase-Registered Trademark- enzyme by the
Distributor under this Article III.
3.11 Accounting and Financial Reporting. The Distributor shall
maintain records and books of account, in the form of computer data or
otherwise, which will identify the Distributor's inventory of
Ceredase-Registered Trademark- enzyme, each sale and shipment of
Ceredase-Registered Trademark- enzyme by the Distributor (showing recipient's
name, amount of drug dispensed, and charges for said drug), and all revenue
collected from the sale and distribution of Ceredase-Registered Trademark-
enzyme by the Distributor properly applied to and against the invoices for
said drug generated by the Distributor. In addition to these records, the
Distributor shall generate such distribution, sales, customer, account and
financial reports, including records necessary to trace lot numbers to
Ceredase-Registered Trademark- Enzyme Patients, to
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<PAGE>
monitor shelf life and trace shipments and such other data and information
(collectively "Accounting Records") as the parties shall agree. The
Distributor agrees that on a monthly basis, it will furnish Genzyme with an
accounting of all Ceredase-Registered Trademark- enzyme received, all
Ceredase-Registered Trademark- enzyme shipped and, all bills submitted and
all revenues collected in connection with Ceredase-Registered Trademark-
enzyme sold and distributed, by the Distributor during that month.
3.12 Computer System Access.
(a) Terms of Access. The Distributor maintains an IBM AS400
computer system. The Distributor shall establish a separate computer data
base for demographic, account and Patient information regarding
Ceredase-Registered Trademark- enzyme within the Distributor's IBM AS400
computer system, or any successor hardware. Genzyme shall be given direct
inquiry (read only) access to the computer data base for Ceredase-Registered
Trademark- enzyme maintained within the Distributor's computer system;
provided, however, that Genzyme shall be responsible for obtaining at its
cost all compatible terminal hardware, modems, telephone access lines, and
all other hardware and materials necessary to access the Distributor's
computer system. The Distributor shall also have full access to this data
base. The Distributor will make available to Genzyme the necessary phone
numbers, access codes and passwords which shall provide Genzyme with direct
inquiry access solely to the Distributor's computer data base concerning
Ceredase-Registered Trademark- Enzyme. Genzyme shall be responsible for all
long distance charges incurred by Genzyme in using dial access to the
Distributor's computer system. Genzyme acknowledges that the entry of data
and information into the computer data base may be delayed, however, the
Distributor will make all reasonable efforts to ensure that the information is
current and will promptly notify Genzyme if the information in the data base
is not current.
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<PAGE>
(b) Confidentiality of Computer Data. The information contained in
the data base is considered by the Distributor to be confidential. The
Distributor shall provide Genzyme with a list of material in the database
considered confidential by the Distributor in accordance with Section 4.5.
Genzyme shall deal with all such data designated as confidential by the
Distributor, together with any computer access codes and passwords provided
to Genzyme by the Distributor to permit Genzyme access to said database, in
accordance with Section 4.5.
3.13 Audit. The Distributor shall allow Genzyme access to the
Distributor's books and records related to the sale of Ceredase-Registered
trademark- enzyme under this Article III for purposes of audit. Any such
audit shall be at Genzyme's cost and shall be conducted at the Distributor's
offices in Memphis, Tennessee during the Distributor's regular business
hours, and upon Genzyme providing the Distributor with reasonable advance
notice. Any amounts found from such audit due and owning Genzyme but unpaid
shall thereafter be paid in accordance with the terms of this Agreement.
3.14 Personnel. The Distributor shall designate certain of its
personnel to perform the Distributor's obligations under this Article III,
including those with respect to inventory, storage, shipment, billing,
collections, accounting and record keeping. The Distributor shall be solely
responsible for its employee's salaries, federal and state income tax
withholding, Social Security tax withholding, worker's compensation benefits
and fringe benefits. When the Distributor determines that the volume of its
distribution of Ceredase-Registered trademark- enzyme requires, the
Distributor shall dedicate certain of its personnel, which the Distributor
shall select, exclusively to handle the Distributor's obligations under this
Article III.
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<PAGE>
3.15 Compensation to the Distributor.
(a) Service Fee. In consideration for the services provided to
Genzyme by the Distributor under this Article III, Genzyme agrees to pay to
the Distributor a service fee for * net of returns pursuant to this
Article III. In the event Genzyme has paid such fee with respect to
Ceredase-Registered trademark- enzyme which is returned by the Distributor to
Genzyme, the Distributor shall reimburse the service fee applicable to such
returned Ceredase-Registered trademark- enzyme at the time it is returned.
For Ceredase-Registered trademark- enzyme purchased between April 1, 1994 and
December 31, 1994, the amount of the service fee per unit shall be $* . The
amount of the service fee will be renegotiated for each calendar year (or a
portion thereof) thereafter in accordance with Section 3.17.
(b) Invoicing. Genzyme shall pay this service fee to the
Distributor within * (*) days of the date that Genzyme invoices the
Distributor for a shipment of Ceredase-Registered trademark- enzyme. In the
event that Genzyme fails to pay any such service fee in full within *
(*) days, Genzyme shall pay the Distributor late payment charges of *
percent (* %) per annum on all unpaid amounts due pursuant to this Section
3.15 calculated from the end of that * (*) day period. The parties
hereto agree that should any provision of this Section 3.15 violate any law,
rule or regulation pertaining to usury or the contracting for or charging of
interest, then the excess of interest contracted for or charged or
collected over the maximum lawful rate of interest shall be applied as a
prepayment of future obligations due by Genzyme to the Distributor under this
Article III, and if any such amount so prepaid shall be unused upon
termination of the Distributor's election to the subject to Article III, the
excess of the prepaid fees over the fees actually due to the Distributor
shall be immediately returned to Genzyme.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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(c) Reimbursement for Expenses. Upon presentment of invoices or other
documentation of such expenses, Genzyme will reimburse the Distributor for
any reasonable expenses which are the responsibility of Genzyme under this
Article III so long as such expenses are advanced by the Distributor with the
prior approval of Genzyme. Genzyme will reimburse such expenses within *
(*) days of Genzyme's receipt of the documentation of any such expenses.
Notwithstanding this Section 3.15(c), the Distributor shall be solely
responsible for expenses incurred by it in carrying out its obligations under
this Article III, including but not limited to, shipping, obtaining supplies,
postage and printing necessary for the collection of accounts receivable
generated by the Distributor's distribution of Ceredase-Registered trademark-
enzyme.
3.16 Taxes. The Distributor shall prepare and file all sales and use
tax returns which are required by, and pay all taxes due to any state or
local governmental entity from, or as a result of, the sale or distribution
of Ceredase-Registered trademark- enzyme by the Distributor. To the extent
directed by any Ceredase-Registered trademark- Enzyme Customer for whom the
Distributor acts as billing agent, the Distributor will include the amount of
such taxes on invoices submitted by the Distributor on behalf of said
Ceredase-Registered trademark- Enzyme Customer if sales or use taxes are
required to be collected from said Ceredase-Registered trademark- Enzyme
Customer. The Distributor shall be liable for any personal property taxes on
inventory of Ceredase-Registered trademark- enzyme held in Tennessee by the
Distributor, any gross receipts or business taxes resulting from the sale or
distribution of Ceredase-Registered trademark- enzyme by the Distributor, and
to the extent required, shall include such inventories of Ceredase-Registered
trademark- enzyme held by the Distributor, and sales of Ceredase-Registered
trademark- enzyme distributed by the Distributor, in the Distributor's
federal and state income and franchise tax returns. To the extent that the
Distributor is required to file tax returns with any governmental entity in
regard to the distribution and sale of
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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Ceredase-Registered trademark- enzyme by the Distributor pursuant to this
Article III and to remit taxes in connection therewith, other than income
taxes for service fee income pursuant to Section 3.15 herein. Genzyme shall
promptly reimburse the Distributor for such taxes upon presentation by the
Distributor of evidence reasonably satisfactory to Genzyme that the
Distributor has paid such taxes.
3.17 Renegotiation of Terms.
(a) Renegotiation of Terms of Article III. In the event that the
Distributor elects to be subject to Article III during the first year of this
Agreement, and if, upon the first anniversary of the effective date of this
Agreement, any of the following shall have occurred: * , the Distributor may,
within * (*) days after such anniversary, request in writing that Genzyme
renegotiate those terms of this Agreement specified in such request. Genzyme
shall have * (*) days from the receipt of such request to agree to
renegotiate the terms specified in the request, together with such terms as
Genzyme shall specify in its response, or to give notice of termination of
this Agreement under Section 4.2(b)(ii).
(b) Renegotiation of Service Fee. The service fee to be paid by
Genzyme by the Distributor for services provided under this agreement will be
renegotiated by the parties between * and * of each calendar year, with
changes in such fee, if any, to become effective with respect to
Ceredase-Registered trademark- enzyme purchased after * of the applicable
calendar
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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year, subject at all times to the parties' right of termination under Section
4.2(b)(ii). The service fee to be paid with respect to Ceredase-Registered
trademark- enzyme purchased during the time period the parties are
negotiating such fee shall be paid at the rate in effect during the preceding
year, and once the parties agree upon a change such fee, if any, Genzyme
shall promptly pay to the Distributor the amount by which the new service fee
exceeds the previous service fee, or the Distributor promptly shall reimburse
Genzyme the amount by which the new service fee is less than the previous
service fee, whichever is applicable. The parties agree to use reasonable
efforts to negotiate the service fee by * of each calendar year.
3.18 Effect of Termination. Upon termination of the Distributor's
election to be subject to this Article III for any reason, the Distributor
shall promptly provide Genzyme with a final accounting of units of
Ceredase-Registered trademark- enzyme held in inventory at termination, units
shipped, billings, collections and such other information contained in the
Accounting Records as is requested by Genzyme. A copy of all computer and other
records concerning Ceredase-Registered trademark- enzyme, including the
Accounting Records, maintained by the Distributor under this Article III,
shall be provided to Genzyme; however, the Distributor shall maintain the
original of said records.
ARTICLE IV
Miscellaneous
4.1 Indemnity and Insurance.
(a) Indemnification. PTI, Nova Factor and Genzyme hereby agree that
(i) The Distributor shall assume responsibility for and shall
indemnify and hold Genzyme harmless and defend Genzyme from all
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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losses (including claims for injuries to employees of the Distributor or
Genzyme), expenses, attorney's fees, damages, claims and judgments resulting
solely from (A) the Distributor's breach of the terms of this Agreement; (B)
the negligent acts or omissions or wrongful acts of the Distributor, its
agents or employees; or (C) any misrepresentation or breach of any
representation or warranty made herein by the Distributor; provided,
however, that the Distributor shall have no liability to Genzyme for loss of
profits to Genzyme in the event the Distributor is unable, through no fault
of the Distributor's, to ship Ceredase-Registered trademark- enzyme to a
Ceredase-Registered trademark- Enzyme Customer.
(ii) Genzyme shall assume responsibility for and shall indemnify
and hold the Distributor harmless and defend the Distributor from all losses
(including claims for injuries to employees of the Distributor or Genzyme),
expenses, attorneys' fees, damages, claims and judgments resulting from (A)
Genzyme's breach of the terms of this Agreement; (B) the negligent acts or
omissions or wrongful acts of Genzyme, its agent or employees; (C) any
misrepresentation or breach of any representation or warranty made herein by
Genzyme; or (D) any defect in the design, manufacture or condition of
Ceredase-Registered trademark- enzyme supplied to the Distributor by Genzyme.
(b) Insurance. During the term of this Agreement, the Distributor and
Genzyme will each maintain general public liability, products liability and
products property damage insurance, each policy with limits of not less than
$1,000,000.00 per incident, $3,000,000.00 in the aggregate. All policies
insuring against liability for bodily injury or death or damage to property
shall include coverage for claims resulting from the sale and distribution of
Ceredase-Registered trademark- enzyme and in the case of Genzyme, claims
resulting from the manufacture of Ceredase-Registered trademark- enzyme.
Genzyme and the Distributor will provide each other with certificates
evidencing the insurance required
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hereunder, and all such policies shall provide that notice of cancellation or
termination or reduction in the limits of or other material change to the
coverage thereof shall be provided in advance to the other party. In the
event of such cancellation, termination, reduction or change of coverage
described herein, the party maintaining such insurance shall immediately
obtain substitute or replacement coverage. Failure to obtain substitute or
replacement coverage shall be grounds for the termination of this Agreement.
4.2 Term, Renewal and Termination.
(a) Term. This Agreement shall be for an initial term of three years
from the date of execution, unless otherwise terminated in accordance with
this section. Unless otherwise terminated, this Agreement will automatically
renew at the expiration of the initial three-year term for an additional
period of one year and shall thereafter automatically renew from year to year
for additional one-year periods, unless Genzyme or the Distributor shall give
written notice of cancellation to the other party at least 90 days prior to
the end of the initial three-year term or the expiration of any extension.
(b) Termination. This Agreement shall automatically terminate upon
(i) the mutual agreement of Genzyme and the Distributor, (ii) at any time
upon sixty (60) days prior written notice by Genzyme or the Distributor to
the other, (iii) upon the insolvency or bankruptcy of either Genzyme or the
Distributor, the making by either such party of an assignment for the benefit
of creditors, the consent by either such party to the appointment of a
trustee or receiver, or the appointment without its consent, of a trustee or
receiver for it or for a substantial part of its property, or (iv) the
institution by or against either such party of bankruptcy, reorganization,
arrangement or insolvency proceedings. In addition, if either Genzyme or the
Distributor shall breach the terms of this Agreement, the nonbreaching party
may given written notice of the
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breach to the breaching party, and if said breach is not cured within 30 days
following the giving of said notice, this Agreement shall at the option of
the nonbreaching party be terminated. Late payment by the Distributor under
the terms of Section 3.2(c) shall not constitute a breach of the terms of
this Agreement sufficient to give rise to termination of this Agreement.
(c) Return of Ceredase-Registered trademark- Enzyme. The Distributor
shall cause the inventory of Ceredase-Registered trademark- enzyme then in
the Distributor's possession to be returned to Genzyme, at Genzyme's cost.
Each unit of Ceredase-Registered trademark- enzyme returned to Genzyme shall
be credited in full payment for the amount due from the Distributor for that
unit, except any units which are destroyed or damaged for which the
Distributor shall bear the risk of loss in accordance with Section 3.3(d).
(d) Survival of Obligations. Termination of this Agreement shall not
relieve either Genzyme or the Distributor from any liability or obligation it
had incurred prior to the date of such termination including, but not limited
to, obligations to pay any outstanding unpaid amounts due pursuant to this
Agreement and to accept returns of Ceredase-Registered trademark- enzyme in
accordance with the provisions of this Agreement. It is the express intention
and agreement of Genzyme and the Distributor that all the covenants,
agreements, warranties, and indemnities contained in Sections 4.1, 4.5 and
4.7 shall survive the termination of this Agreement.
4.3 Force Majeure. Neither Genzyme nor the Distributor shall be
liable to the other for failure or delay in the performance of any of its
obligations under this Agreement for the time, and to the extent, such
failure or delay is caused by riots, civil commotion, wars, hostilities
between nations, embargoes, acts of God, earthquakes, storms, fires, strikes,
sabotage, explosions, shortages of raw materials or power, or any other
matter which is
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beyond the reasonable efforts of the party to control. This provision shall
not excuse, or apply to, obligations of a party to make monetary payments
hereunder.
4.4 Independent Contractor. Subject to the requirements herein, the
Distributor shall determine the time spent and the methods employed in
carrying out its obligations hereunder, and the Distributor shall be solely
responsible for the operation and management of its business. In entering
into and carrying out its obligations under this Agreement, the Distributor
is an independent contractor. Nothing in this Agreement, or in the
relationship between Genzyme or the Distributor or in the activities of the
Distributor, its agents or employees, shall be construed to make the
Distributor, its agents or employees, an employee of, or joint venturer or
partner with, Genzyme, or to empower any of them to bind or obligate Genzyme
in any way. The Distributor further agrees that it will make no
representations with respect to its relationship to Genzyme, except that it
has contracted with Genzyme to act as a distributor of Ceredase-Registered
trademark- enzyme and to perform the obligations set out herein. It is
further agreed and understood that the Distributor is only contracting to
provide certain specified services to, and purchases Ceredase-Registered
trademark- enzyme from, Genzyme. Genzyme shall be responsible for all costs
incurred in operating Genzyme's business, and Genzyme shall be solely
responsible for the management and operation of its business.
4.5 Confidentiality and Restrictive Covenant.
(a) Protection of Documents. Each party has developed or may during
the term hereof develop, certain formulae, products, methods of doing
business, and other proprietary information which that party deems to be
confidential and a trade secret. In the course of fulfilling each party's
respective obligations hereunder, some of these formulae, products, methods
and other
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proprietary information of one party will become known to another party
hereto. Each of Genzyme and the Distributor agrees that it will not
duplicate, make use of, or disclose, in any manner whatsoever, any information
which is deemed to be confidential by the other such party (as provided in
Section 4.5(b)), either during or after the term of this Agreement, without
the express prior written consent of the other such party hereto.
(b) Designation of Materials. In the event that any information
deemed to be confidential by Genzyme or the Distributor is provided to the
other such party or its employees or agents in writing, the party providing
same shall mark the writing as confidential, prior to providing such
information to the other such party. In the event that such information is
provided in nonwritten form such as orally, by audio tape, by direct
telephonic access to computer data bases, videotape or computer software or
disc, the party claiming such information to be confidential shall, at the
time such information is furnished to the other such party or within fifteen
(15) days thereafter, furnish to the other such party a written list
containing a brief description of such item and designating such item as
confidential. Upon termination of this Agreement, all such information,
together with any copies thereof, of any information hereunder deemed, or
designated by a party as, confidential shall be returned to the party who
supplied the information. Notwithstanding the preceding provision, the
following types of information provided by a party shall always be deemed
confidential, whether or not so designated: patient medical records; patient
and physician names and addresses; hospitals; clinics; number of patients on
therapy; prescription files; costs of goods and supplies; the formula and
composition of Ceredase-Registered trademark- enzyme; and financial records
of party.
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(c) Exceptions. The restrictions in this Section 4.5 shall not
apply (i) to any information which is not deemed confidential hereunder, or
which has not been designated as confidential in the manner specified
herein, (ii) to any information which was already known to the receiving
party prior to its disclosure by the other party, as can be proven by
competent evidence, (iii) to any information which is or becomes public
knowledge thought no fault or failure of a party bound by this Agreement,
(iv) to any information which is independently developed by an employee of
the receiving party who had no access to or knowledge of the information
disclosed hereunder or (v) to any information which was rightfully obtained
from a third party who was not subject to any restriction of confidentiality.
(d) Covenant. PTI and Nova Factor each agree that during the term
of this Agreement, and for a period of five years following the termination
hereof, it will not undertake to distribute or supply any prescription drug
for the treatment of Gaucher's disease other than Ceredase -Registered
Trademark- enzyme, without the prior written consent of Genzyme. Furthermore,
during the same period, and whether or not otherwise prohibited by the
restrictions set out hereinabove, neither PTI nor Nova Factor will disclose
to any other person or entity, or use for purposes of competing directly or
indirectly with the sale of Ceredase -Registered Trademark- enzyme by
Genzyme: (i) the names of Patients or hospitals, clinics or physicians or
number thereof provided Ceredase -Registered Trademark- enzyme by it pursuant
to this Agreement, (ii) the volume of Ceredase -Registered Trademark- enzyme
supplied to Ceredase -Registered Trademark- Enzyme Customers by it, (iii) the
addresses of Patients, (iv) the referral sources of Ceredase -Registered
Trademark- Enzyme Customers, (v) Genzyme's price for Ceredase -Registered
Trademark- enzyme, or (vi) the service fees, if any, paid to it pursuant to
this Agreement. This provision shall not prohibit disclosure of such
information in the event that PTI or Nova Factor is requested or required by
law or governmental regulations or
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by litigation discovery requests, subpoena, civil investigative demands or
similar processes to disclose such information, nor shall it prohibit
disclosure and use by PTI or Nova Factor or such information, if and as
necessary in any litigation between PTI or Nova Factor and Genzyme. PTI shall
continue to be bound by the terms of this Section 4.5, and by any comparable
provisions of the Unamended Distribution Agreement and the Amended
Distribution Agreement, notwithstanding PTI's assignment to Nova Factor of
its duties and obligations hereunder and thereunder pursuant to the
Assignment and Nova Factor's assumption of such duties and obligations
pursuant to the Assignment and Section 4.12 hereof.
4.6 Representations, Warranties and Covenants.
(a) No Interference. Genzyme represents and warrants to the
Distributor that Genzyme has the sole and exclusive right to manufacture and
distribute Ceredase-Registered Trademark- enzyme and that the distribution
of Ceredase-Registered Trademark- enzyme and the other activities to be
performed by the Distributor hereunder do not, and will not, infringe upon or
violate the rights of, any other party. Genzyme will protect, indemnify and
hold the Distributor harmless from any claims of infringement of patent,
trademark, mark name or proprietary rights by third parties relating to the
Distributor's distribution of Ceredase-Registered Trademark- enzyme.
(b) Governmental Approval. Genzyme further represents and warrants
to the Distributor that all FDA and state approvals and permits required for
Genzyme's manufacture, sale and distribution of Ceredase-Registered
Trademark- enzyme have been obtained and that Genzyme has the corporate
authority to authorize the Distributor to sell and distribute Ceredase
- -Registered Trademark- enzyme. Genzyme shall comply with all applicable FDA
and state laws and regulations in the manufacture, design, testing,
inspection, labeling, warning and instructions for use of
Ceredase-Registered Trademark- enzyme, material to its performance under this
Agreement.
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(c) Compliance with Laws, Licensure. The Distributor represents
and warrants to Genzyme that the Distributor has materially complied with,
shall continue to comply with, and nothing in the transactions contemplated
by this Agreement would cause it not to be in compliance with, all federal
and state laws, regulations and orders applicable to it and its business as a
pharmacy, including all pharmacy laws. The Distributor possesses all federal
and state governmental licenses and permits material to and necessary in its
performance of this Agreement. Such licenses and permits are, and shall
remain, in full force and effect, no violations are or have been recorded in
respect of any such licenses or permits and no proceeding is pending or, to
the knowledge of the Distributor, threatened to revoke or limit any thereof.
The Distributor shall promptly notify Genzyme in the event that a proceeding
is threatened or commenced to revoke or limit any such licenses or permit.
4.7 Trade Names and Trademarks.
(a) Use of the Name Ceredase -Registered Trademark- Enzyme.
Genzyme grants to the Distributor the non-exclusive privilege to use, in
connection with the stocking, sale and distribution of Ceredase -Registered
Trademark- enzyme, the various trade names, trademarks, service marks and
several other word and design marks which Genzyme associates with Ceredase
- -Registered Trademark- enzyme. The Distributor acknowledges that Genzyme is
the exclusive owner of the various trade names, trademarks, service marks and
several other word and design marks which Genzyme uses in connection with
Ceredase -Registered Trademark- enzyme and the sales thereof, and that all
goodwill associated with such is the property of and shall inure to the
benefit of Genzyme. The Distributor agrees that Genzyme has the right to
control the use or display thereof by the Distributor. This non-exclusive
license is a limited license and may be terminated at any time by Genzyme.
The Distributor shall discontinue the display or use of any such mark or
name, or change the manner
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in which any such name or mark is displayed or used, upon request by Genzyme.
The Distributor further agrees that;
(i) No such name or mark will be used in such a manner
that it may become a generic word, causing a loss of its protected
status as such;
(ii) The Distributor shall not use such names or marks, or
any variant thereof, as the whole or an part of its title or the name
of its business, except upon Genzyme's express written consent to
such use;
(iii) The Distributor shall not use such names or marks in
any manner in connection with an effort to sell goods of others,
whether or not such goods are competitive with
Ceredase-Registered Trademark- enzyme, and shall not use such names
or marks as part of its business name;
(iv) The Distributor shall not use, or allow the use of, any
name or mark which is likely to cause confusion, mistake or deception
with respect to any of the trade names or trademarks of Genzyme; and
(v) The Distributor shall not assert, acquire or attempt
to acquire any rights or interests in or to, or contest or assist
others in contesting, said names or marks of Genzyme.
Upon termination of this Agreement, the distributor shall discontinue any and
all use of Genzyme's trademarks, trade names and any other identification
with Genzyme and shall avoid any statement or implication that it is a
distributor of Ceredase -Registered Trademark- enzyme. Notwithstanding the
foregoing, upon the effective date of the Assignment, PTI shall discontinue
any and all use of Genzyme's
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trademarks, trade names and any other identification with Genzyme and shall
avoid any statement or implication that it is a distributor of Ceredase
- -Registered Trademark- enzyme.
(b) Use of the Name PharmaThera -Registered Trademark-. The
parties recognize that PHARMATHERA, INC. -Registered Trademark- is a
registered trademark, and PTI hereby grants to Genzyme the non-exclusive
privilege to use, in connection with the stocking and sale of Ceredase
- -Registered Trademark- enzyme, the various trade names, trademarks, service
marks and the several other word and design marks which are associated with
PHARMATHERA, INC. -Registered Trademark-. Genzyme acknowledges that PTI is
the exclusive owner of the various trade names, trademarks, service marks and
the several other word and design marks which are used in connection with the
name PHARMATHERA, INC. -Registered Trademark- and that all good will
associated with such is the property of and shall inure to the benefit of
PTI. Genzyme agrees that PTI has the right to control the use or display
thereof by Genzyme. This non-exclusive license is a limited license and may
be terminated at any time by PTI. Genzyme shall discontinue the display or
use of any such name or mark, or change the manner in which any such name or
mark is displayed or used, upon request by PTI. Genzyme further agrees that;
(i) No such name or mark shall be used in such a manner
that it may become a generic word, causing the loss or its protected
status as such;
(ii) Genzyme shall not use such names or marks, or any
variant thereof, as the whole or any part of its title or the name of
its business, except upon PTI's express written consent to such use;
(iii) Genzyme shall not use such names or marks in any
manner in connection with an effort to sell goods of others and shall
not use such names or marks as part of its business name;
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(iv) Genzyme shall not use, or allow the use of any name or
mark which is likely to cause confusion, mistake or deception with
respect to any of the trade names or trademarks of PTI; and
(v) Genzyme shall not assert, acquire or attempt to acquire
any rights or interests in or to, or contest or assist others in
contesting, the names or marks of PTI.
Within 60 days after the effective date of the Assignment, Genzyme shall
discontinue any and all use of PTI's trademarks, trade names and any other
identification with PTI, and shall avoid any statement or implication that it
is affiliated with PTI.
4.8 Service to Others Businesses. Genzyme acknowledges that the
Distributor offers its services to other businesses, and Genzyme agrees that
no provision contained herein shall restrict or prohibit the Distributor from
providing services to others in addition to Genzyme as long as the
performance of said services does not violate the restrictions set out in
Section 4.5, or interfere with the performance of the Distributor's
obligations hereunder.
4.9 Records. To the extent required by Section 1861(b)(1)(I) of
the Social Security Act, each of PTI and Nova Factor shall, upon proper
request, allow the United States Department of Health and Human Services, the
Comptroller General of the United States and their duly authorized
representatives, access to this Agreement and to all books, documents and
records necessary to verify the nature and extent of the costs of the
services provided by it under this Agreement at any time during the term of
this Agreement and for an additional period of four (4) years following the
last date services are furnished under this Agreement by it.
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4.10 Specific Performance. Each of the parties hereto acknowledges that
violation of Section 4.5 and 4.7 could cause irreparable damage to the party
against whom the violation is committed which would not adequately be
remedied by an action at law for damages. The parties agree that, in the
event of a breach or threatened breach of any of these sections, the party
alleging such breach shall be entitled to injunctive relief prohibiting such
breach or threatened breach in any court of appropriate jurisdiction of the
United States or of any state or other political subdivision thereof.
4.11 Remedies Cumulative. The remedies provided herein shall be
cumulative and shall not preclude any party from asserting any other rights or
seeking any other remedies against any other party, or such other party's
successors or permitted assigns, pursuant to this Agreement, as provided
under other agreements and as provided by law. Nothing contained herein shall
preclude a party from seeking equitable relief, where appropriate.
4.12 Nonassignability and Subcontracting. This Agreement and the
rights, duties, responsibilities, and liabilities of the parties hereto shall
not be assigned by Genzyme or the Distributor without the prior written
consent of the other party, except that no prior consent shall be required in
the event of acquisition of all or substantially all of the assets of a party
by an acquirer. The parties to this Agreement acknowledge that for a limited
period of time, it may be necessary for the Distributor to arrange for the
performance of certain of its obligations under this Agreement by a third
party pursuant to an agreement between the Distributor and such third party.
The Distributor shall not enter into such agreement without the prior written
consent of Genzyme, which shall not be unreasonably withheld, provided that
Nova Factor may enter into such an agreement with New Pharma Thera Inc.
without the consent of Genzyme. Notwithstanding anything contained in the
first sentence of this Section 4.12 to
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the contrary, Genzyme hereby consents to the assignment of PTI to Nova
Factor of its rights and obligations to and under this Agreement, the
Unamended Distribution Agreement, the Amended Distribution Agreement, the
Security Agreement and the Amended and Restated Security Agreement pursuant
to the Assignment and agrees that, except as is otherwise expressly set forth
in this Agreement, PTI shall be released from all liability hereunder and
thereunder, subject to the condition that Genzyme shall have received, on or
prior to the date hereof, that certain Amendment Number One to Guaranty
Agreement, dated of even date herewith, executed by PTI, Nova Factor and
Southern Health Systems, Inc. Nova Factor hereby acknowledges, and represents
and warrants to Genzyme, that, effective July 1, 1994, Nova Factor has
assumed pursuant to the Assignment all of the rights, duties,
responsibilities and liabilities of PTI under this Agreement and under the
Unamended Distribution Agreement, the Amended Distribution Agreement, the
Security Agreement and the Amended and Restated Security Agreement.
4.13 Applicable Law. This Agreement shall be construed in accordance
with the laws of the State of Tennessee (excluding the choice of law rules
thereof), and the laws of the State of Tennessee shall govern the rights,
duties, liabilities and responsibilities created hereunder.
