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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 0-17254
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NOVEN PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 59-2767632
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11960 S.W. 144th Street, Miami, Florida 33186
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (305)253-5099
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered Pursuant to Section 12(g)
of the Act: Common Stock $.0001 Par Value
-----------------------------
(Title of class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this Chapter) is not contained herein,
and will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
YES [ ] NO [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on February 23, 1998 was $112,497,000, (See definition of
affiliate in Rule 405, 17 CFR 230.405).
As of February 23, 1998, 20,475,531 shares of common stock, $.0001 par
value, were outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Incorporated documents
(to the extent indicated herein) Part of Form 10-K
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Portions of the Definitive Proxy Part III
Statement for the 1998 Annual
Meeting of Shareholders Items 10-13
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NOVEN PHARMACEUTICALS, INC.
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
Item 1. Business...............................................................................1
Item 2. Properties ...........................................................................16
Item 3. Legal Proceedings ....................................................................17
Item 4. Submission of Matters to a Vote of Security Holders ..................................17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................................................17
Item 6. Selected Financial Data ..............................................................19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................................................20
Item 8. Financial Statements and Supplementary Data ..........................................24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...............................................25
PART III (omitted)
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................25
</TABLE>
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Item 1. BUSINESS
Noven Pharmaceuticals, Inc. ("Noven" or the "Company") is a leader in
developing and manufacturing transdermal and transoral drug delivery systems.
These systems utilize an adhesive patch containing medication which, when
adhered to the skin or the mucosa of the oral cavity, allows the delivery of
drugs across the tissues and into the bloodstream over an extended period of
time. Noven has developed and patented thin, solid state, multi-laminate
transdermal and transoral drug delivery systems that have a small surface area
and are adaptable to deliver numerous drug entities.
The Company's first product, an estrogen patch for the treatment of
menopausal symptoms, was launched in the U.S. in March, 1996 by Ciba-Geigy
Corporation ("Ciba- Geigy") under the brand name Vivelle(R). (In December, 1996,
Ciba-Geigy's parent corporation was merged with Sandoz S.A. to form Novartis
S.A. (hereinafter "Novartis"). All references to Novartis herein shall include
Ciba-Geigy Corporation.) Novartis also launched the same product in Canada in
June, 1996. Rhone-Poulenc Rorer, Inc. ("RPR") has received regulatory approval
to market this product for the treatment of menopausal symptoms in 38 countries
and has launched the product under the brand name MENOREST in 19 countries
including Germany, France and the United Kingdom. MENOREST has also been
approved in 36 countries as a preventative treatment for osteoporosis and
Novartis is conducting clinical trials in the U.S. for this indication.
The Company's other major development in hormonal replacement therapy
("HRT"), a combination patch of estrogen and progestogen, completed Phase III
clinical trials in the U.S. and Europe. In August, 1997 RPR submitted a New Drug
Application ("NDA") with the Food and Drug Administration ("FDA") for this
product and has made similar regulatory filings for this product in Europe. This
product has significant advantages over the estrogen replacement system,
inasmuch as the combination of the two hormones reduces the incidences of
endometrial hyperplasia and in low dosage forms, taken over several months, may
eliminate bleeding for menopausal women. It also eliminates the need to take two
single entity drugs (i.e. two pills). RPR has worldwide marketing rights to this
product. Finally, Noven has also developed a second generation estrogen
replacement system which has all of the beneficial features of its present patch
but is approximately one-third its size. Novartis has marketing rights to this
product in the U.S. and Canada and RPR has marketing rights in Japan. Noven has
retained marketing rights in all other territories.
DentiPatch(R), the Company's novel transoral anesthetic delivery
system, was approved for marketing by the FDA in May, 1996. A regional launch of
this product by the Company commenced in the second half of 1996. The Company
launched this product on a national basis in 1997. DentiPatch(R), which contains
lidocaine, the most widely used injectable dental anesthetic, is indicated for
the prevention of pain from oral injection and for soft tissue dental
procedures.
The Company is also developing a range of new products based on its
transdermal and transoral technologies.
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The Company conducts its operations in Miami-Dade County, Florida.
Commercial production was initiated in Noven's original facility in 1995. The
Company's new manufacturing facility, located on approximately 15 acres, was
approved by the FDA in April, 1996 and is also in commercial production. This
new facility expands Noven's manufacturing capability from approximately 100
million patches to approximately 500 million patches per year. The further
development of existing facilities at the new site will significantly increase
Noven's manufacturing capacity to accommodate additional products under
development.
STRATEGY
Noven's strategy for continued growth is based on certain key elements:
a leadership position with its broad range of HRT products; an extensive
pipeline of transdermal and transoral drug delivery products under various
stages of development in a number of the larger therapeutic classes; the
successful commercialization of the unique DentiPatch(R) system; and finally,
the possible acquisition of technologies and products which are compatible with
its long term plans to become a fully integrated pharmaceutical company capable
of developing, manufacturing and marketing alternative drug delivery systems.
TRANSDERMAL DRUG DELIVERY
Transdermal drug delivery systems utilize an adhesive patch containing
medication which is administered through the skin and into the bloodstream over
an extended period of time. Transdermal drug delivery systems may offer
significant advantages over conventional oral and parenteral dosage forms,
including non-invasive administration, controlled delivery over an extended
period of time, improved patient compliance and avoidance of the problems and
adverse side-effects associated with oral and parenteral drug delivery.
Transdermal drug delivery also provides benefits to the pharmaceutical industry
by reducing costs and expanding the market for certain drugs.
Noven's patented, proprietary transdermal drug delivery systems
incorporate a thin, solid state, multi-laminate construction with a drug-bearing
interpolymeric adhesive. This transdermal drug delivery system, or patch, has a
finite area with a specific geometric shape. On one side the patch has a release
liner that, when removed, exposes a pressure-sensitive adhesive. This adhesive
functions as both the drug platform and as the means of affixing the system to
the patient's skin. The outside of the patch is comprised of a specialized
backing material that is specifically tailored to the drug being delivered and
the length of time the system is intended to be worn. The patch can administer
different amounts of drug needed by the patient, and its shape is designed so
that it can be worn comfortably with excellent adhesion. The transdermal drug
delivery system is packaged in a pouch designed to maintain the system's
stability and protect against contamination.
Noven's transdermal drug delivery systems are capable of being modified
so that they may be used to deliver various drugs. The techniques utilized to
modify the system include those which improve the solubility and diffusability
of drugs within the transdermal system and those which improve a drug's
percutaneous absorption by changing the skin's ability to retain moisture; by
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softening the skin and improving the skin's permeability; by adding compounds
which may act as penetration assistants or hair follicle openers; or by changing
the skin's boundary layer.
TRANSORAL DRUG DELIVERY
Transoral drug delivery systems utilize a bio-adhesive patch containing
medication which, when moistened, adheres to the buccal mucosa. These systems
then administer the drug across the mucosa and into the bloodstream. The buccal
mucosa can be utilized as a drug delivery site due to its thin structure and
highly vascular property which may allow larger drug molecules, including
peptides, proteins and carbohydrates, to be delivered into the bloodstream in
therapeutic quantities. Transoral drug delivery systems also have many of the
advantages associated with transdermal drug delivery, including non-invasive
administration and controlled delivery.
There has been only limited medical use of the buccal mucosal route for
drug administration, the best known example being nitroglycerin tablets, which
dissolve under the tongue and provide a rapid therapeutic response in angina
sufferers. Although drugs may pass from these tablet systems across the mucosa
into the bloodstream, certain potential disadvantages exist, such as having to
position the tablet against the mucosal in a constant fashion; the drug
dissolving into the saliva; or the drug being swallowed. A transoral patch
presents the advantage of focused drug delivery at the site of the application
of the patch in the mouth; saliva will not dilute the delivery of the drug in
the same way that it will for a transoral tablet. Transoral patch technology
might also provide an alternative to the parenteral administration of large
molecules such as peptides, proteins and carbohydrates.
Noven's first transoral delivery system is a patented, proprietary
technology consisting of a thin, solid state multi-laminate construction with a
drug-bearing bio-adhesive. The DentiPatch(R) system is 2 cm2 in area with a
protective liner on one side that, when removed, exposes an adhesive that is
then applied to the mucosa. The drug, which is contained in the adhesive, is
absorbed through the buccal mucosa over time. The outside of the patch is
comprised of a specialized backing material that is specifically tailored to the
drug being delivered, which in the case of the DentiPatch(R), is lidocaine. The
patch is contained in a pouch to maintain its stability and to protect against
contamination.
This basic system can be modified to deliver various drugs. The
techniques used to modify the patch system might include those which improve the
solubility and diffusability of drugs within the adhesive matrix and the release
characteristics of the drug from the adhesive to the mucosa.
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PRODUCTS
The following table summarizes the status of products marketed,
approved and under development by the Company and is qualified by reference to
the more detailed descriptions elsewhere in this Annual Report.
<TABLE>
<CAPTION>
MARKETING
PRODUCT INDICATION STATUS MILESTONES
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<S> <C> <C> <C>
TRANSDERMAL/HRT
Estrogen/Vivelle(R) and Menopausal -FDA approved -Novartis--
MENOREST Symptoms U.S. and Canada
-RPR-- all other
territories
-Approved in 38
foreign countries
-Commercial sales in
the United States,
Canada and 19 foreign
countries
Osteoporosis -Approved in 36 -Novartis--U.S. and
foreign countries Canada
-RPR--all other
territories
Combination Menopausal -NDA filed in U.S. -RPR -- Worldwide
Estrogen/Progestogen Symptoms/ -Regulatory filings in
Osteoporosis Europe
Second Generation Menopausal -Clinical development -Novartis--U.S. and
Estrogen Symptoms/ Canada
Osteoporosis -RPR--Japan
TRANSORAL
Lidocaine/ Dental Pain Control -FDA approved -Marketing
DentiPatch(R) -Filed in UK Commenced
Ketoprofen Dental pain -Pre-clinical --
development
(Undisclosed Osteoporosis -Pre-clinical --
molecules) development
</TABLE>
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<TABLE>
<S> <C> <C> <C>
OTHER TRANSDERMALS
(Undisclosed Central nervous system -Phase I clinical trials --
Molecules)
Nitroglycerin Angina Pectoris -FDA tentative --
approval
Clonidine Hypertension -Phase I clinical trials --
Scopolamine Motion sickness -IND filed --
Ketoprofen Pain relief -Phase I clinical trials --
completed
Testosterone/Estrogen Menopause/libido -Pre-clinical --
</TABLE>
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HORMONAL PRODUCTS
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MARKET OVERVIEW
There are more than 40 million post-menopausal women in the U.S. and
this group is expected to grow by 50% within the next decade. There are an
additional 60 million post- menopausal women in Europe. The Company estimates
that worldwide sales of all hormone replacement products, including those
delivered transdermally, are approximately $2.5 billion to $3.0 billion
annually. With the aging of the population worldwide, conditions and diseases
such as menopause, osteoporosis and heart disease, which may benefit from
hormone replacement therapy, will become significantly more prevalent.
Menopause begins when the ovaries cease to produce estrogen, or when
both ovaries are removed surgically prior to natural menopause. The most common
acute physical symptoms of natural or surgical menopause are hot flashes and
night sweats, which occur in up to 85% of menopausal women. One of the most
common problems, after hot flashes, is vaginal dryness. This condition, which
affects an estimated 25% percent of women, usually begins within five years
after menopause. Moderate-to-severe menopausal symptoms can be treated by
replacing the estrogen the body can no longer produce. Estrogen replacement
therapy relieves hot flashes and night sweats effectively, and prevents drying
and shrinking of the reproductive system.
Another condition related to the inability to produce estrogen is
osteoporosis, a progressive deterioration of the skeletal system through the
loss of bone mass. The loss of estrogen in menopause causes increased skeletal
resorption and decreased bone formation. According to the National Osteoporosis
Foundation, osteoporosis currently affects 25 million people and contributes to
approximately 1.5 million fractures annually in the U.S. Morbidity and suffering
associated with these fractures are substantial. Estrogen replacement prevents
the loss of bone mass and reduces the incidence of vertebral and hip fractures
in older women. Numerous medical studies and the National Institutes of Health
recommend estrogen replacement therapy as the most effective method of
preventing osteoporosis in post-menopausal women.
Heart disease is the number one killer of post-menopausal women in the
U.S. There have been in excess of 30 studies that provide evidence that estrogen
replacement therapy reduces cardiovascular disease by approximately 50% in
post-menopausal women. Various reported studies have also shown that estrogen
replacement therapy may significantly reduce the risk of colon cancer and have
shown positive results in preventing or treating osteoarthritis, Alzheimer
disease, strokes, and tooth loss in menopausal women, as well as post-pardum
depression.
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VIVELLE(R) AND MENOREST TRANSDERMAL ESTROGEN DELIVERY SYSTEM
Noven's products are targeted to the expanding worldwide market for
hormonal replacement therapy. Noven's transdermal estrogen delivery system,
being sold by Novartis and RPR, is designed to offer a superior alternative to
all dosage forms, including other transdermal systems, either currently in the
market or under development.
Marketing rights to the Company's transdermal estrogen delivery system
have been licensed in the United States and Canada to Novartis and in all other
territories to RPR. This product has been approved for marketing by the FDA, as
well as by regulatory authorities in 38 foreign countries, for the treatment of
menopausal symptoms. This product has also been approved in 36 foreign countries
for the prevention of osteoporosis. RPR is selling Noven's transdermal estrogen
delivery system under the trade name MENOREST in nineteen foreign countries,
including France, Germany and the United Kingdom. In March and June, 1996,
Ciba-Geigy launched the sale of this product under the brand name Vivelle(R), as
an alternative to its older patch, Estraderm(R), in the United States and
Canada, respectively.
Vivelle(R) and MENOREST are available by prescription and utilize
Noven's advanced transdermal matrix technology. These products deliver 17-beta
estradiol, the primary estrogen produced by the ovaries, and are applied twice
weekly. Vivelle(R) and MENOREST are the only transdermal estrogen systems
currently in the market to offer up to four dosage strengths. This new treatment
option allows physicians to maintain patients on the lowest possible dose of
estrogen in a skin patch form. This product is also easy to wear due to its
small size and is less irritating than other similar systems.
