SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to ________.
COPLEY PHARMACEUTICAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2514637
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
25 John Road 02021
Canton, Massachusetts (Zip Code)
(Address of principal executive offices)
Commission file number: 0-20126
Registrant's telephone number, including area code: (781) 821-6111
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_______
The number of shares outstanding of the registrant's only class of common stock
as of October 31, 1998 was 19,188,351 shares.
<PAGE>
COPLEY PHARMACEUTICAL, INC.
INDEX
For the Nine Months Ended September 30, 1998
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30,
1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
and Comprehensive Income for the three and nine 4
months ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of Results of
Operations and Changes in Financial Condition 11 - 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(In thousands, except share data) 1998 1997
----------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,119 $ 13,847
Available-for-sale securities 25,817 19,498
Accounts receivable, trade, net 34,117 30,170
Inventories:
Raw materials 10,759 7,282
Work in process 5,267 5,207
Finished goods 8,504 10,797
------------ ---------------
Total inventories 24,530 23,286
Current deferred tax assets 5,434 5,239
Other current assets 4,781 4,189
------------ ---------------
Total current assets 107,798 96,229
Property, plant and equipment, net 43,785 46,450
Other assets 2,936 3,065
------------ ---------------
Total assets $ 154,519 $ 145,744
------------ ---------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 2,973 $ 2,583
Accounts payable, related party 16,815 13,668
Current portion of long-term debt 300 300
Accrued compensation and benefits 1,533 1,275
Accrued rebates 8,826 9,071
Accrued income taxes 4,102 374
Current portion of accrued recall related and litigation expenses 8,067 8,048
Accrued expenses 1,018 830
------------ ---------------
Total current liabilities 43,634 36,149
Accrued recall related and litigation expenses --- 3,645
Deferred tax liabilities 940 269
Long-term debt 4,500 4,800
------------ ---------------
Total liabilities 49,074 44,863
Shareholders' equity:
Preferred stock, $.01 par value; authorized 3,000,000 shares;
none issued --- ---
Common stock, $.01 par value; authorized 60,000,000 shares;
issued 25,370,745 shares 254 254
Additional paid-in capital 78,275 78,063
Unrealized holding (loss)gain on available-for-sale securities 60 (16)
Retained earnings 39,387 35,133
Treasury stock, at cost, 6,189,060 and 6,235,978 shares
outstanding, respectively (12,531) (12,553)
------------ --------------
Total shareholders' equity 105,445 100,881
------------ --------------
Total liabilities and shareholders' equity $ 154,519 $ 145,744
------------ --------------
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
3
<PAGE>
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(Unaudited) (Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 (In thousands, except per share data) 1998 1997
-------------- -------------- --------------- --------------
<C> <C> <S> <C> <C>
Net sales:
$ 16,931 $ 19,665 Manufactured products $ 52,049 $ 52,478
18,409 16,810 Distributed products 46,226 35,313
-------------- -------------- --------------- --------------
35,340 36,475 Net sales 98,275 87,791
Cost of goods sold:
13,100 13,864 Manufactured products 39,820 39,331
14,714 12,270 Distributed products 36,502 26,442
-------------- -------------- --------------- --------------
27,814 26,134 Cost of goods sold 76,322 65,773
7,526 10,341 Gross profit 21,953 22,018
Operating expenses:
2,954 2,831 Research and development 7,804 9,080
1,023 1,160 Selling, marketing and distribution 3,448 3,478
1,608 2,068 General and administrative 4,387 5,535
183 227 Recall related and litigation, net 378 2,593
--- (142) Restructuring --- 170
-------------- -------------- --------------- --------------
1,758 4,197 Income from operations 5,936 1,162
395 360 Interest and other investment income 1,300 1,013
(110) (304) Interest expense (430) (434)
29 (59) Other income (expense), net (46) (1,559)
-------------- -------------- --------------- --------------
2,072 4,194 Income before income taxes 6,760 182
975 2,440 Provision for income taxes 2,505 305
-------------- -------------- --------------- --------------
$ 1,097 $ 1,754 Net income (loss) $ 4,255 (123)
-------------- -------------- --------------- --------------
Other comprehensive income, net of taxes
71 11 Unrealized gains (loss) on securities 78 (8)
Less: reclassification adjustment
(4) --- for (losses) included in net income (2) ---
-------------- -------------- --------------- --------------
$ 1,164 $ 1,765 Comprehensive income (loss) $ 4,331 $ (131)
-------------- -------------- --------------- --------------
Weighted average common
shares outstanding:
19,179 19,135 Basic 19,162 19,124
19,360 19,231 Diluted 19,303 19,124
Earnings (loss) per share:
$0.06 $0.09 Basic $0.22 $(0.01)
$0.06 $0.09 Diluted $0.22 $(0.01)
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