4.14 Headings. All headings used herein are for ease of reference only
and shall in no way be construed as interpreting, decreasing or enlarging the
provisions of this Agreement.
4.15 Effect. Subject to the provisions hereof restricting assignment,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto, their successors, administrators, trustees and permitted
assigns.
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4.16 Modification. This Agreement, the Amended and Restated Security
Agreement and that certain Guaranty Agreement, dated December 2, 1993, among
Genzyme, PTI and Southern Health Systems, Inc., as amended by Amendment
Number One to Guaranty Agreement, of even date herewith among Genzyme, PIT,
Nova Factor and Southern Health Systems, Inc., constitute the entire
agreement and understanding between the parties hereto in respect to the
transactions contemplated herein and supersede all prior written or oral
agreements, arrangements and understandings relating to the subject matter
hereof. This Agreement may be amended, changed or modified only with the
written consent of Genzyme and the Distributor.
4.17 Notices. All notices, demands, requests, consents, reports,
approvals or other communications which may be or are required to be given,
served or sent pursuant to this Agreement shall be in writing and shall be
hand delivered, or mailed by first class, registered or certified mail,
return receipt requested, postage prepaid or transmitted by telegram,
facsimile or by overnight courier addressed to Genzyme or the Distributor, as
applicable, at its business addresses and to the attention of the individual
set out following the signatures of the parties on the last page of this
Agreement. Each party may designate by notice in writing a different person,
or new address, to which any notice, demand, request, consent, report,
approval or communication may thereafter be given, served or sent. Each
notice, demand, request, consent, report, approval or communication mailed in
the manner described above or delivered to a telegraph company or to an
overnight courier, or by facsimile transmission shall be deemed sufficiently
given, served, sent or received for all purposes at such time as it is
delivered to the addressee (with the return receipt or delivery receipt or
machine report, in the case of facsimile transmission,
38
<PAGE>
being deemed conclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
4.18 Waivers. No waiver of the breach of any provision of this
Agreement shall be deemed a waiver of any other breach of or default under
the same or any other provision hereof, nor will any waiver constitute a
continuing waiver. No term or provision of this Agreement shall be waived
except by a written instrument executed by a duly authorized officer of the
waiving party and no course of dealing, act or omission to act shall operate
as a waiver of any right, power or privilege granted to a party hereunder.
4.19 Accreditation Standards. The services provided hereunder are
designed to meet the applicable requirements stated in PH.1 through PH11.3 of
the Standards for the Accreditation of Home Care-Pharmaceutical Services of
the Joint Commission on Accreditation of Healthcare Organizations ("JCAHO").
In the performance of this Agreement the parties shall conform to the
policies, standards and requirements of JCAHO, to the extent applicable.
4.20 Severability. If any one or more of the provisions of this
Agreement shall for any reason be held illegal or invalid, such illegality or
invalidity shall not affect any other provision of this Agreement and this
Agreement shall be enforced as if such illegal or invalid provision had not
been contained herein.
39
<PAGE>
IN WITNESS WHEREOF, the undersigned parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
GENZYME CORPORATION
By: /s/ illegible
---------------------------------
Title: President Therapeutics
------------------------------
Address: One Kendall Square
Cambridge, Massachusetts 02139
Attention: William Aliski
PHARMATHERA, INC.
By: /s/ Joel Kimbrough
---------------------------------
Title: CEO - Illegible
------------------------------
Address: Suite 107
1785 Nonconnah Blvd.
Memphis, Tennessee 38132
Attention: Joel Kimbrough
NOVA FACTOR, INC.
By: /s/ Randy Grow
---------------------------------
Title: C.O.O.
------------------------------
Address: Suite 114
1785 Nonconnah Blvd.
Memphis, Tennessee 38132
Attention: Randy Grow
40
<PAGE>
Exhibit A
Section 3.2(b)
Basis for Calculating Inventory
*
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
<PAGE>
Exhibit 10.31
AMENDMENT NO. 1 TO
SECOND AMENDED AND RESTATED DISTRIBUTION AGREEMENT
THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED DISTRIBUTION AGREEMENT
(the "Amendment") is made and entered into as of the 30th day of September,
1994 by and among PHARMATHERA, INC., a Tennessee corporation ("PTI"), NOVA
FACTOR, INC., a Tennessee corporation ("Nova Factor"), and GENZYME
CORPORATION, a Massachusetts corporation ("Genzyme").
WHEREAS, Genzyme, PTI and Nova Factor entered into that certain
Second Amended and Restated Distribution Agreement dated as of July 1, 1994
pursuant to which Genzyme agreed to sell to PTI and/or Nova Factor, and PTI
and/or Nova Factor agreed to purchase, the prescription drug Ceredase
- -Registered Trademark- enzyme (the "Ceredase -Registered Trademark- enzyme
Distribution Agreement");
WHEREAS, Genzyme and Nova Factor entered into that certain
Distribution Agreement, dated of even date herewith, pursuant to which
Genzyme agreed to sell to Nova Factor and Nova Factor agreed to purchase, the
prescription drug Cerezyme -TM- (the "Cerezyme -TM- Distribution Agreement");
and
WHEREAS, the parties hereto wish to modify certain provisions of the
Ceredase -Registered Trademark- enzyme Distribution Agreement requiring PTI
and/or Nova Factor to maintain a certain level of inventory of Ceredase
- -Registered Trademark- enzyme to take into account the inventory level of
Cerezyme -TM- maintained by Nova Factor pursuant to the Cerezyme -TM-
Distribution Agreement.
NOW, THEREFORE, for and in consideration of the foregoing and for
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. Section 3.2(b) of the Ceredase -Registered Trademark- enzyme
Distribution Agreement is hereby amended such that the first sentence thereof
shall be deleted and the following shall be substituted therefor:
"The Distributor agrees that it will purchase adequate amounts of
Ceredase -Registered Trademark- enzyme so that such inventory, when
added to the Distributor's inventory of Cerezyme -TM- (the "Combined
Inventory"), will result in an average of 45 days Combined Inventory
during each calendar quarter; provided that, the Distributor agrees
that at the option of Genzyme it will purchase adequate amounts of
<PAGE>
Ceredase -Registered Trademark- enzyme to bring the Combined
Inventory to a *-day level prior to the end of any such calendar
quarter, however, in no event will such purchase cause the Combined
Inventory to exceed an average of * days for such calendar quarter;
provided further, that in no event shall the Distributor be required
to have on hand Combined Inventory in excess of * dollars."
2. Except as specifically amended by this Amendment, the terms and
provisions of the Ceredase -Registered Trademark- enzyme Distribution
Agreement shall continue in full force and effect and shall be unaffected
hereby.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed on its behalf as of the date first set forth above.
GENZYME CORPORATION
By: [Illegible]
------------------------------
Title: President Therapeutics
---------------------------
PHARMATHERA, INC.
By: /s/ Joel K. Kimbrough
------------------------------
Title: Sec-Treasurer
---------------------------
NOVA FACTOR, INC.
By: /s/ Randy Grow
------------------------------
Title: President
---------------------------
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately w/the Securities Exchange Commission.
2
<PAGE>
Exhibit 10.32
AMENDMENT NO. 2 TO
SECOND AMENDED AND RESTATED DISTRIBUTION AGREEMENT
THIS AMENDMENT NO. 2 TO SECOND AMENDED AND RESTATED DISTRIBUTION
AGREEMENT (the "Amendment") is made and entered into as of the 1st day of
Jan., 1995 by and between NOVA FACTOR, INC. a Tennessee corporation ("Nova
Factor"), and GENZYME CORPORATION, a Massachusetts corporation ("Genzyme").
WHEREAS, Genzyme, Pharmathera, Inc., a Tennessee corporation
("PTI"), and Nova Factor entered into that certain Second Amended and
Restated Distribution Agreement dated as of July 1, 1994 pursuant to which
Genzyme agreed to sell to PTI and/or Nova Factor, and PTI and/or Nova Factor
agreed to purchase, the prescription drug Ceredase-Registered Trademark-
enzyme, as amended by Amendment No. 1 to Second Amended and Restated
Distribution Agreement dated as of September 30, 1994 (collectively the
"Ceredase-Registered Trademark- enzyme Distribution Agreement");
WHEREAS, PTI assigned all of its rights and liabilities under the
Ceredase-Registered Trademark- enzyme Distribution Agreement to Nova Factor,
which accepted that assignment, and Genzyme consented to such assignment;
WHEREAS, Genzyme and Nova Factor entered into that certain
Distribution Agreement, dated as of September 30, 1994 pursuant to which
Genzyme agreed to sell to Nova Factor and Nova Factor agreed to purchase, the
prescription drug Cerezyme-TM- (the "Cerezyme-TM- Distribution Agreement");
and
WHEREAS, the parties hereto wish to modify certain provisions of
the Ceredase-Registered Trademark- enzyme Distribution Agreement requiring
Nova Factor to maintain a certain level of inventory of Ceredase-Registered
Trademark- enzyme and Cerezyme-TM-.
NOW, THEREFORE, for and in consideration of the foregoing and
for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Section 3.2(b) of the Ceredase-Registered Trademark- enzyme
Distribution Agreement is hereby amended such that the first sentence thereof
shall be deleted and the following shall be substituted therefor:
"The Distributor agrees that it will purchase adequate amounts of
Ceredase-Registered Trademark- enzyme so that such inventory, when
added to the Distributor's inventory of Cerezyme-TM- (the "Combined
Inventory"), will result in an average of
<PAGE>
*days Combined Inventory during each calendar quarter; provided
that, the Distributor agrees that at the option of Genzyme it will
purchase adequate amounts of Ceredase-Registered Trademark- enzyme to
bring the Combined Inventory to a * -day level prior to the end of any
such calendar quarter, however, in no event shall such purchase cause
the Combined Inventory to exceed an average of * days for such
calendar quarter; provided further, that in no event shall the
Distributor be required to have on hand Combined Inventory in excess
of * dollars."
2. Except as specifically amended by this Amendment, the terms
and provisions of the Ceredase-Registered Trademark- enzyme Distribution
Agreement shall continue on full force and effect and shall be unaffected
hereby.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed on its behalf as of the date first set forth above.
GENZYME CORPORATION
/s/ [ILLEGIBLE]
--------------------------------------
By:
--------------------------------------
Title:
--------------------------------------
NOVA FACTOR, INC.
By: /s/ Randy Grow
--------------------------------------
Title: President
--------------------------------------
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
-2-
<PAGE>
Exhibit 10.33
DISTRIBUTION AND SERVICES AGREEMENT
This Distribution and Services Agreement is entered into as of this
1st day of November, 1995 by and between Biogen, Inc., with principal offices
located at 14 Cambridge Center, Cambridge, MA 02142 ("Biogen"), and Nova
Factor, Inc., with principal offices located at 1785 Nonconnah Blvd., Suite
114, Memphis, TN 38132 ("Nova Factor").
WHEREAS, Biogen has filed a Product License Application with the
United States Food and Drug Administration for approval to market and sell
Biogen's AVONEX-TM- beta interferon-1a in the United States in the
treatment of multiple sclerosis;
WHEREAS, Biogen is in the process of establishing a distribution
network for the sale of AVONEX-TM-;
WHEREAS, as part of its distribution network, Biogen intends to
appoint preferred distributors to provide quality services to users of
AVONEX-TM- and to provide data reporting and other services to Biogen;
WHEREAS, Nova Factor has the facilities and expertise to distribute
AVONEX-TM- to customers at their homes, to provide quality reimbursement
assistance and other customer services to its customers and to provide data
reporting and other services to Biogen;
WHEREAS, Biogen is willing to appoint Nova Factor as a preferred
distributor of AVONEX-TM- on the terms and conditions set forth in this
Agreement, and Nova Factor is willing to accept such appointment.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereby agree as follows:
1. DEFINITIONS
For purposes of this Agreement the following terms shall have the
following meanings:
1.1 "Adverse Event" shall have the meaning set forth in 21 CFR 600.80.
1.2 "Affiliates" shall mean, with respect to a given party, any
corporation, firm, partnership or other entity which directly or
indirectly controls or is controlled by or is under common control
with such party. For purposes of this Section 1.2, "control" shall
mean direct or indirect ownership of greater than fifty percent
(50%) of the equity having the power to vote on or direct the
affairs of the entity.
<PAGE>
1.3 "Average Wholesalers' Price" ("AWP") for purposes of this Agreement
shall mean the suggested wholesale price submitted by Biogen in
responding to inquiries from commercial publishers of pricing
information, as adjusted by Biogen from time to time in its sole
discretion. In the event Biogen decides not to submit a suggested
wholesale price to commercial publishers of pricing information, the
parties shall meet to discuss a revised definition of AWP for
purposes of this Agreement.
1.4 "Commercial Launch" shall mean the date on which Biogen makes
Product available for commercial sale after receipt from the FDA of
approval to manufacture Product at Biogen's Cambridge facility and
approval to market and sell Product in the Territory.
1.5 "Database" shall have the meaning set forth in Section 7.1.
1.6 "Facility" shall mean Nova Factor's facility located at 1785
Nonconnah Blvd., Suite 114, Memphis, TN or any other Nova Factor
facility approved by Biogen prior to use by Nova Factor in
connection with services to be provided under this Agreement,
provided that a new facility which conforms to the plans referenced
in Section 20 shall be deemed to have been approved by Biogen.
1.7 "FDA" shall mean the United States Food and Drug Administration.
1.8 "Home Delivery Customers" shall mean multiple sclerosis patients in
the Territory who want Product delivered to their homes or to such
other residence, office or similar locations as they may specify,
not including pharmacies.
1.9 "Nova Factor Collection Policy" shall have the meaning set forth in
Section 5.1 (iv).
1.10 "PLA/ELA filing" shall mean the Product License Application and
Establishment License Application filed by Biogen with respect to
Product.
1.11 *
1.12 "Product" shall mean Biogen's AVONEX-TM- beta interferon-1a for
the treatment of multiple sclerosis in the packaged form listed in
Schedule A hereto, as amended from time to time by the parties.
1.13 "Specifications" shall mean the Product specifications attached
hereto as Schedule B as amended by Biogen from time to time.
1.14 "SOP" shall mean the written standard operating procedures,
specifications and instructions approved by both parties as the same
may be amended from time to time by the parties.
1.15 "Territory" shall mean the United States of America.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
2
<PAGE>
2. APPOINTMENT AS PREFERRED DISTRIBUTOR
2.1 Subject to the terms and conditions contained in this Agreement, Biogen
hereby appoints Nova Factor and Nova Factor hereby accepts appointment
as a nonexclusive, preferred distributor of Product to Home Delivery
Customers. Nova Factor shall not sell Product other than to Home Delivery
Customers without the prior written consent of Biogen. Biogen expressly
reserves the right to appoint other distributors, to sell Product to
wholesalers, pharmacy benefit managers and other third parties and to
sell Product directly. Biogen shall provide Nova Factor with written
notice at least thirty (30) days prior to the effective date of any
agreement between Biogen and a third party under which Biogen grants the
third party the right to sell Product to Home Delivery Customers which
such notice shall specify the name of the third party.
3. ORDERS, DELIVERY, FORECASTS
3.1 The parties hereto agree that, commencing upon Commercial Launch and
continuing during the term of this Agreement, Nova Factor shall purchase
Product from Biogen at the prices set forth in Section 8, and, subject
to the right of Biogen to allocate supplies of Product under Section 3.6,
Biogen shall supply Product to Nova Factor, for sale and distribution to
Home Delivery Customers. Nova Factor shall order Product from Biogen in
such quantities as are necessary to meet the demand for Product from
Nova Factor's Home Delivery Customers. On average during any month, Nova
Factor shall submit orders not more frequently than once per week. All
orders shall be firm and Nova Factor shall not change or cancel an order
without prior approval from Biogen. All purchases of Product by Nova
Factor shall be on the terms and conditions set forth in this Agreement.
No purchase order, invoice or other form shall be deemed to vary the
terms of this Agreement. To assist Biogen in managing its manufacturing
operations, Nova Factor shall furnish to Biogen, on the first day of each
month, a nonbinding forecast of Nova Factor's anticipated needs for
Product for such month and the following five months. Biogen shall assist
Nova Factor in preparing forecasts for the first three months after
Commercial Launch. Each forecast shall represent Nova Factor's good faith
best estimate of its Product needs. Notwithstanding anything herein to
the contrary, if Biogen receives an order in any month which would cause
the total amount ordered for such month to exceed the amount shown on
the first forecast for such month, Biogen shall have the right, in its
sole discretion, to reject the order. As soon as Nova Factor's inventory
falls to a one-week supply of Product, Nova Factor shall submit an order
to Biogen for an additional two (2) weeks' supply of Product, based on
Nova Factor's most recent forecast. Biogen shall notify Nova Factor of
receipt from the FDA of approval to manufacture Product at Biogen's
Cambridge facility and of approval to market and sell Product in the
Territory and of the date of Commercial Launch.
3.2 Biogen shall ship Product to Nova Factor not more frequently than weekly
FOB Biogen's warehouse facility. Biogen shall ship Product to Nova
Factor by means of transportation
3
<PAGE>
(commercial truck or better) determined by Biogen and at Biogen's cost.
While Biogen shall use reasonable efforts to avoid any delay in
delivering Product on the delivery dates agreed upon by the parties,
failure to deliver Product by the agreed upon date will not be sufficient
cause for termination of this Agreement by Nova Factor as long as the
delay does not extend beyond two (2) weeks from the agreed upon delivery
date, nor will Biogen be liable to Nova Factor for late delivery.
3.3 Nova Factor shall unload each shipment of Product immediately upon
receipt from Biogen in accordance with the applicable SOP. The parties
acknowledge that preparation of the SOPs will continue after execution
of this Agreement and Biogen and Nova Factor shall each use reasonable
efforts and shall each cooperate with the other to develop a set of
mutually agreeable SOPs within three (3) months after execution of this
Agreement. Nova Factor shall store Product in a refrigerated storage
area at the Facility. Nova Factor shall notify Biogen prior to moving
Product to another location for storage and distribution. Nova Factor
shall use storage facilities and storage conditions for Product which
comply with applicable SOPs. Nova Factor shall at all times handle and
store Product in accordance with applicable SOPs. Nova Factor shall not
alter Product packaging without Biogen's consent (except to remove
Product from the shipping containers) and shall not alter Product
labeling except to add a prescription label to Product. Nova Factor
shall at all times comply with the information and recommendations
communicated by Biogen in writing with respect to the storage, handling
and shipment of Products, provided that if such information and
recommendations are materially different than those included in the SOPs
or otherwise set forth in this Agreement and result in a material
increase in the costs incurred by Nova Factor in performing its
obligations under this Agreement, the parties shall negotiate in good
faith *. Nova Factor shall be responsible for all costs associated with
storage, handling and shipment from the Facility of Product.
3.4 Nova Factor shall carefully examine Products upon delivery and shall
notify Biogen within one (1) business day of any nondelivery of a
portion of a shipment or any defect in any Product which is reasonably
discoverable upon visual inspection of the Product without unloading
individual shipping units. Along with notice of any defect, Nova Factor
shall furnish to Biogen a detailed description of the nature of the
defect. Upon receipt of notice of any defect or nondelivery, Biogen, at
its option, shall replace or repair any defective Product or issue Nova
Factor a credit in the amount of the purchase price paid for any
defective Product or replace or issue Nova Factor a credit in the amount
of purchase price paid for any undelivered Product. Except as set forth
in Section 16, the preceding sentence sets forth Biogen's sole liability
with respect to Product defects reasonably discoverable upon visual
inspection of the Product without unloading individual shipping units or
with respect to Product that is not in accordance with Nova Factor's
order and Section 9.1 sets forth Biogen's sole liability with respect to
other Product defects and Biogen shall not be otherwise liable to Nova
Factor. In the absence of written notice from Nova Factor to Biogen in
accordance with the terms of this Section 3.4, a shipment of Products
shall be deemed to have been delivered and accepted by Nova
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
4
<PAGE>
Factor as complete and in satisfactory condition. Nova Factor shall, at
Biogen's request and expense, follow Biogen's instructions to return to
Biogen or Biogen's third party disposal company any Products delivered
to Nova Factor which are not in compliance with the Specifications. Nova
Factor shall cooperate with Biogen in investigating the cause of any
defect in Product.
3.5 Title to Product shall transfer to Nova Factor upon delivery of Product
to the carrier for shipment to the Facility. Risk of loss of Product
shall transfer to Nova Factor upon delivery of Product to the Facility.
3.6 Notwithstanding anything herein to the contrary, in the event of a
shortage of Product, Biogen reserves the right to allocate available
supplies of Product in its sole discretion. If Biogen is not able to
supply Product to Nova Factor in the quantities ordered by Nova Factor
for more than twelve (12) weeks on any occasion during the term of this
Agreement because of a Product shortage, Nova Factor shall have the right
to terminate this Agreement for material breach under Section 14.3
excluding the thirty (30) day cure period.
4. CUSTOMER ORDERS AND HOME DELIVERY
4.1 Marketing and sales literature distributed by Biogen's sales force will
contain a Biogen toll-free number as the point of contact for all
potential customers for Product. Biogen's customer service
representatives shall include Nova Factor in their description to
potential customers of various purchase and delivery options for
Product, and, if a potential customer expresses interest in Nova
Factor's home delivery program, the Biogen customer service
representative shall forward the call or direct the customer to Nova
Factor. Biogen and Nova Factor shall mutually agree on the description
of Nova Factor to be used by Biogen's customer service representatives.
Biogen shall provide Nova Factor with a copy of the script used by
Biogen's customer service representatives in describing Product
distribution options to potential customers. Nova Factor shall maintain
a telephone line dedicated to calls transferred from Biogen and to calls
from customers for Product. Nova Factor shall answer all calls from
customers for Product in accordance with a script mutually agreeable to
Biogen and Nova Factor. If the customer has volunteered information to
Biogen or has previously been in contact with Biogen's third party
reimbursement agency, Biogen or the agency shall transmit the
information to Nova Factor. At Biogen's request, Nova Factor shall
assist Biogen in developing a standard intake form for initial customer
contact. Nova Factor shall direct to Biogen's customer service operation
all potential users of Product who contact Nova Factor directly in
accordance with a script mutually agreeable to Biogen and Nova Factor.
4.2 Nova Factor shall ship Product to customers at their homes or to any
other residence, office or similar location designated by customer, not
including pharmacies, via Federal Express standard overnight delivery
service or another mutually agreed to overnight carrier. Nova Factor
shall package Products for shipment in insulated shipping units in
5
<PAGE>
accordance with the applicable SOP. Nova Factor shall use its best
efforts to ship Products such that Product having the earliest
expiration date is shipped first from available inventory. Nova Factor
shall track each shipment of Product to customer and confirm receipt. If
product is not received by the intended customer, Nova Factor shall use
reasonable efforts to track the missing shipment until found and, if
found, shall retrieve the missing shipment. Any shipment not delivered
to the intended recipient which is found shall be retrieved by Nova
Factor and, if determined by Nova Factor to be unusable, shall be
disposed of by Nova Factor.
4.3 Except for initial shipments made to a customer's home or designated
location and except where the customer's payor requires preapproval of
subsequent shipments. Nova Factor shall, subject to Product
availability, ship Product to a customer within 48 hours of receipt of
an order. Nova Factor shall use reasonable efforts to obtain
reimbursement clearance, if necessary, for anticipated subsequent orders
from a customer prior to actual receipt of the subsequent order. Nova
Factor shall ship each initial order and any subsequent order which
requires reimbursement clearance to a customer's home or designated
location within 48 hours of reimbursement clearance unless Biogen and
Nova Factor have agreed upon a first shipment program. At Biogen's
request, Biogen and Nova Factor shall work together to develop a first
shipment program to allow shipment of initial quantities of Product to a
patient prior to reimbursement clearance. If the parties have agreed
upon a first shipment program, Nova Factor shall comply with the
timelines for delivery of Product contained in the program.
4.4 Nova Factor shall be responsible for all billing and collection in
connection with its sales of Product. Nova Factor shall not bundle sales
of Product with other products or services, provided that Nova Factor
may list Product on the same invoice with other products for the same
customer, if required by the customer's insurance provider, as long as
the Product price and any negotiated discount from or allowance taken
with respect to the Product price are listed separately. Nova Factor may
bundle shipments of Product with other products for delivery to the same
customer, provided that such bundling is covered by an SOP.
4.5 Nova Factor shall be responsible for all costs associated with
distribution and delivery of Products to its customers.
5. REIMBURSEMENT-RELATED SERVICES
5.1 To ensure a consistent, high level of services and to maintain
consistency of communications with end-users of Product, the parties
have agreed that Nova Factor will, as part of its commitment to its
customers, provide the following services for each potential or existing
Nova Factor customer who contacts Nova Factor for home delivery of
Product:
6
<PAGE>
(i) Nova Factor shall collect the relevant insurance information
from each new customer who has insurance and shall obtain
confirmation of the existence and extent of insurance coverage
for Product from the customer's insurance provider or other
third party payor. Nova Factor shall use its best efforts to
confirm reimbursement coverage within one (1) week of receipt of
an order from a customer. Biogen understands that, despite Nova
Factor's best efforts, confirmation of reimbursement coverage
will often take longer than one (1) week.
(ii) Nova Factor shall accept assignment of benefits from each
customer with reimbursement coverage unless the customer's
insurance provider or other third party payor does not allow
assignment of benefits. To effect the assignment of benefits,
Nova Factor shall, within two (2) business days of initial
contact with each customer, provide to the customer the
applicable forms and instructions for assignment of benefits and
shall file the forms with the customer's insurance provider or
other third party payor at the time of Product shipment and
billing.
(iii) Upon receipt of the appropriate approval, Nova Factor shall bill
and submit the appropriate claims to each customer's insurance
provider, third party payor or other responsible party,
including Medicaid, but not including Medicare.
(iv) Consistent with applicable law and Nova Factor's standard
collection policy, a copy of which is attached hereto as
Schedule C (the "Nova Factor Collection Policy"). Nova Factor
shall use its best efforts to collect the amount allowed from
each customer's insurance provider or other third party payor,
and shall work with customers and negotiate with providers and
third party payors to maximize reimbursement coverage.
(v) Nova Factor shall bill patient co-payments, self-pays or
deductibles and shall use reasonable good faith efforts to
collect such payments consistent with applicable law and the
Nova Factor Collection Policy. Nova Factor shall provide Biogen
with a copy of any changes to the Nova Factor Collection Policy
prior to implementation of such changes.
(vi) Nova Factor shall make the intake coordinator function available
from 9:00 a.m. to 8:00 p.m., E.S.T, Monday through Friday,
except Nova Factor holidays, to answer customer, insurance
provider, third party payor and prescriber reimbursement
questions. Biogen will, in its sales and marketing material,
list Biogen's toll-free number as the number for users of the
Product to call with reimbursement questions. When Biogen
receives a telephone call from a Nova Factor customer with a
reimbursement question, the Biogen customer service
representative will transfer the telephone call to Nova Factor.
(vii) Nova Factor shall use its best efforts to resolve reimbursement
issues of customers who would like to purchase Product from Nova
Factor. If Biogen has engaged
7
<PAGE>
a third party to provide reimbursement support services to
Biogen, Nova Factor shall direct certain reimbursement inquiries
to such third party and share relevant information with such
third party, as specified in guidelines established by Biogen.
(viii) Biogen shall furnish to Nova Factor the criteria for
eligibility in Biogen's financial assistance program, and Nova
Factor shall direct potential customers who meet the criteria to
Biogen's customer service department.
5.2 Nova Factor shall not deny Product to customers who do not have insurance
or who have insufficient insurance coverage if the customer has the
ability to self-pay.
5.3 Nova Factor shall be responsible for all costs associated with the
services provided under this Section 5.
5.4 Nova Factor shall be responsible for assuring that the services provided
under this Section are carried out in a manner consistent with
applicable federal and state laws.
6. OTHER SERVICES
6.1 Nova Factor shall ensure that a licensed pharmacist, who is properly
trained to answer Product-related questions or requests for emergency
supplies of Product, is available by telephone (i) from 9:00 a.m. to 6:00
p.m. E.S.T., Monday through Friday, except Nova Factor holidays, for
routine calls and (ii) twenty-four hours (24) per day for emergency
calls. Biogen's customer service representatives will direct any
appropriate calls from Nova Factor's customers received on Biogen's
toll-free line to the Nova Factor pharmacist.
6.2 Nova Factor shall, to the extent consistent with applicable federal and
state pharmacy laws, contact each of its customers approximately one
week before the customer's supply of Product, assuming proper
administration, will be depleted to determine if the customer needs a
new supply of Product.
6.3 Upon receipt of an order from a new customer, Nova Factor shall inquire
whether the customer has received Product administration training. If
the customer has not received Product administration training or would
like to receive additional training, Nova Factor shall direct the
patient to Biogen's customer service department or such other contact as
Biogen shall designate.
6.4 Nova Factor shall maintain an inventory of Product educational materials
developed and provided by Biogen. Nova Factor shall, to the extent
permissible under applicable laws, ship the materials as requested by
Nova Factor's customers or by its customers' insurance providers or
other third party payors.
8
<PAGE>
6.5 To the extent allowable under applicable law, Nova Factor's customer
service representatives shall call each new customer one to three weeks
after the customer has received an initial shipment of Product to check
on the customer's progress. In checking on the customer's progress,
Nova Factor shall use a script and checklist mutually agreeable to the
parties. At Biogen's request, Nova Factor shall during its telephone
conversations with customers conduct additional clinical efficacy and
customer satisfaction surveys provided by Biogen and shall report the
resulting information to Biogen in a manner consistent with any
confidentiality restrictions. The parties shall negotiate, in advance,
the fee for each additional survey initiated by Biogen.
6.6 Nova Factor shall be responsible for assuring that the services
provided under this Section are carried out in a manner consistent with
applicable federal and state laws, including state pharmacy laws.
7. DATA AND REPORTS
7.1 Nova Factor shall maintain in a separate, Biogen-specific database (the
"Database") the information specified in Schedule D for each customer
and each order. In addition, Nova Factor shall maintain in the Database
information, by customer, regarding (i) *, (ii) *, and (iii) any other
information Biogen reasonably requests Nova Factor to track to the
extent that collection of such other information will not result in a
material increase in the costs incurred by Nova Factor in performing its
obligations under this Agreement.