TRANSDERMAL COMBINATION ESTROGEN / PROGESTOGEN DELIVERY SYSTEM
Noven has developed a combination patch containing 17-beta estradiol
and a progestogen, norethindrone acetate (NETA). This product is designed to
make hormone replacement therapy available to a greater portion of the female
population, including those who terminate HRT due to the adverse side effects of
continuous or irregular bleeding.
Estrogen produces the benefits of menopausal symptom control,
osteoporosis prevention and cardiovascular protection. For women who have an
intact uterus (non-hysterectomized), estrogen replacement therapy has been
associated with an increased risk of uterine cancer. To address this situation,
a combination therapy of estrogen and progestogen is prescribed. Using both
products together has been shown to reduce the risk of cancer and continue to
produce the benefits of estrogen replacement therapy. Further, continuous use of
both estrogen and low dose progestogen may be the way to eliminate the monthly
menstrual cycle or irregular bleeding. Combination therapy would provide
long-term HRT treatment opportunities to women experiencing natural menopause
and could, therefore, significantly expand the total HRT market.
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This product has been licensed to RPR on a worldwide basis. An NDA was
filed for this product in August, 1997 and European regulatory filings also
commenced in 1997. This product is also in clinical development in Japan.
SECOND GENERATION ESTROGEN
The Vivelle(R) and MENOREST products are state-of-the-art matrix patch
delivery systems for estrogen. However, Noven continues to make technological
breakthroughs and improvements in matrix patch technology which has resulted in
a second generation transdermal estrogen replacement system. This second
generation system, utilizing Dot Matrix(TM) technology, is only one-third the
area of a Vivelle(R) or MENOREST system at any given dosage level, yet provides
the same delivery of drug over a four day period. This new system is even more
flexible and comfortable to wear than the first generation product, with a lower
potential for skin irritation. In addition to these clear-cut benefits in
patient satisfaction and compliance, this product could provide Noven with
increased profitability through greater gross margins.
Novartis has the right to market the product in the U.S. and Canada and
RPR has marketing rights in Japan. Other markets are available for licensing and
negotiations between Noven and potential marketing partners are ongoing.
TRANSORAL PRODUCTS
- ------------------
DENTIPATCH(R) - TRANSORAL LIDOCAINE DELIVERY SYSTEM
Injections are rated as the most fear provoking stimulus in all of
dentistry; even the sight of the needle is a fear provoking event. These phobias
appear to be a major contributor to the avoidance of routine dental care.
According to the ADA national survey in 1990, there are approximately 1.2
billion dental procedures performed each year in the U.S. The Company believes
that approximately 450 million dental procedures performed each year involving
either injections or soft tissues might benefit from the DentiPatch(R) system.
DentiPatch(R) was approved for marketing by the FDA in May, 1996 and is
the world's first approved oral transmucosal patch. The product is the first
topical anesthetic clinically proven to prevent injection pain when large
needles are inserted to the bone. It is indicated for the prevention of pain
from oral injections and soft tissue dental procedures. The DentiPatch(R) system
is applied to the oral mucosa by the dentist or hygienist and quickly releases
lidocaine which passes into the soft tissues producing an anesthetic effect.
Benefits of this system include: (i) site-specific delivery providing numbing
only where needed; (ii) rapid onset in a few minutes with a duration that lasts
for 40 minutes throughout most procedures; (iii) increased patient comfort
resulting from minimizing fears and anxieties; (iv) enhanced practice building
as patients become more receptive to treatment recommendations; (v) no
cross-contamination as systems are individually and conveniently packaged; and
(vi) low risk of toxicity as drug levels in the bloodstream are only
approximately one-twentieth that of an injection.
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Noven launched the product nationwide in September, 1997.
Additional products using the DentiPatch technology are currently being
developed to enhance Noven's dental business.
TRANSORAL DRUG DELIVERY PRODUCTS FOR OTHER INDICATIONS
- ------------------------------------------------------
Large, complex, biotechnology molecules such as peptides, proteins and
carbohydrates typically require an injectable route of delivery. When taken
orally (as capsules or tablets) they are broken down and largely inactivated in
the stomach and intestines. The transdermal route is usually unsuitable too, as
the molecules are often too large to pass through the skin intact. However,
transoral drug delivery, utilizing Noven's transoral patch technology, might
offer a viable alternative in several cases.
The lining of the mouth is thin and highly vascular and drugs can pass
across into the bloodstream rapidly without being subjected to breakdown in the
gastrointestinal tract. Noven's oral patch technology provides the opportunity
of focusing and maintaining a high concentration of drug against the mucosa to
maximize absorption.
Noven is concentrating on new transoral delivery systems designed for
dental anesthesia that offer increased efficacy and are easier for one dental
professional to use in an expanded number of procedures.
OTHER TRANSDERMAL PRODUCTS
- --------------------------
Noven is in the process of combining its transdermal delivery system
with a number of different drugs for various indications. Transdermal delivery
systems have been and are being developed for nitroglycerin, scopolamine,
clonidine and undisclosed molecules for the treatment of central nervous system
disorders. Pre-clinical development is also ongoing involving testosterone and
testoterone/estradiol. The Company intends to continue to develop and
concentrate on the most attractive of these products. The ability of Noven to
develop and commercialize these products depends, to a great extent, upon the
financial resources it dedicates to them.
RESEARCH AND DEVELOPMENT
Noven's research and development philosophy is based on the
identification of drugs that can be delivered either transdermally or
transorally and which can be developed rapidly. The majority of drugs that Noven
will work on are already established agents being delivered to patients by means
other than transdermally or transorally. Noven seeks therapies that can be
improved by using Noven's innovative technologies, and which have substantial
market potential.
Research and development currently involves twenty-four persons,
consisting of formulation experts, analytical chemists and a medical and
regulatory group.
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MARKETING
Noven has licensed its transdermal estrogen delivery system worldwide
to two major pharmaceutical companies, Novartis and RPR, who are selling the
product in the U.S., Canada and other foreign countries. In addition, Noven has
licensed its transdermal combination estrogen/progestogen delivery system
worldwide to RPR and its second generation estrogen delivery system to Novartis
in the U.S. and Canada and to RPR in Japan.. In May, 1996, RPR formed a global
strategic alliance with Novo Nordisk A/S to offer a comprehensive range of
hormone replacement therapies.
Noven is also in the process of negotiating the terms of a joint
venture with Novartis in connection with the marketing of products for women's
health care, including Vivelle(R).
The Company has developed and implemented its own marketing and sales
plan with respect to the DentiPatch(R) system. This product became available
nationally in the second half of 1996. Initially, Noven marketed this product
regionally, and commenced a national roll-out in September, 1997. This national
roll-out of DentiPatch(R) combined the efforts of a nationwide distribution
network and a specific periodontal sales force. The marketing plan will focus
primarily on dental schools and periodontist in highly populated progressive
areas and will emphasize "pain control" and soft tissue procedures.
In order to fulfil its marketing plans for DentiPatch(R) and other
products, Noven has established an in-house sales and marketing department that
includes an Executive Director of Marketing & Sales, a national and six district
sales managers, a product manager, a professional programs team and marketing
and sales support staff.
As Noven develops new products it will evaluate whether to license
products to a larger company with an established sales force or to utilize its
own marketing and sales capabilities. The Company's evaluation will be conducted
on an individual product basis and will include consideration of the
characteristics of the particular market, the estimated costs associated with
sales, marketing and distribution. These combined costs and the Company's
financial position will be factored into the decision of whether to license or
directly market the product.
MANUFACTURING
Noven manufactures MENOREST for RPR and Vivelle(R) for Novartis
pursuant to certain supply agreements. These supply agreements govern the
specifications of the product, price, required quantities and other aspects of
the manufacturing relationship. The Novartis agreement is for a term of three
years terminating in March, 1999. The RPR agreement is for a term coextensive
with the term of the last to expire foreign patent related to the MENOREST
product, presently approximately eighteen years.
Noven has the capacity of designing, developing, building and
maintaining its production equipment, including fabrication of replacement parts
where appropriate. Additionally, Noven's
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engineering expertise provides valuable support to its research and development
groups by rapidly fabricating or modifying equipment essential in the product
development program.
Noven's original manufacturing facility in Miami-Dade County, which
consists of approximately 11,400 square feet, is fully equipped and has a
manufacturing capacity of approximately 100 million transdermal patches per
year. This facility has been approved to commercially manufacture Vivelle(R) and
MENOREST for Novartis and RPR, respectively and the DentiPatch(R) system and has
also received a pre-approval inspection for the manufacture of Noven's
transdermal nitroglycerin product.
Noven's newer 15 acre site in Miami-Dade County includes two adjacent
buildings, each with approximately 40,000 square feet. One of the buildings has
been fully renovated and equipped. This site was inspected and approved by the
FDA and the Medicines Control Agency of the United Kingdom and is currently
producing MENOREST and Vivelle(R) for commercial sale by its licensing partners.
The facility will have a capacity of approximately 400 million transdermal
patches per year. It is anticipated that full development of this site,
including possible new construction on the property, can accommodate Noven's
space requirements for its foreseeable long term growth.
COMPETITION
Noven's operations are conducted in highly competitive areas. All drug
delivery products being developed by the Company will face competition from both
conventional forms of drug delivery (i.e., oral and parenteral), and possibly
alternate forms of drug delivery, such as controlled release oral delivery,
liposomes and implants.
Competition in drug delivery systems is generally based on a company's
marketing strength, product performance characteristics (i.e., reliability,
safety, patient convenience) and product price. Acceptance by physicians and
other health care providers including managed care groups is also critical to
the success of a product. In a highly competitive marketplace and with evolving
technology, there can be no assurances that additional product introductions or
developments by others will not render the Company's products or technologies
noncompetitive or obsolete.
Noven's transdermal delivery technology will face competition from
other transdermal products. Other companies, including Alza Corporation, Cygnus
Therapeutic Systems, Elan Corporation, plc, TheraTech, Inc., Ethical Holdings,
plc, Cilag, a division of Johnson & Johnson, Schering-Plough and 3M Corp. are
developing and marketing competing transdermal drug delivery products. In
January 1995, 3M Pharmaceuticals/Drug Delivery Systems and Berlex Laboratories,
Inc. announced the receipt of FDA approval to market an estradiol transdermal
system in the United States in two dosage strengths. Berlex Laboratories, Inc.,
along with Forest Laboratories, Inc., have U.S. marketing rights for this
product. Commercial distribution of this transdermal delivery product commenced
in the second quarter of 1995. It is estimated that this product has captured
approximately thirty two percent (32%) of the transdermal estrogen market in the
U.S., with the balance substantially held by Estraderm(R), a Novartis product.
In addition, TheraTech, Inc.
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announced in December, 1996 that it had received FDA approval to market its
transdermal estrogen system under the name Alora(R). Proctor and Gamble
commenced marketing this product in the spring of 1997. Finally, Cygnus
Therapeutic Systems received FDA approval in 1997 of FemPatch(R) which is being
marketed by Parke Davis.
Noven has attempted to minimize certain competitive risks by its
technological innovativeness and by developing strategic alliances. For example,
Noven has aligned itself with two worldwide marketing organizations, Novartis
and RPR, for marketing its estrogen delivery system as Vivelle(R) in the U.S.
and Canada and as MENOREST elsewhere. Noven also believes that its estrogen
replacement system has certain competitive advantages due to the product's
characteristics, such as its small size, reduced irritation and availability in
several different dosages. Further, Noven believes that its technological
expertise in developing, manufacturing and commercializing other transdermal
hormonal systems, such as its combination estrogen/progestogen delivery system
and the second generation estrogen delivery system, will enable it to
successfully compete in the global marketplace.
Noven's transoral lidocaine delivery system, DentiPatch(R), faces
competition from all other forms of topical anesthetics, such as gels, rinses
and swabs. Septodont and Astra are the largest suppliers of these forms of
anesthetics and it is unclear at this time how these competitors will respond to
the introduction of the DentiPatch(R) system in the market. Noven's competitive
position will also be substantially affected by the product's degree of
acceptance in the dental community, and the time required to obtain such
acceptance.
PATENTS AND PROPRIETARY RIGHTS
Noven has obtained 14 U.S. patents relating to its transdermal and
transoral delivery systems and manufacturing processes and has over 100 pending
patent applications worldwide.
As a result of the changes in the United States patent law under the
General Agreement on Tariffs and Trade and the accompanying Agreement on
Trade-Related Aspects of Intellectual Property Law, which took effect in their
entirety on January 1, 1996, the terms of some existing Noven patents have been
extended beyond the term of seventeen years from the date of grant. Noven
patents filed after June 7, 1995 will have a term of twenty years computed from
the effective filing date.
The Company is unaware of the existence of any challenges to the
validity of its patents or of any third party claim of patent infringement with
respect to any of its products that could have a material adverse affect on
Noven's business or prospects.
Although there is a statutory presumption as to a patent's validity,
the issuance of a patent is not conclusive as to such validity, or as to the
enforceable scope of the claims of the patent. There is no assurance that
Noven's patents or any future patents will prevent other companies from
developing similar or functionally equivalent products. Furthermore, there is no
assurance that any
12
<PAGE> 17
of the Company's future processes or products will be patentable, that any
pending or additional patents will be issued in any or all appropriate
jurisdictions or that Noven's processes or products will not infringe upon the
patents of third parties.
None of the drug chemical entities Noven uses for the products now in
clinical trials are patented in the U.S. However, some of the drugs which may be
incorporated in the Company's future products may be patented by others.
Therefore, the ability of Noven to market such products prior to the expiration
of such patents may depend, among other things, upon its ability to enter into
arrangements with the holders of such patents.
Noven also attempts to protect its proprietary information under trade
secret laws. Generally, Noven's agreements with each employee, licensing
partner, consultant, university, pharmaceutical company and agent contain
provisions designed to protect the confidentiality of its proprietary
information. There can be no assurance that these agreements will not be
breached, that the Company will have adequate legal remedies as a result
thereof, or that the Company's trade secrets will not otherwise become known or
be independently developed by others.