4
<PAGE>
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ended
September 30,
(In thousands) 1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,255 $ (123)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 5,019 5,411
Realized losses (gains) on sales of assets 8 (183)
Change in deferred taxes 476 2,025
Changes in operating assets and liabilities:
Decreases (increases) in assets:
Accounts receivable (3,947) (7,618)
Inventories (1,244) 1,153
Other current assets (592) 1,161
Other assets, net of amortization 23 1,253
Increases (decreases) in liabilities:
Accounts payable 3,537 2,744
Accrued income taxes 3,728 (2,017)
Accrued expenses (3,425) (6,533)
------------ ------------
Net cash provided by (used in) operating activities 7,838 (2,727)
------------ ------------
Cash flows from investing activities:
Capital expenditures (2,230) (868)
Purchases of available-for-sale securities 8,900 (13,754)
Proceeds from sales of available-for-sale securities 8,104 ---
Proceeds from maturities of available-for-sale securities (23,273) 11,250
Proceeds from sales of property, plant and equipment --- 201
------------ ------------
Net cash provided by (used in) investing activities (8,499) (3,171)
------------ ------------
Cash flows from financing activities:
Stock option excercises 30 ---
Issuance of common stock to Employee Stock Purchase Plan 203 202
Payment of long-term debt (300) (300)
------------ ------------
Net cash provided by (used in) financing activities (67) (98)
------------ ------------
Net increase (decrease) in cash and cash equivalents (728) (5,996)
Cash and cash equivalents at beginning of period 13,847 15,974
------------ ------------
Cash and cash equivalents at end of period $ 13,119 $ 9,978
------------ ------------
</TABLE>
The accompanying notes are an integral part of the Condensed
Consolidated Financial Statements.
5
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the nine months ended September 30, 1998
Note A - General
In the opinion of Copley Pharmaceutical, Inc. ("the Company"), the accompanying
condensed consolidated financial statements contain all normal and recurring
adjustments necessary to present fairly the financial position of the Company as
of September 30, 1998 and December 31, 1997, the results of its operations for
the three and nine months ended September 30, 1998 and 1997, and its cash flows
for the nine months ended September 30, 1998 and 1997. While the Company
believes that the disclosures presented are adequate to make the information not
misleading, these consolidated financial statements should be read in
conjunction with the Notes included in the Company's Form 10-K for the year
ended December 31, 1997. The results for the three-month and nine-month period
ended September 30, 1998 are not necessarily indicative of the results that may
be expected for any future period.
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could have a material adverse effect on the Company's
business, financial condition, results of operations and stock price. Statements
in this Report on Form 10-Q which are not historical facts, so-called
"forward-looking statements", are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that all forward-looking statements involve risks and uncertainties, including
those detailed in the Company's filings with the Securities and Exchange
Commission. See, for example, "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors and Future Trends"
contained in the Company's Form 10-K for the year ended December 31, 1997.
Note B - Related Party Transactions
On July 18, 1995, Hoechst Corporation ("HC"), the Company's indirect 51% fully
diluted shareholder, completed its purchase of Marion Merrell Dow, Inc. ("MMD")
and changed MMD's name to Hoechst Marion Roussel, Inc. ("HMRI"). This
transaction resulted in a related party relationship between the Company and its
customer Rugby Laboratories ("Rugby"), which was a subsidiary of MMD and
subsequently a subsidiary of HMRI. Effective February 27, 1998, Rugby was sold
by HMRI to an unrelated third party.
In connection with HC's acquisition of its majority interest in the Company, the
Company is a party to a Product Agreement with HC pursuant to which the Company
is afforded the opportunity under specified conditions to distribute and market
the generic version of products sold by Hoechst-Roussel Pharmaceuticals, Inc.
("HRPI"), which was an indirect majority-owned subsidiary of HC. This Product
Agreement had an initial term of five years, until November 11, 1998, and has
been extended until June 1, 1999 at which time it will expire. On January 1,
1996, HRPI was merged into HMRI. HMRI has agreed to be bound by the Product
Agreement to the extent that HRPI was bound; that is, the Product Agreement
continues to be in effect for products manufactured by the former HRPI but not
for products manufactured by HMRI prior to the merger with HRPI nor for products
developed by HMRI after January 1, 1996. In furtherance of the Product
Agreement, the Company and HMRI entered into separate contracts relating to
specific products as these products became available for generic distribution.