7.2 Nova Factor shall generate and furnish to Biogen monthly and weekly
reports from the Database as specified in Schedule D and such other
reports as Biogen may from time to time reasonably request to the
extent that generation of such other reports will not result in a
material increase in the costs incurred by Nova Factor in performing
its obligations under this Agreement. The reports shall identify
customers only by number and not by name.
8. PAYMENT
8.1 Nova Factor shall purchase Product from Biogen at a price *
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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* Nova Factor shall have sole responsibility and authority for
determining the price at which it will sell Product to its customers.
8.2 All amounts due hereunder shall be payable by check to Biogen in United
States funds. Biogen shall invoice Nova Factor for all amounts due
hereunder. Payment by Nova Factor shall be due within * (*) days
from the date of the invoice or on such other payment terms as the
parties shall mutually agree. Biogen shall have the right to charge
interest on a per diem basis on any amounts past due at an annualized
rate of one and one-half percent (1-1/2%) over the prime rate then in
effect at the Bank of Boston, Boston, Massachusetts.
8.3 Except as otherwise expressly set forth herein, Nova Factor shall be
responsible for all costs and expenses associated with fulfilling its
obligations under this Agreement.
8.4 All prices are exclusive of federal, state and local excise, sales, use
and other taxes levied or imposed on the sale, shipment, delivery,
ownership, possession or resale of Product or any other activities
contemplated under this Agreement. Except for taxes on Biogen's income.
Nova Factor shall be liable for any pay all taxes imposed in connection
with the activities contemplated hereunder.
8.5 During the term of this Agreement and for a period of three (3) years
after termination or expiration of this Agreement, Nova Factor shall
keep complete and accurate records of sales of Product in sufficient
detail to enable Biogen to calculate and confirm *. Nova Factor shall
permit Biogen, during the term of this Agreement and for a period of
three (3) years after termination or expiration of this Agreement, to
examine periodically, but not more than once per year during regular
business hours, the books, ledgers and records of Nova Factor for any
year for the purpose of and to the extent necessary to verify the
information provided by Nova Factor *. The cost of such examination
shall be borne by Biogen unless it shall be established by Biogen that,
as a result of an error in information provided by Nova Factor, there
was a miscalculation * Nova Factor exceed $* per audit.
8.6 *
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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9. REPLACEMENTS AND RETURNS
9.1 In the event Nova Factor or a Nova Factor customer returns or requests
to return a Product, Nova Factor shall promptly notify Biogen and
Biogen shall, upon return of Product, unless the customer requests
replacement Product, give Nova Factor a credit in the amount of the
purchase price paid by Nova Factor for the returned Product, provided
that the Product is returnable and returned under Biogen's then current
Return Goods Policy, a copy of which Biogen shall furnish to Nova
Factor, and provided that the reason for the return of the Product does
not arise from (i) the negligence or intentional misconduct of Nova
Factor or any of its agents or employees, (ii) failure of Nova Factor
to follow applicable SOPs or to otherwise comply with the terms of
this Agreement or (iii) misdelivery or loss of Product by a carrier
used by Nova Factor. For any return of Product authorized by Biogen,
Nova Factor shall send the Product, or shall instruct customers to send
the Product, to Biogen or Biogen's designated disposal company as
specified and in the manner described in the then current Return Goods
Policy.
9.2 If a Nova Factor customer requests replacement Product for Product
returned under Biogen's then current Return Goods Policy or under
circumstances in which Biogen will otherwise furnish replacement
Product at no charge under the Return Goods Policy, Nova Factor shall
furnish the replacement Product to the customer from Nova Factor's
inventory. At the end of each month, Nova Factor shall furnish Biogen
with a list specifying (i) the quantity of replacement Product supplied
to customers under circumstances in which Biogen will supply
replacement Product at no charge under its then current Return Goods
Policy and (ii) the name of the relevant customers. Biogen shall
deliver to Nova Factor an amount of Product equal to the amount used by
Nova Factor as replacement Product consistent with Biogen's then
current Return Goods Policy, at no cost to Nova Factor. If Biogen
determines not to supply replacement Product at no charge, Nova Factor
may purchase the replacement Product at the prices and on the terms set
forth in Section 8. Biogen shall not supply replacement Product to Nova
Factor at no charge if the need for replacement product arises from (i)
the negligence or intentional misconduct of Nova Factor or any of its
agents or employees, (ii) failure of Nova Factor to follow applicable
SOPs or to otherwise comply with the terms of this Agreement or (iii)
misdelivery or loss of Product by a carrier used by Nova Factor. Biogen
may change its Return Goods Policy in its sole discretion, provided
that if any change results in a material increase in the costs incurred
by Nova Factor in performing its obligations under this Agreement, the
parties shall meet *.
9.3 In the event that in any quarter the quantity of Products returned by
Nova Factor's customers under the Return Goods Policy or the quantity
of replacement Product provided to Nova Factor by Biogen, at no cost,
for Nova Factor's customers exceeds *% of the total quantity of
Product sold by Nova Factor in the quarter, the parties shall meet to
negotiate in good faith *.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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9.4 Nova Factor shall cooperate with Biogen in investigating the need for
any replacement Product or the reason for return of a Product by a Nova
Factor customer.
10. ADVERSE EVENT REPORTING AND CUSTOMER COMPLAINTS
10.1 Nova Factor shall notify the designated contact in Biogen's Drug Safety
and Medical Information Group (or such other person as Biogen may
designate), by telephone, immediately (but in no event later than one
(1) business day) after receipt of notice of an Adverse Event
associated with the Product or after Nova Factor or any of its agents
or employees becomes aware of an Adverse Event associated with the
Product. Nova Factor shall confirm each notice of an Adverse Event by
providing to Biogen within two (2) business days a written report in
the format required for Adverse Events by the FDA, or, at Biogen's
request, in the format provided by Biogen. All communications and
reports regarding Adverse Events shall be sent to: Biogen, Inc., 14
Cambridge Center, Cambridge, MA 02142, Attention: Director - Drug
Safety and Medical Information Group, Fax No. (617) 679-2342, or to
such other address as Biogen may from time to time designate.
10.2 Nova Factor shall give notice by fax to Biogen's customer service
department within two (2) business days of all customer complaints
related to Product, other than Adverse Events, and all labeling and
package insert issues, specifying the nature of the complaint or issue.
Nova Factor shall send Biogen a monthly report describing all
complaints related to customer service. The parties shall mutually
agree on Product information to be used by Nova Factor in addressing
customer complaints, Adverse Events and labeling and package insert
issues.
10.3 Nova Factor shall cooperate with Biogen in responding to or
investigating any customer complaints and Adverse Events.
11. SUSPENSION OF DISTRIBUTION AND RECALLS
11.1 If requested by Biogen as the result of a problem with Product quality
or a directive from the FDA, Nova Factor shall suspend distribution of
Product. If the suspension continues for more than * (*) *
Biogen will repurchase the Product held in inventory by Nova Factor at
* and Nova Factor shall have
the right to terminate this Agreement for material breach under Section
14.3 excluding the thirty (30) day cure period.
11.2 Biogen shall promptly notify Nova Factor of any recalls initiated by
Biogen or required by the FDA. Upon receipt of notice of a recall from
Biogen, Nova Factor shall immediately notify the affected customers
Biogen shall provide Nova Factor with the form of letter to be used in
connection with notice of any recall which shall contain the
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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appropriate instructions as to whether the customer should return or
dispose of the affected Product. Biogen shall be responsible for the
mailing, shipping and reasonable administrative expenses incurred by
Nova Factor in connection with the recall as well as the cost of
replacement Product for Nova Factor's customers, provided that the
reason for the recall does not arise from (i) the negligence or
intentional misconduct of Nova Factor or any of its agents or employees
or (ii) failure of Nova Factor to follow applicable SOPs or to
otherwise comply with the terms of this Agreement. Nova Factor shall
cooperate in any recalls by providing relevant Product tracking
information to Biogen.
11.3 Nova Factor shall maintain for two (2) years after termination or
expiration of this Agreement such information as shall be reasonably
required by Biogen to effect a Product recall after termination or
expiration of this Agreement, and shall make such information available
to Biogen, at Biogen's request, in the event of such a recall.
11.4 Nova Factor shall cooperate with Biogen in investigating any Product
failure which resulted in the need for a recall.
12. REPRESENTATIONS AND WARRANTIES OF NOVA FACTOR
12.1 In performing its obligations under this agreement, Nova Factor shall
comply with all applicable laws and regulations, including federal and
state pharmacy laws, laws relating to the disposal of pharmaceutical
products and hazardous wastes, to the extent disposal of Product is
Nova Factor's responsibility under this Agreement, and all applicable
professional and industry standards and good business practices. Nova
Factor shall use a dedicated, well-trained, knowledgeable team of
employees to handle Product and to perform the services to be performed
by Nova Factor under this Agreement.
12.2 *
12.3 Nova Factor represents that it is currently eligible to participate as
a provider in the Medicaid program in each state in the Territory except
those states listed on SCHEDULE F and agrees to maintain such
eligibility during the term of the Agreement. Nova Factor may amend
SCHEDULE F in its sole discretion to add additional states and shall
provide Biogen with prompt notice of any such amendment, provided that
Nova Factor shall not add any state to SCHEDULE F unless the state has
changed its laws to require an in-state pharmacy presence for
eligibility in its Medicaid program. Nova Factor shall remove a state
from SCHEDULE F (and shall provide notice to Biogen of such removal)
when the state no longer requires an in-state pharmacy presence for
eligibility in the state's
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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Medicaid program.
12.4 Nova Factor shall not take any action which would materially adversely
affect its standing or that of Biogen in the industry or with respect
to Product customer base or which would undermine the image of Product.
12.5 Nova Factor shall periodically, but not less frequently than once per
year, perform written quality reviews of Nova Factor's performance in
fulfilling its obligations under this Agreement, and shall provide
Biogen with copies of such reviews. Nova Factor shall administer a
validation checklist to each employee performing services related to
Product upon completion of such employee's initial training and
annually thereafter, and shall provide Biogen with copies of such
checklists.
12.6 Nova Factor represents that it now has and shall maintain a full force
during the term of this Agreement all federal and state pharmacy,
wholesaler and other licenses or approvals required by Nova Factor to
fulfill its obligations under this Agreement, except as otherwise set
forth in Section 12.3, and except that Nova Factor shall not be
required to maintain its licenses in any state which amends its laws
and regulations to require an in-state pharmacy presence as a
requirement for licensing if the new requirement would materially
increase the costs incurred by Nova Factor in performing its
obligations under this Agreement. Nova Factor shall provide Biogen with
notice of any communications with Pharmacy licensing boards which
relate to potential problems with facilities, operations or procedures
used by Nova Factor in its distribution of Product, including notices
of inquiries, investigations or inspections and resulting findings.
12.7 Nova Factor shall not make any performance claims or engage in any
promotional activities with respect to Product except for the
distribution of Product literature prepared by Biogen and any other
activities expressly approved by Biogen.
12.8 Nova Factor shall not use the trademarks or tradenames of Biogen except
to the extent contained in Product literature provided by Biogen and on
Product labels or as otherwise approved by Biogen.
12.9 Nova Factor shall furnish to Biogen copies of quarterly and annual
financial statements of Nova Factor and its parent (including balance
sheet and income statements). Nova Factor shall promptly notify Biogen
of any significant change to the business or financial condition of
Nova Factor or any changes in its ownership or control. The financial
statements provided to Biogen by Nova Factor and its parent under this
Section shall be treated by Biogen as confidential information of Nova
Factor under Section 17.2.
12.10 Nova Factor represents that it has the authority to enter into this
Agreement and that its execution of this Agreement and its performance
of its obligations hereunder will not conflict with and is not
prohibited by any other agreement to which Nova Factor is a party.
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12.11 In no event shall Nova Factor be liable for loss of profit or any
other incidental or consequential damages of Biogen.
13. REPRESENTATIONS AND WARRANTIES OF BIOGEN
13.1 Biogen shall be responsible for testing Product and ensuring that
Product complies, when shipped to Nova Factor, with all applicable
laws, regulations, directives and requirements of the FDA, including
without limitation, packaging and labeling requirements, product
warning requirements, product design and safety requirements and
advertising requirements.
13.2 Biogen shall not use the trademark or tradenames of Nova Factor
except to the extent necessary for activities contemplated under
this Agreement.
13.3 Biogen warrants that, as of the date of shipment to Nova Factor,
Product will conform to the Specifications, will not be adulterated
or misbranded within the meaning of the Federal Food, Drug and
Cosmetic Act and will not be articles which may not, under the
provisions of the Act, be introduced into interstate commerce. THE
WARRANTIES CONTAINED IN THIS SECTION 13.3 ARE IN LIEU OF ALL OTHER
REPRESENTATIONS AND WARRANTIES, BIOGEN DISCLAIMS ALL OTHER
WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING WITHOUT LIMITATION ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
Except as otherwise set forth in Section 16, Biogen's sole liability
and Nova Factor's sole remedy for breach of warranty under this
Agreement shall be for Biogen to repair or replace the defective
Product or to credit Nova Factor's account in accordance with
Section 3.4 and Section 9.1. In no event shall Biogen be liable for
loss of profit or any other incidental or consequential damages of
Nova Factor.
13.4 Biogen represents and warrants to Nova Factor that at the time of
the first shipment of Product to Nova Factor, Biogen will have
received approval from the FDA to market and sell Product in the
Territory.
13.5 Biogen represents that it has the authority to enter into this
Agreement and that its execution of this Agreement and its
performance of its obligations hereunder will not conflict with and
is not prohibited by any other Agreement to which Biogen is a party.
14. TERM AND TERMINATION
14.1 This Agreement shall become effective on the date hereof and, unless
earlier terminated in accordance with this Section, shall continue
in effect for an initial term of three (3) years from the date of
Commercial Launch.
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14.2 Either party may terminate this Agreement for any reason, at any
time after the first anniversary of the Commercial Launch, upon
ninety (90) days prior written notice given after the first
anniversary of Commercial Launch. In addition, Biogen shall have
the right to terminate this Agreement immediately in the event the
FDA rejects the PLA/ELA filing, or if Biogen withdraws its PLA/ELA
filing.
14.3 Either party may terminate this Agreement (i) for a material breach
by the other party upon thirty (30) days' prior written notice
unless the breaching party cures the breach within such thirty (30)
day period or (ii) in the event of any proceedings, voluntary or
involuntary, in bankruptcy or insolvency, by or against the other
party, or the appointment with or without the other parties' consent
of a receiver for such party.
14.4 Upon receipt or delivery of a termination notice by Nova Factor or
ninety (90) days prior to expiration of this Agreement at the end of
the term, as applicable, the parties shall begin to transition
distribution of Product for Nova Factor's customers to a party to be
designated by Biogen. Transition of distribution under this Section
14.4 shall mean the following:
(i) Biogen shall as soon as possible begin referring Nova
Factor customers who contact Biogen's customer service
department to the designated distributor.
(ii) At Biogen's request, Nova Factor shall provide notice to
all of Nova Factor's customers of the change in distributors.
(iii) Nova Factor shall complete any reimbursement clearances
and Product shipments then underway, but otherwise shall refer
customers to the designated distributor.
(iv) Nova Factor shall transfer a copy of the Database and
customer information, including prescription files, to the
designated distributor, provided that if applicable patient
confidentiality laws prohibit transfer of the customers' name
to the designated distributor, Nova Factor shall transfer the
Database and customer information using customer numbers instead
of names.
(v) Nova Factor's obligation to order additional Product
when its inventory falls to a one-week supply shall cease and
Biogen shall repurchase any Product held in inventory by Nova
Factor on the date of termination at the price paid for the
Product by Nova Factor.
After receipt of the termination notice and during the period
thereafter ending six months after termination, Nova Factor shall
use reasonable efforts to cooperate with Biogen in ensuring the
smooth transition of the services provided by Nova Factor under this
Agreement to the distributor designated by Biogen, provided that
after termination of this Agreement, Biogen shall reimburse Nova
Factor for its reasonable out-of-pocket, non-
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personnel-related expenses associated with such cooperation.
14.5 Sections 9, 10, 11, 14.4, 15, 16, 17, and 22.7 shall survive
termination or expiration of this Agreement.
15. REGULATORY, INSPECTIONS, AUDITS
15.1 Nova Factor shall provide to the FDA or, at Biogen's request, shall
provide to Biogen all documents and information requested by the FDA
or by Biogen in support of its regulatory filings. Copies of all
documents to be provided to the FDA shall be provided to Biogen in
advance, if practicable, or otherwise within two (2) business days
of delivery to the FDA. Nova Factor shall notify Biogen immediately
upon receipt of notice of any inspection by the FDA directed
specifically toward Product, and Biogen shall have the right to have
an employee present at any such inspection, if allowed by law. Nova
Factor shall notify Biogen immediately of any notices, requests for
information or other communications related to Product from the U.S.
Department of Health and Human Services or any other government agency
or any state healthcare program or other state agency and, to the
extent permitted under applicable law, shall give Biogen copies of
such communications.
15.2 Nova Factor shall provide to Biogen, at Biogen's request, any
information reasonably required in connection with Biogen
investigations relating to recalled or returned Product or any
requests of investigations by or filings with governmental bodies,
including the FDA or in support of Biogen's applications to the FDA.
Nova Factor shall respond within two (2) business days to any
reasonable requests for information by Biogen.
15.3 Nova Factor shall from time to time submit to inquiries, audits and
inspections by Biogen during normal business hours or at any other
time during which the services being audited are ongoing. Biogen
shall give Nova Factor at least two (2) business days prior notice
of any audit or inspection and shall bear the costs of such audit or
inspection.
16. INDEMNIFICATION
16.1 Biogen shall at all times during the term of this Agreement and
thereafter defend, indemnify and hold Nova Factor and its officers,
directors, agents and employees harmless from and against any and
all claims, suits, damages, liabilities, costs and expenses,
including but not limited to court costs and reasonable attorneys'
fees, incurred in connection with any third-party claim arising out
of the use of any Product by an end-user, except to the extent
caused by (i) the negligence or intentional misconduct of Nova
Factor or any of its officers, directors, agents or employees or
(ii) breach by Nova Factor of any of the terms of this Agreement or
(iii) acts of Nova Factor or any of its officers, directors, agents
or employees which are outside the scope of this Agreement.
16.2 Nova Factor shall at all times during the term of this Agreement and
thereafter defend, indemnify and hold Biogen and its officers,
directors, agents and employees harmless
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from and against any and all claims, suits, damages, liabilities,
costs and expenses, including but not limited to court costs and
reasonable attorneys' fees, incurred in connection with any
third-party claim arising out of (i) the negligence or intentional
misconduct of Nova Factor or any of its officers, directors, agents
or employees, (ii) breach by Nova Factor of any of the terms of this
Agreement, or (iii) acts of Nova Factor or any of its officers,
directors, agents or employees which are outside the scope of this
Agreement.
16.3 A party seeking indemnification under this Section shall give prompt
notice of the claim to the other party and, provided that the
indemnifying party is not contesting the indemnity obligation, shall
permit the indemnifying party to control any litigation relating to
such claim and disposition of any such claim, provided that the
indemnifying party shall act reasonably and in good faith with
respect to all matters relating to the settlement or disposition of
any claim as the settlement or disposition relates to the parties
being indemnified under this Section and the indemnifying party
shall not settle or otherwise resolve any claim without prior notice
to the indemnified party. The indemnified party shall cooperate with
the indemnifying party in its defense of any claim for which
indemnification is sought hereunder.
17. CONFIDENTIALITY
17.1 Nova Factor agrees to treat any confidential or proprietary
information obtained from Biogen and any confidential or proprietary
information generated by Nova Factor in performing its obligations
under this Agreement, including information regarding Biogen's
pricing policies and reimbursement for the Product, information
regarding the cost of providing services to Biogen and the
information in the Database,and anything derived therefrom,
(collectively, the "Biogen Information") as the confidential and
exclusive property of Biogen, (except for the information in the
Database which shall be joint property of Biogen and Nova Factor),
and agrees not to disclose any of the Biogen Information to any
third party without first obtaining the written consent of Biogen.
Nova Factor agrees that it will use any Biogen Information only for
purposes of performing its obligations hereunder and for no other
purpose without the prior written consent of Biogen. Nova Factor
further agrees to take all practicable steps to ensure that the
Biogen Information will not be used by its directors, officers or
employees, except on like terms of confidentiality as aforesaid, and
will be kept confidential by them.
The above provisions of confidentiality shall not apply to that part
of the Biogen Information which Nova Factor is able to demonstrate
by documentary evidence:
(a) was in Nova Factor's possession prior to receipt from Biogen;
or
(b) was in the public domain at the time of receipt from Biogen; or
(c) became part of the public domain through no fault of Nova
Factor, its directors, officers or employees; or
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(d) was lawfully received by Nova Factor from some third party not
disclosing the information on behalf of Biogen and having a
right of further disclosure; or
(e) is required by law to be disclosed.
Nova Factor agrees that, at Biogen's request, it shall return to
Biogen all parts of the Biogen Information existing in documentary
form, not including pharmacy records and will, at Biogen's request,
return or destroy any copies thereof made by Nova Factor, its
directors, officers or employees except that Nova Factor shall
retain a copy of the Database, subject to the ongoing obligation of
confidentiality. Nova Factor shall not dispose of the information in
the Database without first offering in writing, given at least sixty
(60) days prior to such disposal, to deliver the information to
Biogen.
17.2 Biogen agrees to treat any confidential or proprietary information
obtained from Nova Factor, (not including the Database, information
about insurers' reimbursement policies with respect to Product and
information used to calculate * ) and anything
derived therefrom, (collectively, the "Nova Factor Information") as
the confidential and exclusive property of Nova Factor, and Biogen
agrees not to disclose any of the Nova Factor Information to any
third party without first obtaining the written consent of Nova
Factor, provided that Biogen may disclose Nova Factor Information to
any third party providing reimbursement-related services to Biogen
as long as the third party is obligated to Nova Factor to keep such
information confidential. Biogen agrees that it will use any Nova
Factor Information only for purposes of activities contemplated
hereunder and for no other purpose without the prior written consent
of Nova Factor. Biogen further agrees to take all practicable steps
to ensure that the Nova Factor Information will not be used by its
directors, officers or employees, except on like terms of
confidentiality as aforesaid, and will be kept confidential by them.
The above provisions of confidentiality shall not apply to that part
of the Nova Factor Information which Biogen is able to demonstrate
by documentary evidence:
(a) was in Biogen's possession prior to receipt from Nova Factor;
or
(b) was in the public domain at the time of receipt from Nova
Factor; or
(c) became part of the public domain through no fault of Biogen, its
directors, officers or employees; or
(d) was lawfully received by Biogen from some third party not
disclosing the information on behalf of Nova Factor and having a
right of further disclosure; or
(e) is required by law to be disclosed.
Biogen agrees that, at Nova Factor's request, it shall return to
Nova Factor all parts of the Nova Factor Information existing in
documentary form and will, at Nova Factor's request, return or
destroy any copies thereof made by Biogen, its directors, officers,
or employees.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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17.3 Nothing contained herein shall be deemed to grant to either party any
rights or licenses under any patent applications or patents or to any
know-how, technology, inventions or other intellectual property rights
of the other party.
17.4 Notwithstanding anything to the contrary contained in Section 12.7,
Nova Factor shall be permitted to disclose to potential and existing
customers of Nova Factor as well as to potential purchasers of stock
or assets of Nova Factor or other potential sources of capital (i)
that Nova Factor distributes Product under an agreement with Biogen
and (ii) the general nature of the relationship with Biogen. Nova
Factor shall also be permitted to make such public statements
regarding its relationship with Biogen as may be required by law,
regulation or by obligations pursuant to any listing agreement with
any securities exchange. Nova Factor shall not disclose the terms of
this Agreement to any third party or, except as expressly set forth in
this Section, make any public announcement of the existence of its
relationship with Biogen without the prior written consent of Biogen
except to its auditors and lawyers or as required by law.
17.5 The obligations of the parties under this Section 17 shall continue
during the term of this Agreement and for a period ending five (5)
years after termination or expiration of this Agreement.
18. INSURANCE
Nova Factor agrees (i) to obtain and maintain, while this Agreement is
in effect, commercial general liability insurance, including product
liability insurance, with coverage limits of not less than $1,000,000
per occurrence and $3,000,000 in the aggregate, and (ii) not to cancel
the insurance or reduce the coverage without giving at least thirty
(30) days prior written notice to Biogen. Nova Factor shall cause
Biogen to be a notice party on each insurance policy such that Biogen
shall receive notice of any cancellation or change in the policy. At
the request of Biogen, Nova Factor shall provide Biogen with a copy of
a certificate of insurance to verify that insurance with the required
coverage is in effect.
19. TRAINING
Nova Factor shall be responsible for insuring that the personnel
handling Product, dealing with customers and payors and performing the
services contemplated under this Agreement are properly trained to
perform their functions. Biogen and Nova Factor will jointly prepare a
training manual and orientation program for Nova Factor and Biogen
personnel to familiarize the personnel with the Product and the market.
20. FACILITIES EXPANSION
Nova Factor plans, at its sole expense, to extend its existing
facilities and modify its existing procedures and processes. A
facility expansion plan and procedures modification
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plan are attached as Schedule G.
21. COMPETITIVE PRODUCTS
As long as Nova Factor is *
approved by Biogen, other than distributors authorized to sell to
Medicaid customers in the states listed on Schedule F, Nova Factor
shall not distribute, as a reseller or as a consignee, or provide
reimbursement assistance with respect to, any products which compete
with Product in the treatment of multiple sclerosis.
22. MISCELLANEOUS
22.1 This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns,
provided that neither party shall have the right to assign this
Agreement or its rights and obligations hereunder without the prior
written consent of the other party, which such consent shall not be
unreasonably withheld, except that Biogen may assign this Agreement or
its rights and obligations hereunder to its Affiliates or successors
in business who assume and agree to be bound by the terms hereof
provided the entity has demonstrated financial ability to carry out
Biogen's obligations hereunder.
22.2 This Agreement constitutes the entire and only agreement between the
parties relating to the subject matter hereof, and all prior
negotiations, representations, agreements and understandings are
superseded hereby. No agreements amending, altering or supplementing
the terms hereof may be made except by means of a written document
signed by the duly authorized representatives of both parties.
22.3 Any notice required by this Agreement shall be given by prepaid, first
class, certified mail, return receipt requested, or by air courier,
hand delivery or facsimile, to the parties at the following addresses:
If to Biogen:
Biogen, Inc.
14 Cambridge Center
Cambridge, MA 02142
Attention: Vice President - Marketing and Sales
with a copy to Vice President-General Counsel
Fax: (617) 679-2617
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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If to Nova Factor, Inc.:
Nova Factor, Inc.
1785 Nonconnah Blvd.
Suite 114
Memphis, TN 38132
Attention: Chief Executive Officer
Fax: (901) 348-8261
with a copy to:
Thomas W. Bell, Jr.
Armstrong Allen Prewitt
Gentry Johnson & Holmes
Brinkley Plaza
80 Monroe Ave., Suite 700
Memphis, TN 38103-2467
Fax: (901) 524-4936
Any notice sent under this Section shall be deemed delivered within
five (5) days if sent by mail and within twenty-four (24) hours if
sent by fax, courier or hand delivery.
22.4 Neither party shall be liable for any failure or delay caused by
fires, flood, earthquakes, peril of the sea, accidents, explosions,
sabotage, strikes, or other labor disturbances (regardless of the
reasonableness of the demands of labor), civil commotions, riots,
invasions, wars, acts, restraints, requisitions, regulations, or
directions of governmental authorities, shortages of labor, fuel,
power, or raw material, inability to obtain equipment or supplies,
inability to obtain or delays in transportation, acts of God, or any
other cause beyond its reasonable control.
22.5 Headings included herein are for convenience only, and shall not be
used to construe this Agreement.
22.6 For the purposes of this Agreement, the parties shall be, and shall be
deemed to be, independent contractors and not agents or employees of
the other party. No party shall have authority to make any statements,
representations or commitments of any kind, or to take any action,
which shall be binding on the other party, except as may be explicitly
provided for herein or authorized in writing.
22.7 Except as required by law, neither party shall use the name of the
other party or of any employee of the other party in connection with
any publicity without the prior written approval of the other party.
22.8 If any provision of this Agreement shall be found by a court to be
void, invalid or unenforceable, the same shall either be reformed to
comply with applicable law or stricken if not so conformable, so as
not to affect the validity or enforceability of this Agreement, except
if the principal intent of the Agreement is frustrated by such
22
<PAGE>
reformation or deletion in which case this Agreement shall terminate.
22.9 Failure of either party to enforce a right under this Agreement shall
not act as a waiver of that right or the ability to later assert that
right relative to the particular situation involved or to terminate
this Agreement as a result of any subsequent default or breach.
22.10 This Agreement shall be construed and enforced in accordance with the
laws of the Commonwealth of Massachusetts.