GOVERNMENT REGULATION
UNITED STATES
- -------------
The marketing of pharmaceutical products requires the approval of the
FDA in the U.S. The FDA has established regulations, guidelines and safety
standards which apply to the pre-clinical evaluation, clinical testing,
manufacturing and marketing of pharmaceutical products. The process of obtaining
FDA approval for a new product may take several years and is likely to involve
the expenditure of substantial resources. The steps required before a product
can be produced and marketed for human use include: (i) pre-clinical studies;
(ii) submission to the FDA of an IND, which must become effective before human
clinical trials may commence in the U.S.; (iii) adequate and well controlled
human clinical trials; (iv) submission to the FDA of an NDA or, in some cases,
an ANDA; and (v) review and approval of the NDA or an ANDA by the FDA.
An ANDA may be submitted for products that have the same active
ingredient(s), indication, route of administration, dosage form and dosage
strength as an existing FDA-approved product, if clinical studies have
demonstrated bio-equivalence of the new product to the FDA-approved product.
Under FDA ANDA regulations, companies that seek to introduce a generic product
must also certify that the product does not infringe on the approved product's
patent. In such circumstances, legal action may ensue to determine the relative
rights of the parties and the application of the patent. This patent
certification process may involve Noven's transdermal nitroglycerin product, due
to the FDA's full approval of another transdermal nitroglycerin product in
April, 1995. Accordingly, it is possible that Noven's ability to obtain FDA
approval for the marketing of its transdermal nitroglycerin product could
involve litigation over the applicability of another patent to Noven's product.
This type of litigation is already ongoing with respect to two other parties'
efforts to
13
<PAGE> 18
commercialize a transdermal nitroglycerin delivery system. The Company is
assessing various alternatives in anticipation of these developments.
An NDA generally is required for products with new active ingredients,
new indications, new routes of administration, new dosage forms or new
strengths. An NDA requires that complete clinical studies of a product's safety
and efficacy be submitted to the FDA, the cost of which is substantial. These
costs can be reduced, however, for delivery systems which utilize approved
drugs. Limited testing may begin on humans after submission and approval of the
IND.
Pre-clinical studies are conducted to obtain preliminary information on
a product's efficacy and safety. The results of these studies are submitted to
the FDA as part of the IND and are reviewed by the FDA before human clinical
trials begin. Human clinical trials may commence 30 days after receipt of the
IND by the FDA, unless the FDA objects to the commencement of clinical trials.
Human clinical trials are typically conducted in three sequential
phases, but the phases may overlap. Phase I trials consist of testing the
product primarily for safety in a small number of patients at one or more doses.
In Phase II trials, the safety and efficacy of the product are evaluated in a
patient population somewhat larger than the Phase I trials. Phase III trials
typically involve additional testing for safety and clinical efficacy in an
expanded population at different test sites. A clinical plan, or protocol,
accompanied by the approval of the institution participating in the trials, must
be reviewed by the FDA prior to commencement of each phase of the clinical
trials. The FDA may order the temporary or permanent discontinuation of a
clinical trial at any time.
The results of product development and pre-clinical and clinical
studies are submitted to the FDA as an NDA or an ANDA for approval. If an
application is submitted, there can be no assurance that the FDA will review and
approve the NDA or an ANDA in a timely manner. The FDA may deny an NDA or an
ANDA if applicable regulatory criteria are not satisfied or it may require
additional clinical testing. Even if such data is submitted, the FDA may
ultimately deny approval of the product. Further, if there are any modifications
to the drug, including changes in indication, manufacturing process, labeling,
or a change in a manufacturing facility, an NDA or an ANDA supplement may be
required to be submitted to the FDA. Product approvals may be withdrawn after
the product reaches the market if compliance with regulatory standards is not
maintained or if problems occur regarding the safety or efficacy of the product.
The FDA may require testing and surveillance programs to monitor the effect of
products which have been commercialized, and has the power to prevent or limit
further marketing of these products based on the results of these post-marketing
programs.
The Prescription Drug User Fee Act of 1992 (the "Fee Act") authorized
the FDA to collect three types of fees from prescription drug manufacturers: (1)
one-time application fees imposed upon submission to the FDA for approval, (2)
establishment fees, and (3) product fees which are imposed annually. Payment of
application fees are required for each human drug application including an NDA,
certain ANDAs, certain initial certification/approval of certain antibiotic
drugs, and licensure
14
<PAGE> 19
under the Public Health Service Act of certain biological products. The Fee Act
also mandates a fee on supplements (containing clinical data) to human drug
applications. The amount of the fee is dependent on whether the application is
accompanied by clinical data on safety and efficacy (other than bioavailability
or bioequivalence studies). Through September 30, 1997 the application fee for
human drug applications was $205,000, while applications without clinical data
and supplements with clinical data were one-half of that fee. Payment of
establishment fees are required for prescription drug establishments at which at
least one prescription drug product is manufactured. Through September 30, 1997
the establishment fee was $115,700. Payment of product fees are required for
each strength and dosage form of an approved prescription drug product at
$13,200 through September 30, 1997. The corresponding fees for the period from
October 1, 1997 through December 31, 1997 were $256,846, $141,966 and $18,591.
The Fee Act provides for fee exceptions, waivers and reductions, including
payment deferrals under certain circumstances, primarily for the benefit of
small businesses. While Noven will endeavor to request such fee exceptions,
waivers and reductions where it believes it can demonstrate eligibility, there
is no assurance that the FDA will grant any such request.
Foreign and domestic manufacturing facilities are subject to periodic
inspections for compliance with the FDA's GMP regulations and each domestic drug
manufacturing facility must be registered with the FDA. In complying with
standards set forth in these regulations, manufacturers must continue to expend
time, money and effort in the area of quality assurance to insure full technical
compliance. Facilities handling controlled substances, such as Noven, must be
licensed by the U.S. Drug Enforcement Administration ("DEA"). The Company has
produced transdermal drug delivery products in accordance with the FDA's GMP
regulations for clinical trials, manufacturing process validation studies and
commercial sale.
Noven's activities are subject to various federal, state and local laws
and regulations regarding occupational safety, laboratory practices,
environmental protection and hazardous substance control, and may be subject to
other present and possible future local, state, federal and foreign regulations.
Under certain of these laws, Noven could be liable for substantial costs and
penalties in the event that waste is disposed of improperly. Noven utilizes one
waste management firm to provide for proper disposal of hazardous waste. The
Company believes that its hazardous waste disposal procedure prevents improper
disposal.
FOREIGN
- -------
Noven intends to have its products marketed in certain foreign
countries. Therefore, approval by these countries' regulatory authorities must
be obtained. The approval procedures vary from country to country, and the time
required for approval may be longer or shorter than that required for FDA
approval. Even after foreign approvals are obtained, further delays may be
encountered before products may be marketed. For example, many countries require
additional governmental approval for price reimbursement under national health
insurance systems. Such approval can be critical to any extensive marketing of
drug products in such countries. If practical and acceptable to the FDA, Noven
intends to design its FDA protocols for the clinical studies of its products to
15
<PAGE> 20
permit acceptance of the data by foreign regulatory authorities and to thereby
reduce the risk of duplication of clinical studies. However, additional studies
may be required to obtain foreign regulatory approval. Further, some foreign
regulatory agencies may require additional studies involving patients located in
their countries.
As a result of the enactment of the FDA Export Reform & Enhancement Act
of 1996, a drug not yet approved in the United States may be exported to certain
foreign markets as long as the product: (i) is approved by the importing nation;
(ii) is labeled for export and (iii) the product is not in conflict with the
laws of the country to which it is intended for export.
EMPLOYMENT
The Company employs approximately one hundred and forty-six people;
approximately fifty are engaged in manufacturing and process development,
twenty-two in research and development, thirty-four in medical affairs,
regulatory affairs, quality assurance and quality control and forty in marketing
and administration. Most of the Company's scientific and engineering employees
have had prior experience with pharmaceutical or medical product companies. No
employee is represented by a union and Noven has never experienced a work
stoppage. The Company believes its employee relations are excellent.
INSURANCE
The Company has procured general liability insurance, in an amount of
$8 million per incident and $9 million in the aggregate per annum. This policy
provides coverage on an occurrence basis and is subject to annual renewal. The
Company has also procured product liability insurance in an amount of $12
million per incident and $12 million in the aggregate per annum. This policy
provides coverage on a claims made basis and is subject to annual renewal. No
assurance can be given that the coverage limits will be adequate.
Item 2. PROPERTIES.
The Company owns a 20,000+/- square foot building which is used for
laboratory, engineering, office and administrative purposes on one and one-half
acres. The Company also owns 9.5 acres of vacant land that could accommodate
160,000+/- square feet of new buildings for a variety of manufacturing,
warehousing and developmental purposes. RPR owns, on a contiguous site, two
existing buildings of approximately 80,000+/- square feet on four acres. One of
the buildings is being used by Noven for manufacturing purposes. The other
building is presently utilized for engineering, offices and warehousing. In 1998
this building will also be utilized for manufacturing. The RPR facility is
leased to the Company for a term of 31.5 years on favorable terms. The lease
grants Noven a purchase option. RPR may terminate the lease prior to the
expiration of its term upon termination or expiration of the license agreement
entered into in June 1992. These facilities, it is believed, will provide
sufficient space for the Company's projected growth in the foreseeable future.
16
<PAGE> 21
The Company leases real property at 13300 Southwest 128th Street,
Miami, Florida, under standard leases that expire on December 31, 1998. The
aggregate annual rental under these leases is approximately $94,000 per year,
subject to certain adjustments. Substantially all of the approximately 11,400
square feet under lease at this location is used for manufacturing and
packaging.
The Company believes that its existing properties are well maintained
and in good operating condition and that there is no excessive obsolescence.
Item 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings, and to
the knowledge of the Company, none are threatened.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of stockholders during
the fourth quarter of the fiscal year ended December 31, 1997.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Market Information
The following table sets forth, for the periods indicated, the high and
low sale prices for the Common Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH PRICE LOW PRICE
---------- ---------
<S> <C> <C>
First Quarter, 1996 16 1/2 10 7/8
Second Quarter, 1996 18 3/4 10 1/2
Third Quarter, 1996 16 3/8 11 1/4
Fourth Quarter, 1996 16 1/4 8 3/4
First Quarter, 1997 16 1/8 7 7/8
Second Quarter, 1997 9 1/8 5 3/4
Third Quarter, 1997 11 1/8 7
Fourth Quarter, 1997 8 3/4 6
</TABLE>
(b) Holders.
17
<PAGE> 22
As of December 31, 1997, the number of stockholders of record was 653
and the approximate number of beneficial owners was 5,308.
(c) Dividends.
The Company has never paid a cash dividend on its Common Stock, intends
to retain all earnings for the operation and expansion of its business and does
not anticipate paying cash dividends in the future. Any future declaration and
payment of dividends will be determined by the Board of Directors in light of
conditions then existing, including the Company's earnings, financial condition,
capital requirements, as well as such other factors as the Company's Board of
Directors may consider.
18
<PAGE> 23
Item 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
The selected financial data presented below are derived from the
financial statements of the Company. The financial statements for the years
ended December 31, 1995, 1996 and 1997 and the reports thereon, are included
elsewhere in this Form 10-K. The selected financial data as of December 31, 1993
and 1994 are derived from financial statements previously filed with the
Commission and not included in this Form 10-K. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Financial
Statements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues:
Product Sales $ -- $ 295 $ 8,747 $ 19,652 $ 12,395
License revenue 3,125 4,155 1,703 815 1,872
Interest income 624 1,214 1,682 1,177 893
Other income 345 381 52 -- 31
-------- -------- -------- -------- --------
Total 4,094 6,045 12,184 21,644 15,191
Expenses:
Cost of products
sold -- 148 4,814 10,020 5,180
Research and
development 5,161 8,036 10,509 8,730 10,333
Marketing, general and
administrative 2,244 2,805 3,442 4,878 9,235
-------- -------- -------- -------- --------
Total 7,405 10,989 18,765 23,628 24,748
Net loss $ (3,311) $ (4,944) $ (6,581) $ (1,984) $ (9,557)
======== ======== ======== ======== ========
Net loss per share $ (.21) $ (.28) $ (.34) $ (.10) $ (.47)
======== ======== ======== ======== ========
Weighted average
shares of common
stock and common
stock equivalents 15,925 17,440 19,237 19,800 20,159
</TABLE>
19
<PAGE> 24
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 14,822 $ 35,047 $ 27,560 $ 24,859 $ 18,683
Total assets 29,860 54,365 48,646 44,229 38,224
Long-term obligations -- -- -- -- --
Accumulated deficit (10,539) (15,483) (22,063) (24,047) (33,604)
Total stockholders'
equity 20,693 44,546 38,030 36,077 29,881
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
From inception (1987) through 1994, the Company primarily engaged in
the research and development of transdermal drug delivery systems. During this
period, the Company's revenues were principally generated by license fees,
milestone payments pursuant to various license agreements and interest earned on
funds raised through the sale of its common stock. In 1995, due to the receipt
of regulatory approvals for its transdermal estrogen delivery system, a
significant portion of the Company' revenues were derived from the sale of this
product to the Company's two licensing partners. In 1996, revenues from the sale
of these products increased substantially as the Company's licensing partners
purchased product to supply their distribution channels and build their own
inventory positions.
Although in-market sales on Noven's estrogen delivery systems continue
to increase on a global basis, Noven experienced lower product sales during 1997
as compared to 1996 as the inventory levels of its licensee partners and the
distribution channels diminished without resupply. Noven anticipates
increased product sales in 1998; however losses are expected for 1998 due to the
fact that product sales still will not be sufficient to offset operating costs,
which will include significant research and development expenditures.
Noven expects that revenues from product sales to its licensing
partners will fluctuate from quarter to quarter and year to year depending upon
various factors not in Noven's control, including, but not limited to, the
inventory requirements of each licensing partner at different times throughout
the year, possible special selling efforts undertaken by each licensing partner
at different times
20
<PAGE> 25
during the year, and, in the case of RPR the introduction of MENOREST and the
estrogen/progestogen combination delivery system into new territories.