These separate contracts will continue in effect beyond the expiration of the
Product Agreement. In order to assure continuity of supply and to provide other
competitive benefits, the Company, in August 1997, renegotiated the distribution
contracts relating to glyburide and micronized glyburide; as a result, the
profit contribution of these products has decreased. In 1997 the Company entered
into an agreement to distribute HMRI's pentoxifylline product. As a result of
these new and renegotiated distribution contracts, the Company has incurred
increased royalty costs. For the nine months ended September 30, 1998 and 1997,
approximately $34.3 million and $26.4 million, respectively, of generic versions
of products were purchased from HMRI under these Product Agreements.
6
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the nine months ended September 30, 1998
The Company obtains its comprehensive general liability, product liability,
excess liability and all risks property insurance coverage through an insurance
and risk-sharing arrangement with HC and its parent, Hoechst Aktiengesellschaft
("Hoechst AG"), and its various subsidiaries. Insurance coverage is provided by
HC through its wholly-owned insurance subsidiary, as well as by external
parties. The Company's total expense for these insurance policies was
approximately $3.4 million and $3.6 million, respectively, for the nine months
ended September 30, 1998 and 1997.
During the nine months ended September 30, 1998 and 1997 the Company had net
sales of approximately $0 and $157,000, respectively, to Wuxi Chia Tai Copley
Pharmaceutical, a Chinese company whose majority owner is Chia Tai Copley
Pharmaceutical of which the Company is a 49% partner.
In June 1997, the Company discontinued its partnership participation in MIR
Pharmaceutical, a partnership formed to market and manufacture pharmaceutical
products in Russia, and whose senior vice president was a member of the
Company's Board of Directors until July 27, 1998. The Company may continue to
sell product through the MIR Pharmaceutical partnership.
Note C - Litigation and Contingencies
Albuterol Class Action Lawsuits
In connection with the Company's December 1993 and January 1994 product recall
of albuterol sulfate inhalation solution, 0.5% ("albuterol"), the Company has
been served with complaints in numerous lawsuits in federal and state court,
some of which are on behalf of numerous claimants. The plaintiffs principally
seek compensatory and punitive damages and allege that injuries and deaths were
caused by inhalation of allegedly contaminated product manufactured and
distributed by the Company.
The federal court lawsuits were consolidated in the United States District Court
for the District of Wyoming as a multi-district litigation for pre-trial
purposes under the caption In Re: Copley Pharmaceutical, Inc. "Albuterol"
Products Liability Litigation. The District Court certified a partial class
action for determination of liability only and commenced a jury trial in June
1995. In August 1995, prior to the conclusion of the jury trial, the Company
entered into a settlement agreement with the representative plaintiffs in the
class action lawsuit. The settlement calls for the Company to receive a general
release of all non-death claims in return for contributions by the Company and
its insurers of a minimum of $65 million and a maximum of $130 million to settle
all non-death claims relating to the Company's manufacture, sale and recall of
albuterol. An additional $20 million is allocated under the terms of the
settlement as an estimate of the cost of settling claims by persons alleging
wrongful death, which claims are limited by the settlement to compensatory
damages only and are subject to non-binding negotiation and arbitration. Within
the Company's minimum and maximum contributions, the amount to be paid by the
Company is subject to the number and seriousness of individual claims eventually
filed. On November 15, 1995, the District Court entered its Order giving final
approval of the settlement. This Order has become final and nonappealable.
The settlement agreement requires the $150 million maximum contribution to be
funded by an initial $50 million cash deposit and issuance of letters of credit
for the remaining balance, to be held by the Albuterol Settlement Trust Fund as
security for potential future payments. The Company negotiated agreements with
its insurers pursuant to which the Company and its insurers have agreed to pay
defined percentages of required settlement payments and related expenses. During
the third quarter of 1995, the Company paid $5.1 million to the Albuterol
Settlement Trust Fund and obtained approximately $17.1 million in irrevocable
stand-by letters of credit to cover its uninsured obligation to fund the
settlement agreement. The settlement agreement required an additional $15
million cash deposit after the order approving the settlement became final and
nonappealable, which occurred in late December 1996. In January 1997, the
Company made an additional $2.25 million cash deposit and its stand-by letters
of credit were reduced by a like amount. The balance was funded by one of the
Company's insurers. These cash contributions made by the Company totaling $7.35
million are nonrefundable pursuant to the terms of the settlement agreements.