22.11 Unless waived by the parties, any dispute, controversy or claim
between the parties arising out of or relating to this Agreement
either during or after the term hereof (including the question as to
whether any particular matter is arbitrable) shall be solely and
finally settled by arbitration conducted in Memphis, Tennessee, if the
arbitration is initiated by Nova Factor or in the Boston,
Massachusetts metropolitan area, if the arbitration is initiated by
Biogen, in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in force (the "Rules"). The
party requesting arbitration shall serve upon the other party to the
controversy, dispute or claim a written demand for arbitration stating
the substance of the controversy, dispute or claim, the contention of
the party requesting arbitration, and the name and address of the
arbitrator appointed by it. The recipient of such demand shall within
twenty (20) days after such receipt appoint an arbitrator and notify
the party requesting arbitration of the identity of the arbitrator so
selected, and the two arbitrators shall appoint a third, and the
decision or award of any two arbitrators shall be final and binding
upon the parties. In the event that the two arbitrators fail to
appoint a third arbitrator within twenty (20) days of the appointment
of the second arbitrator, either arbitrator, or any party to the
arbitration, may apply to a judge of the United States District Court
for the district in which the arbitration is held for the appointment
of the third arbitrator and the appointment of such arbitrator by such
judge or such application shall have precisely the same force and
effect as if such arbitrator had been appointed by the two
arbitrators. If for any reason the third arbitrator cannot be
appointed in the manner prescribed by the preceding sentence, either
regularly appointed arbitrator, or either party to the arbitration,
may apply to the American Arbitration Association for appointment of
the third arbitrator in accordance with the Rules. If the parties upon
whom the demand for arbitration has been served fail or refuse to
appoint an arbitrator within twenty (20) days, the single arbitrator
shall have the right to decide alone, and such arbitrator's decision
or award shall be final and binding upon the parties. The decision of
the arbitrator shall be in writing and shall set forth the basis
therefor. The parties shall abide by all awards rendered in
arbitration proceedings, and all such awards may be enforced and
executed in any court having jurisdiction over the party against whom
enforcement of such award is sought. The party losing the dispute
which was submitted to arbitration shall pay the administrative
charges, arbitrator's fees, and related expenses of arbitration, and
each parties legal fees incurred in connection with any such
arbitration. This agreement to arbitrate shall be specifically
enforceable under the prevailing arbitration law.
23
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
BIOGEN INC.
By: /s/ [illegible]
--------------------
Title: President/CEO
--------------------
NOVA FACTOR, INC.
By: /s/ Randy Grow
--------------------
Title: President
24
<PAGE>
Exhibit 10.34
AMENDMENT NO. 1 TO DISTRIBUTION AND SERVICES AGREEMENT
This Amendment No. 1 to Distribution and Services Agreement is entered
into as of this 17th day of May, 1996 by and between Biogen, Inc., with
principal offices located at 14 Cambridge Center, Cambridge, MA 02142
("Biogen"), and Nova Factor, Inc., with principal offices located at 1620
Century Center Parkway, Suite 109, Memphis, TN 38134 ("Nova Factor"). Except
as otherwise set forth herein, the capitalized terms used in this Amendment
shall have the meanings assigned to such terms in the Distribution and
Services Agreement between the parties dated as of November 1, 1995 (the
"Distribution Agreement").
WHEREAS, Biogen has appointed Nova Factor as a preferred distributor of
Biogen's AVONEX-TM- (Interferon beta - 1a);
WHEREAS, under the terms of the Distribution Agreement, Nova Factor has
agreed to provide reimbursement assistance and other customer services to
end-users of the Product and to provide data reporting and other services to
Biogen;
WHEREAS, as additional services under the Distribution Agreement, Biogen
desires Nova Factor (i) to supply replacement Product, as authorized by
Biogen, to all end-users and physicians, whether or not customers of Nova
Factor and (ii) to supply Product to participants in Biogen's AVONEX-TM-
Access Program-TM-, and Nova Factor is willing to provide such additional
services to Biogen on the terms and conditions set forth in this Amendment;
WHEREAS, to reflect the additional services to be provided by Nova Factor,
the parties desire to amend the Distribution Agreement as set forth herein;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereby agree as follows:
1. Section 9 of the Distribution Agreement shall be amended to be and read
in its entirety as follows:
"9. REPLACEMENTS, RETURNS AND AVONEX-TM- ACCESS PROGRAM-TM
9.1 In the event Nova Factor returns or requests to return a Product,
Nova Factor shall promptly notify Biogen and Biogen shall, upon
return of Product, unless the customer requests replacement
Product, give Nova Factor a credit in the amount of the purchase
price paid by Nova Factor for the returned Product, provided that
the Product is returnable and returned under Biogen's then current
Return Goods Policy, a copy of which Biogen shall furnish to Nova
Factor, and provided that the reason for the return of the Product
does not arise from (i) the negligence or intentional
<PAGE>
misconduct of Nova Factor or any of its agents or employees, (ii)
failure of Nova Factor to follow applicable SOPs or to otherwise
comply with the terms of this Agreement or (iii) misdelivery or
loss of Product by a carrier used by Nova Factor. For any return
of Product authorized by Biogen, Nova Factor shall send the
Product, or shall instruct customers to send the Product, to
Biogen or Biogen's designated disposal company as specified and in
the manner described in the then current Return Goods Policy.
9.2 Nova Factor shall refer any Nova Factor customer who requests
replacement Product to one of Biogen's customer support
specialists for authorization. Biogen's customer support
specialist shall authorize the supply of replacement Product at no
charge to a Nova Factor customer under appropriate circumstances
as determined by Biogen. Biogen shall not authorize the supply of
replacement Product to a Nova Factor customer at no charge if the
need for replacement product arises from (i) the negligence or
intentional misconduct of Nova Factor or any of its agents or
employees, (ii) failure of Nova Factor to follow applicable SOPs
or to otherwise comply with the terms of this Agreement or (iii)
misdelivery or loss of Product by a carrier used by Nova Factor.
If Biogen determines not to supply replacement Product to a Nova
Factor customer at no charge, Nova Factor may purchase replacement
product at the prices and on the terms set forth in Section 8.
9.3 Biogen may change its Return Goods Policy in its sole discretion,
provided that if any change results in a material increase in the
costs incurred by Nova Factor in performing its obligations under
this Agreement, *.
9.4 In addition to the other services to be provided by Nova Factor
under this Agreement, Nova Factor shall act as a supplier of
replacement Product and replacement diluent for Biogen. Upon
receipt of each authorization from a Biogen customer support
specialist to send replacement Product or diluent to an end-user
of Product or to a physician who has purchased Product, Nova
Factor shall supply replacement Product or diluent from its
inventory to the end-user at the end-user's home, other residence,
office or similar location, as designated by the end-user, or to
the physician at the physician's office, whether or not such
person is a customer of Nova Factor. Authorization from Biogen's
customer support specialist for Nova Factor to supply replacement
Product or diluent shall be in the form of the transfer of the
telephone call from the end-user or physician on Biogen's customer
support line to Nova Factor followed by same-day written
confirmation from the Biogen customer support specialist that
replacement Product or diluent may be sent, such written
confirmation to specify the quantity of replacement Product to be
sent and to be in a form mutually agreeable to the parties. Nova
Factor shall supply replacement Product in one or more single dose
packs or in the full package of four dose packs, as authorized by
Biogen's customer support specialist. In no event shall Nova
Factor open or alter the packaging of single dose packs of
Product. Nova factor shall package and ship replacement Product
and diluent in accordance with Section 4.2 for delivery within
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
2
<PAGE>
twenty-four (24) hours of receipt of authorization from Biogen,
provided that Nova Factor has received a copy of the applicable
prescription form. Nova Factor shall use reasonable efforts to
obtain the prescription form for a patient, as necessary, within
twenty-four (24) hours of receipt of authorization from Biogen to
ship replacement Product to such patient. Nova Factor shall notify
the appropriate Biogen customer support specialist in the event
Nova Factor has not received the prescription form for a patient
within forty-eight (48) hours of receipt of authorization from
Biogen. Vials of replacement diluent used by Nova Factor in
fulfilling its obligation under this Section shall be purchased
and properly stored by Nova Factor, at Nova Factor's cost. Nova
Factor shall use diluent which has been manufactured by Abbott
Laboratories Inc. and which conforms to the specifications for the
diluent used in the Product administration packages.
Notwithstanding anything herein to the contrary, shipments made
by Nova Factor under this Section 9.4 *.
9.5 (a) In addition to the other services to be provided by Nova
Factor under this Agreement, Nova Factor shall act as a supplier
of Product to participants in Biogen's AVONEX-TM- Access
Program-TM- (the "Program"). Biogen shall have sole responsibility
for enrolling participants in the Program. Upon enrollment by
Biogen of a participant in the Program (each a "Program
Participant"), one of Biogen's customer support specialists or a
representative of Biogen's third party reimbursement support
services vendor shall notify Nova Factor in writing of the name,
address and telephone number of the Program Participant and shall
send a copy of the applicable prescription form for the Program
Participant. Within twenty-four (24) hours of receipt of notice
under the preceding sentence, Nova Factor shall contact the
Program Participant to obtain an order for Product.
(b) Nova Factor shall supply Product to Program Participants from
Nova Factor's inventory and shall deliver Product to the office of
the Program Participant's physician with forty-eight (48) hours of
receipt of each order. If the Program Participant requests
delivery of Product to a location other than his or her
physician's office, or if the physician refuses to accept delivery
of the Product, Nova Factor shall notify Biogen, and Biogen will
work with the Program Participant to determine an alternate
shipping destination. Upon determination of an alternate shipping
location. Biogen shall notify Nova Factor in writing of the
address to which Product is to be shipped for the Program
Participant, and Nova Factor shall then ship the Product in
accordance with this Section. *. Nova Factor shall package and ship
Product to Program Participants in accordance with Section 4.2.
(c) As a condition to participation in the Program, Program
Participants will agree to pay a shipment fee of $* for each
shipment of Product after the initial shipment (the "Program
Fee"). Nova Factor shall bill each Program Participant for the
Program Fee, and shall send a follow-up reminder letter following
the third
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
3
<PAGE>
shipment of Product if the Program Participant has not paid the
Program Fee. Nova Factor shall apply the Program Fees collected
for any month against the amount of the Shipment Fees owed by
Biogen for such month under Section 9.7. Nova Factor shall not
bill Program Participants for Product other than in the amount of
the Program Fees. Except to the extent expressly set forth in this
paragraph, Nova Factor shall not be responsible for collecting
Program Fees from Program Participants.
(d) Nova Factor shall treat each Program Participant as a Nova
Factor customer under this Agreement, except that shipments to
Program Participants shall be identified separately in the
Database and in reports provided to Biogen under Section 8.1.
Notwithstanding anything herein to the contrary, shipments made by
Nova Factor to Program Participants under this Agreement *.
(e) During each follow-up telephone call to a Program Participant
under Section 6.2, Nova Factor shall confirm that the Program
Participant's insurance status or financial condition has not
changed. If the Program Participant's insurance status or
financial condition has changed, Nova Factor shall immediately
notify Biogen or Biogen's third party reimbursement support
services vendor. Nova Factor shall have no obligation to verify
information received from a Program Participant as to insurance
status. Nova Factor shall not ship Product to a Program
Participant under this Section after Nova Factor receives written
notice from Biogen or Biogen's third party reimbursement support
services vendor that the Program Participant is no longer eligible
to participate in the Program.
9.6 At the end of each month, Nova Factor shall furnish to Biogen a
report (the "Supply Report") specifying (A) for each shipment of
replacement Product or diluent (i) *. Within thirty (30) days of
receipt of the Supply Report for any month, Biogen shall issue to
Nova Factor a credit memo in an amount equal to the quantity of
Product shipped during the month from Nova Factor's inventory under
the terms of Section 9.4 and 9.5 of this Agreement (with
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
4
<PAGE>
individual one dose packs treated as one-quarter of a Product)
multiplied by the applicable Credit Price for the month (as
defined below). Notwithstanding the foregoing, Biogen shall only
issue credit memos in multiples of the full four does
administration pack. Any fraction of a full four does pack for
which credit is due shall be added to the credit memo for the next
period. *. Nova Factor may apply credits given under this Section 9
against subsequent purchases of Product under this Agreement.
Credits may not be assigned or transferred by Nova Factor to a
third party, and no cash payments shall be made on account of any
credit. Nova Factor shall not unilaterally apply any credit
against or make any deductions from payment due to Biogen without
the prior written approval of Biogen. Nova Factor shall apply
credits on a first-in, first-out basis.
9.7 In consideration of the services rendered by Nova Factor to Biogen
under this Section 9, Biogen shall pay to Nova Factor a fee of $*
for each shipment of replacement Product or diluent by
Nova Factor in accordance with Section 9.4 and for each shipment
of Product to a Program Participant shipped by Nova Factor in
accordance with Section 9.5 (the "Shipment Fee"), provided that
the Shipment Fee shall be reduced to $* for each shipment
commencing with the first quarter in which * . Notwithstanding
anything herein to the contrary, shipment of multiple one dose
packs or multiple packages of four dose packs or vials of diluent
to a single patient shall be deemed one shipment for purposes of
this Section 9.7. Nova Factor shall invoice Biogen at the end of
each month for amounts due hereunder with respect to Product shown
in the Supply Report for such month. The amount due for any month
as shown on the applicable invoice shall be the Shipment Fees due
for such month less the Program Fees collected by Nova Factor
during such month. All amounts due hereunder shall be payable by
check to Nova Factor in United States funds. Payment by Biogen
shall be due within thirty (30) days from the date of the invoice.
9.8 Except as otherwise expressly set forth herein, Nova Factor shall
be responsible for all costs and expenses associated with
fulfilling its obligations under this Section 9.
9.9 Nova Factor shall cooperate with Biogen in investigating the need
for any replacement Product or the reason for return of a Product
by a Nova Factor customer.
2. Except as otherwise expressly set forth herein, all of the terms and
conditions of the Distribution Agreement shall remain in full force and
effect.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
5
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
BIOGEN, INC.
By: /s/ Kenneth M. Bate
------------------------------------
Kenneth M. Bate
Vice President - Marketing and Sales
NOVA FACTOR, INC.
By: /s/ Randy Grow
------------------------------------
Title: President
---------------------------------
6
<PAGE>
Exhibit 10.35
ADDENDUM AND AMENDMENT NO. 2 TO
DISTRIBUTION AND SERVICES AGREEMENT
This Addendum and Amendment to Distribution and Services Agreement is
entered into as of this 21st day of May 1997 by and between Biogen, Inc.,
through its offices located at 701 Green Valley Road, Suite 308, Greensboro,
NC 27408 ("Biogen"), and Nova Factor, Inc., with principal offices located at
1620 Century Center Parkway, Suite 109, Memphis, TN 38134 ("Nova Factor").
WHEREAS, Biogen has appointed Nova Factor as a preferred distributor of
Biogen's AVONEX-Registered Trademark- (Interferon beta - 1a) under the terms
of a Distribution and Services Agreement between the parties dated as of
November 1, 1995, as amended by Amendment No. 1 to Distribution and Services
Agreement, dated as of May 17, 1996, (the "Distribution Agreement");
WHEREAS, under the Distribution Agreement, Nova Factor has agreed to
provide reimbursement assistance and other customer services to end-users of
AVONEX-Registered Trademark- and to provide data reporting and other
services to Biogen;
WHEREAS, as additional services under the Distribution Agreement, Biogen
desires Nova Factor (i) to supply replacement components purchased by Nova
Factor to all end-users (whether or not customers of Nova Factor) who have a
need for such replacement components, as determined by a qualified Nova
Factor pharmacist and as approved by a Biogen customer support specialist,
(ii) to supply Alliance Kits, as defined below, to participants in Biogen's
Alliance Program, and (iii) at Biogen's request, to supply Product, as
defined in the Distribution Agreement, to physicians for investigational use
under investigator-sponsored INDs approved by Biogen, and Nova Factor is
willing to provide such additional services to Biogen on the terms and
conditions set forth in this Addendum;
WHEREAS, in addition to providing for additional services, the parties
desire to include in this Addendum an amendment to the Distribution Agreement
to reflect a new arrangement regarding the fee paid to Nova Factor for
supplying replacement Product to end-users;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereby agree as follows:
I DEFINITIONS.
The capitalized terms used in this Addendum that are defined in the
Distribution Agreement shall have the meanings assigned to such terms in
the Distribution Agreement. In addition, the following terms shall have
the following meanings:
1.1 "Additional Services" shall mean the services to be provided by Nova
Factor under this Addendum.
<PAGE>
1.2 "Alliance Kit" shall mean a plastic ziplock bag containing five
syringes, five MicroPins-Registered Trademark- and five needles intended
for use with Product.
1.3 "Alliance Program" shall mean a program established by Biogen to provide
educational information and materials to persons using Product.
1.4 "Alliance Program Participant" shall mean an end-user of Product who has
enrolled in the Alliance Program.
1.5 "Emergency Shipment" shall have the meaning set forth in Section 2.2.
1.6 "Investigator" shall mean a physician who, with the consent of Biogen,
has filed and will be conducting research under an investigator-sponsored
IND for investigational use of Product.
1.7 "IND" shall mean an Investigational New Drug application filed with the
FDA.
1.8 "Replacement Components" shall mean diluent, syringes,
MicroPins-Registered Trademark- and needles intended for use with Product.
1.9 "Service Report" shall have the meaning set forth in Section 5.1.
1.10 "Specifications" shall mean the specifications for Replacement
Components provided to Nova Factor by Biogen, as updated by Biogen from
time to time.
2. SUPPLY OF MISCELLANEOUS REPLACEMENT COMPONENTS.
2.1 As additional services under the Distribution Agreement, Nova Factor
shall, under the terms of this Addendum, act as a supplier of Replacement
Components to end-users of Product (whether or not the end-users are Nova
Factor customers) who have requested Replacement Components and whose
requests have been approved by a Biogen customer support specialist.
Approval from a Biogen customer support specialist for Nova Factor to
supply Replacement Components shall be in the form of the transfer of the
telephone call from the end-user on Biogen's customer support line to Nova
Factor followed by same-day written confirmation from the Biogen customer
support specialist. Upon receipt of a request from an end-user for
Replacement Components, Nova Factor shall, using a qualified Nova Factor
pharmacist, determine whether the supply of Replacement Components under
the circumstances set forth by the end-user is appropriate and allowable,
without a prescription, under applicable law. If Nova Factor determines
that the supply of Replacement Components is appropriate and allowable,
without a prescription, under applicable law, Nova Factor shall supply the
approved quantity and type of Replacement Components from its inventory of
Replacement Components to the end-user at the end-user's home, other
residence, office or similar location, as designated by the end-user. In
the event Nova Factor determines that a prescription is required for the
supply of Replacement Components to an end-user, Nova Factor shall use
reasonable efforts to obtain the prescription from the end-
2
<PAGE>
user's physician within twenty-four (24) hours of the request. If Nova
Factor, having used reasonable efforts, is unable to obtain a prescription
from the end-user's physician within five (5) business days of receipt of
the request for Replacement Components or if Nova Factor otherwise
determines that the supply of Replacement Components to an end-user is not
appropriate, Nova Factor shall notify a Biogen customer support specialist.
2.2 Nova Factor shall ship Replacement Components to end-users via
third-class mail unless the end-user requires an emergency supply in which
case Nova Factor shall ship the Replacement Components via Federal Express
standard overnight delivery service or another mutually agreed to
overnight carrier (an "Emergency Shipment"). Nova Factor shall ship
Replacement Components within twenty-four (24) hours of receipt of the
request, unless Nova Factor determines that a prescription is required in
which case Nova Factor shall ship Replacement Components within twenty-four
(24) hours of receipt of the applicable prescription. Nova Factor shall
package Replacement Components in accordance with industry standards, and
shall include in the package a Nova Factor pharmacy label. If Replacement
Components are not received by the intended recipient, Nova Factor shall
use reasonable efforts to track and retrieve the missing shipment.
2.3 Nova Factor shall purchase and store the Replacement Components that it
supplies to end-users under this Section 2, at Nova Factor's cost. In
fulfilling its supply obligation under this Section 2, Nova Factor shall
use only those Replacement Components that conform to the Specifications.
Nova Factor shall perform appropriate quality control testing to confirm
that Replacement Components conform to Specifications, including but not
limited to (i) inspection of incoming inventory shipments to verify
conformance of Replacement Components to Specifications, (ii) documentation
of such inspections and (iii) for each shipment to an end-user verification
by a registered pharmacist or pharmacy technician acting under the direct
supervision of a registered pharmacist that the Replacement Components
being shipped are the Replacement Components that were requested and
authorized.
2.4 The parties agree that, notwithstanding anything herein to the contrary,
Section 9 of the Distribution Agreement, including the payment provisions
of Section 9.7, shall no longer apply to the supply of replacement diluent,
but rather replacement diluent shall be treated in the same manner as other
Replacement Components under the terms of this Addendum.
3. ALLIANCE PROGRAM
3.1 As further additional services under the Distribution Agreement, Nova
Factor shall, under the terms of this Addendum, supply one Alliance Kit
to each Alliance Program Participant who submits a completed Alliance
Program voucher to Nova Factor. Nova Factor shall use its best efforts not
to send more than one Alliance Kit to each Alliance Program Participant,
and shall notify a Biogen customer support specialist promptly in the event
an Alliance Program Participant submits more than one voucher. Nova Factor
shall not ship Alliance Kits to any Alliance Program Participant in any
state in which a prescription for any of the Replacement Components
contained in the Alliance Kits is required without having first obtained
the necessary prescription. In the event Nova Factor determines that a
prescription
3
<PAGE>
is required to supply an Alliance Kit to an Alliance Program
Participant, Nova Factor shall use reasonable efforts to obtain a
prescription from the end-user's physician within twenty-four (24) hours of
receipt of the voucher. If Nova Factor, having used reasonable efforts, is
unable to obtain a prescription from an end-user's physician within five
(5) business days of receipt of the voucher, Nova Factor shall notify a
Biogen customer support specialist.
3.2 Nova Factor shall ship Alliance Kits within two (2) business days of
receipt of the applicable voucher, unless Nova Factor determines that a
prescription is required in which case Nova Factor shall ship Alliance Kits
within two (2) business days of receipt of the applicable prescription.
Nova Factor shall send Alliance Kits via third class mail, unless otherwise
agreed by the parties. Nova Factor shall package Alliance Kits in
accordance with industry standards, and shall include on the Alliance Kit
a Nova Factor pharmacy label.
3.3 Nova Factor shall purchase the Replacement Components used in the
Alliance Kits and store the Alliance Kits, all at Nova Factor's cost. Prior
to commencement of the Alliance Program by Biogen, Nova Factor shall have
purchased * of each Replacement Component contained in the Alliance Kit
for use in the Alliance Kits (the "Initial Inventory"). At Nova Factor's
request, in the event Nova Factor does not use the Initial Inventory by
December 31, 1997, Biogen shall repurchase the unused portion of the
Initial Inventory from Nova Factor, at a cost of $* per repurchased
Alliance Kit. In fulfilling its supply obligation under this Section 3,
Nova Factor shall use in the Alliance Kits only those Replacement
Components that conform to the Specifications. Nova Factor shall perform
appropriate quality control testing to confirm that Replacement Components
contained in the Alliance Kits conform to Specifications, including but not
limited to (i) inspection of incoming inventory shipments to verify
conformance of Replacement Components to Specifications, (ii) documentation
of such inspections and (iii) for each shipment to an end-user verification
by a registered pharmacist or a pharmacy technician acting under the direct
supervision of a registered pharmacist that the Replacement Components
contained in the Alliance Kit are as specified under this Addendum.
4. PHYSICIAN INVESTIGATIVE USE
4.1 As further additional services under the Distribution Agreement, Nova
Factor shall, upon receipt of written authorization from Biogen, supply
Product from Nova Factor's inventory to Investigators. Nova Factor shall
package and ship Product to the location specified by the Investigator in
accordance with Section 4.2 of the Distribution Agreement for delivery
within twenty-four (24) hours of receipt of the applicable authorization
from Biogen. If the Investigator requests delivery of the Product to an
end-user's home, Nova Factor shall obtain the necessary prescription from
the physician. Product shall be supplied to Investigators under this
Section at no cost to the Investigator.
4.2 For the initial shipment of Product to an Investigator under this
Section, Nova Factor shall deliver one package of Product (a one month's
supply). For the next shipment to the Investigator, Nova Factor shall
deliver two (2) packages of Product (a two (2) months' supply). For the
final order of Product to an Investigator under a Biogen authorization,
Nova Factor shall deliver three (3) packages of Product (a three (3)
months' supply). Nova
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
4
<PAGE>
Factor shall not deliver more than a total of six (6) packages (a six
months' supply) of Product to any Investigator without further
authorization from Biogen. Notwithstanding anything herein to the
contrary, in no event shall Nova Factor ship Product to any
Investigator in a quantity more than the Investigator ordered or
otherwise specified or in a quantity more than Biogen authorized or
otherwise approved.
5. SERVICE REPORT.
5.1 At the end of each month, Nova Factor shall furnish to Biogen a report
(the "Service Report") specifying *. The parties may change the format
of the Service Report at any time upon mutual agreement. At Biogen's
request, Nova Factor shall provide to Biogen weekly reports containing
some or all of the information specified in this Section.
5.2 The information contained in the Service Report shall be maintained in
the Database.
6. PAYMENT.
6.1 In consideration of the Additional Services rendered by Nova Factor to
Biogen under this Addendum, Biogen shall pay to Nova Factor the following
fees:
<TABLE>
<S> <C>
Type of Service Fee
Non-Emergency Shipment of Replacement Components $* per shipment
Emergency Shipment of Replacement Components $* per shipment
Shipment of Alliance Kits $* per shipment
Shipment of Product to Investigator $* per unit of Product
shipped (four dose
package)
</TABLE>
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
5
<PAGE>
Notwithstanding anything herein to the contrary, commencing with the
first quarter in which Nova Factor *. Biogen shall not have
any payment obligation with respect to any shipment of Product or
Replacement Components that is not authorized by a Biogen customer
support specialist or with respect to any shipment of an Alliance Kit
that is sent other than pursuant to a completed Alliance Program voucher.
6.2 Nova Factor shall invoice Biogen at the end of each month for amounts
due hereunder with respect to Additional Services shown on the Service
Report for such month. All amounts due hereunder shall be payable by
check to Nova Factor in United States funds. Payment by Biogen shall be
due within thirty (30) days from the date of the invoice.
6.3 Within thirty (30) days of receipt of the Supply Report for any month,
Biogen shall issue to Nova Factor a credit memo in an amount equal to the
quantity of Product shipped during the month from Nova Factor's
inventory under the terms of Section 4.1 of this Addendum multiplied by
the applicable Credit Price for the month (as defined in the Distribution
Agreement). Nova Factor may apply credits given under this Section against
subsequnt purchases of Product under the Distribution Agreement. Credits
may not be assigned or transferred by Nova Factor to a third party, and no
cash payments shall be made on account of any credit. Nova Factor shall
not unilaterally apply any credit against or make any deductions from
payment due to Biogen without the prior written approval of Biogen.
Credits shall be applied on a first-in, first-out basis.
6.4 Except as otherwise set forth herein, Nova Factor shall be responsible
for all costs and expenses associated with fulfilling its obligations
under this Agreement. In no event shall Nova Factor charge an end-user,
insurance provider or any other third party for any Additional Services
provided under this Addendum.
7. TERMINATION.
Biogen may terminate all or a portion of the Additional Services at any
time upon thirty (30) days' prior written notice to Nova Factor without
terminating the Distribution Agreement. Biogen's repurchase obligation
under Section 3.3 of this Addendum with respect to unused Initial
Inventory shall survive termination of the Additional Services.
8. NOVA FACTOR COVENANTS
8.1 Nova Factor understands that Biogen's approval and transfer to Nova
Factor of a request for Replacement Components or the submission of a
voucher by an Alliance Program Participant shall not be deemed to replace,
in whole or in part, the exercise by the Nova Factor pharmacist of his or
her judgment under applicable pharmacy law as to whether the shipment of
Replacement Components or Alliance Kits is permissible under applicable
pharmacy laws.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
6
<PAGE>
8.2 Nova Factor shall be responsible for ensuring that the Additional
Services are carried out in a manner consistent with applicable federal
and state laws and regulations and relevant professional standards.
8.3 The Additional Services provided under this Addendum shall be deemed to
be obligations of Nova Factor under the Distribution Agreement, and the
terms of the Distribution Agreement shall apply to the Additional
Services with the same force and effect as such terms are applied to the
services origianlly specified in the Distribution Agreement.
9. AMENDMENT TO DISTRIBUTION AGREEMENT.
9.1 Section 9.7 of the Distribution Agreement is amended to be and read in
its entirety as follows:
"9.7 (a) In consideration of the services rendered by Nova
Factor to Biogen under this Section 9, Biogen shall pay to
Nova Factor the followign fees (the "Shipment Fees"):
<TABLE>
<CAPTION>
Service Fee
------- ---
<S> <C>
Shipment of replacement $* per end-user per shipment
Product in accordance with
Section 9.4 to an end-user
who is not a Nova Factor
customer.
Shipment of replacement $* per end-user per shipment
Product in accordance with
Section 9.4 to an end-user
who is a Nova Factor
customer.
Shipment of Product to a $* per unit of Product
Program Participant in shipped (four dose package)
accordance with Section
9.5.
</TABLE>
Notwithstanding anything herein to the contrary,
commencing with the first quarter in which Nova Factor *.
Notwithstanding anything herien to the contrary, shipment of
multiple one does packs or multiple packages of four dose
packs to a single patient shall be deemed one shipment for
purposes of this Section 9.7.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
7
<PAGE>
(b) Nova Factor shall invoice Biogen at the end of each
month for amounts due under this Section 9 with respect to
Product shown on the Supply Report for such month. The amount
due for any month as shown on the applicable invoice shall be
the Shipment Fees due for such month less the Program Fees
collected by Nova Factor during such month. All amounts due
hereunder shall be payable by check to Nova Factor in United
States funds. Payment by Biogen shall be due within thirty
(30) days from the date of the invoice."
9.2 The sixth sentence of Section 9.4 of the Distribution Agreement is
amended to be and read in its entirety as follows:
"Nova Factor shall package and ship replacement Product in
accordance with Section 4.2 for delivery within forty-eight
(48) hours of receipt of authorization from Biogen, provided
that Nova Factor has received a copy of the applicable
prescription form".
9.3 Section 22.3 of the Distribution Agreement is amended to add the
following party to receive copies of notices sent to Biogen under the
Distribution Agreement:
Biogen, Inc.
701 Green Valley Road
Suite 308
Greensboro, NC 27408
Attention: National Accounts Manager
9.4 Except as otherwise expressly set forth herein, all of the terms and
conditions of the Distribution Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, the parties have executed this Addendum on the date
first above written.
BIOGEN, INC.
By: /s/ Mark W. Leuchtenberger
--------------------------------
Mark W. Leuchtenberger
Vice President-Marketing and Sales
By: /s/ Darlene Romine
--------------------------------
Darlene Romine
Director of National Accounts
NOVA FACTOR, INC.