Noven also expects to generate revenues in 1998 from licensing
agreements with respect to products under development, although such revenues
will fluctuate depending upon such factors as the number of new agreements
finalized, timely achievements of milestones and strategic decisions affecting
self-funding of products.
Finally, during calendar year 1996, the Company commenced the marketing
of its DentiPatch(R) system on a regional basis. The product was launched
nationally in the second quarter of 1997, with the first national advertising
program commencing at the beginning of the fourth quarter of 1997. Revenues from
this product are anticipated to increase during 1998.
INFORMATION SYSTEMS AND THE YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. As the year 2000
approaches, such systems may be unable to accurately process certain date-based
information.
As is the case with most other companies using computers in their
operations, the Company is in the process of addressing the Year 2000 problem.
The Company is currently engaged in a comprehensive review of all of its
computer systems and obtaining assurances from key third parties that they are
Year 2000 compliant.
The Company anticipates completing the Year 2000 project by the end of
1998. The total cost to the Company of these Year 2000 Compliance activities is
in the process of being determined.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
- ---------------------
Total revenues decreased approximately 30% from approximately
$21,644,000 in 1996 to approximately $15,191,000 in 1997. The decrease in
revenue was a result of the decrease in product sales of the Company's
transdermal estrogen delivery system to its two licensing partners.
License revenues increased approximately 130% from approximately
$815,000 in 1996 to approximately $1,872,000 in 1997 as a result of milestone
payments received in connection with the submission by RPR of a New Drug
Application for the combination patch of estrogen and progestogen in the United
States and similar filings in Europe. Interest income decreased approximately
24% from approximately $1,178,000 in 1996 to approximately $893,000 in 1997 due
to lower average investment balances.
Cost of product sold decreased approximately 48% from approximately
$10,021,000 in 1996 to approximately $5,180,000 in 1997. The gross margin
percentage was approximately 58% in 1997 and approximately 49% in 1996. The
gross margins vary depending on the amount of product sold to each licensing
partner and manufacturing efficiencies, including those relating to production
volumes and in 1997 were favorably impacted by the sale of the DentiPatch(R)
product.
Research and development expenses increased approximately 18% from
approximately $8,730,000 in 1996 to approximately $10,333,000 in 1997. The
increase in research and development expenses was attributable to new product
development, and manufacturing process development activity. New product
development included work related to transoral delivery systems in the areas of
dental therapeutics and larger molecular entities and transdermal delivery
systems for hormone deficiency, nonsteroidal anti-inflammatory agents, central
nervous system and cardiovascular drugs. Marketing, general and administrative
expenses increased approximately 89% from approximately $4,878,000 in 1996 to
approximately $9,235,000 in 1997. The increase in marketing, general and
administrative expenses was primarily due to initial marketing expense to
21
<PAGE> 26
support the launch of the DentiPatch(R) system and increases in staffing and
associated office expenses.
1996 COMPARED TO 1995
- ---------------------
Total revenues increased approximately 78% from approximately
$12,184,000 in 1995 to approximately $21,644,000 in 1996. The increase in
revenues from $8,748,000 in 1995 to $19,652,000 in 1996 was primarily a result
of the increase in product sales of the Company's transdermal estrogen delivery
system to its two licensing partners. Royalties from transdermal estrogen
delivery systems are included in product sales.
License revenues decreased approximately 52% from approximately
$1,703,000 in 1995 to approximately $815,000 in 1996. Interest income decreased
approximately 30% from approximately $1,682,000 in 1995 to approximately
$1,178,000 in 1996 due to lower average security balances.
Cost of product sold increased approximately 108% from approximately
$4,814,000 in 1995 to approximately $10,021,000 in 1996. The gross margin
percentage was approximately 49% in 1996 and approximately 45% in 1995. The
gross margins vary depending on the amount of product sold to each licensing
partner and manufacturing efficiencies, including those relating to production
volumes.
Research and development expenses decreased approximately 17% from
approximately $10,509,000 in 1995 to approximately $8,730,000 in 1996. The
decrease in research and development expenses was attributable to less process
development activity and a reduced amount of costs associated with the
validation of manufacturing equipment and facilities. In 1996 research and
development expenses for new product development continued at the same rate as
in 1995. New product development included work related to the transoral dental
anesthetic system (DentiPatch(R)), an estrogen/progestogen combination delivery
system, a second generation estrogen delivery system, a transdermal system
delivering a nonsteroidal anti-inflammatory drug, an albuterol delivery system
and a nicotine delivery system. Marketing, general and administrative expenses
increased approximately 42% from approximately $3,442,000 in 1995 to
approximately $4,878,000 in 1996. The increase in marketing, general and
administrative expenses was primarily due to initial marketing expense to
support the launch of the DentiPatch(R) system and increases in staffing and
associated office expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through public
offerings of common stock, including the exercise of warrants issued in
connection with the first such offering, private placements of its equity
securities, license and contract revenues, and interest income. However, since
the launch of its first commercial product in 1995, the Company's operations
have been principally financed increasingly by revenues from the sale of its
transdermal estrogen delivery system to its licensing partners. The Company has
neither utilized debt nor has it engaged in
22
<PAGE> 27
significant commercial lease transactions to finance its operations. As of
December 31, 1997 and 1996, the Company had approximately $17,148,000 and
$19,149,000 respectively, in cash and securities held to maturity.
Net cash used in operating activities for the year ended December 31,
1997 was approximately $4,241,000 compared to approximately $3,353,000 for the
year ended December 31, 1996. Cash used in 1997 funded the net operating loss
along with decreases in accounts payable and accrued liabilities partially
offset by decreases in accounts receivables and inventories and an increase in
customer advances. Cash used in 1996 was primarily due to decreases in accounts
payable, along with the net operating loss and increases in accounts receivable,
partially offset by a decrease in inventories.
During the year ended December 31, 1997, the Company's investing
activities provided approximately $6,691,000, compared to approximately
$7,352,000 used in the prior year. Net cash provided during 1997 by investing
activities was primarily from the sale of securities held to maturity offset by
investments in property and equipment, and patents. Net cash used during 1996 in
investing activities was primarily for the purchase of securities held to
maturity and additionally for commercial manufacturing equipment, improvements
at the new manufacturing site and investments in patents. As of December 31,
1997 the Company had no significant commitments for capital expenditures.
During the year ended December 31, 1997, the Company's financing
activities provided approximately $3,361,000 , compared to approximately $31,000
provided in the prior year. In 1997, net cash provided by financing activities
was primarily from RPR's purchase of 500,000 shares of common stock for
$4,000,000, offset by the Company's purchase of 97,100 shares of Treasury Stock
for $663,235. The balance of the cash provided by financing activities in 1997
and 1996 was due to the exercise of options pursuant to the employee stock
option plan.
The Company expects to incur additional operating losses in 1998. Noven
is presently negotiating the terms of a joint venture with Novartis in
connection with women's health care products, including Vivelle(R). In the event
this joint venture is consummated, Noven will be required to make a substantial
capital contribution. These factors will adversely affect Noven's short-term
liquidity. Under these circumstances therefore, it is highly likely that Noven
will need to raise additional funds. Further, in the event the joint venture is
not consummated, additional funds may still be required in the future for
Noven's operations and in particular, product development.
FORWARD LOOKING STATEMENTS
From time to time, Noven may publish forward looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, usage and development
activities and some other matters. The words "may", "will", "expect",
"anticipate", "continue", "estimate", "project", "intend" and similar
expressions are intended to identify such forward looking statements. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward looking statements. In order to comply with the terms of the safe
23
<PAGE> 28
harbor, Noven notes that a variety of factors could cause its actual results and
experience to differ materially from anticipated results and other expectations
expressed by Noven's forward looking statements. The risks and uncertainties
that may effect the operations, performance, development and results of Noven's
business, include the following:
1. Dependence upon RPR and Novartis, its two licensing partners, with
respect to (i) the commercialization and marketing of certain transdermal
hormonal products and (ii) obtaining regulatory approval of certain other
transdermal hormonal products. Noven's revenues in any period can be materially
affected by the sales and marketing performance of either or both of its
licensing partners.
2. Uncertainties regarding (i) the market share for Noven's transdermal
hormonal products which can be captured by Noven's licensing partners, and (ii)
the market for the DentiPatch(R) product and Noven's ability to successfully
establish and effectuate a marketing program.
3. Competition from other entities engaged in transdermal and/or
transoral research, development, manufacturing and marketing, as well as other
entities engaged in alternative drug delivery technologies.
4. Difficulties associated with (i) identifying appropriate licensing
partners capable of meeting the financial requirements of research and
development and/or marketing new products, and (ii) consummating satisfactory
licensing agreements.
5. The time required to obtain regulatory approval of products and its
associated expenses.
6. Unanticipated difficulties associated with the manufacturing process
of MENOREST and Vivelle(R) for its licensing partners as well as its
DentiPatch(R) product, that could result in delays in delivery and shortages of
product.
7. The possible exposure to product liability suits in excess of
insurance policy limits or excluded from insurance coverage.
Readers are cautioned not to place undue reliance on forward looking
statements when made, which speak only as of the date made. Noven undertakes no
obligation to publicly release the results of any revision of these forward
looking statements to reflect events or circumstances after the date they are
made or to reflect the occurrence of unanticipated events. Also, unless
expressly stated, Noven does not adopt projections, forecasts or other forward
looking statements which may be disseminated from time to time by analysts and
other third parties.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
24
<PAGE> 29
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT AUDITORS'
Deloitte & Touche LLP F-1
FINANCIAL STATEMENTS
Balance Sheets as of December 31, 1997 and 1996 F-2
Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 F-3
Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-4
Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F-5
Notes to Financial Statements F-6
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
--------
Omitted pursuant to General Instruction G(3) to Form 10-K
PART IV
-------
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements included in Part II of this Report.
2. Exhibits
25
<PAGE> 30
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3.1 --Certificate of Incorporation of the Registrant dated April 10, 1987
and January 28, 1987, incorporated by reference to Exhibit 3(a) of
Registration Statement on Form S-18 (Commission File No. 33-20331-A).
3.2 --Amendments to Certificate of Incorporation of the Registrant dated
April 10, 1987 and January 28, 1988, incorporated by reference to
Exhibit 3(b) of Registration Statement on Form S-18 (Commission File
No. 33-20331-A).
3.3 --Amendment to Certificate of Incorporation of the Registrant dated
June 21, 1991, incorporated by reference to Exhibit 3.3 of Registration
Statement on Form S-2 (Commission File No. 33-45784).
3.4 --Amendment to Certificate of Incorporation of the Registrant dated
August 17, 1992, incorporated by reference to Exhibit 3.4 of Form 10-K
filed with the Securities and Exchange Commission on March 31, 1994.
3.5 --By-laws of the Registrant, as amended and restated as of April 28,
1992, incorporated by reference to Exhibit 3.5 of Form 10-K filed with
the Securities and Exchange Commission on March 31, 1994.
3.6 --Amendment to Certificate of Incorporation of the Registrant dated
August 2, 1994 incorporated by reference to Exhibit 3.6 of Form 10-K
filed with the Securities and Exchange Commission on March 31, 1995.
10.2 --Agreement between the Registrant and Rorer Group, Inc. (now known as
Rhone- Poulenc Rorer, Inc.) dated April 27, 1989 (with certain
provisions omitted pursuant to Rule 24b-2), as amended on June 22, 1990
(with certain provisions omitted pursuant to Rule 24b-2), incorporated
by reference to Exhibit 10-2 of Form 10-K filed with the Securities and
Exchange Commission on March 31, 1996.
10.3 --Amended and Restated Stock Option Plan of the Registrant,
incorporated by reference to Exhibit 10.10 of Form 10-K for the year
ended December 31, 1990 filed with the Securities and Exchange
Commission on March 28, 1991, as further amended on June 23, 1992 and
incorporated by reference to the 1992 Proxy Statement filed with the
Securities and Exchange Commission on April 30, 1992.
10.7 --Parkside Plaza Office Lease between Mark Rubino and the Registrant
dated November 28, 1990, incorporated by reference to Exhibit 10-7 of
Form 10-K filed with the Securities and Exchange Commission on March
31, 1996.
26
<PAGE> 31
10.8 --Parkside Plaza Office Lease between Bud Eiskant and the Registrant
dated June 1, 1990, incorporated by reference to Exhibit 10-8 of Form
10-K filed with the Securities and Exchange Commission on March 31,
1996.
10.9 --License Agreement between the Registrant and Ciba-Geigy Corporation
dated November 15, 1991 (with certain provisions omitted pursuant to
Rule 406) incorporated by reference to Exhibit 10.9 of Amendment No. 1
to Registration Statement on Form S-2 (Commission File No. 33-45784).
10.12 --Warrant and Warrant Agreement between the Registrant and Ciba-Geigy
Corporation dated November 15, 1991, incorporated by reference to
Exhibit 10.12 of Registration Statement on Form S-2 (Commission File
No. 33-45784).
10.13 --License Agreement and Supply Agreement between the Registrant and
Rhone- Poulenc Rorer Pharmaceuticals Inc. dated June 26, 1992 (with
certain provisions omitted pursuant to Rule 24b-2), incorporated by
reference to Exhibit 10.13 of Form 10-K for the year ended December 31,
1992, filed with the Securities and Exchange Commission on March 31,
1993.
10.14 --Warrant and Warrant Agreement between the Registrant and
Rhone-Poulenc Rorer Pharmaceuticals Inc. dated June 26, 1992,
incorporated by reference to Exhibit 10.14 of Form 10-K for the year
ended December 31, 1992, filed with the Securities and Exchange
Commission on March 31, 1993.
10.15 --Parkside Plaza Office Lease between Scott E. Stuckey and Annamarie
Stuckey and Registrant dated July 27, 1992, incorporated by reference
to Exhibit 10.15 of Form 10-K for the year ended December 31, 1992,
filed with the Securities and Exchange Commission on March 31, 1993.