By: /s/ Randy Grow
--------------------------------
Title: President
--------------------------------
8
<PAGE>
EXHIBIT 10.36
ADDENDUM AND AMENDMENT NO. 3 TO
DISTRIBUTION AND SERVICES AGREEMENT
This Addendum and Amendment No. 3 to Distribution and Services Agreement
is entered into as of this 1st day of July, 1997 by and between Biogen, Inc.,
through its offices located at 701 Green Valley Road, Suite 308, Greensboro,
NC 27408 ("Biogen") and Nova Factor, Inc., with principal offices located at
1620 Century Center Parkway, Suite 109, Memphis, TN 38134 ("Nova Factor").
WHEREAS, Biogen has appointed Nova Factor as a preferred distributor of
Biogen's AVONEX-Registered Trademark- (Interferon beta-1a) under the terms of
a Distribution and Services Agreement between the parties, dated as of
November 1, 1995, as amended by Amendment No. 1 to Distribution and Services
Agreement, dated as of May 17, 1996, and as amended and supplemented by
Addendum and Amendment No. 2 to Distribution and Services Agreement, dated as
of May 21, 1997, (the "Distribution Agreement");
WHEREAS, as additional services under the Distribution Agreement, Biogen
desires Nova Factor to (i) accept and process referrals from physicians under
* program and (ii) to supply Product, as defined in the Distribution
Agreement, to participants in Biogen's variable cap program, and Nova Factor
is willing to provide such additional services on the terms and conditions
set forth in this Addendum;
WHEREAS, to reflect the additional services to be provided by Nova
Factor, the parties desire to supplement and amend the Distribution Agreement
as set forth in this Addendum;
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereby agree as follows:
1. DEFINITION
The capitalized terms used in this Addendum that are defined in the
Distribution Agreement shall have the meanings assigned to such terms in
the Distribution Agreement. In addition, the following terms used in
this Addendum shall have the following meanings:
1.1 "Additional Services" shall mean the services to be provided by
Nova Factor under this Addendum.
1.2 "Free VCAP Product" shall mean Product supplied by Nova Factor,
acting on behalf of Biogen, to a VCAP Participant in a VCAP
Program Year, at no cost to the VCAP Participant or to any third
party payor, after the VCAP Participant has purchased his or her
VCAP Quantity of Product for such VCAP Program Year.
1.3 "Interim" shall mean Interim Healthcare, Inc.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
<PAGE>
1.4 "Paid VCAP Product" shall mean Product supplied by Nova Factor,
acting on behalf of Biogen, to a VCAP Participant in a VCAP
Program Year as part of the VCAP Participant's VCAP Quantity of
Product for such VCAP Program Year.
1.5 *
1.6 *
1.7 *
1.8 "Training Provider" shall mean Interim or such other company as
Biogen shall engage to provide Product administration training
services, and as to whose appointment Biogen shall notify Nova
Factor.
1.9 "Variable Cap Program" shall mean a financial assistance program
funded by Biogen and administered for Biogen by the VCAP
Administrator under which a VCAP Participant who has purchased his
or her VCAP Quantity of Product during a VCAP Program Year will
thereafter receive Free VCAP Product for the remainder of such
VCAP Program Year.
1.10 "VCAP Administrator" shall mean Covance Health Economics and
Outcome Services Inc., or such other administrator of the Variable
Cap Program as Biogen shall appoint and as to whose appointment
Biogen shall notify Nova Factor.
1.11 "VCAP Participant" shall mean an end-user of Product who has been
enrolled in the Variable Cap Program by the VCAP Administrator
acting on behalf of Biogen.
1.12 "VCAP Product" shall mean Free VCAP Product and Paid VCAP Product.
1.13 "VCAP Program Year" for each VCAP Participant shall mean the
twelve-month period commencing with the date of the VCAP
Participant's enrollment or re-enrollment, as the case may be, in
the Variable Cap Program, as determined by the VCAP Administrator.
1.14 "VCAP Quantity", as determined by the VCAP Administrator, for each
VCAP Participant, shall mean the quantity of Product which such
VCAP Participant must purchase in any VCAP Program Year (using
available insurance and other resources) before such VCAP
Participant will be eligible to receive Free VCAP product in such
VCAP Program Year.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
2
<PAGE>
2. *
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
3
<PAGE>
3. VARIABLE CAP PROGRAM
--------------------
3.1 As additional services under the Distribution Agreement, Nova
Factor shall, under the terms of this Addendum, act as a supplier
of VCAP Product on behalf of Biogen to VCAP Participants. Biogen
reserves the right to appoint other distributors of VCAP Product,
provided that Biogen shall give Nova Factor at least *
(*) days written notice prior to any such appointment.
3.2 Biogen, through the VCAP Administrator, shall have sole
responsibility for enrolling participants in the Variable Cap
Program. Upon enrollment of a * Customer into the
Variable Cap Program, as a VCAP Participant, the VCAP
Administrator shall provide notice to Nova Factor, substantially
in the form attached to this Agreement as Schedule C, of the name,
address, telephone number, Nova Factor code number, if applicable,
VCAP Quantity and VCAP Program Year for the VCAP Participant and
shall indicate whether or not the VCAP Participant will be
obtaining Paid VCAP Product through Nova Factor. In the event the
VCAP Participant is using another
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
4
<PAGE>
pharmacy for Paid VCAP Product, the VCAP Administrator shall
provide additional notification to Nova Factor at such time as the
VCAP Participant has purchased his or her VCAP Quantity from such
other source.
3.3 If the VCAP Administrator has indicated that a VCAP Participant
will be obtaining Paid VCAP Product through Nova Factor, Nova
Factor shall, on behalf of Biogen, supply Paid VCAP Product (at a
price determined by Biogen) to the VCAP Participant from Nova
Factor's inventory until the VCAP Participant has received his or
her VCAP Quantity for the applicable VCAP Program Year. Nova
Factor shall notify the VCAP Administrator when a VCAP Participant
who is receiving Paid VCAP Product through Nova Factor has been
shipped his or her VCAP Quantity for the applicable VCAP Program
Year and at such time as the VCAP Participant has fully paid for
the Paid VCAP Product.
3.4 Except as set forth in Section 3.7, after a VCAP Participant has
purchased (and paid for) his or her VCAP Quantity of Product in a
VCAP Program Year, Nova Factor shall, on behalf of Biogen, supply
Free VCAP Product on behalf of Biogen to the VCAP Participant from
Nova Factor's inventory for the remainder of such VCAP Program
Year. Nova Factor shall not bill a VCAP Participant or any insurer
or other third party payor for Free VCAP Product.
3.5 Nova Factor shall have the same obligations with respect to the
supply of VCAP Product to VCAP Participants as Nova Factor has
under the Distribution Agreement with respect to the supply of
Product to Nova Factor customers, including but not limited to
accepting assignment of benefits and billing and collecting with
respect to amounts due to Biogen for Paid VCAP Product, except
that (i) services provided with respect to VCAP Participants shall
be provided by Nova Factor on behalf of Biogen and Biogen shall
pay Nova Factor for such services as specified in Section 6.1 of
this Addendum, (ii) Nova Factor shall not bill a VCAP Participant
or any insurer or other third party payor for Free VCAP Product,
(iii) shipments of VCAP Product to VCAP Participants shall be
identified separately in the Database and in reports provided to
Biogen, as more fully described in Section 4 of this Addendum and
(iv) *. Each shipment of Free VCAP
Product shall be a three (3) months supply except that Nova Factor
shall ship less than a three (3) months supply of Free VCAP
Product when necessary to as not to exceed a VCAP Participant's
VCAP Program Year.
3.6 During each follow-up telephone call to a VCAP Participant under
Section 6.2 of the Distribution Agreement, Nova Factor shall use
its best efforts to confirm that the VCAP Participant's insurance
status or financial condition has not changed. If the VCAP
Participant's insurance status or financial condition has
changed, Nova Factor shall immediately notify the VCAP
Administrator.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
5
<PAGE>
3.7 Nova Factor shall not ship VCAP Product to a VCAP Participant
after the end of the VCAP Participant's VCAP Program Year unless
Nova Factor receives written or faxed notice from the VCAP
Administrator that the VCAP Participant has been re-enrolled in
the Variable Cap Program for the next VCAP Program Year in which
case Nova Factor shall ship Free VCAP Product to the VCAP
Participant only after the VCAP Participant has purchased his or
her VCAP Quantity of Product for the new VCAP Program Year. Nova
Factor shall not ship VCAP Product to a VCAP Participant unless
Nova Factor has received notice of enrollment from the VCAP
Administrator. Nova Factor shall not ship VCAP Product to a VCAP
Participant after Nova Factor receives written notice that the
VCAP Participant is no longer participating in the Variable Cap
Program.
3.8 Nova Factor shall remit to Biogen on a weekly basis all amounts
collected by Nova Factor for Biogen with respect to Paid VCAP
Product supplied to VCAP Participants.
4. DATA AND REPORTS
----------------
In addition to the other information to be maintained in the Database
under the Distribution Agreement, Nova Factor shall maintain in the
Database the information specified in Schedule D to the Agreement
regarding the * Program and distribution of VCAP Product
under the Variable Cap Program. In addition to other reports to be
generated by Nova Factor under the Distribution Agreement, Nova Factor
shall generate the monthly and weekly reports from the Database as
specified in Schedule D to this Addendum.
5. *
---------------------
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
6
<PAGE>
5.2 *
6. PAYMENT
6.1 In consideration of the delivery by Nova Factor for Biogen of VCAP
Product to VCAP Participants under this Addendum, Biogen shall pay
to Nova Factor (i) a fee per unit of Paid VCAP Product (four dose
pack) shipped by Nova Factor to VCAP Participants equal to *, and
(ii) a fee of $* per unit of Free
VCAP Product (four dose pack) shipped by Nova Factor to VCAP
Participants, provided that the fee for the supply of Free VCAP
Product shall be reduced to $* per unit of Free VCAP
Product shipped commencing with the first quarter in which *
is $* or less. Nova Factor shall invoice Biogen at
the end of each month for amounts due hereunder with respect to
VCAP Product shipped during such month. Along with its invoice
Nova Factor shall submit to Biogen a report (the "VCAP Program
Report") specifying (i) the total quantity of Paid VCAP Product
shipped to VCAP Participants during the month, (ii) the total
quantity of Free VCAP Product shipped to VCAP Participants during
the month, (iii) the total amount billed and total amount
collected by Nova Factor during the month for Paid VCAP Product
and (iv) the amount then owing from VCAP Participants and third
party payors to Biogen on Paid VCAP Product. All amounts due from
Biogen shall be payable by check to Nova Factor in United States
funds. Payment by Biogen shall be due within * (*) days from
the date of invoice.
6.2 Within * (*) days of receipt of the VCAP Program Report,
Biogen shall issue to Nova Factor a credit in an amount equal to
the quantity of VCAP Product
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
7
<PAGE>
shipped during the month from Nova Factor's inventory under the
terms of this Addendum multiplied by the applicable Credit Price
for the month (as defined in the Distribution Agreement). Nova
Factor may apply credits under this Section against subsequent
purchases of Product under the Distribution Agreement. Credits may
not be assigned or transferred by Nova Factor to a third party,
and no cash payments shall be made on account of any credit. Nova
Factor shall not unilaterally apply any credit against or make any
deductions from payments due to Biogen without the prior written
approval of Biogen. Nova Factor shall apply credits on a first-in,
first-out basis.
6.3 Except as otherwise set forth herein, Nova Factor shall be
responsible for all costs and expenses associated with fulfilling
its obligations under this Agreement.
7. REPRESENTATIONS
---------------
Nova Factor shall not engage in any promotional activities with respect
to the * Program or the Variable Cap Program, other than
the distribution of literature approved by Biogen and other activities
expressly authorized by Biogen. Nova Factor shall not use any
promotional materials which refer to the * Program or the
Variable Cap Program unless such promotional materials have been approved
in writing in advance by Biogen. Any promotional literature or verbal
representations describing Nova Factor's role in the *
Program or the Variable Cap Program shall be approved in advance
in writing by Biogen.
8. TERMINATION
-----------
Biogen may terminate all or a portion of the Additional Services at any
time, upon forty-five (45) days' written notice to Nova Factor, without
terminating the entire Distribution Agreement, provided that
notwithstanding anything to the contrary contained in this Agreement,
Biogen may terminate further enrollment in the VCAP Program at any time
without prior notice to Nova Factor. After receipt of the termination
notice with respect to some or all of the Additional Services and during
the period thereafter ending six (6) months after such termination, Nova
Factor shall use reasonable efforts to cooperate with Biogen in ensuring
the smooth transition of the terminated services to a distributor
designated by Biogen.
9. DISTRIBUTION AGREEMENT
----------------------
The Additional Services to be provided by Nova Factor under this
Addendum shall be deemed to be services provided and obligations assumed
by Nova Factor under the terms of the Distribution Agreement, and,
except as expressly set forth herein, the terms of the Distribution
Agreement shall apply with full force and effect to such obligations and
the performance of such services.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Addendum on the date first
above written.
BIOGEN, INC.
By: /s/ Mark W. Leuchtenberger
-----------------------------------
Mark W. Leuchtenberger
Vice President--Marketing
and Sales
By: /s/ Darlene Romine
-----------------------------------
Darlene Romine
Director of National Accounts
NOVA FACTOR, INC.
By: /s/ Randy Grow
-----------------------------------
Title: President
9
<PAGE>
Exhibit 10.37
ADDENDUM AND AMENDMENT NO. 4 TO
DISTRIBUTION AND SERVICES AGREEMENT
This Addendum and Amendment No. 4 to Distribution and Services
Agreement is entered into as of this 1st day of January, 1998, by and between
Biogen, Inc., through its offices located at 701 Green Valley Road, Suite
308, Greensboro, NC 27408 ("Biogen") and Nova Factor, Inc., with principal
offices located at 1620 Century Center Parkway, Suite 109, Memphis, TN 38134
("Nova Factor").
WHEREAS, Biogen has appointed Nova Factor as a preferred distributor of
Biogen's AVONEX-registered trademark- (Interferon Beta-1a) product under the
terms of a Distribution and Services Agreement between the parties, dated as
of November 1, 1995, as amended by Amendment No. 1 to Distribution and
Services Agreement, dated as of May 17, 1996, and as amended and supplemented
by Addendum and Amendment No. 2 to Distribution and Services Agreement, dated
as of May 21, 1997, and Addendum and Amendment No. 3 to Distribution and
Services Agreement, dated as of July 1, 1997, (the "Distribution Agreement");
WHEREAS, as additional services under the Distribution Agreement,
Biogen desires Nova Factor (i) to provide a reimbursement hotline to which
Biogen may refer those persons who contact Biogen's customer support line
with reimbursement-related questions; (ii) to contact for follow-up those
patients who are referred to Nova Factor for reimbursement-related assistance
or who are referred to Nova Factor under the * Program or referred to Nova
Factor by a Biogen customer support specialist, as contemplated under Section
4.1 of the Distribution Agreement, but who decide not to use Nova Factor's
home delivery services for delivery of AVONEX-registered trademark-, and
(iii) to provide administrative services in connection with Biogen's variable
cap program, and Nova Factor is willing to provide all such additional
services on the terms and conditions set forth in this Addendum;
WHEREAS, Biogen and Nova Factor also desire to amend the Distribution
Agreement to adjust * for services provided by Nova Factor under the
Distribution Agreement;
WHEREAS, to reflect the additional services to be provided by Nova
Factor and *, the parties desire to supplement and amend the Distribution
Agreement as set forth in this Addendum;
NOW THEREFORE, in consideration of the premises and mutual convenants
contained in this Agreement, the parties hereby agree as follows:
1. DEFINITIONS.
-------------
The capitalized terms used in this Addendum that are defined in the
Distribution Agreement shall have the meanings assigned to such terms in
the Distribution Agreement.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
<PAGE>
In addition, the following terms as used in this Addendum shall have
the meanings set forth below:
1.1 "Additional Services" shall mean the services to be provided by
Nova Factor under this Addendum.
1.2 "Enrollment Form" shall have the meaning set forth in Section 3.1
of this Addendum.
1.3 "Hotline Customer" shall mean an end-user who is referred to Nova
Factor via the Reimbursement Hotline.
1.4 "Outcome Call" shall have the meaning set forth in Section 3.1 of
this Addendum.
1.5 "Reimbursement Hotline" shall mean telephone access to
reimbursement specialists at Nova Factor who are trained to answer
or find answers to reimbursement questions and problems related to
Product which such access is available through a telephone line at
Nova Factor dedicated to calls transferred from Biogen, all as
more fully described in Section 2.
1.6 "Triaged Customer" shall mean an end-user (other than a Hotline
Customer) who is referred to Nova Factor under the *
Program or referred to Nova Factor by a Biogen customer support
specialist, as contemplated by Section 4.1 of the Distribution
Agreement, but who decides not to use Nova Factor's home delivery
services for delivery of Product.
2. REIMBURSEMENT HOTLINE.
----------------------
2.1 Hotline Services. As additional services under the Distribution
Agreement, Nova Factor shall operate a Reimbursement Hotline
through which end-users, physicians, nurses, pharmacies, payors,
providers and others referred to Nova Factor by Biogen's customer
support specialists will be able to obtain assistance in answering
reimbursement-related questions and resolving reimbursement-
related issues and problems. Nova Factor shall make the
Reimbursement Hotline accessible as one of the connection options
available through the Nova Factor telephone line dedicated to
calls transferred from Biogen's customer support
specialists. Services to be provided by Nova Factor as part of
the Reimbursement Hotline shall include, but shall not be limited
to, using reasonable efforts *
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
2
<PAGE>
* If an end-user or other person referred to Nova Factor on the
Reimbursement Hotline has any questions related to Medicare
coverage for Product, Nova Factor shall, unless otherwise
specified by Biogen, transfer the person to the third party
service provider designated by Biogen to provide further
assistance on Medicare issues.
2.2 Delivery Options. In presenting the delivery options available
to an end-user referred to Nova Factor via the Reimbursement
Hotline, Nova Factor shall follow a script which accurately
describes all potential methods of delivery available to the
end-user and which is in a form mutually agreeable to Nova Factor
and Biogen. If the end-user decides not to use Nova Factor's home
delivery services for delivery of Product, Nova Factor shall use
reasonable efforts to obtain the name, telephone number and fax
number of the desired dispensing pharmacy, and shall provide to
the dispensing pharmacy, by telephone or fax, all of the
information in Nova Factor's possession regarding the end-user.
2.3 Staffing. Nova Factor shall use qualified and properly trained
reimbursement specialists to answer calls on the Reimbursement
Hotline. The number of reimbursement specialists made available by
Nova Factor to answer calls on the Reimbursement Hotline shall be
determined by the volume of calls, and shall be that number which
is sufficient to ensure a high level of customer service and
satisfaction. If Biogen believes that the number of reimbursement
specialists made available by Nova Factor to answer calls on the
Reimbursement Hotline is not sufficient to ensure a high level of
customer service and satisfaction, Biogen shall notify Nova Factor
and the parties shall meet to determine what corrective actions
Nova Factor shall take.
2.4 Direct Delivery Customers. Nothing in this Addendum or in the
operation of the Reimbursement Hotline shall be deemed to limit in
any way the obligation of Nova Factor to provide reimbursement-
related services under the terms of Section 5 of the Distribution
Agreement to those end-users who order Product from Nova Factor.
Services provided by Nova Factor to end-users under Section 5 of
the Distribution Agreement will not be considered Reimbursement
Hotline services for purposes of Section 7 of this Addendum.
2.5 Customer Satisfaction Survey. At Biogen's request from time to
time, Nova Factor shall, at no additional cost to Biogen, send
customer satisfaction surveys to Hotline Customers in a form
mutually agreed upon by the parties. The completed surveys shall
be sent to Biogen.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
3
<PAGE>
2.6 Reliance on Payor Information. Nova Factor shall have no
liability for relying upon information provided by third party
payors concerning coverage in the event that such information
shall subsequently prove to be incorrect, and Nova Factor may
include a disclaimer to that effect in any communication with
end-users or others regarding coverage by third party payors.
3. *
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
4
<PAGE>
4. *
5. DATA AND REPORTS.
-----------------
In addition to the other information to be maintained in the Database
under the Distribution Agreement, Nova Factor shall maintain in the
Database the information specified in Schedule B to this Addendum
regarding (i) calls to Hotline Customers and calls to Triaged Customers,
(ii) calls received on the Reimbursement Hotline, and (iii) end-users
transferred to the VCAP Administrator for assessment of eligibility under
the Variable Cap Program. In addition to other reports to be generated by
Nova Factor under the Distribution Agreement, Nova Factor shall generate
from the Database monthly and weekly reports related to the Additional
Services, as specified in Schedule B to this Addendum. The information
collected by Nova Factor and maintained in the Database under this
Section shall be treated by Nova Factor as the confidential and exclusive
property of Biogen.
6. SCHEDULE E ADJUSTMENT.
----------------------
To accurately reflect the value of services provided to Biogen by Nova
Factor under the Distribution Agreement, the parties have agreed to amend
the *
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
5
<PAGE>
*
7. PAYMENT.
--------
7.1. Fees. In consideration of the Additional Services rendered by
Nova Factor under this Addendum, Biogen shall pay to Nova Factor
the following fees: (i) $* for each * under Section 3 of this
Addendum, (ii) $* for each Hotline Customer to whom Nova Factor
provides assistance on the Reimbursement Hotline under Section 2
of this Addendum (which such payment shall include the costs of *
), and (iii) $* for each end-user as to
whom Nova Factor sends to the VCAP Administrator a completed
Enrollment Form. Nova Factor shall send an invoice to Biogen at
the end of each month with respect to Additional Services provided
by Nova Factor during such month. In its invoice, Nova Factor shall
specify separately the total number of Traiged Customers, Hotline
Customers and Variable Cap Program referrals with respect to whom
services are being billed. All amounts due from Biogen shall be
payable by check to Nova Factor in United States funds. Payment by
Biogen shall be due within * (*) days from the date of
invoice.
7.2. Other Services. Biogen acknowledges that it from time to time
requests Nova Factor to provide information, reports and services
which Nova Factor is not obligated to provide under the
Distribution Agreement, including but not limited to additional
data requests, additional operational requests and requests to
have Nova Factor personnel visit Biogen's facilities. In
consideration of Nova Factor's agreement to use reasonable efforts
to respond to Biogen's requests, Biogen shall pay to Nova Factor a
total of $* in 1998, payable in four quarterly installments
with each installment due on the fifteenth day of the quarter.
Nova Factor acknowledges that the first installment was paid by
Biogen prior to execution of this Addendum.
7.3 Other Costs. Except as otherwise set forth in this Agreement,
Nova Factor shall be responsible for all costs and expenses
associated with fulfilling its obligations under this Agreement.
8. TERMINATION.
------------
Biogen may terminate all or a portion of the Additional Services at any
time, upon forty-five (45) days' written notice to Nova Factor, without
terminating the entire Distribution
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
6
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Agreement, provided that notwithstanding anything to the contrary
contained in this Agreement, Biogen may terminate further enrollment in
the VCAP Program at any time without prior notice to Nova Factor. After
receipt of the termination notice with respect to some or all of the
Additional Services and during the period thereafter ending three (3)
months after such termination, Nova Factor shall use reasonable efforts
to cooperate with Biogen in ensuring the smooth transition of the
terminated services to a distributor designated by Biogen.
9. DISTRIBUTION AGREEMENT.
-----------------------
The Additional Services to be provided by Nova Factor under this
Addendum shall be deemed to be services provided and obligations assumed
by Nova Factor under the terms of the Distribution Agreement, and, except
as expressly set forth herein, the terms of the Distribution Agreement
shall apply with full force and effect to such obligations and the
performance of such services.
IN WITNESS WHEREOF, the parties have executed this Addendum on the date first
above written.
BIOGEN, INC.
By: /s/ Mark W. Leuchtenberger
-----------------------------------
Mark W. Leuchtenberger
Vice President - Sales, Marketing
and Business Development
By: /s/ Darlene Romine
-----------------------------------
Darlene Romine
Director of National Accounts
NOVA FACTOR, INC.
By: /s/ Randy Grow
-----------------------------------
Title: President
---------------------------------
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Exhibit 10.41
TEXAS HEALTH PHARMACEUTICAL RESOURCES
PARTNERSHIP AGREEMENT
This PARTNERSHIP AGREEMENT (the "Agreement") is made and entered into as of
the 1st day of July, 1994, by and between ALTERNATIVE CARE SYSTEMS, INC.
("ACS"), a Texas for profit corporation, and NOVA FACTOR, INC. ("NF"), a
Tennessee for profit corporation;
WITNESSETH:
WHEREAS, ACS is a Texas business corporation, all of the capital stock of
which is owned by Children Health Services of Texas, a Texas non-profit
corporation; and
WHEREAS, ACS and NF believe that it is necessary for them to join together
in order to create an economically viable entity capable of providing goods and
services contemplated herein; and
WHEREAS, ACS and NF have mutually agreed to form a general partnership
under and pursuant to the laws of Tennessee for the purposes and upon the terms
hereinafter set forth in this Agreement;
NOW, THEREFORE, In consideration of the mutual promises and agreements of
the parties hereto, and for other good and valuable consideration, the receipt
and sufficiency of which is hereby
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acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
ARTICLE I
FORMATION OF PARTNERSHIP
1.01. Formation. ACS and NF (both of which are sometimes hereinafter
referred to collectively as the "Partners" and each of which is sometimes
hereinafter referred to individually as a "Partner") hereby form a general
partnership (the "Partnership") pursuant to the provisions of the Tennessee
Uniform Partnership Act (the "Act"). In the event of a conflict between the
provisions of the Act and the provisions of this Agreement, the latter shall
control.
1.02. Name and Office. The name of the Partnership shall be Texas Health
Pharmaceutical Resources. The Partners may change the name from time to time,
and the Partnership may also do business under one or more fictitious names as
determined by the Partnership's Steering Committee. The principal office of the
Partnership shall be in Dallas, Texas.
1.03. Purpose. The purpose of the Partnership is (i) to market, sell,
provide and distribute drugs manufactured by other parties, such as growth
hormone, hemophilia therapy services and supplies (clotting factor and blood
components) and other drugs,
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either as a dealer or a distributor for the manufacturer or its' duly authorized
agents. ("Drug Therapies").
ARTICLE II
AREA OF OPERATION OF PARTNERSHIP AND RELATED RIGHTS
AND OBLIGATIONS OF THE PARTNERS
2.01 Definitions. For purposes of this Agreement, the following terms shall
have the following respective meanings:
(a) "Target Provider" means all health Caregivers listed on Exhibit A.
(b) "Caregiver" means the provider of health care at which, or from whom,
the patient is, at the time of any determination made pursuant to the provisions
of this Article II, receiving care, as either an outpatient or inpatient" for
the condition or illness which necessitates the use of goods or services offered
by the Partnership. Solely in the context of a Target Provider, the patient's
Caregiver will be the Target Provider if the Target Provider is at the time of
determination in a position to refer the patient to the Partnership by reason of
its providing, paying for or arranging for the provision of health care to the
patient for the condition or illness which necessitates the purchase of goods
from or the use of services provided by the Partnership.
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<PAGE>
2.02 Service Area. The service area of the business of the Partnership
shall be the area encompassed within the * of Dallas, Texas and
within the city limits of *, Texas.
2.03 Non-Competition.
(a) Restriction on Partner's Activities With Respect to Patients. Each
Partner agrees that, during the term of this Agreement, it shall not compete
with the Partnership by providing therapies, services, supplies or goods which
are encompassed within the definition of the business purposes of the
Partnership (as set forth in Article I of this Agreement) to any patient who has
his principal residence in the Service Area or whose Caregiver is either located
in the Service Area or a Target Provider ("Restricted Patient"). From time to
time, either Partner may, but shall have no obligation to, refer non-restricted
Patients to the Partnership from outside the Service Area.
(b) Notwithstanding the preceding provisions of this Article II, the
restrictions or activities contained in this Article II shall not apply to
Restricted Patients as defined in the Operating Agreement for the Campus Home
Health L.L.C. formed between the Partners and Zale Lipshy University Hospital,
nor to Restricted Patients as defined in the Partnership Agreement between Nova
Factor, Inc. and Cook-Fort Worth Children's Medical Center. Notwithstanding the
preceding provisions of this Article II, the restrictions on activities
contained in this Article II shall not
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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<PAGE>
apply to therapies, services, supplies or goods which are not at the time in
question being offered by the Partnership. However, if a Partner wishes to
provide therapies, services, supplies or goods of a type which is encompassed
within the business purposes of the Partnership (as set out in Article I) but
which is not then currently being offered by the Partnership, to Restricted
Patients, the Partner shall first notify the Partnership of its intentions. The
Partnership shall then have * days within which to notify the Partner in
writing that it elects to offer the therapy, services, supplies or goods. During
such * day period the proposing Partner shall not compete with the Partnership
and shall disclose any information reasonably requested by the Partnership as
being necessary to reach a decision as to whether the Partnership should provide
the new therapies, services, supplies or goods. If the Partnership elects to
offer such therapy, services, supplies or goods, the restrictions on competition
shall apply to the therapy, services, supplies or goods for so long as the
Partnership continues such election.
(c) Neither Partner shall be in violation of this Article II if it has made
reasonable inquiry of the patient and the patient has denied having a principal
residence or Caregiver which would cause the patient to be covered by these
restrictions. However, if the correct information is subsequently discovered
such that the patient should not have been provided therapies, services,
supplies or goods, the Partner shall so advise the patient and shall use
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
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<PAGE>
reasonable efforts to encourage the patient to have such therapies, services,
supplies or goods, as the case may be, provided by the Partnership, consistent
with the right of the patient to select his own care provider.
(d) All restrictions contained in this Section 2.03 shall terminate upon
termination of the Partnership.
ARTICLE III
TERM OF PARTNERSHIP
The Partnership shall commence as of the date of this Agreement and
continue until March 31, 1999, unless (i) terminated at an earlier date in
accordance with Section 11.01 hereof; or (ii) extended beyond such date by
agreement of the Partners.
ARTICLE IV
PARTNERSHIP INTERESTS AND CAPITAL CONTRIBUTIONS
4.01. Partnership Interests. The percentage interest (the "Partnership
Percentage") of each Partner in the assets, liabilities, profits, losses, income
and expenses of the Partnership shall be fifty percent (50%).
4.02. Initial Capital Contribution. Each Partner shall contribute to the
capital of the Partnership the sum of $ . Such contributions shall be in cash
and shall constitute the
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<PAGE>
initial capital of the Partnership. Such contributions shall be made within a
reasonable period of time following execution of this Agreement as agreed upon
by the Partners.
4.03. Additional Capital Contributions. In the event that at one time (or
from time to time) funds in excess of retained operating revenues and any
Partnership borrowings are required by the Partnership for or in respect of its
business or any of its obligations, expenses, costs, liabilities or expenditures
(including, without limitation, operating deficits), the Partners shall
contribute cash to the capital of the Partnership in such amounts as are
determined ("Additional Capital Contribution"), and on such dates as are set
(the "Contribution Date") by the unanimous vote of all members of the Steering
Committee. Each Partner shall contribute its share of such amounts based on its
Partnership Percentage.
4.04. Failure To Make Additional Capital Contribution. In the event that a
Partner fails to make an Additional Capital Contribution as required under
Section 4.03 hereof, the amount of Additional Capital Contribution made by the
other Partner (the "Contributing Partner") shall not be treated as a Capital
Contribution but shall instead be treated as a loan from the Contributing
Partner to the Partnership. Such loan shall be evidenced in the manner deemed
appropriate by the Contributing Partner and shall be secured by a security
interest in the
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<PAGE>
Partnership Receipts (as defined in Section 5.02). Such loan shall bear interest
at an annual rate equal to the lower of: (i) four percent (4%) more than the
prime rate, as set by the Chase Manhattan Bank, N.A., One Chase Manhattan Plaza,
New York, New York 10081, in effect on the Contribution Date; or (ii) the
maximum rate permitted under applicable law; and said loan, principal and
interest, shall be repaid on a quarterly basis from the Partnership Receipts
before distributions are made to the Partners. The amount of the loan to be
repaid each quarter shall be determined by the Steering Committee, provided
however, that the loan shall be repaid as promptly as possible taking into
account the reasonable needs of the Partnership to retain cash for the operation
of the business of the Partnership. All repayments shall be first applied
against interest due before reducing the principal balance of the loan.
4.05. Interest on Capital Contributions. No interest shall accrue or be
paid the Partners on Capital Contributions and Additional Capital Contributions.
4.06. Limit on Contributions, Extent of Liability. Except as provided in
Sections 4.02 and 4.03 hereof, the Partners shall not be required to make any
capital contributions, loans, or other advances to the Partnership. The Partners
shall have no personal liability, one to another, for the payment or repayment
of Contributions or loans made pursuant to this Article IV, except as
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<PAGE>
provided in Section 11.02 hereof where there is a Delinquent Partner (as defined
in Section 11.02).
4.07. No Third Party Benefit. The provisions of Section 4.03 hereof are not
intended to be for the benefit of any creditor or other person (other than a
Partner in his capacity as a Partner) to whom any debts, liabilities or
obligations are owed by, or who otherwise has any claim against, the Partnership
or any of the Partners; and no such creditor or other person shall by reason of
any such foregoing provisions make any claim in respect of any debt, liability
or obligation (or otherwise) against the Partnership or any of the Partners.
ARTICLE V
CAPITAL ACCOUNTS, DISTRIBUTIONS, ALLOCATIONS
5.01. Capital Accounts. The Partnership Steering Committee shall establish
and maintain on the Partnership Books a capital account for each Partner. The
capital account of each Partner shall be credited with (i) the initial Capital
Contribution made by such Partner pursuant to Section 4.02 hereof; (ii)
Additional Capital Contributions made by such Partner pursuant to Section 4.03
hereafter and (iii) such Partner's Partnership Percentage of the net profits of
the Partnership. The capital account of each Partner shall be decreased by (i)
the amount of any distribution which is made to such Partner pursuant to Section
5.02
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<PAGE>
hereof, and (ii) such Partner's Partnership Percentage of all net losses of the
Partnership.
5.02. Distributions. The Partnership Steering Committee shall, as soon as
practicable following the end of each fiscal quarter of the Partnership,
distribute to the Partners their respective Partnership Percentages of any
amounts of cash (the "Partnership Receipts") held by the Partnership which are
in excess of amounts reasonably required for operation of the business of the
Partnership in accordance with the approved Partnership Budget (as described in
Section 7.03 hereof).
5.03. Allocation of Income and Losses. The net profits and losses of the
Partnership and each item of income, gain, loss, deduction or credit entering
into the computation thereof shall, for accounting and tax purposes, be
allocated to and between the Partners in proportion to their respective
Partnership Percentages.
ARTICLE VI
PATIENT DEVELOPMENT AND REFERRAL
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6.01. CMC Patients. Partnership will arrange for homecare services to
individual patients discharged from Children Medical Center of Dallas ("CMC")
based upon the assumption that homecare services remain as they are currently
provided by the Partnership. If new homecare services are developed, the
partners will review the situation to arrive at a mutually satisfactory position
on care.
6.02. Best Efforts Obligations of Partners. The Partners agree to use their
best efforts to promote the sale of services and supplies offered by the
Partnership to Restricted Patients. However, both Partners are in the same
business as Partnership and unless a Partner's actions would violate the
restrictions contained in Article II, the Partners may compete with the
Partnership without such competition constituting a breach of loyalty or other
duty owed by a Partner to the Partnership.
ARTICLE VII
PARTNERSHIP MANAGEMENT
7.01. Steering, Committee. The overall management and control of the
business and affairs of the Partnership shall be vested in the Steering
Committee. The Steering Committee will consist of two persons designated by ACS,
two persons designated by NF, and one additional member to be selected by the
remaining Steering Committee members, by unanimous vote. Each Steering
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<PAGE>
Committee member will serve at the pleasure of the Partner designating such
member and may be replaced, with or without cause, at any time by such Partner,
except that the member chosen by the Steering Committee itself will serve at the
pleasure of both Partners and shall be replaced, with or without cause, at any
time at the request of either Partner. In the event that the Steering Committee
member selected by the Committee must be replaced, the remaining Steering
Committee members, by unanimous vote, will select a successor. Except with
respect to Partnership Major Decisions as set forth in Section 7.02, approval of
the Partnership Budget or as otherwise provided in this Section with respect to
Steering Committee membership selection, the act of a majority of the members of
the Steering Committee shall constitute the act of the entire Committee, so long
as each member is given written notice at least three days in advance of a
Steering Committee meeting (unless such notice is waived in writing by a member
at any time) of all actions proposed to be taken at that meeting by the Steering
Committee. The presence of a quorum of the Steering Committee members shall be
necessary at any meeting for the transaction of business. A quorum shall consist
of four members of the Steering Committee provided however that any Steering
Committee member appointed by a Partner may be represented by a substitute
designated by the Partner which designated the Steering Committee member who is
to be represented by the substitute.
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<PAGE>
(a) Meetings. The Steering Committee shall meet regularly at such times and
places as it shall determine, provided that a Partner may call a special meeting
of the Steering Committee on three days' advance written notice to all members
of the Committee. Meetings of the Steering Committee may, upon the request of
any two members and as otherwise agreed, be held by means of conference
telephone or similar communications equipment by means of which all members
participating in a meeting can hear and speak to each other. The members of the
Steering Committee shall elect a chairman to preside at all the meetings of the
Steering Committee, which chairman will be responsible for providing notice for
meetings and proposed actions to be taken by the Steering Committee, and for
maintaining minutes of Steering Committee meetings.
(b) Responsibilities. The Steering Committee, either directly, or by
specific delegation to one or more of its members, or by contract with a third
party, shall be responsible for the implementation of the Partnership Major
Decisions and for conducting the ordinary and usual business and affairs of the
Partnership in accordance with and as limited by this Agreement, including,
without limitation, the following:
(i) protecting and preserving the title and interests of the Partnership
with respect to all property and other assets owned by the Partnership;
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<PAGE>
(ii) filing any tax returns and paying all taxes, assessments and other
governmental impositions applicable to the Partnership;
(iii) negotiating and entering into and supervising the performance of
contracts and other agreements, subject to the provisions of Section 7.02
hereof;
(iv) maintaining all Partnership Books and other records of the
Partnership;
(v) collecting all amounts due to the Partnership;
(vi) to the extent that funds of the Partnership are available therefor,
paying all debts and other obligations of the Partnership;
(vii) maintaining all funds of the Partnership in a bank or banks as
provided in Section 9.04 hereof;
(viii) making distributions to the Partners in accordance with the
provisions of Section 5.02 hereof;
(ix) performing other normal business functions and otherwise operating and
managing the business and affairs of the Partnership in accordance with and as
limited by this Agreement;
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<PAGE>
(x) appointing or removing any officers of the Partnership in accordance
with Section 7.04 hereof, delegating to such officers any responsibilities which
may be delegated to such officers under this Agreement, and directing such
officers in the performance of their respective responsibilities;
(xi) hiring and firing of Partnership personnel;
(xii) engaging legal counsel;
(xiii) determining all advertising and other promotional activities on
behalf of the Partnership (as distinguished from individual partners); and
(xiv) performing any other obligations required elsewhere in this Agreement
to be performed by the Steering Committee.
(c) Limitation of Responsibilities. The Steering Committee shall be
obligated to perform its respective responsibilities and obligations hereunder
only to the extent that funds of the Partnership are available therefor.
Notwithstanding any other provisions hereof, the members of the Steering
Committee shall be liable to the Partnership and the Partners only for actions
constituting bad faith or breach of an express provision of this Agreement, but
in all other respects shall not be liable for mistakes of judgment.
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<PAGE>
7.02. Partnership Major Decisions. No act shall be taken or funds expended
or obligation incurred by the Partnership, by any Partner acting on behalf of
the Partnership, by any member of the Steering Committee acting on behalf of the
Partnership, or by any officer of the Partnership appointed pursuant to Section
7.04 hereof acting on behalf of the Partnership, with respect to a matter within
the scope of any of the Partnership Major Decisions, as hereinafter defined,
affecting the Partnership, unless such Partnership Major Decision shall have
been unanimously approved in advance in writing by all the members of the
Steering Committee. The "Partnership Major Decisions" shall be the following:
(a) acquiring any real estate or interest therein, including, without
limitation, entering into, terminating or modifying leases or other arrangements
involving space occupied or to be occupied by the Partnership, except as
previously provided for in the Partnership Budget;
(b) borrowing any money or property or otherwise obtaining financing for
the Partnership, other than credit purchases of goods and services on a current
basis and in the normal course of business, or except as previously provided for
in the Partnership Budget;
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<PAGE>
(c) selling, leasing or otherwise transferring, or mortgaging, pledging,
granting a security interest in, or otherwise encumbering any of the property or
other assets of the Partnership;
(d) taking, or omitting to take, any action if such action or omission
would constitute a breach or default under any agreement or instrument to which
the Partnership is a party or by which it or any of its properties is bound;
(e) entering into, or permitting any amendment or termination of, any
contract of insurance, except in the ordinary course of business of the
Partnership or as previously provided for in the Partnership Budget;
(f) entering into, or permitting any amendment or termination of, any
contract, agreement, license or other instrument involving (i) the expenditure
of an amount in excess of the amount provided for in the Partnership Budget or,
if not specifically covered by the Partnership Budget, an amount in excess of
twenty thousand dollars ($20,000.00); (ii) a financial interest on the part of,
or a relationship with, a Partner or any officer, director, shareholder or
partner of a Partner, or any two or more such persons or entities, or between
the Partnership and any other corporation, partnership, association or other
organization in which any one or more of the aforementioned persons is a
director or officer, or has a financial interest, regardless of amount; or
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(iii) a duration for a period of more than one (1) year, or (iv) a matter not
undertaken in the ordinary course of the business of the Partnership;
(g) organizing, acquiring or disposing of an interest in, merging or
combining with, or entering into a corporation, partnership or joint venture
with any other person or entity;
(h) admitting any new Partner;
(i) adopting any general rules or guidelines governing the conduct of the
business and affairs of the Partnership;
(j) changing the location of the Partnership's principal office and
establishing or terminating any additional offices;
(k) selecting depreciation and accounting methods, establishing reserves,
and making other decisions with respect to the treatment of various transactions
for federal income and other tax purposes;
(l) determining whether or not distributions should be made to the Partners
in accordance with the provisions of Section 5.02 hereof;
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<PAGE>
(m) approving, modifying or taking any action inconsistent with the
Partnership Budget;
(n) making any capital or other expenditure or incurring any obligation by,
for or of the Partnership in an amount exceeding twenty thousand dollars
($20,000.00) for any one transaction or series of related transactions, except
with respect to expenditures made and obligations incurred pursuant to the
Partnership Budget;
(o) initiating, terminating and settling legal proceedings;
(p) establishing or terminating bank accounts and depositing or investing
funds in any other manner, and designating authorized signatories for all such
accounts;
(q) establishing any employee benefit program;
(r) determining the type and limits of fidelity bonds obtained on various
employees of the Partnership;
(s) making any other decision or taking any other action which by any
provision of this Agreement is required to be approved by the Partnership, or
which reasonably would be expected to have a material effect on the Partnership
or the assets or operations thereof, except with respect to expenditures made
and obligations
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incurred pursuant to a Partnership Budget or another approved Partnership Major
Decision;
(t) determining the amount of Additional Capital Contributions pursuant to
Section 4.03 hereof; and
(u) establishing charges for Partnership goods and services.
7.03. Partnership Budget. Prior to the beginning of each fiscal year (and,
in the first instance, as soon as practicable after the date of this Agreement),
the Steering Committee shall prepare and, upon the concurrence of all members of
the Steering Committee, approve in accordance with Section 7.02 hereof a budget
("Partnership Budget") setting forth the estimated receipts and expenditures
(capital, operating and other) of the Partnership for the period covered by the
Partnership Budget. The first Partnership Budget shall be developed from a
suggested Partnership Budget prepared by the Partners prior to execution of this
Agreement and submitted to the Steering Committee for such use. When the
Partnership Budget has been approved, the Steering Committee, the members
thereof, and any officers appointed by the Steering Committee in accordance with
Section 7.04 hereof, shall in good faith use their best effort to implement the
Partnership Budget and shall be authorized, without the need for further
approval of the Partners, to make expenditures and incur the obligations as
provided in the Partnership Budget.
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7.04. Officers. The Steering Committee shall be authorized to appoint a
General Manager, and such other officers or agents of the Partnership, with such
titles and responsibilities, as the Steering Committee shall from time to time
designate in accordance with Section 7.01 hereof. To the extent that such duties
have not been contractually delegated to a third party, the Steering Committee
may authorize officers of the Partnership to exercise any of the powers or to
carry out any of the responsibilities of the Steering Committee set forth in
Section 7.01(b) hereof, provided, however, that the Steering Committee may not
delegate to any officer or officers of the Partnership the responsibility (i)
for making Partnership Major Decisions, or (ii) to carry out any of the
responsibilities of the Steering Committee described in Section 7.01(b)(x)
hereof. Any officer appointed by the Steering Committee may be removed at any
time from such office, with or without cause, by the Steering Committee, by
written notice to such officer, as provided in Section 7.01(b) hereof.
7.05. Audit. Either Partner may at its discretion, request a consolidated
audit of the Partnership's financial statements to be prepared and paid for by
the Partnership.
ARTICLE VIII
OPERATIONS AND EMPLOYEES
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8.01. Operations. Notwithstanding the restriction that the Partnership
shall not enter into any separate agreement with either Partner without the
written consent of the Partner which is not a party to such agreement, both
Partners consent and agree that as needed the Partnership may contract with NF
or its parent, Southern Health Systems, Inc. ("SHS") for certain supplies,
equipment, solutions and other materials and for the performance of certain
services as may be needed and reasonably available from NF or SHS. Consent of
the Steering Committee shall be required for entering into these contracts.
8.02. Employee Protection. During the term of this Agreement and for a
period of eighteen (18) months following termination of this Agreement, each
Partner agrees that neither it, nor any entity associated with it or under its
control will hire any employee of the Partnership who, immediately prior to
employment by the Partnership, was an employee of the other Partner (or its
corporate affiliates or subsidiaries). This limitation will be subject to waiver
based on written consent of both Partners.
8.03. Proprietary Information. Each Partner is currently engaged in the
same business as the Partnership and each Partner has developed, or may develop
during the term hereof, certain formulas, products, methods of doing business,
customer lists and other proprietary information which the Partner deems to be
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confidential and a trade secret. Some of these formulae, products, methods and
other proprietary information will be made available to the Partnership, and
thus become known to the other Partner. It is contemplated that each employee or
agent of the Partnership who will be exposed to such confidential information
will be required to execute a confidentiality agreement. Each Partner also
agrees that it will not duplicate, make use of, or disclose, in any manner
whatsoever, any information which is deemed to be confidential by the other
Partner, either during or after the term of this Agreement, without the express
prior written consent of the other Partner. Each Partner further agrees that it
will cause its employees and agents who will have access to such information to
execute a confidentiality agreement similar to that executed by employees and
agents of the Partnership.
In the event that any information deemed to be confidential by a Partner is
provided to the Partnership or its employees or agents in writing, the Partner
providing same shall mark the writing as "confidential". In the event that such
information is provided in non-written form such as orally, by audio tape,
videotape or computer software or disc, the Partner claiming such information to
be confidential shall furnish to the other Partner and/or the Partnership's
employees and agents a written list containing a brief description of such item
and designating such item as confidential. Upon termination of this Agreement
all copies of any information hereunder deemed, or designated as, confidential
by a
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Partner shall be returned to the Partner who supplied the information, or who
designated same as confidential. Notwithstanding the preceding provisions the
following types of information provided by a Partner shall always be deemed
confidential whether or not so designated: Patient records; prescription files;
lists of patient names, addresses or phone numbers; lists of referring
practitioner names, addresses or phone numbers; costs of goods and supplies; and
financial records of the Partner.
It is recognized and acknowledged that damages caused by a Partner's breach
of this Section would be difficult to ascertain and would not adequately
compensate the other Partner for its losses. Therefore, both Partners agree that
the Partner claiming a breach of this Section shall be entitled to injunctive
relief to restrain the commission or continued commission of said breach either
through the arbitration procedures set out herein or, at the injured Partner's
discretion, by seeking such relief from a court of competent jurisdiction.
Notwithstanding the preceding paragraphs of this Section, this restriction
shall not apply to (i) any information which is not deemed confidential
hereunder, or which has not been designated as confidential in the manner
specified herein, (ii) any information which was known to a Partner prior to its
disclosure by the other Partner, (iii) any information which is or becomes
public knowledge
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through no failure of a party bound by this Agreement, or (iv) any information
which is independently developed by a party hereto.
It is further contemplated that each Partner will execute a confidentiality
agreement with the Partnership by which, subject to Sections 11.04 and 14.01
herein, each will agree not to disclose during the term of the Partnership
confidential information developed by the Partnership.
ARTICLE IX
ACCOUNTING
9.01. Fiscal Year. The fiscal year of the Partnership for purposes of
accounting and federal and local income and other taxes shall begin on January 1
and end on December 31 of each year of the term.
9.02. Books and Records. The Steering Committee shall establish, maintain
and keep accurate, full and complete books of account and records (the
"Partnership Books") showing the assets and liabilities, revenues and
expenditures, and all other aspects of the operations, transactions and
financial condition of the Partnership (including changes in the respective
capital accounts of the Partners). The Partnership Books shall be maintained at
the principal office of the Partnership or at such other place reasonably
designated by the Steering Committee, and each Partner and its authorized
representatives shall have access to the
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Partnership Books during ordinary business hours. The Partnership Books shall be
maintained in accordance with generally accepted accounting principles,
consistently applied.
9.03. Financial Reports. The Steering Committee shall cause to be prepared
and submitted to each Partner, within one hundred fifty (150) days after the end
of each fiscal year, unaudited financial statements for the fiscal year showing
the revenues and expenditures, and the assets and liabilities, of the
Partnership. In addition, the Steering Committee shall cause to be prepared and
submitted to each Partner, within thirty (30) days after the end of each month,
an unaudited financial statement for that month, showing the revenues and
expenditures, and the assets and liabilities, of the Partnership for such month.
9.04. Bank Accounts. All receipts, funds and income of the Partnership
shall be deposited in an account or accounts in the name of the Partnership in
such bank or banks as shall be designated by the Steering Committee. All such
bank accounts shall be owned by both Partners, and the signatories for such bank
accounts shall be duly authorized representatives selected by both Partners,
together with such other persons as the Partners may jointly designate for
specific accounts. No check to one Partner shall be issued without the signature
of a representative of the other Partner. There shall be no commingling of the
monies and funds of the Partnership with monies and funds of any other entity,
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and such monies and funds shall be maintained in separate and distinct accounts
of the Partnership.
9.05. Tax Status and Tax Returns. Each of the Partners hereby recognizes
that, for United States federal income tax purposes, the Partnership will be
subject to all provisions of Subchapter K of Chapter 1 of Subtitle A of the
United States Internal Revenue Code of 1986, as amended. The Steering Committee
shall prepare the informational U.S. federal, state and municipal tax returns
required to be filed by the Partnership, and all other tax returns required to
be filed by the Partnership; provided, however, that the filing of U.S. federal,
state, municipal and other tax returns shall not be construed to extend the
purposes of the Partnership or expand the obligations or liabilities of the
Partners.
ARTICLE X
RESTRICTIONS ON TRANSFER OF INTERESTS
IN PARTNERSHIP, RIGHT OF FIRST REFUSAL
10.01. Restrictions on Transfer. During the term of this Agreement, neither
Partner may, directly or indirectly sell, transfer, assign, give, pledge,
syndicate, hypothecate, encumber, alienate or otherwise dispose of (voluntarily
or involuntarily, by operation of law or otherwise) all or any part of its
interest in the Partnership without the prior consent of the other Partner,
except that either Partner may transfer not less than all of its interest in the
Partnership (a) to a corporation which is wholly
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owned by such Partner, or which acquires substantially all of the assets and
assumes substantially all of the liabilities of such Partner (including
specifically assuming in writing all of the Partner's obligations under this
Agreement) or (b) in the manner provided in Section 10.02 hereof. If a loan to
the Partnership from a Partner who desires to sell its Partnership interest
remains outstanding at the time of sale, all of the selling Partner's rights in
said loan must be sold as part of the selling Partner's Partnership interest.
10.02. Right of First Refusal. This Section sets forth a procedure by which
a Partner may sell all of its interest in the Partnership, but does not
authorize a Partner to sell less than all of its interest in the Partnership
without the consent of the other Partner. In the event a Partner desires to sell
all (but not a part) of its interests in the Partnership, it shall first notify
and fully inform the other Partner in writing of the identity of the proposed
buyer ("Buyer") and the proposed terms and conditions of such proposed sale
("Notice of Proposed Sale") and shall afford the non-selling Partner the
opportunity, within thirty (30) days after receiving such notice, to elect to
purchase such interests in accordance with such proposed terms and conditions by
delivery of written notice to this effect to the selling Partner. In the event
the non-selling Partner shall so elect to make a purchase of such interests on
such terms and conditions, the closing on the purchase will take place according
to the proposed terms and conditions of
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the sale, or, if not specified, within a reasonable period (but not more than
ninety (90) days) after such election to purchase is made. In the event the
non-selling Partner does not so elect, within the 30 days period to purchase
such interests so offered, the selling Partner will then be free to sell to the
proposed Buyer all (but not part) of such interests on terms no less favorable
to the selling Partner than the proposed terms and conditions specified in the
Notice of Proposed Sale within a period of one hundred and twenty (120) days
after the end of such 30 day period. In the event that the sale does take place
to the proposed Buyer in compliance with this Section within the 120 day period,
the selling Partner shall give written notice to this effect to the non-selling
Partner no later than the date of the closing thereof. At any time following
receipt of the Notice of Proposed Sale and prior to expiration of 30 days
following the closing thereof, the nonselling Partner shall have the right (by
delivering notice to the selling Partner or to the Buyer (if the sale has
closed)) to terminate this Agreement. In the event a sale of such interests is
not made by the selling Partner to the proposed Buyer during such 120 day
period, any sale by that Partner of its interests in the Partnership will
require compliance anew with the provisions of this Section.
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<PAGE>
ARTICLE XI
TERMINATION
11.01. Partnership Termination. The Partnership shall terminate upon the
first to occur of the following events:
(a) upon the written agreement of the Partners to terminate this Agreement:
(b) upon written notice by either Partner (the "Non-Defaulting Partner"),
if the other Partner (the "Defaulting Partner") shall fail to perform its
obligations hereunder, including without limitation the failure to make its
share of Additional Contributions as required by Section 4.03 hereof (the
"Default"), and such Default shall continue for a period of at least forty-five
(45) days after written notice of such Default from the Non-Defaulting Partner
to the Defaulting Partner;
(c) upon the permanent cessation or abandonment of the business of the
Partnership;
(d) upon 12 months written notice of termination by either Partner;
provided, however, that neither Partner may request termination under this
Section 11.01(d) sooner than twelve (12) months following execution of the
Agreement;
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(e) if either Partner (i) shall voluntarily suspend or otherwise
discontinue its business operations; (ii) shall become insolvent; (iii) shall
become unable to pay or shall fail to pay generally its debts as such debts
become due, or shall admit in writing such inability or such failure to pay
generally its debts when due; (iv) shall make a general assignment for the
benefit of its creditors or shall enter into a composition agreement with its
creditors; (v) shall take or authorize any action preparatory to, or for the
purpose of, commencing (in the capacity of debtor) a voluntary case under any
applicable chapter of Title 11 of the United States Code, 11 U.S.C. Sections 101
et seq. (entitled "Bankruptcy"), or any future United States bankruptcy code or
statute; or (vi) shall have possession of all or a substantial portion of its
property taken by a custodian, receiver, trustee or assignee for the benefit of
creditors, or shall consent to such possession;
(f) upon the acquisition by either Partner of all of the other Partner's
interest in the Partnership in accordance with Section 10.02 hereof or
otherwise;
(g) upon election by the non-selling Partner pursuant to Section 10.02
hereof; or
(h) upon expiration of this Agreement.
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<PAGE>
11.02. Distributions on Partnership Termination.
(a) Upon termination of the Partnership, the affairs of the Partnership
shall be wound up as soon as practicable. A reasonable time shall be allowed for
the liquidation mad discharge of the liabilities of the Partnership. Each
Partner shall be furnished with an audited financial statement, prepared by the
Partnership's Certified Public Accountants, setting forth the total amount of
assets and liabilities of the Partnership as of the date of complete
liquidation. In the event that the liabilities of the Partnership (including
loans to Partners shall exceed the assets available for distribution, the
Partners shall assume and pay the excess in accordance with their respective
Partnership Percentages, and in the event that any Partner (the "Delinquent
Partner") shall fail to pay its full share of any such excess and the other
Partner is required to do so, then the other Partner shall be entitled to
contribution from the Delinquent Partner to the extent of the Delinquent
Partner's obligation hereunder. During the period of the winding up of the
Partnership, the affairs of the Partnership shall continue to the extent
necessary to permit an orderly termination thereof.
(b) The Partnership assets shall be used and distributed first to pay the
liabilities of the Partnership, including the complete satisfaction of all liens
against Partnership property
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(other than the loans or advances that may have been made by the Partners to the
Partnership) and the expenses of liquidation. The remaining Partnership assets
shall next be applied to the repayment of any loans or advances made to the
Partnership by the partners. The net assets of the Partnership, after making all
of the payments previously set forth in this Section shall be distributed to the
Partners in an amount equal to their respective Partnership Percentage in the
Partnership. If assets other than cash are distributed, such assets shall be
valued at their then fair market value.
(c) Distribution upon liquidation shall be in full and final satisfaction
of all amounts of capital contributed by the Partners pursuant to Section 4.02
and 4.03 hereof.
11.03. Termination of Agreement. This Agreement shall terminate upon (i)
the termination of the Partnership in accordance with Section 11.01 hereof, and
(ii) the completion of the winding up of the affairs of the Partnership and the
distribution of all assets and payment of all liabilities of the Partnership in
accordance with Section 11.02 hereof.
11.04. Post-Termination Business Activities of the Partners. The Partners
agree that upon termination of the Partnership, there will be a return to the
status guo ante; at such time, each Partner will be free to offer to Restricted
Patients the
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services and supplies formerly offered by the Partnership, subject to the
limitations set out in Sections 8.02, 8.03 and 14.01 herein. Upon termination of
the Partnership for any reason, the Partnership name shall not be used by either
Partner. The Partnership's telephone numbers shall not be used by either
Partner. Upon termination of this Agreement copies of all Partnership files and
lists of patients, other than information covered by the confidentiality
provisions of Section 8.03 and Technology purchased under Section 14.01, shall
be provided to each Partner upon request.
ARTICLE XII
ARBITRATION
Except as otherwise provided in Section 8.03, any dispute, controversy or
claim between the Partners arising out of or relating to this Agreement either
during or after the term thereof (including the question as to whether any
particular matter is arbitrable) shall be solely and finally settled by
arbitration conducted in Dallas, Texas, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association then in force (the
"Rules"). The Partner requesting arbitration shall serve upon the other Partner
to the controversy, dispute or claim a written demand for arbitration, stating
the substance of the controversy, dispute or claim, the contention of the
Partner requesting arbitration, and the name and address of the arbitrator
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<PAGE>
appointed by it. The recipient of such demand shall within 20 days after such
receipt appoint an arbitrator and notify the other Partner of the identity of
the arbitrator so selected, and the two arbitrators shall appoint a third, and
the decision or award of any two arbitrators shall be final and binding upon the
parties. In the event that the two arbitrators fail to appoint a third
arbitrator within 20 days of the appointment of the second arbitrator, either
arbitrator, or either party to the arbitration, may apply to a judge of the
United States District Court located in or nearest to Dallas, Texas for the
appointment of the third arbitrator, and the appointment of such arbitrator by
such judge on such application shall have precisely the same force and effect as
if such arbitrator had been appointed by the two arbitrators. If for any reason
the third arbitrator cannot be appointed in the manner prescribed by the
preceding sentence, either regularly appointed arbitrator, or either party to
the arbitration, may apply to the American Arbitration Association for
appointment of the third arbitrator in accordance with the Rules. Should the
party upon whom the demand for arbitration has been served fail or refuse to
appoint an arbitrator within 20 days, the single arbitrator shall have the right
to decide alone, and such arbitrator's decision or award shall be final and
binding upon the parties. The decision of the arbitrator shall be in writing and
shall set forth the basis therefor. The Partners shall abide by all awards
rendered in arbitration proceedings, and all such awards may be enforced and
executed upon in any court having jurisdiction over
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the party against whom enforcement of such award is sought. The Partners shall
divide equally the administrative charges, arbitrator's fees, and related
expenses of arbitration, but each Partner shall pay its own legal fees incurred
in connection with any such arbitration. This agreement to arbitrate shall be
specifically enforceable under the prevailing arbitration law and the parties
stipulate that this Agreement involves interstate commerce.