10.16 --Parkside Plaza Office Lease between Lawrence T. Deddy, Trustee and
the Registrant dated July 29, 1992, incorporated by reference to
Exhibit 10.16 of Form 10-K for the year ended December 31, 1992, filed
with the Securities and Exchange Commission on March 31, 1993.
10.17 --Agreement between the Registrant and Turnpike-McNeil Development
Limited dated January 29, 1993 (re: real property), incorporated by
reference to Exhibit 10.17 of Form 10-K for the year ended December 31,
1992, filed with the Securities and Exchange Commission on March 31,
1993.
10.18 --Agreement between the Registrant and Turnpike-McNeil Development
Limited dated January 29, 1993 (re: real property and building),
incorporated by reference to Exhibit 10.18 of Form 10-K for the year
ended December 31, 1992, filed with the Securities and Exchange
Commission on March 31, 1993.
27
<PAGE> 32
10.19 --Warrant issued to Ciba-Geigy Corporation dated April 1, 1993,
incorporated by reference to Exhibit 10.19 of Form 10-K for the year
ended December 31, 1993, filed with the Securities and Exchange
Commission on March 31, 1994.
10.20 --Industrial Lease between Rhone-Poulenc Rorer Pharmaceuticals Inc. and
the Registrant dated March 23, 1993 and effective February 16, 1993
(with certain provisions omitted pursuant to Rule 24b-2), incorporated
by reference to Exhibit 10.20 of Form 10-K for the year ended December
31, 1993, filed with the Securities and Exchange Commission on March
31, 1994.
10.21 --Second Amendment dated May 13, 1993 to Agreement between the
Registrant and Rhone-Poulenc Rorer, Inc. (successor to Rorer Group,
Inc.) dated April 27, 1989 (with certain provisions omitted pursuant to
Rule 24b-2), incorporated by reference to Exhibit 10.21 of Form 10-K
for the year ended December 31, 1993, filed with the Securities and
Exchange Commission on March 31, 1994.
10.22 --Amendment dated May 17, 1994 to Warrant dated November 15, 1991
issued to Ciba-Geigy Corporation incorporated by reference to Exhibit
10.22 of Form 10-K for the year ended December 31, 1994, filed with the
Securities and Exchange Commission on March 31, 1995.
10.23 --Warrant issued to Ciba-Geigy Corporation dated November 28, 1994
incorporated by reference to Exhibit 10.23 of Form 10-K for the year
ended December 31, 1994, filed with the Securities and Exchange
Commission on March 31, 1995.
10.24 --Employment Agreement between Steven Sablotsky and the Registrant
dated December 31, 1994 incorporated by reference to Exhibit 10.24 of
Form 10-K for the year ended December 31, 1994, filed with the
Securities and Exchange Commission on March 31, 1995.
10.25 --Employment Agreement between Mitchell Goldberg and the Registrant
dated December 31, 1994 incorporated by reference to Exhibit 10.25 of
Form 10-K for the year ended December 31, 1994, filed with the
Securities and Exchange Commission on March 31, 1995.
10.27 --Supply Agreement between the Registrant and Ciba-Geigy Corporation,
Pharmaceuticals Division, dated August 31, 1995 and effective March,
1996 (certain portions have been omitted pursuant to Rule 24b-2),
incorporated by reference to Exhibit 10.27 of Form 10-Q(A-2) for the
quarter ended March 31, 1996, filed with the Securities and Exchange
Commission on November 1, 1996.
28
<PAGE> 33
10.28 --Amendment dated May 6, 1996 to the June 9, 1994 Amendment to the
License Agreement and the Supply Agreement, each dated April 27, 1989
by and between the Company and Rhone-Poulenc Rorer, Inc. (with certain
portions omitted pursuant to Rule 24b- 2), incorporated by reference to
Exhibit 10.28 of Form 10-Q(A) for the quarter ended June 30, 1996,
filed with the Securities and Exchange Commission on December 3, 1996.
10.29 --Amendment to Certificate of Incorporation
10.30 --1997 Stock Option Plan incorporated by reference to the 1997 Proxy
Statement filed with the Securities and Exchange Commission on April
29, 1997.
10.31 --Employment Agreement between Robert C. Strauss and the Registrant
dated December 12, 1997.
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K-None.
29
<PAGE> 34
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 27, 1998 NOVEN PHARMACEUTICALS, INC.
By: /s/ Steven Sablotsky
---------------------------------
STEVEN SABLOTSKY, Chairman
of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
By: /s/ Steven Sablotsky Chairman of the Board March 27, 1998
---------------------------------
Steven Sablotsky
By: /s/ Robert C. Strauss Principal Executive March 27, 1998
--------------------------------- Officer and Director
Robert C. Strauss
(President)
By: /s/ William A. Pecora Principal Financial March 27, 1998
--------------------------------- and Accounting Officer
William A. Pecora
(Chief Financial Officer)
By: /s/ Mitchell Goldberg Director March 27, 1998
---------------------------------
Mitchell Goldberg
(Executive Vice President)
By: /s/ Sheldon H. Becher Director March 27, 1998
---------------------------------
Sheldon H. Becher
</TABLE>
30
<PAGE> 35
<TABLE>
<S> <C> <C>
By: /s/ Sidney Braginsky Director March 27, 1998
---------------------------------
Sidney Braginsky
By: /s/ Lawrence J. DuBow Director March 27, 1998
---------------------------------
Lawrence J. DuBow
By: /s/ Fred G. Weiss Director March 27, 1998
---------------------------------
Fred G. Weiss
</TABLE>
31
<PAGE> 36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Noven Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Noven Pharmaceuticals, Inc.
("Noven") as of December 31, 1997 and 1996, and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of Noven'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, such financial statements present fairly, in all material
respects, the financial position of Noven Pharmaceuticals, Inc. as of December
31, 1997 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Miami, Florida
February 13, 1998
F-1
<PAGE> 37
NOVEN PHARMACEUTICALS, INC.
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,267,555 $ 5,456,826
Securities held to maturity 5,880,430 13,692,010
Accounts receivable 1,224,492 3,366,489
Inventories 2,500,660 4,151,020
Prepaid and other current assets 282,472 248,357
------------ ------------
Total current assets 21,155,609 26,914,702
------------ ------------
PROPERTY AND EQUIPMENT:
Property and equipment, at cost 18,990,113 18,574,875
Less: accumulated depreciation and amortization 3,746,846 2,873,401
------------ ------------
Total net property and equipment 15,243,267 15,701,474
------------ ------------
OTHER ASSETS:
Patent development costs, net 1,761,122 1,547,434
Deposits and other assets 64,053 65,128
------------ ------------
Total other assets 1,825,175 1,612,562
------------ ------------
TOTAL $ 38,224,051 $ 44,228,738
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,163,177 $ 1,525,192
Accrued liabilities 309,798 530,588
------------ ------------
Total current liabilities 2,472,975 2,055,780
------------ ------------
DEFERRED LICENSE REVENUE 5,870,019 6,096,015
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock - authorized 100,000 shares of
$.01 par value; no shares issued or outstanding
Common stock - authorized 40,000,000 shares
of $.0001 par value; issued and
outstanding 20,475,531 in 1997 and
19,831,538 shares in 1996 2,048 1,983
Additional paid-in capital 64,146,061 60,122,275
Accumulated deficit (33,603,817) (24,047,315)
Treasury stock, 97,100 shares in 1997, at cost (663,235) --
------------ ------------
Total stockholders' equity 29,881,057 36,076,943
------------ ------------
TOTAL $ 38,224,051 $ 44,228,738
============ ============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 38
NOVEN PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Product sales $ 12,394,610 $ 19,651,872 $ 8,747,965
License revenue 1,871,996 814,996 1,702,780
Interest income 893,091 1,177,535 1,681,688
Other income 31,325 -- 51,908
------------ ------------ ------------
Total revenues 15,191,022 21,644,403 12,184,341
------------ ------------ ------------
EXPENSES:
Cost of products sold 5,179,598 10,020,614 4,814,349
Research and development 10,333,152 8,729,709 10,508,763
Marketing, general and administrative 9,234,774 4,878,033 3,441,837
------------ ------------ ------------
Total expenses 24,747,524 23,628,356 18,764,949
------------ ------------ ------------
NET LOSS $ (9,556,502) $ (1,983,953) $ (6,580,608)
============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.47) $ (0.10) $ (0.34)
============ ============ ============
WEIGHTED AVERAGE SHARES
OF COMMON STOCK AND
COMMON STOCK EQUIVALENTS 20,158,946 19,800,115 19,236,807
============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 39
NOVEN PHARMACEUTICALS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON SHARES ADDITIONAL
-------------------- PAID-IN ACCUMULATED TREASURY
STOCK AMOUNT CAPITAL DEFICIT STOCK TOTAL
----- ------ ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 18,839,068 $ 1,884 $ 60,026,833 $(15,482,754) $ $ 44,545,963
------------ ------------ ------------ ------------ ------------ ------------
Issuance of 726, 347 shares of
stock pursuant to stock
option plan, net 726,347 72 64,929 65,001
Issuance of 108,729 shares of stock
for acquisition of property
and equipment 108,729 11 (11)
Net loss (6,580,608) (6,580,608)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1995 19,674,144 1,967 60,091,751 (22,063,362) 38,030,356
------------ ------------ ------------ ------------ ------------ ------------
Issuance of 157,394 shares of
stock pursuant to stock
option plan, net 157,394 16 30,524 30,540
Net loss (1,983,953) (1,983,953)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 19,831,538 1,983 60,122,275 (24,047,315) 36,076,943
------------ ------------ ------------ ------------ ------------ ------------
Issuance of 140,793 shares of
stock pursuant to stock
option plan, net 140,793 14 3,837 3,851
Issuance of 3,200 shares of stock
pursuant to a license agreement 3,200 1 19,999 20,000
Issuance of 500,000 shares of
stock pursuant to partial
exercise of warrant 500,000 50 3,999,950 4,000,000
Purchase of 97,100 shares of
treasury stock, at cost (663,235) (663,235)
Net loss (9,556,502) (9,556,502)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 20,475,531 $ 2,048 $ 64,146,061 $(33,603,817) $ (663,235) $ 29,881,057
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 40
NOVEN PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,556,502) $ (1,983,953) $ (6,580,608)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 1,008,466 899,263 1,327,254
Amortization of patent costs 358,093 120,480 120,480
Decrease (increase) in inventories 1,650,360 918,926 (3,805,393)
(Increase) decrease in prepaid and other
current assets (34,115) 9,863 566,939
Decrease (increase) in accounts receivable 2,141,997 (853,928) (1,800,106)
Increasee (decrease) in accounts payable 637,985 (2,286,862) 602,859
(Decrease) increase in accrued liabilities (220,790) 49,457 419,669
Decrease in deferred license revenue (225,996) (225,996) (225,996)
------------- ------------ --------------
Cash flows used in operating activities (4,240,502) (3,352,750) (9,374,902)
------------- ---------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Maturity (purchase) of securities 7,811,580 (5,835,613) 15,563,673
Purchase of fixed assets, net (550,260) (1,067,940) (1,837,528)
Payments for patent development costs (571,780) (449,284) (359,909)
Refund of deposits and other assets 1,075 610 4,656
------------ ------------ -------------
Cash flows provided by (used in) investing activities 6,690,615 (7,352,227) 13,370,892
------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock 4,023,851 30,540 65,001
Treasury stock purchased (663,235) -- -
-------------- ------------ ------------
Cash flows provided by financing activities 3,360,616 30,540 65,001
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 5,810,729 (10,674,437) 4,060,991
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 5,456,826 16,131,263 12,070,272
------------- ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 11,267,555 $ 5,456,826 $ 16,131,263
============= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 41
NOVEN PHARMACEUTICALS, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Noven Pharmaceuticals, Inc. ("Noven" or the "Company") was incorporated in
Delaware in January 1987 and is an industry leader in the development and
commercialization of advanced drug delivery systems. The following is a
summary of significant accounting policies of Noven:
PERVASIVENESS OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash and
securities with a remaining maturity of three months or less.
SECURITIES HELD TO MATURITY - Securities held to maturity consist mainly of
U.S. Government obligations with maturities no longer than one year. The
securities are recorded at cost which approximates fair value.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or net realizable value. The following are the major
classes of inventories as of December 31:
1997 1996
---- ----
Finished goods $ 857,219 $1,399,858
Work in process 335,650 491,014
Raw materials 1,307,791 2,260,148
---------------- ---------------
Total $2,500,660 $4,151,020
================ ===============
Inventories at December 31, 1997 and 1996 related primarily to the
Company's transdermal and transoral delivery systems. To date, Noven has
not experienced and does not anticipate any difficulty acquiring materials
necessary to manufacture its transdermal and transoral delivery systems.
PROPERTY AND EQUIPMENT - Property and equipment is recorded at cost.
Depreciation is provided over the estimated useful lives of the assets
ranging up to 31 years. Leasehold improvements are amortized over the life
of the lease or the service life of the improvements, whichever is shorter.
The straight-line method of depreciation is principally followed for
financial purposes. Fully depreciated assets are removed from the cost and
accumulated depreciation accounts.
PATENT DEVELOPMENT COSTS - Costs, principally legal fees, related to the
development of patents are capitalized and amortized over the lesser of
their estimated economic useful lives or their remaining legal lives.
F-6
<PAGE> 42
INCOME TAXES - Noven accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". SFAS 109 provides that income taxes are
accounted for using an asset and liability method which requires the
recognition of deferred tax assets and liabilities for expected future tax
consequences of temporary differences between tax bases and financial
reporting bases of assets and liabilities. As there is no assurance that
the Company will generate sufficient earnings to utilize its available tax
assets for carryforwards, a valuation allowance has been established to
offset the existing net deferred tax asset. At December 31, 1997 and 1996,
Noven had net operating loss carryforwards of approximately $35,000,000 and
$26,000,000. Additionally, at December 31, 1997 and 1996, Noven had
research and development credit carryforwards of approximately $3,600,000
and $2,600,000 respectively. Carryforwards expire through 2011.
REVENUE RECOGNITION - Revenue from product sales is recognized at the time
of shipment. Royalty revenue is recognized when earned and is included in
product sales. License revenue is recognized into income when earned under
the terms of the agreements. Substantially all of Noven's product sales
were to its principal licensees (see Note 3).
COSTS OF PRODUCT SOLD - Direct and indirect costs associated with
manufacturing the transdermal and transoral delivery systems are included
in costs of products sold.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs consist of
self-funded research and development costs and the costs associated with
work performed under license agreements. Research and development costs
included direct and allocated expenses and are expensed as incurred.
Research and development costs under license agreements partially funded by
the licensees are recorded as license revenue or other income.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash
equivalents, securities held to maturity, accounts receivable, accounts
payable and accrued expenses approximate fair value due to the relatively
short maturity of the respective instruments.
LOSS PER SHARE - The Company adopted SFAS No. 128, EARNINGS PER SHARE, for
fiscal year 1997. Under SFAS No. 128, basic loss per share excludes
dilution and is computed based on the average number of common shares
outstanding and diluted loss per share is computed based on the average
number of common and common equivalent shares outstanding. Under the
treasury stock method, common equivalent shares are not included in the per
share calculations where the effect of their inclusion would be
antidilutive. SFAS No. 128 required the restatement of all prior-period
earnings per share data. For purposes of the financial statements herein
net loss per share represents basic and diluted loss per share.
NEW ACCOUNTING STANDARDS - In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS No. 131"). SFAS No. 131,
establishes standards for the way that public companies report selected
information about operating segments in annual financial statements and
requires that those companies report selected information about segments in
interim financial reports issued to shareholders. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. SFAS No. 131 is effective for financial
statements for the periods beginning after December 15, 1997. The Company
has not determined the effects, if any, SFAS No. 131 will have on the
disclosures in its financial statements.
F-7
<PAGE> 43
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land $ 2,540,035 $ 2,540,035
Building 2,365,190 2,267,859
Leased property and leasehold improvements 8,118,046 8,053,841
Manufacturing and testing equipment 5,368,329 5,172,775
Furniture 598,513 540,365
--------------- ---------------
18,990,113 18,574,875
Less accumulated depreciation and amortization 3,746,846 2,873,401
--------------- ---------------
$ 15,243,267 $ 15,701,474
=============== ===============
</TABLE>
On February 16, 1993, Noven purchased a 20,000 square foot building and 9.5
acres of vacant land in two separate transactions. The $1.1 million
purchase price for the building was paid with $300,000 in cash and 87,317
shares of restricted Noven common stock. The purchase price for the vacant
land, $2,204,000 was paid with 168,399 shares of Noven restricted stock.
The price protection provisions of the contract resulted in the issuance of
108,729 additional shares of Noven restricted stock on March 15, 1995. The
land and building are adjacent to two 40,000 square foot manufacturing
facilities which are leased by Noven from a licensee as part of a license
agreement.
3. LICENSE AGREEMENTS
The Company has license agreements with two licensees Rhone Poulenc Rorer
("RPR") and Novartis Pharmaceuticals Corporation ("Novartis"). Noven's
license agreement with Novartis grants Novartis the right to market Noven's
transdermal estrogen delivery system in the United States and Canada. The
agreement provides for receipt of royalty payments based on the sales by
Novartis. In addition, warrants to purchase 1,091,151 shares of common
stock were granted under this agreement. The exercise prices of these
warrants range from $2.5875 to $15.34. The term of the warrants range from
five to seven years. In addition, during a 30-day period subsequent to any
public or private sale of common stock by Noven, Novartis has the right to
purchase shares of common stock at the same price and in an amount
sufficient to maintain the same ownership percentage (inclusive of shares
subject to warrants held by the licensee) in outstanding common stock held
prior to any such sales. As of December 31, 1997, none of these warrants
have been exercised.
Noven has entered into two license agreements with RPR. These agreements
grant RPR the right to market Noven's transdermal estrogen delivery system
worldwide except for the United States and Canada and Noven's transdermal
combination estrogen/progestogen delivery system worldwide. The agreements
will provide Noven certain milestone payments. In addition, Noven granted a
warrant to RPR for the right to purchase up to 1,000,000 shares of Noven
common stock at a price of $8 per share for a period of five years. On July
1, 1997, 500,000 shares were purchased for $4,000,000 pursuant to this
warrant, and the warrant for the remaining 500,000 shares was extended for
a period of eighteen months. Further, RPR funded the construction of a
manufacturing facility for the production of transdermal drug
F-8
<PAGE> 44
delivery systems. The facility is leased by Noven at a substantially below
market rate. Noven retains the right to purchase the facility at any time
in the future at RPR's book value. Noven has recorded both the facility and
deferred revenue at amounts equal to the funds advanced by RPR which are
depreciated/amortized to depreciation expense and license revenue over the
life of the underlying lease (see Note 2).
4. COMMITMENTS AND CONTINGENCIES
Noven has employment agreements that provide for base salaries subject to
cost of living increases each year and other increases and bonuses as
determined by the Compensation Committee. These agreements provide for
annual commitments of approximately $1,130,000 in the aggregate and with
terms up to 2002.
5. STOCK OPTIONS
Noven established a stock option plan (the "Plan") effective January 1,
1997 that provides for the granting of up to 4,000,000 incentive and
non-qualified stock options to selected individuals or entities. The terms
and conditions of these options (including price, exercise date and number
of shares) are determined by the Stock Option Committee, which administers
the Plan. The per share exercise price of (i) non-qualified stock options
granted to directors and all other persons, can not be less than the fair
market value of the common stock on the date of grant and (ii) incentive
stock options granted to employees and employees owning in excess of 10% of
the issued and outstanding common stock, can not be less than the fair
market value and 110% of the fair market value, respectively, of the common
stock on the date of grant.
Each option issued under the Plan is exercisable after the period(s)
specified in the option agreement, but no option can be exercised after 10
years from the date of grant (or five years from the date of grant in the
case of a grantee holding more than 10% of the issued and outstanding
common stock). Generally the options vest over a period of five years,
beginning one year after date of grant.
The predecessor stock option plan, which had 3,750,000 options authorized
to be granted, had provisions similar to those of the Plan. This plan
terminated on December 31, 1996, and no additional options may be granted
under this plan. At the end of December 31, 1997, there were approximately
983,000 stock options outstanding under this plan.
The Company applies Accounting Principles Board Opinion No. 25, ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES, and related interpretations in accounting
for its option plan. Accordingly, no compensation expense has been
recognized. Had compensation cost for the Company's plan been determined
based upon the fair value at the grant date consistent with the methodology
prescribed under Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK BASED COMPENSATION, the Company's net income and
earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net Loss:
As Reported $ (9,556,502) $ (1,983,953) $(6,580,608)
Pro forma (9,863,653) (2,698,116) (6,961,488)
Loss per Share:
As Reported $(0.47) $(0.10) $(0.34)
Pro forma (0.49) (0.14) (0.36)
</TABLE>
F-9
<PAGE> 45
The fair value of the options granted during 1997, 1996 and 1995, is
estimated as $2.91, $6.44 and $4.24, respectively, on the date of the grant
using the Black Scholes option-pricing model with the assumptions listed
below. The discount rate reflects the reduction in value due to transfer
restrictions on the stock.
1997 1996 1995
---- ---- ----
Volatility 65.3% 65.9% 62.4%
Risk free interest rate 5.83% 6.21% 6.09%
Expected life (years) 7 7 7
Discount rate 33.3% 33.3% 33.3%
Stock option transactions related to the plans are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Shares Price Shares Price Shares Price
- ------- ----------------------------- --------------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,565,005 $ 8.95 1,509,363 $ 6.79 2,042,149 $ 4.23
Granted 611,523 $ 6.62 362,675 $ 14.38 628,700 $ 9.08
Exercised (155,649) $ 2.64 (189,158) $ 2.17 (961,636) $ 2.13
Canceled (426,896) $ 2.45 (117,875) $ 8.86 (199,850) $ 10.31
----------- --------- ---------
Outstanding at
year end 1,593,983 $ 8.27 1,565,005 $ 8.95 1,509,363 $ 6.79
=========== ========= =========
Shares of common
stock reserved 4,983,483 1,565,005 1,746,432
Options exercisable
at year end 350,317 489,048 663,031
</TABLE>
The following tables summarize information concerning outstanding and
exercisable options at December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------- ---------------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Price at Year End Contractual Life Exercise Price at Year End Exercise Price
-------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
$0 - $4 280,835 4.38 $ 2.31 86,376 $ 2.98
$4 - $8 604,500 6.50 $ 6.53 68,750 $ 6.70
$8 - $12 352,773 3.18 $ 9.73 106,998 $ 10.09
$12 - $18 355,875 5.11 $ 14.49 88,193 $ 14.69
--------- -------
1,593,983 5.08 $ 8.27 350,317 $ 8.83
========= =======
</TABLE>
F-10
<PAGE> 46
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------- ---------------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Price at Year End Contractual Life Exercise Price at Year End Exercise Price
-------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C>
$0 - $4 413,834 2.17 $ 2.37 179,384 $ 2.44
$4 - $8 97,500 5.42 $ 7.63 6,750 $ 7.57
$8 - $12 614,546 4.07 $ 9.62 232,140 $ 9.59
$12 - $18 439,125 6.03 $ 14.49 70,774 $ 14.78
--------- -------
1,565,005 4.20 $ 8.95 489,048 $ 7.69
========= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
-------------------------------------------------------------- ---------------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Price at Year End Contractual Life Exercise Price at Year End Exercise Price
-------------------------------------------------------------- ---------------- ----------------------
<S> <C> <C> <C> <C> <C>
$0 - $4 602,667 2.21 $ 2.30 355,169 $ 2.31
$4 - $8 167,500 6.30 $ 7.68 -- --
$8 - $12 650,596 5.12 $ 9.61 255,231 $ 9.78
$12 - $18 88,600 3.03 $ 14.83 52,631 $ 14.78
--------- --------
1,509,363 3.97 $ 6.79 663,031 $ 6.17
========= ========
</TABLE>
6. 401(k) PLAN
On January 1, 1997, the Company adopted a 401(k) profit sharing plan (the
"401(k) Plan") covering substantially all employees who have completed
three months of service and have reached the age of twenty-one. This plan
allows eligible participants to defer from one to fifteen percent of their
current compensation and have these amounts contributed to the 401(k) Plan
on their behalf.
The Company determines, on a year to year basis, the amount, if any, that
it will provide as a matching contribution. For the year ended December 31,
1997, no matching contributions were made by the Company.
F-11
<PAGE> 1
Exhibit 10.29
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
NOVEN PHARMACEUTICALS, INC.
NOVEN PHARMACEUTICALS, INC., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That by unanimous consent of the Board of Directors of Noven
Pharmaceuticals, Inc. resolutions were duly adopted setting forth a proposed
amendment to the Certificate of Incorporation of said corporation, declaring
said amendment to be advisable and submitting it to the stockholders entitled
to vote thereto for adoption at a meeting of stockholders. The resolution
setting forth the proposed amendment is as follows:
RESOLVED, that the Certificate of Incorporation of this corporation be
amended by changing the Article thereof numbered "Fourth" so that, as amended,
said Article shall be and read as follows:
The total number of shares of capital stock which the corporation
shall have authority to issue is 40,100,000, of which 40,000,000 shall
be common stock of $.0001 par value per share and of which 100,000
shall be preferred stock of $.01 par value per share.
The Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is expressly authorized, in the
resolution or any resolutions providing for the issue of any wholly
unissued series of Preferred Stock, to fix, state and express the
powers, rights, designations, preferences, qualifications, limitations
and restrictions thereof, including, without limitation: the rate of
dividends upon which and the times at which dividends on shares of
such series shall be payable and the preferences, if any,
<PAGE> 2
which such dividends shall have relative to dividends on shares of any
other class or classes or any other series of stock of this
corporation, whether such dividends shall be cumulative or
non-cumulative, and if cumulative, the date or dates from which
dividends on shares of such series shall be cumulative; the voting
rights, if any, to be provided for shares of such series; the rights,
if any, which the holders of shares of such series shall have in the
event of any voluntary or involuntary liquidation, dissolution or
winding up of the corporation; the rights, if any, which the holders
of shares of such series shall have to convert such shares into or
exchange such shares for shares of Common Stock of this Company and
the terms and conditions, including price and rate of exchange of such
conversion or exchange; the redemption (including sinking fund
provisions), if any, of shares of such series; and such other powers,
rights, designations, preferences, qualifications, limitations and
restrictions as the Board of Directors may desire to so fix. The
Board of Directors is also expressly authorized to fix the number of
shares constituting such series and to increase or decrease the number
of shares of any series prior to the issue of shares of that series
and to decrease, but not increase, the number of shares of any series
subsequent to the issue of shares of that series, but not below, the
number of shares of such series then outstanding. In case the number
of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of
such series.
SECOND: That thereafter, pursuant to resolution of its Board of
Directors, the amendment was submitted to the stockholders entitled to vote
thereon for adoption at the annual meeting of stockholders with the required
notice in accordance with Section 242 of the General Corporation Law of the
State of Delaware and at which the necessary number of shares as required by
statute were voted in favor of the amendment.
<PAGE> 3
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, said Noven Pharmaceuticals, Inc. caused this
certificate to be signed by Steven Sablotsky, its President and Noreen
Sablotsky, its Secretary, this 9th day of June, 1997.
/s/ Steven Sablotsky
------------------------------------
STEVEN SABLOTSKY, President
/s/ Noreen Sablotsky
------------------------------------
NOREEN SABLOTSKY, Secretary
The foregoing instrument was acknowledged before me this 9th day of June,
1997 by STEVEN SABLOTSKY and NOREEN SABLOTSKY, President and Secretary,
respectively, of Noven Pharmaceuticals, Inc., a Delaware corporation, who are
personally known to me, and did not take an oath.