ARTICLE XIII
COVENANTS, REPRESENTATIONS AND WARRANTIES
13.01. Partners' Authority. Each Partner warrants to the other that it is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction in which it is organized and has the full unrestricted power
and authority, corporate and otherwise, to carry on its business as currently
conducted, to own, operate and lease its properties, to execute and deliver this
Agreement and to carry out the transactions contemplated thereby; and that the
execution, delivery and performance of this Agreement have been duly authorized
by all proper and necessary corporate actions.
13.02. Absence of Violation. Each Partner warrants to the other that
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will constitute a violation of, or a default
under, or conflict with,
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any term or provision of the charter or by-laws of the warranting Partner or any
contract, commitment, indenture, lease or other agreement to which the Partner
is a party or by which it is bound.
13.04. Binding Effect. Each Partner warrants to the other that this
Agreement constitutes a valid and binding obligation of the warranting Partner,
enforceable in accordance with its terms.
ARTICLE XIV
MISCELLANEOUS
14.01. New Technology. The Partnership may from time to time develop new
and innovative service techniques, equipment, supplies or other related
technologies or patents ("Technology"). These will be proprietary to the
Partnership, and neither Partner shall use these techniques, equipment,
supplies, technologies or patents except as provided in this Section. The
Partnership shall give both Partners the right to bid for the right to own and
engage in exclusive marketing of such items (such right to be subject to the
Partnership's exclusive right to market and use such items during the term of
this Agreement with regard to Restricted Patients). Subject to negotiation of a
financial arrangement satisfactory to the Partnership, the Partner submitting
the highest bid shall be granted said ownership and marketing rights. In the
event that the Partners are unable to negotiate such an arrangement, the matter
may be submitted by either Partner to
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arbitration pursuant to ARTICLE XII hereof. To the extent that such ownership
and marketing rights are not sold to a Partner under this section, the
Technology shall be disposed of on dissolution of the Partnership in the same
manner as other Partnership assets.
14.02. Limitation on Agency. It is specifically understood and agreed
between the Partners that this Partnership extends only to, and is limited to,
the rights and obligations under this Agreement and, except an otherwise
expressly provided herein, this Agreement shall not constitute either Partner as
the agent of, or principal for, the other Partner.
14.03. Other Activities. Nothing in this Agreement shall be construed to
restrict either Partner from carrying on any business or activity (other than as
specifically stated in Article II hereof), whether or not any such business or
activity is competitive with the business of the Partnership.
14.04. Inspection of Records. Each Partner or its authorized representative
may examine the Partnership Books or other records of the Partnership as
provided in Section 9.02 hereof, and may examine or inspect any of the property
or assets owned or used by the Partnership at any time without notice.
To the extent required by Section 1861(b)(1)(I) of the Social Security Act,
each Partner shall, upon proper request, allow the
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United Stated Department of Health and Human Services, the Comptroller General
of the United States and their duly authorized representatives, access to this
Agreement and to all books, documents and records necessary to verify the nature
and extent of the costs of the services provided by the Partnership at anytime
during the term of this Agreement and for an additional period of four (4) years
following the last date services are furnished by the Partnership. If the
Partnership carries out any of the duties of this Agreement through an agreement
between it and a Partner or other individual or organization related to it,
Partnership shall require that a clause be included in such agreement to the
effect that until the expiration of four (4) years after the furnishing of such
services pursuant to such an agreement, the related organization shall make
available, upon request by the Department of Health and Human Services, the
Comptroller General of the United States or any of their duly authorized
representatives, all agreements, books, documents and records of such related
organization that are necessary to verify the nature and extent of the costs of
the services provided under that agreement. Except as set forth in this section,
neither Partner nor any third party shall have any right or access to the
separate business and other records of either Partner.
14.05. Notices. All notices, demands, requests, consents, reports,
approvals, or other communications which may be or are required to be given,
served, or sent pursuant to this Agreement
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<PAGE>
shall be in writing and shall be mailed by first class, registered or certified
mail, return receipt requested, postage prepaid, or transmitted by telegram,
addressed as follows:
(a) If to ACS:
Alternative Care Systems, Inc.
2777 Stemmons Freeway
Suite 1089
Dallas, Texas 75207
Attention: Mr. George Farr
(b) If to NF:
Nova Factor, Inc.
1785 Nonconnah Blvd.
Memphis, Tennessee 38132
Attention: Mr. Randy Grow
Each Partner may designate by notice in writing a new address to which any
notice, demand, request, consent, report, approval or communication may
thereafter be so given, served or sent. Each notice, demand, request, consent,
report, approval or communication which shall be mailed in the manner described
above, or which shall be delivered to a telegraph company, shall be deemed
sufficiently given, served, sent or received for all purposes at such time as it
is delivered to the addressee (with the return receipt or the delivery receipt
being deemed conclusive evidence of such delivery) or at such time as delivery
is refused by the addressee upon presentation.
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<PAGE>
14.06. Severability. If any part of any provision of this Agreement or any
other agreement, document or writing given pursuant to or in connection with
this Agreement shall be invalid or unenforceable under applicable law, said part
shall be ineffective to the extent of such invalidity or unenforceability only,
without in any way affecting the remaining parts of said provision or the
remaining provisions of said agreement.
14.07. Benefits and Obligations. The covenants and agreements contained
herein shall inure to the benefit of, and be binding upon, the Partners and
their respective legal, successors. Any persons succeeding to the interest of a
Partner shall succeed to all of such Partner's rights, interests and obligations
hereunder, subject to and with the benefit of all terms and conditions of this
Agreement, including the restrictive conditions contained herein.
14.08. Amendment. This Agreement shall not be amended, altered, or modified
except by an instrument in writing duly executed by the parties hereto.
14.09. Entire Agreement. This Agreement constitutes the entire agreement
between the Partners with respect to the transactions contemplated herein, and
it supersedes all prior oral or written agreements, commitments or
understandings with respect to the matters provided for herein.
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14.10. Headings. Article and Section headings contained in this
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions hereof.
14.11. Governing Law. This Agreement, the rights and obligations hereunder,
and any claims or disputes relating thereto, shall be governed by and construed
in accordance with the laws of the State of Tennessee (but not including the
choice of law rules thereof).
14.12. Waiver of Partition. Each Partner hereby waives during the term of
this Agreement any right that it may have to maintain any action for Partition
with respect to any Partnership property.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed on their behalf, on the day and year hereinabove set forth.
NOVA FACTOR, INC.
By:
-------------------------------------
Title:
-----------------------------------
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ALTERNATIVE CARE SYSTEMS, INC.
By:
-------------------------------------
Title:
-----------------------------------
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Exhibit 10.42
DRUG DISTRIBUTION BUSINESS
MANAGEMENT AND SERVICE AGREEMENT
This Management and Service Agreement (hereinafter referred to as the
"Agreement") is made and entered into this 1st day of July, 1994, by and between
SOUTHERN HEALTH SYSTEMS, INC., a Tennessee corporation (hereinafter referred to
as "SHS") and TEXAS HEALTH PHARMACEUTICAL RESOURCES, a Tennessee general
partnership (hereinafter referred to as "THPR");
W I T N E S S E T H:
WHEREAS, THPR has been formed to engage in the business of providing
distribution of certain drugs (the "Drug Distribution Business"); and
WHEREAS, THPR desires to obtain from SHS, and SHS is willing to provide to
THPR, certain services necessary or desirable in the conduct of THPR's Drug
Distribution Business, all upon the terms and subject to the conditions
hereinafter set forth;
NOW, THEREFORE, for and in consideration of the mutual promises contained
herein and for other good and valuable consideration, the receipt and adequacy
of which is hereby acknowledged, the parties hereto agree as follows:
<PAGE>
1. Services to be Provided by SHS. During the term of this
Agreement, SHS agrees to provide or arrange for the provision of, the following
services to THPR:
A. Billing, Reimbursement, Collection and Financial Counseling
Services.
(i) Services. SHS shall provide such billing, reimbursement,
collection and financial counseling services as are required,
or reasonably requested, by THPR in conducting its Drug
Distribution Business, including the preparation, transmitting
and monitoring of all bills to patients of THPR's Drug
Distribution Business or third party payors, preparing
requests or otherwise assisting patients of THPR's Drug
Distribution Business in seeking reimbursement from all third
party payors for the services provided to such patients by
THPR, collecting amounts due THPR from patients or third
parties, and counseling patients regarding the options
available to them in paying for the Drugs and related services
provided to them by THPR. THPR shall establish all patient
charges for
2
<PAGE>
such Drugs and related services provided by THPR to the
patients.
(ii) Clearance of Patients. SHS agrees that it will not commit
to provide Drugs or related services to any patient until such
patient is approved by THPR. THPR shall promptly notify SHS as
to any potential patient and shall obtain such patient data as
shall be specified by SHS. SHS agrees to promptly investigate
a potential patient's insurance coverage and financial ability
to pay and to notify THPR as to the patient's financial
ability to pay for Drugs or related services from THPR. THPR
shall thereafter obtain all documentation necessary to file
claims with third party payors and forward same to SHS. SHS
shall have no liability for relying upon information provided
by third party payors concerning coverage in the event that
such information shall subsequently prove to be incorrect.
(iii) Collection and Disbursement. SHS shall monitor and
coordinate collection, for and on behalf of THPR, of all
monies due to THPR from patients and/or third party payors for
Drugs and related services. SHS shall deposit said funds into
a bank account designated by
3
<PAGE>
THPR. SHS shall not have authority to disburse funds from
said bank account. However, funds from said Account, in an
amount determined by THPR, shall be deposited in a separate
operating account, and SHS shall have authority to disburse
funds from this operating account as necessary to carry out
the management functions specified herein. Collections of all
accounts are performed by SHS on behalf of THPR and SHS shall
not be responsible for any failure to collect such accounts.
SHS hall use reasonable efforts to collect said accounts
(but not greater than those efforts used in the collection of
its own accounts), but SHS shall not be required to institute
suit for collection or incur any extraordinary expenses in
attempting to collect these receivables unless such action is
approved by the Steering Committee and the costs are paid by
THPR.
B. Accounting and Financial Reporting. SHS shall provide the following
accounting and financial reporting services required by THPR in the conduct of
its Drug Distribution Business: (i) monthly, quarterly and annual financial
statements consisting of income statements, balance sheets, a detailed General
Ledger and Status Report of Collections, (ii) all sales tax returns and reports,
(iii) schedules of accounts receivable,
4
<PAGE>
accounts payable and cash applications, (after applying cash received to
appropriate invoices, applying credits to patient accounts and applying
write-offs and adjustments approved by THPR) and (iv) reconciliation of the Drug
Distribution Business bank account statements of THPR. SHS shall not make
provision for any annual audit of THPR, and such audit if desired by THPR shall
be the responsibility of THPR and shall be conducted by such independent
accounting firm as THPR may select. SHS agrees to cooperate with the accounting
firm in the conduct of the audit of THPR or any other accounting procedure for
which the accounting firm may be engaged by THPR. THPR shall make available to
SHS such information and documentation as may be needed to enable SHS to prepare
the tax returns and financial reports specified herein.
C. Management Services and Marketing.
(i) Responsibilities. THPR hereby appoints SHS to manage and
supervise the operation of THPR's day-to-day operations of its
Drug Distribution Business and for this purpose, THPR
delegates to SHS the authority to make, subject to the terms
hereof, such management decisions as are necessary for the
day-to-day operations of THPR's Drug Distribution Business.
SHS accepts this engagement and agrees to faithfully
5
<PAGE>
perform the duties and responsibilities set out herein.
In carrying out its management responsibilities, and in
accordance with the provisions of this Agreement, SHS shall
be subject to the direction, input and general guidance of
the Steering Committee. The Steering Committee shall
communicate to SHS all decisions of that Committee which
affect the duties and responsibilities of SHS under this
Agreement.
(ii) Marketing. SHS shall also provide such procedure manuals,
and marketing materials as SHS may from time to time determine
to be helpful in the operation of THPR's Drug Distribution
Business and upon the direction of the Steering Committee, SHS
personnel shall perform sales calls and other related
marketing activities. Such marketing materials and procedure
manuals are deemed confidential by SHS and shall be available
for review by THPR at SHS's offices.
(iii) Personnel. SHS shall designate certain SHS personnel to
perform the management functions set out hereunder and such
SHS personnel shall supervise the operation of THPR's Drug
Distribution Business. Subject to the reimbursement provisions
set out in
6
<PAGE>
Section 2 hereinbelow, SHS shall solely be responsible for
all costs associated with such employment, including without
limitation, its employees' salaries, federal and state income
tax withholding, Social Security tax withholding, workmen's
compensation benefits and fringe benefits.
(iv) Steering Committee. The overall management and control of
the business and affairs of THPR's Drug Distribution Business
shall be vested in a Steering Committee as described in the
THPR Partnership Agreement.
2. Compensation. THPR shall pay a monthly fee to SHS for the reimbursement,
accounting, management and computer services specified herein as set out on
Exhibit A attached hereto and made a part hereof, plus an amount equal to *
percent (*%) of net patient revenues of THPR during that month. Net patient
revenue shall be determined in accordance with generally accepted accounting
principles. SHS will bill THPR for all charges for services and employment costs
on a monthly basis. All charges shall be due and payable by THPR * (*)
days from the end of the month in which the changes reflected on SHS's invoice
to THPR were earned by SHS.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
7
<PAGE>
Notwithstanding any provision herein to the contrary, the * percent
of net patient revenues when added to similar fees (excluding reimbursement,
accounting, management and computer service fees as described on Exhibit A) paid
to SHS by all other partnerships between an SHS affiliate and Alternative Care
Systems, Inc. shall not exceed for fiscal year July 1, 1994 through June 30,
1995 the sum of $*. If the total should exceed this amount, SHS shall
determine which of the fees paid by these partnerships to SHS shall be reduced.
The management fees are based on the assumption that the homecare reimbursement
market remains relatively stable. If significant changes in the Texas Medicaid
levels of reimbursement or other unforeseen material changes occur, then the
parties to this Agreement will mutually review other options for compensation.
The management fees set out in this section will be effective from July 1, 1994
to June 30, 1995 unless one of the unforeseen events referenced hereinabove
should occur. Both parties will review the previous years fees and their
reasonableness on an annual basis and resolve outstanding issues and agree to
the fees and cap on fees for the following year. In the event that the parties
cannot agree, the management fees shall remain the same as for the prior fiscal
year ending June 30.
3. THPR Costs. It is agreed and understood that during the term of this
Agreement, THPR shall also be responsible for
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
8
<PAGE>
the costs incurred by SHS in providing the services which it is obligated to
provide under Sections 1A, 1B and 1C hereunder (including without limitation,
telephone, travel, office supplies and postage). In addition to the preceding
provision, THPR shall be responsible for the costs of salaries and fringe
benefits for THPR's employees, if any; outside auditor fees; acquisition of
Drugs; facility lease costs; capital expenditures; principal and interest on
loans; payroll taxes for its employees, if any; and the cost of preparing
Federal and state Income Tax returns, and all sales taxes on sales to patients.
THPR shall contract for all such expenses for and in the name of THPR, without
basing the same upon SHS's credit, and SHS shall not be liable to third party
providers for the costs of such goods and services. SHS shall file for and on
behalf of THPR all sales and use tax returns necessary in the operation of
THPR's Drug Distribution Business.
4. Subcontracting. The parties to this Agreement recognize that SHS may
provide to THPR certain of the services which it is obligated to provide under
this Agreement by means of subcontracts with third parties. However, no such
subcontract shall release SHS from its duties and responsibilities under this
Agreement with respect to the services so subcontracted.
9
<PAGE>
5. Term. This Agreement shall be for a term beginning on July 1, 1994 and
ending on March 31, 1999, unless otherwise terminated in accordance with this
section. This Agreement shall automatically terminate upon (i) SHS or THPR
ceasing to exist, (ii)either party ceasing to be licensed to sell Drugs, (iii)
either party permanently ceasing to engage in the Drug Distribution Business,
(iv) the mutual agreement of the parties, (v) the insolvency or bankruptcy of
either party, the making by either party of an assignment for the benefit of
creditors, the consent by either party to the appointment of a trustee or
receiver, or the appointment without its consent, of a trustee or receiver for
it or for a substantial part of its property, or (vi) the institution by or
against either party of bankruptcy, reorganization, arrangement or insolvency
proceedings. In addition, if either party hereto shall breach the terms of this
Agreement, the nonbreaching party may give written notice of the breach to the
breaching party, and if said breach is not cured within 21 calendar days
following the giving of said notice, this Agreement shall at the option of the
nonbreaching party be terminated. Furthermore, notwithstanding any other
provision of this Agreement, either party may terminate this Agreement upon
giving 90 days prior written notice to the other party.
6. Force Majeure. The obligations of SHS hereunder shall be excused during
any period of delay caused by matters such as
10
<PAGE>
strikes, acts of God, shortages of raw materials or power, inability to obtain
product, governmental action or compliance with governmental requirements,
whether voluntary or pursuant to order, or any other matter which is beyond the
reasonable efforts of SHS to control.
7. Severability. If any one or more of the provisions of this Agreement
shall for any reason be held illegal or invalid, such illegality or invalidity
shall not affect any other provision of this Agreement and this Agreement shall
be enforced as if such illegal or invalid provision had not been contained
herein.
8. Confidentiality. Each party has developed or may during the term hereof
develop certain formulae, products, methods of doing business, customer lists
and other proprietary information which that party deems to be confidential and
a trade secret. In the course of fulfilling their respective obligations
hereunder, some of these formulae, products, methods and other proprietary
information will become known to the other party hereto. It is contemplated that
each employee or agent of the parties who will be exposed to such confidential
information will be required to execute a confidentiality agreement with each
party hereto. Each party also agrees that it will not duplicate, make use of, or
disclose, in any manner whatsoever, any
11
<PAGE>
information which is deemed to be confidential by the other party, either during
or after the term of this Agreement, without the express prior written consent
of the other party hereto.
In the event that any information deemed to be confidential by a party is
provided to the other party or its employees or agents in writing, the party
providing same shall mark the writing as "confidential." In the event that such
information is provided in non-written form such as orally, by audiotape,
videotape or computer software or disc, the party claiming such information to
be confidential shall furnish to the other party a written list containing a
brief description of such item and designating such item as confidential. Upon
termination of this Agreement, all copies of any information hereunder deemed,
or designated by a party as, confidential shall be returned to the party who
supplied the information, or who designated same as confidential.
Notwithstanding the preceding provision, the following types of information
provided by a party shall always be deemed confidential, whether or not so
designated: patient records; prescription files; costs of goods and supplies;
and financial records of the party.
Notwithstanding the preceding sections, this restriction shall not apply
(i) to any information which is not deemed confidential hereunder, or which has
not been designated as
12
<PAGE>
confidential in the manner specified herein, (ii) to any information which was
known to a party prior to its disclosure by the other party, (iii) to any
information which is or becomes public knowledge through no failure of a party
bound by this Agreement, (iv) to any information which is independently
developed by a party hereto, or (v) to the extent that such restrictions
conflict with the terms of the THPR Partnership Agreement.
It is recognized and acknowledged that damages caused by a party's breach
of this Section would be difficult to ascertain and would not adequately
compensate the other party for its losses. Therefore, both parties agree that
the party claiming a breach of this Section shall be entitled to injunctive
relief to restrain the commission or continued commission of said breach by
seeking such relief from a court of competent jurisdiction.
9. Service to Other Businesses. THPR acknowledges that
SHS offers its services to other business, and THPR agrees that no provision
contained herein shall restrict or prohibit SHS from providing services to
others in addition to THPR as long as the performance of said services does not
interfere with the performance of SHS's obligations hereunder.
13
<PAGE>
10. Records. To the extent required by Section 1861(b)(1)(I) of the
Social Security Act, SHS shall, upon proper request, allow the United States
Department of Health and Human Services, the Comptroller General of the United
States and their duly authorized representatives, access to this Agreement and
to all books, documents and records necessary to verify the nature and extent of
the costs of the services provided by SHS under this Agreement at any time
during the term of this Agreement and for an additional period of four (4) years
following the last date services are furnished under this Agreement.
11. Nonassignability. The rights, duties and responsibilities of the
parties hereto are personal in nature and shall not be assigned without the
express written consent of the other party except that SHS may subcontract with
other parties to perform some or all of its duties hereunder.
12. Applicable Law. This Agreement shall be construed in accordance with
the laws of the State of Tennessee and the laws of the State of Tennessee shall
govern the rights, duties, liabilities and responsibilities created hereunder.
13. Headings. All headings used herein are for ease of reference only and
shall in no way be construed as interpreting, decreasing or enlarging the
provisions of this Agreement.
14
<PAGE>
14. Effect. This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, their successors, administrators, trustees and
assigns.
15. Modification. This Agreement constitutes the entire understanding
between the parties hereto and may be changed or modified only with the written
consent of both parties.
16. Notices. Any notice required to be given hereunder shall be in writing
and shall be hand delivered or sent by certified United States mail, postage
prepaid, return receipt requested, to the chief executive officer of the party
at its respective primary business address set out below or at such other
address as shall be indicated in writing to the other party. Notice shall be
effective when hand delivered or on the third day after deposit in the United
States mail as required by this Section.
17. Waivers. A waiver of the breach of any provision of this Agreement
shall not be effective unless in writing signed by the waiving party, and such
waiver shall not be deemed a waiver of any other breach of the same or any other
provision hereof.
15
<PAGE>
18. Fairness. The parties hereto recognize that Nova Factor, Inc. is a
general partner of THPR. Each party acknowledges that the terms of this
Agreement are fair and reasonable to both parties and that it is in the best
interest of each party to enter into this Agreement. Each party further
acknowledges that the terms of this Agreement were negotiated and that the
decision to enter into this Agreement was made solely by the unrelated general
partner of THPR, without participation by Nova Factor, Inc.
IN WITNESS WHEREOF, the undersigned parties hereto have caused this
Agreement to be executed as of the day and year first above written.
TEXAS HEALTH DRUG
DISTRIBUTION RESOURCES,
a partnership
By: Nova Factor, Inc.
By:
Title:
Address:
SOUTHERN HEALTH SYSTEMS, INC.
By:
Title:
Address:
16
<PAGE>
EXHIBIT A
FEES TO NFI
In exchange for the goods and services provided by NFI under this Agreement,
the Partnership agrees to pay to NFI the following amounts:
A. * of the Partnership in exchange for computer services.
B. * of the Partnership for reimbursement services.
C. * per month for accounting and reporting services.
D. Reimbursement on a monthly basis for all employment costs incurred
by NFI in providing NFI personnel to perform the services set out
herein. Employment costs shall mean the salary, payroll and FICA
taxes, and the cost of all fringe benefits paid to or for the
employee by NFI, plus all incremental costs incurred by NFI for and
on behalf of the Partnership, such as workers' compensation
insurance, automobile insurance, and incremental costs of property
and casualty insurance coverage. In the event that any NFI employee
devotes only a portion of his or her time to the performance of
services for the Partnership, the employment costs for that
employee, which is charged to the Partnership, shall be a prorated
portion of the total employment costs determined by multiplying the
total costs by a fraction, the numerator of which is the time spent
by the employee for the Partnership and the denominator of which is
the total hours worked by the employee during that month.
E. In exchange for pharmaceutical solutions supplied by NFI, the
Partnership will pay on a monthly basis to NFI an amount equal to
NFI's * said medical equipment, services and supplies. NFI's *
shall mean the * by NFI to its supplier for the medical equipment,
services and supplies, plus taxes and freight.
For purposes of this Agreement, the Partnership's * shall mean all charges
made by the Partnership in a given month, determined on an accrual basis,
regardless of whether such accounts are actually collected, and * shall not
be reduced for *; taxes, depreciation, principal payment on loans,
distributions to Partners, other reserves, fees paid to NFI hereunder, or any
other expenses.
The fees due to NFI shall be determined on a monthly basis by NFI and NFI
shall submit monthly invoices to the Partnership setting out the amounts due
NFI for said month. The invoices for NFI's services shall be due thirty (30)
days from the receipt of same by the Partnership.
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
17
<PAGE>
Exhibit 10.43
AMENDMENT NUMBER ONE TO DRUG DISTRIBUTION BUSINESS MANAGEMENT
AND SERVICE AGREEMENT
This Agreement ("Amendment") is made and entered into by and between
Southern Health Systems, Inc., a Tennessee corporation ("SHS"), Texas Health
Pharmaceutical Resources, a Tennessee general partnership (hereinafter
referred to "THPR"), and Nova Factor, Inc., a Tennessee corporation
(hereinafter referred to "NFI").
WITNESSETH
WHEREAS, SHS and THPR entered into a Drug Distribution Business
Management and Service Agreement dated , 1995 ("Service
Agreement"); and
WHEREAS, THPR is engaged in the business of providing distribution
of drugs and SHS is in the process of withdrawing from that business; and
WHEREAS, THPR, NFI and SHS desire to amend the Service Agreement to
substitute NFI for SHS and to provide that SHS's obligations thereunder shall
hereinafter be performed by NFI.
NOW THEREFORE, for and in consideration of the mutual promises
contained herein and for other good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the Service Agreement is
amended, effective as of the date hereof ("Effective Date"), as follows:
1. Except as set out in Section 4 hereof, THPR, SHS and
NFI agree that from and after the Effective Date, all
privileges, rights, duties and obligations of SHS under
the Service Agreement shall be and hereby are assigned
and transferred to NFI and that the Service Agreement
shall, from the Effective Date, be an agreement solely
by and between NFI and THPR.
2. Except as set out in Section 4 hereof, NFI hereby
accepts the assignment and transfer of all rights,
privileges, duties and obligations of SHS under the
Service Agreement, and from and after the Effective
Date, agrees to carry out the duties and obligations of
SHS set forth in the Service Agreement.
3. All references to SHS in the Service Agreement shall be
deleted and NFI shall be substituted therefor.
4. From and after the Effective Date, SHS shall have no
further liability or responsibility under the Service
Agreement, and THPR shall have no further obligation
and liabilities to SHS thereunder. Notwithstanding the
preceding sentence, all obligations and duties which
<PAGE>
were to be performed by THPR or SHS and all rights and
privileges which accrued in favor of SHS or THPR, prior
to the Effective Date, shall continue to be in effect,
including the indemnity contained in the Service
Agreement for matters occurring prior to the Effective
Date. In addition, SHS and THPR agree to continue to
observe the confidentiality provisions of the Service
Agreement, as well as their respective obligations to
maintain records, all as concern information and
records generated prior to the Effective Date. All
monies earned or owed to SHS or THPR under the Service
Agreement prior to the Effective Date shall promptly be
paid in accordance with the terms of the Service
Agreement as in effect prior to the Effective Date.
5. Effective March 1, 1996, Section 2 of the Service
Agreement entitled Compensation is amended to delete
the reference to "* of THPR
during that month" and to substitute in place thereof
the following: "* of THPR
during that month." In addition, Section 2 is amended
to provide that if the total sum of $* is
exceeded, the excess shall be split among NFI,
PharmaThera, Inc., HealthEffects, Inc. and CliniCall,
Inc. in a manner agreed upon by those four parties. It
is further agreed that these changes in Section 2 of
the Service Agreement shall be in effect until June 30,
1996, at which time, NFI and THPR will negotiate a new
fee arrangement mutually acceptable to both parties.
6. All provisions of the Service Agreement shall
hereinafter be in full force and effect by and between
NFI and THPR except as otherwise specifically stated
herein.
7. NFI and SHS also entered into a Drug Distribution
Management and Services Subcontract dated ,
1995 (the "Subcontract"). The parties hereby agree
that said Subcontract shall be, and is, terminated and
cancelled as of the Effective Date.
IN WITNESS WHEREOF, each of the parties hereto have caused this
Amendment to be executed by their duly authorized officers this day of
, 1996.
SOUTHERN HEALTH SYSTEMS, INC.
By:
----------------------------
Title:
-------------------------
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
2
<PAGE>
NOVA FACTOR, INC.
By:
---------------------------
Title:
------------------------
TEXAS HEALTH PHARMACEUTICAL
RESOURCES, INC., a partnership
By: Nova Factor, Inc., one of
its general partners
By:
---------------------------
Title:
------------------------
3
<PAGE>
Exhibit 10.44
HEMOPHILIA THERAPY PHARMACY MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT (hereinafter referred to as the
"Agreement") is made and entered into this th day of , 19 , by and between
TEXAS HEALTH PHARMACEUTICAL RESOURCES, a Tennessee partnership (hereinafter
referred to as "THPR") and CHILDREN'S MEDICAL CENTER OF DALLAS (hereinafter
referred to as "Company");
W I T N E S S E T H:
WHEREAS, Company is an eligible Covered Entity as defined herein, is
licensed to provide health care services under the laws of the State of Texas
and is engaged in the business of providing certain clotting factors,
therapies and services, commonly referred to as hemophilia therapy, to
hemophilia Patients of the Company, as defined herein (hereinafter referred
to as the "Hemophilia Therapy Business"); and
WHEREAS, Company has access to Public Health Service pricing,
and
WHEREAS, the Company desires to obtain from THPR certain services
necessary or desirable in the conduct of the Company's Hemophilia Therapy
Business, including but not limited to,
1
<PAGE>
dispensing of hemophilia factor, billing and collection services, direct
patient consultations and patient monitoring, all upon the terms and subject
to the conditions hereinafter set forth;
WHEREAS, THPR has the capacity to dispense hemophilia factor to
Patients of the Company to provide homecare services and to provide
additional administrative assistance including, but not limited to, billing
and collection services.