Monica A. Holliday /s/ Monica Holliday
- ----------------------------- ----------------------------------
Typed, Printed or Stamped Notary Public -- State of
Name of Notary Public Florida at large
My Commission expires: August 11, 2000
[seal]
<PAGE> 1
Exhibit 10.31
EMPLOYMENT AGREEMENT
---------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the
12th day of December, 1997 by and between NOVEN PHARMACEUTICALS, INC., a
Delaware corporation (hereinafter called the "Company"), and ROBERT C. STRAUSS
(hereinafter called the "Executive").
Recitals
--------
A. The Board of Directors of the Company (the "Board") recognizes and
desires to assure the Company of the Executive's continued employment in an
executive capacity and to compensate him therefor.
B. The Executive is willing to make his services available to the
Company on the terms and conditions hereinafter set forth.
Agreement
---------
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein, the parties agree as follows:
1. EMPLOYMENT.
1.1 EMPLOYMENT AND TERM. The Company hereby agrees to employ the
Executive and the Executive hereby agrees to serve the Company, on the terms
and conditions set forth herein, for the period commencing on the date hereof
and expiring on December 31, 2002 (the "Initial Term") unless sooner terminated
as hereinafter set forth; provided, however, that commencing on January 1,
2003 and each January 1, thereafter, the Initial Term of this Agreement shall
automatically be extended for one additional year unless at least ninety (90)
days prior to such January 1 date, the Company shall have delivered to the
Executive or the Executive shall have delivered to the Company written notice
that the term of the Executive's employment hereunder will not be extended.
1.2 DUTIES OF EXECUTIVE. The Executive shall serve as the President
and Chief Executive Officer of the Company and shall have powers and authority
superior to any other officer or employee of the Company or of any subsidiary of
the Company except the Chairman of the Board. Subject to the preceding
sentence, during the term of Employment, the Executive shall diligently perform
all services as may be reasonably assigned to him by the Board, and shall
exercise such power and authority as may from time to time be delegated to him
by the Board. The Executive shall be required to report solely to, and shall be
subject solely to the supervision and direction of the Board at duly called
meetings thereof, and no other person or group shall be given authority to
supervise or direct Executive in the performance of his duties. In addition,
the Executive shall regularly consult with and provide information to the
Chairman of the Board with respect to the Company's business and affairs. The
Executive shall devote substantially all his working time and attention to the
business and affairs of the Company (excluding any vacation and sick leave to
which the Executive is entitled), render such services to the best of his
ability, and use his reasonable best efforts to promote the interests of the
Company. It shall not be a violation of this Agreement for the Executive to (A)
serve on corporate, civic or charitable boards or committees (it being agreed
that in no event shall Executive serve on the board of directors of more than
four other corporations and the acceptance of any new directorship after the
date hereof shall be subject to the consent of the Board, which shall not be
unreasonably withheld), (B) deliver lectures, fulfill speaking engagements or
teach at educational institutions, and (C) manage personal investments,
<PAGE> 2
so long as such activities do not interfere with the performance of the
Executive's responsibilities as an employee of the Company in accordance with
this Agreement.
1.3 PLACE OF PERFORMANCE. In connection with his employment by the
Company, the Executive shall be based at the Company's principal executive
offices except for travel reasonably necessary in connection with the Company's
business. The Company shall not, without the written consent of the Executive,
relocate or transfer its principal executive offices outside Dade or Broward
County, Florida.
2. COMPENSATION.
2.1 BASE SALARY. Commencing on the effective date of this
Agreement, the Executive shall receive a base salary at the annual rate of not
less than $400,000 (the "Base Salary") during the term of this Agreement, with
such Base Salary payable in installments consistent with the Company's normal
payroll schedule, subject to applicable withholding and other taxes. On
January 1 of each calendar year (the "Salary Adjustment Date") commencing on
January 1, 1999, the Executive's then Base Salary shall be increased by an
amount equal to the previous year's Base Salary multiplied by the percentage
increase, if any, in the "Consumer Price Index: Dade County, All Items--Urban
Wage Earners and Clerical Workers", published by the Bureau of Labor Statistics
of the United States Department of Labor (the "CPI"), between the CPI as of
December 31 for the year then ended, and the CPI as of December 31 for the year
prior to the year then ended. In the event that there is a change in the basis
of calculating the CPI, or if a change is made in the terms or number of items
contained in the CPI, or if the CPI is discontinued, the Company shall, in good
faith, designate a substitute index or formula, and such substitute index or
formula shall have the same effect as if it had been originally designated
herein. The Base Salary shall also be reviewed, at least annually, for merit
increases (if any) and may, by action and in the discretion of the Board, be
increased at any time or from time to time. The Base Salary, if increased, shall
not thereafter be decreased for any reason.
2.2 INCENTIVE COMPENSATION. The Executive shall be entitled to
receive such bonus payments or incentive compensation as may be determined at
any time or from time to time by the Board (or any authorized committee hereof)
in its discretion. Such potential bonus payments and/or incentive compensation
shall be considered at least annually by the Board (it being agreed that such
consideration shall not create any implication that the Board shall award any
such bonus or incentive compensation).
2.3 STOCK OPTION.
(a) The Company hereby grants to the Executive a seven-year
incentive stock option (the "Option") to purchase 525,000 shares of the
Company's common stock, par value $.0001 per share ("Common Stock"), at a per
share exercise price $6 3/16. The Option shall be treated as an incentive
stock option within the meaning of Section 422 of the Internal Revenue Code to
the greatest extent permitted by law. The Option shall be evidenced by an
agreement in substantially the form attached hereto as EXHIBIT A.
(b) The Option shall be subject to the terms and conditions of
the Company's Stock Option Plan (the "Plan") and contain the following
provisions:
(i) The Option shall be immediately exercisable with
respect to 50,000 shares of Common Stock. The Option shall "vest" (i.e.,
become exercisable) with respect to the remaining 475,000 shares of Common
Stock in whole or in part and cumulatively according to the following schedule
(subject, however, to the accelerated vesting contemplated by the following
clause (ii) of this Section 2.3(b)):
2
<PAGE> 3
10% on or after December 12, 1998
20% on or after December 12, 1999
20% on or after December 12, 2000
25% on or after December 12, 2001
25% on or after December 12, 2002
(ii) Notwithstanding the preceding clause (i), the
Option shall become immediately exercisable as to 50% of the shares of Common
Stock not otherwise vested upon any termination of Executive's employment
pursuant to Section 4.4 hereof;
(iii) The Company shall take all action reasonably
requested by the Executive to permit any "cashless" exercise of the Option
that is permitted under the Plan;
(iv) If the Company's Stock Option Committee requests
within six months of the date hereof, paragraph 11 of the attached Option
agreement form shall be reinstated and be applicable. The Company's Chairman
shall use his best efforts to persuade such Committee to not reinstate such
provision. Executive shall not exercise the Option prior to the six month
anniversary of this Agreement unless his employment is terminated;
(v) The Company agrees that, no later than June 30,
1998, it will file a Registration Statement on Form S-8 or take any other
action necessary to ensure that the issuance of Common Stock pursuant to the
Option is registered under the Securities Act of 1933, as amended; and
(vi) The provisions of the Plan shall not be
adversely modified as to the Option granted to Executive pursuant to this
Agreement without the Executive's prior written consent.
3. EXPENSE REIMBURSEMENT AND OTHER BENEFITS.
3.1 EXPENSE REIMBURSEMENT. During the term of Executive's employment
hereunder, the Company, upon the submission of reasonable supporting
documentation by the Executive, shall reimburse the Executive for all
reasonable expenses actually paid or incurred by the Executive in the course
of and pursuant to the business of the Company, including expenses for travel
and entertainment.
3.2 INCENTIVE, SAVINGS AND RETIREMENT PLANS. During the Initial
Term, the Executive shall be entitled to participate in all incentive, savings
and retirement plans, practices, policies and programs applicable to other key
executives of the Company and its subsidiaries, in each case comparable to
those currently in effect or as subsequently amended. Such plans, practices,
policies and programs, in the aggregate, shall provide the Executive with
compensation, benefits and reward opportunities at least as favorable as the
most favorable of such compensation, benefits and reward opportunities provided
at any time hereafter with respect to other key executives.
3.3 WELFARE BENEFIT PLANS. During the Initial Term, the Executive
and/or the Executive's family (which shall be deemed to include Ms. Camilla M.
Cochrane assuming Ms. Cochrane is insurable and the cost of such coverage is
comparable to the cost of coverage had Ms. Cochrane been Executive's spouse), as
the case may be, shall be eligible for participation in and shall receive all
benefits under welfare benefit plans, practices, policies and programs provided
by the Company and its subsidiaries (including, without limitation, medical,
prescription, dental, disability, salary continuance, employee life, group
life, accidental death and travel accident insurance plans and programs), at
least as favorable as the most favorable of such plans, practices, policies
and programs in effect at any time hereafter with respect to other key
executives; provided, however, that Ms. Cochrane may be covered
3
<PAGE> 4
under alternative plans or policies so long as the coverage is comparable in
all material respects to the coverage provided to Executive.
3.4 WORKING FACILITIES. During the term of Executive's employment
hereunder, the Company shall furnish the Executive with an office, a secretary
and such other facilities and services suitable to his position and adequate
for the performance of his duties hereunder.
3.5 AUTOMOBILE ALLOWANCE. During the Initial Term, the Company shall
provide Executive with a non-accountable automobile allowance of Seven Hundred
Fifty Dollars ($750.00) per month, which amount is intended to compensate
Executive for wear and tear and, in addition, reimburse the Executive for
all costs of gasoline, oil, repairs, maintenance, insurance and other expenses
incurred by Executive by reason of the use of Executive's automobile for
Company business from time to time.
3.6 VACATION. During the Initial Term, the Executive shall be
entitled to paid vacation in accordance with the most favorable plans,
policies, programs and practices of the Company and its subsidiaries as in
effect at any time hereafter with respect to other key executives of the
Company and its subsidiaries; PROVIDED, HOWEVER, that in no event shall
Executive be entitled to less than five weeks paid vacation per year.
4. TERMINATION.
4.1 TERMINATION FOR CAUSE. Notwithstanding anything contained to
the contrary in this Agreement, this Agrement may be terminated by the Company
for Cause. As used in this Agreement, "Cause" shall only mean (i) any material
act or acts of personal dishonesty taken by the Executive which is either (x)
at the expense of the Company, or (y) reasonable likely to bring significant
disrepute to the Company, (ii) subject to the following sentences, any
violation by the Executive of the Executive's material obligations under this
Agreement which is demonstrably willful and deliberate on the Executive's part
and which is not remedied within ten business days after receipt of written
notice from the Company, (iii) the conviction of the Executive for any
criminal act which is a felony or a misdemeanor involving moral turpitude, or
(iv) a material breach of Executive's representation in the last sentence of
Section 17 hereof or a material breach of the Confidentiality and Invention
Agreement contemplated by Section 6.1 hereof. Upon any determination by the
Company's Board of Directors that Cause exists under clause (ii) of the
preceding sentence, the Company shall cause a special meeting of the Board to
be called and held at a time mutually convenient to the Board and Executive,
but in no event later than ten (10) business days after Executive's receipt of
the notice contemplated by clause (ii). Executive shall have the right to
appear before such special meeting of the Board with legal counsel of his
choosing to refute any determination of Cause specified in such notice, and
any termination of Executive's employment by reason of such Cause determination
shall not be effective until Executive is afforded such opportunity to appear.
Any termination for Cause pursuant to clause (i), (iii) or (iv) of the first
sentence of this Section 4.1 shall be made in writing to Executive, which notice
shall set forth in detail all acts or omissions upon which the Company is
relying for such termination. Upon any termination pursuant to this Section
4.1, the Executive shall be entitled to be paid his Base Salary to the date of
termination and the Company shall have no further liability hereunder (other
than for reimbursement for reasonable expenses incurred prior to the date of
termination).
4.2 DISABILITY. Notwithstanding anything contained in this
Agreement to the contrary, the Company, by written notice to the Executive,
shall at all times have the right to terminate this Agreement, and the
Executive's employment hereunder, if the Executive shall, as the result of
mental or physical incapacity, illness or disability, fail to perform his duties
and responsibilities provided for herein for a period of more than one hundred
twenty (120) days in any 12-month period. Upon any termination pursuant to
this Section 4.2, the Executive shall be entitled to be paid his Base Salary to
the date of
4
<PAGE> 5
termination and the Company shall have no further liability hereunder (other
than for reimbursement for reasonable business expenses incurred prior to the
date of termination).
4.3 DEATH. In the event of the death of the Executive during the
term of his employment hereunder, the Company shall pay to the estate of the
deceased Executive an amount equal to the sum of (x) any unpaid amounts of
his Base Salary to the date of his death, plus (y) six months of Base Salary,
and the Company shall have no further liability hereunder (other than for
reimbursement for reasonable business expenses incurred prior to the date of
the Executive's death).
4.4 TERMINATION WITHOUT CAUSE. At any time the Company shall have
the right to terminate Executive's employment hereunder by written notice to
Executive; provided, however, that the Company shall (i) pay to Executive any
unpaid Base Salary accrued through the effective date of termination specified
in such notice, (ii) pay to the Executive in a lump sum, in cash within 30 days
after the date of employment termination, an amount equal to the Executive's
then annual Base Salary, and (iii) pay to the Executive, in accordance with the
Company's normal payroll periods and for a period of two years from the date of
termination, 50% of the Executive's then Base Salary (I.E., one year's Base
Salary will be paid over two years), provided the Executive is not in breach of
Section 6.3 hereof. The Company shall be deemed to have terminated the
Executive's employment pursuant to this Section 4.4 if such employment is
terminated (i) by the Company without Cause, or (ii) by the Executive
voluntarily for "Good Reason." For purposes of this Agreement, "Good Reason"
means
(a) the assignment to the Executive of any duties inconsistent
in any respect with the Executive's position (including status, offices, titles
and reporting requirements), authority, duties or responsibilities as
contemplated by Section 1.2 of this Agreement, or any other action by the
Company, which results in a significant diminution in such position, authority,
duties or responsibilities, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad faith and which is
remedied by the Company within ten (10) business days after receipt of notice
thereof given by the Executive;
(b) any failure by the Company to comply with any of the
provisions of Section 2, Section 3, Section 7 or Section 17 of this Agreement,
other than an isolated, insubstantial and inadvertent failure not occurring in
bad faith and which is remedied by the Company promptly after receipt of notice
thereof given by the Executive;
(c) the Company's requiring the Executive to be based at any
office or location other than Dade or Broward County, Florida, except for
travel reasonably required in the performance of the Executive's
responsibilities;
(d) any purported termination by the Company of the Executive's
employment otherwise than as expressly permitted by this Agreement;
(e) any failure by the Company to comply with and satisfy
Section 10(c) of this Agreement; or
(f) any termination by the Executive during the three-month
period following the effective date of any "Change in Control" other than a
termination for Cause.
5. CHANGE IN CONTROL. For purposes of this Agreement, a "Change in
Control" shall mean:
(a) The acquisition (other than by or from the Company), at any time
after the date hereof, by any person, entity or "group", within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the
"Exchange Act"), of beneficial ownership (within the meaning of Rule
5
<PAGE> 6
13d-3 promulgated under the Exchange Act) of 30% or more of either the then
outstanding shares of common stock or the combined voting power of the
Company's then outstanding voting securities entitled to vote generally in the
election of directors; or
(b) The seven (7) individuals who, after the appointment of
Executive as a director pursuant to Section 7 hereof, constitute the Board (as
of the date hereof the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board (other than an election or
nomination of an individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the election of the
directors of the Company, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board; or
(c) Approval by the shareholders of the Company (A) a
reorganization, merger or consolidation with respect to which persons who were
the shareholders of the Company immediately prior to such reorganization, merger
or consolidation do not, immediately thereafter, own more than 51% of the
combined voting power entitled to vote generally in the election of directors of
the reorganized, merged or consolidated company's then outstanding voting
securities, (B) a liquidation or dissolution of the Company, or (C) the sale of
all or substantially all of the assets of the Company, unless the approved
reorganization, merger, consolidation, liquidation, dissolution or sale is
subsequently abandoned.
(d) The approval by the Board of a distribution (or series of
distributions) of assets representing more than 50% of the Company's current
assets.
6. RESTRICTIVE COVENANTS.
6.1 CONFIDENTIALITY. The Executive agrees to promptly execute and
deliver to the Company a Confidentiality and Invention Agreement in
substantially the same form as set forth on EXHIBIT B.
6.2 NONSOLICITATION OF EMPLOYEES. While employed by the Company and
for a period of twenty-four (24) months thereafter, Executive shall not
directly or indirectly, for himself or for any other person, firm, corporation,
partnership, association or other entity, attempt to employ or enter into any
contractual arrangement with any employee or former employee of the Company,
unless such employee or former employee has not been employed by the Company
for a period in excess of six months.
6.3 NON-COMPETITION. While employed by the Company and for a
period of twenty-four (24) months thereafter, Executive shall not, directly or
indirectly, whether as principal, agent, shareholder (except as set forth
below) or in any other capacity, whether or not compensation is received,
engage or participate in any activity for, be employed by, assist or have an
equity interest in (other than as a passive investor of no more than ten percent
(10%) with no involvement in the management or conduct of the affairs of
business of such entity) any business or other entity which is or plans to
develop, manufacture, market or sell any pharmaceutical product designed to
compete directly with the transdermal/transoral topical or other products of
the Company and its subsidiaries which are under active development or are
manufactured, marketed or sold or other business in which the Company is
engaged during the term of Executive's employment hereunder. Executive
acknowledges that the provisions of this Section 6.3 are reasonably necessary
for the purposes of protecting the Company legitimate business interests and
goodwill. It is accordingly the intention of the parties that this Section 6.3
6
<PAGE> 7
be enforceable to the fullest extent permissible under applicable law. Executive
agrees, however, that in the event any restriction or limitation of this
Section 6.3, or any portion thereof, shall be declared or held to be invalid or
unenforceable by a court of competent jurisdiction, then such restriction or
limitation shall be deemed amended to substitute or modify it, as either or
both may be necessary, to render it valid and enforceable.
6.4 INJUNCTION. It is recognized and hereby acknowledged by
the parties hereto that a breach by the Executive of any of the covenants
contained in Section 6.2 or 6.3 of this Agreement will cause irreparable injury
to the Company's legitimate business interests and goodwill. As a result, the
Executive recognizes and hereby acknowledges that the Company shall be entitled
(without the posting of bond or security or the proving of actual damages) to
an injunction from any court of competent jurisdiction enjoining and
restraining any violation of any or all of the covenants contained in Section 6
of this Agreement by the Executive or any of his affiliates, associates,
partners or agents, either directly or indirectly, and that such right to
injunction shall be cumulative and in addition to whatever other remedies the
Company may possess.
7. ELECTION OF EXECUTIVE AS DIRECTOR. Contemporaneously herewith, the
Board is appointing Executive to fill the vacancy on the Board created by the
increase of its size to seven (7) members. For so long as the Executive
continues to serve as the Company's President and Chief Executive Officer, the
Company shall cause the nomination of the Executive as a director of the
Company at each shareholder meeting at which election of directors is
considered.
8. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Florida.
9. NOTICES: Any notice required or permitted to be given under this
Agreement shall be in writing and shall be deemed to have been given when
delivered by hand or when deposited in the United States mail, by registered
or certified mail, return receipt requested, postage prepaid, addressed as
follows:
If to the Company: Noven Pharmaceuticals, Inc.
11960 S.W. 144th Street
Miami, Florida 33186
Attention: Steven Sablotsky, Chairman
WITH A COPY TO:
Leonard H. Bloom
Shapo, Freedman & Bloom, P.A.
200 S. Biscayne Boulevard, Suite 4750
Miami, Florida 33131
If to the Executive: Robert C. Strauss
760 San Bruno
Coral Gables, Florida 33146
WITH A COPY TO:
Greenberg Traurig Hoffman Lipoff
Rosen & Quentel, P.A.
1221 Brickell Avenue
Miami, Florida 33131
Attention: Cesar L. Alvarez, Esq.
7
<PAGE> 8
or to such other addresses as either party hereto may from time to time give
notice of to the other in the aforesaid manner.
10. SUCCESSORS.
(a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive's legal
representatives.
(b) This Agreement shall inure to the benefit of, be enforceable
by and be binding upon the Company's successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law or otherwise.
11. SEVERABILITY. The invalidity of any one or more of the words,
phrases, sentences, clauses or sections contained in this Agreement shall not
affect the enforceability of the remaining portions of this Agreement or any
part thereof, all of which are inserted conditionally on their being valid in
law, and, in the event that any one or more of the words, phrases, sentences,
clauses or sections contained in this Agreement shall be declared invalid, this
Agreement shall be construed as if such invalid word or words, phrase or
phrases, sentence or sentences, clause or clauses, or section or sections had
not been inserted. If such invalidity is caused by length of time or size of
area, or both, the otherwise invalid provision will be considered to be reduced
to a period or area which would cure such invalidity.
12. WAIVERS. The waiver by either party hereto of a breach or
violation of any term or provision of this Agreement shall not operate nor be
construed as a waiver of any subsequent breach or violation.
13. DAMAGES. Nothing contained herein shall be construed to prevent
the Company or the Executive from seeking and recovering from the other damages
sustained by either or both of them as a result of its or his breach of any term
or provision of this Agreement.
14. NO THIRD PARTY BENEFICIARY. Nothing expressed or implied in this
Agreement is intended or shall be construed, to confer upon or give any person
(other than the parties hereto and, in the case of Executive, his heirs,
personal representative(s) and/or legal representative) any rights or remedies
under or by reason of this Agreement.
8
<PAGE> 9
15. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in this Agreement and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim, recoupment,
defense or other claim, right or action which the Company may have against the
Executive or others (it being agreed that nothing herein shall require any
severance or other payment following a proper termination of Executive's
employment for Cause). In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement.
16. CERTAIN REDUCTION OF PAYMENTS BY THE COMPANY.
(a) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined that any payment or distribution by the
Company to or for the benefit of the Executive, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise (a "Payment"), would be nondeductible by the Company for Federal
income tax purposes because of Section 162(m) or 280G of the Code, then the
aggregate present value of amounts payable or distributable to or for the
benefit of the Executive pursuant to this Agreement (such payments or
distributions pursuant to this Agreement are hereinafter referred to as
"Agreement Payments") shall be reduced to the Reduced Amount. The "Reduced
Amount" shall be an amount expressed in present value which maximizes the
aggregate present value of Agreement Payments without causing any Payment to be
nondeductible by the Company because of Section 162(m) or 280G of the Code.
Anything to the contrary notwithstanding, if the Reduced Amount is zero and it
is determined further that any Payment which is not an Agreement Payment would
nevertheless be nondeductible by the Company for Federal income tax purposes
because of Section 162(m) or 280G of the Code, then the aggregate present value
of Payments which are not Agreement Payments shall also be reduced (but not
below zero) to an amount expressed in present value which maximizes the
aggregate present value of Payments without causing any Payment to be
nondeductible by the Company because of Section 162(m) or 280G of the Code. For
purposes of this Section 16, present value shall be determined in accordance
with Section 280G(d)(4) of the Code. Any amount which is not paid in the taxable
year in which it was originally scheduled to be paid as a result of the
postponement thereof pursuant hereto shall be payable in the next succeeding
taxable year in which such payment will not result in the disallowance of a
deduction pursuant to either Section 162(m) or 280G of the Code; provided,
however, that all postponed payments shall be placed in a Rabbi trust or similar
vehicle for the benefit of the Executive in such a way that the amounts so
transferred are not taxable to such person or deductible by the Company until
payment from such vehicle to the Executive is made. In the event a payment has
been made to the Executive, but then disallowed as a deduction by the Internal
Revenue Service and return of the payment is required into the trust, said
payment to the Executive shall be treated as a loan and said payment to the
trust shall be treated as repayment of said loan. The Company shall not pledge,
hypothecate or othwerise encumber any amounts held in the trust or other similar
vehicle for the benefit of the Executive hereunder.
(b) All determinations required to be made under this Section 16
shall be made by the Company's independent public accountants (the "Accounting
Firm"), which shall provide (i) detailed supporting calculations both to the
Company and the Executive within twenty (20) business days of the termination
of Executive's employment or such earlier time as is requested by the Company,
and (ii) an opinion to the Executive that he has substantial authority not to
report any excise tax on his Federal income tax return with respect to any
Payments. Any such determination by the Accounting Firm shall be binding upon
the Company and the Executive. The Executive shall determine which and how much
of the Payments shall be eliminated or reduced consistent with the requirements
of this Section 16, provided that, if the Executive does not make such
determination within ten business days of the receipt of the calculations made
by the Accounting Firm, the Company shall elect which and how much of the
Payments shall be eliminated or reduced consistent with the requirements of
this Section 16 and shall notify the Executive promptly of such election.
Within five business days thereafter, the Company shall pay to or
9
<PAGE> 10
distribute to or for the benefit of the Executive such amounts as are then due
to the Executive under this Agreement. All fees and expenses of the Accounting
Firm incurred in connection with the determinations contemplated by this Section
16 shall be borne by the Company.
(c) As a result of the uncertainty in the application of Section 162(m)
or 280G of the Code at the time of the initial determination by the Accounting
Firm hereunder, it is possible that Payments will have been made by the Company
which should not have been made ("Overpayment") or that additional Payments
which will not have been made by the Company could have been made
("Underpayment"), in each case, consistent with the calculations required to be
made hereunder. In the event that the Accounting Firm, based upon the assertion
of a deficiency by the Internal Revenue Service against the Executive which the
Accounting Firm believes has a high probability of success, determines that an
Overpayment has been made, any such Overpayment paid or distributed by the
Company to or for the benefit of the Executive shall be treated for all purposes
as a loan ab initio to the Executive which the Executive shall repay to the
Company together with interest at the applicable federal rate provided for in
Section 7872(f)(2) of the Code; provided, however, that no such loan shall be
deemed to have been made and no amount shall be payable by the Employee to the
Company if and to the extent such deemed loan and payment would not either
reduce the amount on which the Executive is subject to tax under Section 1 and
Section 4999 of the Code or generate a refund of such taxes. In the event that
the Accounting Firm, based upon controlling precedent or other substantial
authority, determines that an Underpayment has occurred, any such Underpayment
shall be promptly paid by the Company to or for the benefit of the Executive
together with interest at the applicable federal rate provided for in Section
7872(f)(2) of the Code.
17. CONFLICTS WITH CERTAIN EXISTING ARRANGEMENTS. The Company acknowledges
that it has received and reviewed Executive's non-competition covenants with a
prior employer, a copy of which is attached hereto as EXHIBIT C. The Company
agrees that (x) it shall not hereafter acquire a "Conflicting Organization" or
otherwise expand its present business activities such that Executive could
reasonably be expected to be deemed in breach or violation of such
non-competition covenants, and (y) it shall indemnify and hold harmless the
Executive from any and all damages that Executive may hereafter suffer or incur
by reason of any such Company acquisition or expansion of business after the
date hereof. The Executive represents to the Company that his execution and
performance of the Agreement does not violate the provisions of any employment,
non-competition or other material agreement to which he is a party or by which
he is bound.
18. REIMBURSEMENT OF LEGAL EXPENSES. The Company shall promptly reimburse
Executive for up to $3,000 of all reasonable legal fees incurred by Executive in
connection with the preparation, negotiation and execution of this Agreement and
ancillary documents.
19. INDEMNIFICATION. The Company agrees to promptly execute and deliver to
Executive an Indemnification Agreement in substantially the same form as
utilized for the Chairman of the Board, it being agreed that the Company will
use its best efforts to ensure that such agreement will provide for mandatory
indemnification and advancement of expenses to the fullest extent permitted by
law.
10
<PAGE> 11
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
COMPANY:
NOVEN PHARMACEUTICALS, INC.
By:
-------------------------------
Steven Sablotsky
Chairman of the Board
EXECUTIVE:
----------------------------------
ROBERT C. STRAUSS
11
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0
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