NOW, THEREFORE, for and in consideration of the mutual promises
contained herein and for other good and valuable consideration, the receipt
and adequacy of which is hereby acknowledged, the parties hereto agree as
follows:
I. Definitions. Defined terms used throughout this Agreement
shall have the meanings set out in Appendix A.
II. Services to be Provided by THPR. During the term of this
Agreement, THPR agrees to provide, or arrange for the provision of, the
following services to the Company:
A. Patient Instruction and Clinical Services. THPR agrees to
provide, or arrange for the provision of, clinical consultations
required by patients of the Company's Hemophilia Therapy Business,
said clinical consultations to include prescription consultation,
and the provision of
2
<PAGE>
routine and emergency consultation to such patients.
B. Billing, Reimbursement, Collection and Financial Counseling
Services.
1. Services. In the name of and as directed by Company,
THPR shall provide billing, reimbursement, collection and
financial counseling services on behalf of the Company in
conducting its Hemophilia Therapy Business, including the
preparation, transmitting and monitoring of all bills to
patients of the Company's Hemophilia Therapy Business, or
third party payors; preparing requests or otherwise
assisting patients of the Company's Hemophilia Therapy
Business in seeking reimbursement from all third party
payors for the services provided to such patients by the
Company; assisting in collecting amounts due the Company
from patients or third parties; and counseling patients
regarding the options available to them in paying for the
clotting factor and related drugs ("Hemophilia Therapy
Goods"), and related services, provided to them by the
Company. Company shall establish patient charges for such
Hemophilia Therapy Goods and related services. Company
shall provide THPR with a fee schedule reflecting such
charges.
2. Clearance of Patients. Company understands and
3
<PAGE>
agrees that it is Company's exclusive responsibility to
determine whether an individual is an Approved Patient of
the Company as defined herein. Prior to dispensing any
outpatient drugs, Company shall inform THPR whether the
individual is an Approved Patient of the Company. If an
individual is no longer an Approved Patient of the Company,
Company shall inform THPR, in writing, within 2 days of the
change in status. Company understands that THPR shall rely
upon Company's determination as to whether an individual is
an Approved Patient of the Company who is entitled to
receive outpatient drugs at Section 340B pricing under the
Public Health Services Act. The Company shall promptly
notify THPR as to any potential patient and shall obtain
such patient data as shall be specified by THPR. THPR
agrees to promptly investigate a potential patient's
insurance coverage and financial ability to pay and to
notify the Company as to whether said patient is approved
to purchase Hemophilia Therapy Goods, or related services,
from the Company. Company shall thereafter assist THPR in
obtaining all documentation necessary to file claims with
third party payors and forward same to THPR. THPR shall
have no liability for relying upon information provided by
third party payors concerning coverage in the event that
such information shall subsequently prove to be
4
<PAGE>
incorrect.
3. Authorization. THPR shall bill for all Hemophilia
Therapy Goods as billing agent for Company. All sales of
Hemophilia Therapy Goods dispensed by THPR for Company
shall be invoiced by THPR in Company's name. Following each
sale and delivery of Hemophilia Therapy Goods by Company,
THPR shall cause a bill to be prepared and transmitted to
the patient, third party payor or other applicable entity
which has been identified by Company. Company hereby
engages THPR to serve as "Billing Agent" to bill, collect
and disburse fees resulting from claims for Hemophilia
Therapy Goods sold by Company hereunder and THPR accepts
such engagement. For this purpose, Company hereby
constitutes and appoints THPR as Company's agent and
attorney in fact with full power of sub-stitution or
revocation, and hereby grants to THPR the rights and powers
enumerated herein, for the purpose of taking any action or
executing any instrument which THPR may deem necessary or
advisable to accomplish the purposes set forth herein.
To the extent allowed by third party payors,
Company hereby authorizes THPR to use a stamp
replicating Company's signature, or the signature of an
5
<PAGE>
individual authorized to act on behalf of Company, and
Company's provider number, for the limited purposes of
billing Company's patients, filing claims with the
applicable third party payors to effectuate payment for
Hemophilia Therapy Goods, and collecting and depositing
accounts receivable. Bills shall be on the appropriate
standardized form (i.e., 1500 claim form) or through
electronic filing if available.
4. Collection and Disbursement. THPR shall monitor and
coordinate collection of all monies due to the Company from
patients and/or third party payors for Hemophilia Therapy
Goods and related services. THPR shall deposit all Company
funds received by it into the bank account designated by
the Company. THPR shall not have authority to disburse
funds from said bank account. Collections of all accounts
are performed by THPR on behalf of the Company and THPR
shall not be responsible for any failure to collect such
accounts. THPR shall use reasonable efforts to collect said
accounts (but not greater than those efforts used in the
collection of its own accounts) but THPR shall not be
required to institute suit for collection or incur any
extraordinary expenses in attempting to collect these
receivables unless such action is approved by the Company
and the costs are paid by the Company.
6
<PAGE>
5. THPR shall comply with the rules, regulations and
requirements of third party payors in seeking reimbursement
of behalf of the Company.
C. Accounting and Financial Reporting. THPR shall provide the
following accounting and financial reporting services required by
the Company in the conduct of its Hemophilia Therapy Business: (a)
monthly and annual financial statements consisting of income
statements, balance sheets, and Status Report of Collections, (b)
schedules of accounts receivable (after applying cash received to
appropriate invoices, applying credits to patient accounts and
applying write-offs and adjustments approved by the Company).
D. Audits. THPR and Company understand that they are subject to
audits (by the United States Department of Health and Human Services
("Department") and participating manufacturers) of records that
directly pertain to Company's compliance with the drug resale or
transfer prohibition and the prohibition against duplicate Medicaid
rebates and 340B discounts. THPR will assure that all pertinent
reimbursement accounts and dispensing records, maintained by THPR,
will be separate from THPR's own operations and will be accessible
to Company, the Department, and the manufacturer in the case of a
manufacturer audit.
7
<PAGE>
However, THPR shall not make provision for any annual audit of the
Company, and such audit if desired by the Company shall be the
responsibility of the Company and shall be conducted by such
independent accounting firm as the Company may select. THPR agrees
to cooperate with the accounting firm in the conduct of the audit of
the Company or any other accounting procedure for which the
accounting firm may be engaged by the Company. Company shall make
available to THPR such information and documentation as may be
needed to enable THPR to prepare the financial reports specified
herein and meet the audit requirements established by the Office of
Drug Pricing.
E. Management Services and Marketing.
1. Responsibilities. Company hereby appoints THPR to manage
and supervise the operation of the Company's day-to-day
operations of its Hemophilia Therapy Business, and for this
purpose, Company delegates to THPR the authority to make,
subject to the terms hereof, such management decisions as
are necessary for the day-to-day operations of the
Company's Hemophilia Therapy Business. THPR accepts this
engagement and agrees to faithfully perform the duties and
responsibilities set out herein.
8
<PAGE>
2. Personnel. THPR shall designate certain THPR personnel
to perform the management functions set out hereunder and
such THPR personnel shall supervise the operation of the
Company's Hemophilia Therapy Business.
All such employees shall remain employees of THPR and THPR
shall retain control and supervision of such employees.
F. Pharmacy Services.
1. Agency. THPR will act as the pharmacy agent of
Company for dispensing Hemophilia Therapy Goods sold by
Company to Approved Patients of the Company pursuant to a
prescription.
2. Purchasing and Shipment. Company will purchase
Hemophilia Therapy Goods and assume responsibility for
establishing its price, pursuant to any applicable consumer
protection laws and pursuant to the terms of the Public
Health Services grant. Company agrees to adhere to all
rules and regulations established by the PHS in connection
with its grant of federal funds giving rise to Company's
Covered Entity status. Company will order outpatient drugs
for Approved Patients of the Company from a participating
drug
9
<PAGE>
manufacturer during the term of this Agreement and direct
that the Outpatient Drugs be billed in the name of Company
and delivered to THPR for storage and dispensing to
Approved Patients of the Company.
Notwithstanding any Contracted Pharmacy Service provided by
THPR, including inventory management, Company understands
and agrees that it is Company's responsibility to order a
sufficient quantity of Outpatient Drugs from a
participating manufacturer necessary to meet the
prescription needs of the Approved Patients of the Company.
Company understands and agrees that THPR is acting as a
warehouse for Outpatient Drugs ordered by Company until
such time as THPR receives a request from Company to
dispense outpatient drugs to an Approved Patient of the
Company and that Company retains legal title to such
outpatient drugs until the outpatient drugs have been
dispensed. Company will make timely payments for the
Hemophilia Therapy Goods delivered to THPR pursuant to
Company's order.
THPR will also monitor the receipt of Hemophilia
Therapy Goods, and report the quantities of Hemophilia
Therapy Goods received. THPR will compare all shipments
received to the orders and inform Company of
10
<PAGE>
any discrepancy within five (5) business days of receipt.
3. Services. THPR will provide all Contract Pharmacy
Services for the Company. THPR will secure the
prescription, dispense the Hemophilia Therapy Goods,
maintain a summary of receiving and dispensing records,
provide drug utilization review, provide formulary
maintenance, provide patient profiles, and provide follow
up documentation as required by the Office of Drug
Pricing's Contract Pharmacy Services Guidelines.
4. Patient Choice. Company will inform its patients of his
or her freedom to choose a pharmacy provider on a form
substantially similar to Exhibit A of this Agreement. If
the patient does not elect to use the contracted services
of THPR, the patient may obtain the prescription from the
Company and then obtain the Hemophilia Therapy Goods from
the pharmacy of his or her choice. When a patient obtains
Hemophilia Therapy Goods from a retail pharmacy other than
THPR, the manufacturer is not required to offer Hemophilia
Therapy Goods at 340B pricing.
5. Pharmacy Records. THPR shall maintain such
pharmacy records as required by state and local
governmental entities. Such records shall be the
11
<PAGE>
property of THPR; however, copies will be made available to
Company to the extent allowed by law.
G. Prohibition of Drug Diversion. THPR and Company agree that they
will not resell or transfer Hemophilia Therapy Goods purchased at
section 340B pricing to an individual who is not a Approved Patient
of Company. Company understands that it can be removed from the list
of covered entities because of its participation in drug diversion,
a 340B(a)(5) prohibition, and no longer be eligible for 340B
pricing. Company understands that Agreement is contingent upon it
maintaining its Covered Entity status and agrees to inform THPR (no
later than one (1) business day after becoming aware of same) of the
loss of its status as a Covered Entity.
1. Dispensing of Hemophilia Therapy Goods. THPR will
dispense Hemophilia Therapy Goods only in the
following circumstances:
a. Upon presentation of a prescription bearing
Company's name, the eligible patient's name, a
designation that the patient is an eligible
patient, and the signature of a legally qualified
health care provider affiliated with Company; or
b. Receipt of a prescription ordered by
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<PAGE>
telephone on behalf of an eligible patient by a
legally qualified health care provider affiliated
with Company who states that the prescription is
for an eligible patient. Company will furnish a
list to THPR of all such qualified health care
providers and will update the list of providers to
reflect any changes. If THPR is found to have
violated the drug diversion prohibition, THPR will
pay Company the amount of the discount in question
so that Company can reimburse the manufacturer.
2. Patient Eligibility.
a. Company and THPR will develop a system to
verify patient eligibility. As used in the context
of this Agreement, an individual is a "patient" of
Company (with the exception of State-operated or
funded AIDS drug purchasing assistance programs)
only if:
1. Company has established a
relationship with the individual, such
that Company maintains records of the
individual's health care; and
2. the individual receives health
care services from a health care
professional who is either employed by
Company or provides
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<PAGE>
health care under contractual or other
arrangements (e.g. referral for
consultation) such that responsibility
for the care provided remains with
Company; and
3. the individual receives a health care
service or range of services from Company
which is consistent with the service or
range of services for which grant funding
or Federally-qualified health center
look-alike status has been provided to
Company.
b. An individual is not a "patient" of Company for
purposes of 340B if the only health care service
received by the individual from Company is the
dispensing of a drug or drugs for subsequent
self-administration or administration in the home
setting.
c. An individual registered in a State-operated or
funded AIDS drug purchasing assistance program
receiving financial assistance under title XXVI of
the Public Health Services Act will be considered a
"patient" of Company for purposes of this
definition if so registered as eligible by the
State program.
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H. Tracking Service. THPR, with the assistance of Company, will
establish and maintain a tracking system suitable to prevent diversion
of section 340B discounted drugs to individuals who are not Approved
Patients of the Company. For example, such a tracking system might
include quarterly sample comparisons of eligible patient prescriptions
to the dispensing records and a six (6) month comparison of 340B drug
purchasing and dispensing records as is routinely done in other
reconciliation procedures. Customary business records may be used for
this purpose.
Company will verify, using THPR's (readily retrievable)
customary business records, that a tracking system exists which will
ensure that any Hemophilia Therapy Goods purchased under the Veteran's
Health Care Act of 1992 are not diverted to individuals who are not
Approved Patients of Company. Such records may include: prescription
files, velocity reports, and records of ordering and receipt. These
records will be maintained for the period of time required by State law
and regulations.
Prior to THPR providing pharmacy services pursuant to this
Agreement, Company will have the opportunity, upon reasonable notice
and during business hours, to examine the tracking system. Company will
establish a process for a periodic random (sample) comparison of its
prescribing
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records with THPR's dispensing records to detect potential
irregularities. THPR will permit Company or its duly authorized
representatives to have reasonable access to THPR's facilities and
records during the term of this Agreement in order to make periodic
checks regarding the efficacy of such tracking systems. THPR agrees to
make any and all adjustments to the tracking system which Company
advises are reasonably necessary to prevent diversion of the Hemophilia
Therapy Goods to individuals who are not Approved Patients of the
Company.
I. Handling and Labeling. THPR agrees that all Hemophilia Therapy Goods
provided by Company shall be labeled in accordance with applicable
Federal, State and local law and that said Hemophilia Therapy Goods
shall be stored, shipped and handled by THPR in accordance with
recognized professional standards for handling and storage of such
products and in accordance with Company's policies and procedures to
the extent that same do not contradict the requirements of Federal,
State and local law. As part of preparing Hemophilia Therapy Goods for
shipment, THPR shall pack the goods in cartons or other suitable
packaging with such cooling packs, insulation, or other packing
materials as necessary. All Hemophilia Therapy Goods shall be
delivered to Company's patients on behalf of Company, by Federal
Express or other acceptable courier, with the cost of said
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delivery to be paid by THPR.
J. Other Services. Regardless of the fact that THPR has agreed in this
Agreement to provide services other than Contract Pharmacy Services to
Company, access to 340B pricing will always be restricted to only
Approved Patients of the Company.
III. Compensation. In exchange for the services provided by THPR under
Sections IIA through IIJ of this Agreement, the Company agrees to pay THPR a
monthly fee as set out on Exhibit B. Said fee shall be determined on a monthly
basis by THPR and THPR shall at the end of each calendar month during the term
of this Agreement submit invoices to the Company setting out the amounts due
THPR for said month. The invoices for THPR's services shall be due and payable
* (*) days from the receipt of same by the Company, except that the first
months invoice will be due in * (*) days. Both parties acknowledge and
agree that the fees established for the Contracted Pharmacy Services have been
set in advance, are consistent with fair market value derived in an arms-length
transaction, and have not been determined in a manner that takes into account
the volume or value of any referrals or business otherwise generated between the
parties.
IV. Company Costs. It is agreed and understood that during the term of
this Agreement, THPR shall be responsible for the
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costs incurred in providing the services which it is obligated to provide
hereunder, and that THPR shall pay such costs out of its compensation received
under Section III. Notwithstanding the preceding provision, the Company shall be
responsible for the costs of salaries and fringe benefits for the Company's
employees, if any; cost of goods; outside auditor fees; interest expense; state
taxes; principal on Company loans; depreciation; and payroll taxes for its
employees, if any, and the cost of preparing the Company's Federal and State
Income tax returns. All such expenses shall be contracted for and in the name of
the Company, based solely upon the Company's credit, and THPR shall not be
liable to third party providers for the costs of such goods and services.
V. Subcontracting. The parties to this Agreement recognize that THPR
may provide to the Company certain of the goods and services which it is
obligated to provide under this Agreement by means of subcontracts with third
parties, provided however that the use of subcontractors shall not relieve THPR
of its obligations hereunder.
VI. Indemnity and Insurance. THPR and Company hereby agree that:
A. THPR shall assume responsibility for and shall indemnify and hold
Company harmless and defend Company from all losses (including claims
for injuries to employees of THPR or of Company), expenses, attorneys'
fees, damages,
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claims and judgments awarded to third parties resulting solely from
the negligent acts or omissions or wrongful acts of THPR, its agents
or employees;
B. Company shall assume responsibility for and shall indemnify and hold
THPR harmless and defend THPR from all losses (including claims for
injuries to employees of THPR or of Company), expenses, attorneys'
fees, damages, claims and judgments awarded to third parties resulting
solely from the negligent acts or omissions or wrongful acts of
Company, its agents or employees.
The indemnities and assumptions of liabilities and obligations herein
provided for shall continue in full force and effect notwithstanding the
termination of this Agreement whether by expiration of time, by operation of law
or otherwise. Each party hereto agrees to reimburse the other party for its
attorneys fees incurred in enforcing the provisions of this Agreement. This
obligation shall only apply when the party seeking to recover attorneys fees has
obtained a final non-appealable judgment from a court of competent jurisdiction
holding that a breach of this Agreement has occurred and awarding dollar damages
as a result of said breach. THPR, during the term of this Agreement, will
provide through a related entity at its sole cost and expense, general public
liability, products liability and property damage insurance in limits of not
less than $1,000,000.00 per incident;
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and $3,000,000.00 per annum aggregate. All policies insuring against liability
for bodily injury or death or damage to property shall include coverage for
malpractice if such exposure exists and shall insure THPR against the matters
covered by THPR's contractual duty to indemnify the Company set out hereinabove.
THPR will provide Company with certificates evidencing the insurance
required hereunder, and all such policies shall provide that notice of
cancellation or termination thereof shall be provided in advance to Company. In
the event of cancellation or termination of the coverage described herein, THPR
shall immediately obtain substitute or replacement coverage.
VII. Term. This Agreement shall be for a term beginning on the date of
the execution hereof and expiring on March 31, 1999, unless otherwise terminated
in accordance with this section. This Agreement shall automatically terminate
upon (a) THPR or the Company ceasing to exist or upon either party ceasing to be
licensed to sell Hemophilia Therapy Goods or upon either party permanently
ceasing to engage in the Hemophilia Therapy Business, (b) the mutual agreement
of the parties, (c) upon notice by either party hereto given twelve months prior
to the effective date of termination, (d) upon the insolvency or bankruptcy of
either party, the making by either party of an assignment for the benefit of
creditors, the consent by either party to the appointment of a trustee or
receiver, or the appointment without its consent, of a
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trustee or receiver, for it or for a substantial part of its property, or (e)
the institution by or against either party of bankruptcy, reorganization,
arrangement or insolvency proceedings.
In addition, if either party hereto shall breach the terms of this Agreement,
the nonbreaching party may give written notice of the breach to the breaching
party, and if said breach is not cured within fourteen (14) business days
following the giving of said notice, this Agreement shall at the option of the
nonbreaching party be terminated. Notwithstanding the above, this Agreement
shall be terminated immediately in the event that Company loses its status as a
Covered Entity as defined herein, or if any federal or state law is enacted
which could make this Agreement impractical including, but not limited to, a law
which limits the Company's ability to bill third party payors in excess of the
Company's acquisition cost plus a dispensing fee for outpatient drugs purchased
under Section 340B of the Public Health Services Act.
VIII. Applicable Patients. This Agreement only applies to individuals
who are patients of the Company and who are covered under the Chronically Ill
and Disabled Children's Services Program or Medicare or who pay with private
insurance or personal funds. This Agreement does not apply to patients who are
covered under the state Medicaid program.
IX. Force Majeure. The obligations of THPR hereunder shall
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be excused during any period of delay caused by matters such as strikes, acts of
God, shortages of raw materials or power, governmental action or compliance with
governmental requirements, whether voluntary or pursuant to order, or any other
matter which is beyond the reasonable efforts of THPR to control.
X. Independent Contractor. It is agreed that THPR shall be an
independent contractor, and not an employee of the Company.
THPR shall have sole control and discretion in the manner of performing its
obligations under this Agreement and the Company shall not be responsible for
the acts of THPR while THPR is performing services under this Agreement. THPR is
solely responsible for its employees' salaries, federal and state income
withholding, social security tax withholding, workmen's compensation benefits
and fringe benefits.
XI. Severability. If any one or more of the provisions of this
Agreement shall for any reason be held illegal or invalid, such illegality or
invalidity shall not affect any other provision of this Agreement and this
Agreement shall be enforced as if such illegal or invalid provision had not been
contained herein.
XII. Confidentiality. Each party has developed or may during the term
hereof develop certain products, methods of doing business, customer lists and
other proprietary information which that party deems to be confidential and a
trade secret. In the
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course of fulfilling their respective obligations hereunder, some of these
products, methods and other proprietary information will become known to the
other party hereto. Each party agrees that it will not duplicate, make use of,
or disclose, in any manner whatsoever, any information which is deemed to be
confidential by the other party, either during or after the term of this
Agreement, without the express prior written consent of the other party hereto.
In the event that any information deemed to be confidential by a party
is provided to the other party or its employees or agents in writing, the party
providing same shall mark the writing as "confidential." In the event that such
information is provided in non-written form such as orally, by audiotape,
videotape or computer software or disc, the party claiming such information to
be confidential shall furnish to the other party a written list containing a
brief description of such item and designating such item as confidential. Upon
termination of this Agreement, all copies of any information hereunder deemed,
or designated by a party as, confidential shall be returned to the party who
supplied the information, or who designated same as confidential.
Notwithstanding the preceding provision, the following types of information
provided by a party shall always be deemed confidential, whether or not so
designated: patient records; prescription files; lists of patient names,
addresses or phone
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<PAGE>
numbers; lists of referring practitioner names, addresses or phone numbers;
costs of goods and supplies; and financial records of the party.
It is recognized and acknowledged that damages caused by a party's
breach of this Section would be difficult to ascertain and would not adequately
compensate the other party for its losses. Therefore, both parties agree that
the party claiming a breach of this Section shall be entitled to injunctive
relief to restrain the commission or continued commission of said breach by
seeking such relief from a court of competent jurisdiction.
Notwithstanding the preceding paragraphs, this restriction shall not
apply (a) to any information which is not deemed confidential hereunder, or
which has not been designated as confidential in the manner specified herein,
(b) to any information which was known to a party prior to its disclosure by the
other party, (c) to any information which is or becomes public knowledge through
no failure of a party bound by this Agreement, (d) any information which is
independently developed by a party hereto, or (e) to the extent that such
restrictions conflict with the terms of the Company Agreement evidencing the
Company.
XIII. Service to Other Businesses. Company acknowledges that THPR
offers its services to other businesses and Company agrees that no provision
contained herein shall restrict or prohibit THPR from providing services to
others in addition to the Company as
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long as the performance of said services does not interfere with the performance
of THPR's obligations hereunder.
XIV. Records. To the extent required by Section 1861(b)(1)(1) of the
Social Security Act, THPR shall, upon proper request, allow the United States
Department of Health and Human Services, the Comptroller General of the United
States and their duly authorized representatives, access to this Agreement and
to all books, documents and records necessary to verify the nature and extent of
the costs of the services provided by THPR under this Agreement at any time
during the term of this Agreement and for an additional period of four (4) years
following the last date services are furnished under this Agreement. Upon
request, a copy of this Agreement will be provided to a participating
manufacturer which sells covered outpatient drugs to Company. All confidential
proprietary information shall be deleted from the Agreement prior to disclosure
to a manufacturer.
XV. Nonassignability. The rights, duties and responsibilities of the
parties hereto are personal in nature and, except as stated herein, shall not be
assigned without the express written consent of the other party.
XVI. Applicable Law. This Agreement shall be construed in accordance
with the laws of the State of Tennessee and the laws of the State of Tennessee
shall govern the rights, duties,
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liabilities and responsibilities created hereunder.
XVII. Compliance With The Law. THPR and Company will adhere to all
Federal, State, and local laws and requirements. Both THPR and the Company are
aware of the potential for civil or criminal penalties if Company and/or THPR
violate Federal or State law.
XVIII. Headings. All headings under herein are for each of reference
only and shall in no way be construed as interpreting, decreasing or enlarging
the provisions of this Agreement.
XIX. Effect. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto, their successors,
administrators, trustees and assigns.
XX. Modification. This Agreement may be changed or modified only with
the written consent of both parties.
XXI. Notices. All notices, demands, requests, consents, reports,
approvals, or other communications which may be or are required to be given,
served, or sent pursuant to this Agreement shall be in writing and shall be
mailed by first class, registered or certified mail, return receipt requested,
postage prepaid, or transmitted by telegram, addressed as set out below. Each
party may designate by notice in writing a new address to which any notice,
demand, request, consent, report, approval or
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<PAGE>
communication may thereafter be so given, served or sent. Each notice, demand,
request, consent, report, approval or communication which shall be mailed in the
manner described above, or which shall be delivered to a telegraph company,
shall be deemed sufficiently given, served, sent or received for all purposes at
such time as it is delivered to the addressee (with the return receipt or the
delivery receipt being deemed conclusive evidence of such delivery) or at such
time as delivery is refused by the addressee upon presentation.
XXII. Licenses. THPR is a licensed pharmacy under the laws
of Texas. THPR agrees to maintain all licenses and permits
necessary to fulfill its obligations hereunder.
XXIII. Waivers. A waiver of the breach of any provision of
this Agreement shall not be deemed a waiver of any other breach of
the same or any other provision hereof.
XXIV. Provider. Company represents that it does not have access to
appropriate "in-house" pharmacy services as that term is used by the PHS in its
Contracted Pharmacy Service guidelines. Company understands and agrees that THPR
is the provider of Contracted Pharmacy Services to Approved Patients of the
Covered Entity during the term of this Agreement.
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IN WITNESS WHEREOF, the undersigned parties hereto have caused this
Agreement to be executed as of the day and year first above written.
CHILDREN'S MEDICAL CENTER OF DALLAS
By:
--------------------------------
Title:
--------------------------------
Address:
--------------------------------
--------------------------------
TEXAS HEALTH PHARMACEUTICAL RESOURCES,
a general partnership
By: NOVA FACTOR, INC.,
a general partner
By:
--------------------------------
Title:
--------------------------------
Address:
--------------------------------
--------------------------------
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APPENDIX A
DEFINITIONS
The following terms as used in the Hemophilia Therapy Pharmacy
Management Agreement shall have the meanings set forth in this Appendix A:
1. "Covered Entity" shall mean a comprehensive hemophilia
diagnostic treatment center receiving a grant under Section
501(a)(2) of the Social Security Act.
2. "Contract Pharmacy Services" shall mean those dispensing, home
care and administrative support services described in the
guidelines issued by PHS.
3. "CIDC" shall mean the Texas Chronically Ill and
Disabled Children's Services Program.
4. "Patients of the Company" shall mean those persons who are
receiving care from the Company other than those persons who
receive healthcare benefits from the state Medicaid program.
5. "Approved Patient of the Company" shall mean Patient of the
Company for whom the Company has elected to access the Section
340B pricing under the Public Health Services Act.
<PAGE>
Exhibit 10.45
AMENDMENT NUMBER 1 TO
HEMOPHILIA THERAPY PHARMACY MANAGEMENT AGREEMENT
This Agreement is made and entered into for the purpose of amending
the Hemophilia Therapy Pharmacy Management Agreement (hereinafter referred to
as the "Agreement") which was entered into May 9, 1997, by and between Texas
Health Pharmaceutical Resources (hereinafter referred to as "THPR") and
Children's Medical Center of Dallas (hereinafter referred to as the
"Company").
WITNESSETH
WHEREAS, Company is an eligible Covered Entity and therefore is able
to access Public Health Service pricing for hemophilia products for certain
of its home hemophilia patients; and
WHEREAS, Company has contracted the performance of certain taska
necessary to provide services to its hemophilia patient population to THPR;
WHEREAS, these services have undergone dramatic changes in the level
of reimbursement from third party payors in the last six months;
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:
1. Effective January 1, 1998, ("Effective Date") Exhibit B of
Section III (Compensation) be and hereby is amended by deleting the first
paragraph thereof and substituting in the place thereof, the following
sentence:
<PAGE>
In exchange for services provided by THPR under
section 1A through IJ of this Agreement, the Company
agrees to pay THPR a monthly fee equal to * of
hemophilia patients including those who are covered
under the Chronically Ill Children's Program, Texas
Medicaid program, the Federal Medicare program and
those covered by private insurance.
2. All other provisions of the Agreement shall remain in full
force and effect except as modified by this Agreement.
IN WITNESS WHEREOF, the undersigned parties hereto have caused this
Agreement to be executed as of the 25 day of February, 1998, to be effective
as set out hereinabove.
CHILDREN'S MEDICAL CENTER OF DALLAS
By: /s/ George D Farr
-----------------------------------
Title: President and CEO
-----------------------------------
Address: 1935 Motor Street
-----------------------------------
Dallas, TX 75235
-----------------------------------
TEXAS HEALTH PHARMACEUTICAL RESOURCES,
a general partnership
By: NOVA FACTOR, INC.,
a general partner
By: /s/ David D Stevens
-----------------------------------
Title: CEO
-----------------------------------
Address: 1620 Century Center Parkway
-----------------------------------
Memphis, TN 38134
-----------------------------------
* Omitted information is the subject of a request for confidential treatment
pursuant to Rule 406 under the Securities Act of 1933 and has been filed
separately with the Securities Exchange Commission.