7
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the nine months ended September 30, 1998
In August 1997, the Wyoming District Court ordered the Company to make
additional cash deposits totaling $3.15 million to fund the Company's portion of
payments of settlement amounts for class action cases alleging wrongful death as
well as the settlement of opt-out cases, legal fees and other related expenses.
The Company's stand-by letters of credit were reduced by a like amount in
February 1998. In addition, one of the Company's insurers paid $17.85 million
and its letter of credit was released.
Approximately 5,600 proofs of claim (including approximately 360 alleging
wrongful death) have been filed with the Special Master appointed by the Court
to oversee the Albuterol Settlement Trust Fund. The Special Master has approved
approximately 4,200 class action claims totaling approximately $59 million. No
awards have been made to approximately 1,300 non-death class action claims
(including approximately 980 which have been disallowed by the Special Master).
In addition, approximately 840 clients of Jacoby & Meyers, representing nearly
all of that firm's clients who are not alleging a death caused by albuterol,
have agreed to be treated as if they were class members and class counsel have
agreed that these claimants will be paid out of the Albuterol Settlement Trust
Fund. Based upon the Special Master's classification of these claims, these
Jacoby & Meyers claims have a value of approximately $11.5 million.
Recourse to the remaining letters of credit in the class action settlement will
not occur until all claims are processed and settlement amounts are recommended
by the Special Master, and is contingent on the number of claims filed within
certain categories. Although the total number of claims filed against the
Albuterol Settlement Trust Fund is less than the number of claims the settling
parties anticipated would be necessary to require the maximum funding of the
Albuterol Settlement Trust Fund, at this time the Company is unable to determine
how many of these claims will be awarded damages by the Special Master and, if
awarded damages, how much will be given to various claimants. In addition,
administrative fees and class action attorney fees and expenses will be paid out
of the Albuterol Settlement Trust Fund. On April 30, 1998 the Wyoming District
Court awarded plaintiffs' attorney $19.5 million in attorney's fees and
approximately $1.6 million in expense reimbursement to be paid by claimants and
the Company. The attorney's fees and expenses were previously reserved as part
of the Company's recall and litigation accrual and will not have a material
impact on the current year's earnings. The Company cannot predict the total
amount to be paid out of the Albuterol Settlement Trust Fund.
The settlement also is subject to certain other contingencies and does not cover
certain individuals who previously opted out of the class action. The Company
continues to be a defendant in lawsuits that were brought by or on behalf of
less than five people who properly opted out of the class action.
Grand Jury Investigation
On May 28, 1997, the Company announced that it had entered into a plea agreement
pursuant to which it agreed to waive indictment and plead guilty to a one count
Information charging a violation of Title 18, United States Code, Section 371, a
conspiracy to defraud the United States and the Food and Drug Administration
("FDA"). The Information alleged that Copley made changes in the manufacturing
processes for four drugs (only two of which, procainamide 500 mg tablets and
potassium chloride tablets, currently are being manufactured by the Company)
without proper notification to the FDA and signed false batch records with
respect to two of these drugs. As part of the plea agreement, the Company agreed
to pay a fine of $10.65 million plus interest, $3.55 million of which was paid
in each of June of 1997 and June of 1998, with the remainder due in June 1999.
The plea was accepted by the United States District Court for the District of
Massachusetts on June 19, 1997.
8
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the nine months ended September 30, 1998
The plea agreement followed a nearly three-year investigation and grand jury
subpoenas from the United States Attorney's Office in Massachusetts for
documents focusing particularly on albuterol and Brompheril(R) products, which
were recalled by the Company in December 1993 and September 1994, respectively,
but extending beyond these products. The Company complied with the subpoenas and
cooperated with federal authorities throughout the investigation. The
investigation continues with respect to individuals, some of whom are
indemnified by the Company for legal fees and related expenses.
Also on May 28, 1997 the Company announced that it had entered into an agreement
with the FDA providing for an independent audit of 20 of Copley's ANDAs. The
Company is cooperating fully with the FDA, and the independent audit commenced
in July 1997 has been substantially completed. The FDA has agreed that during
this audit it will continue to review the Company's pending ANDAs, accept new
ANDAs from the Company and, where appropriate, approve Copley's ANDAs.
Shareholder Derivative Action
On September 2, 1998, Copley Pharmaceutical, Inc. was served as a nominal
defendant in a shareholder derivative action against six of its eight current
Directors. The lawsuit, which was brought by Great Neck Capital Appreciation
Investment Partnership, the alleged owner of an unspecified number of Company
shares, is pending in Norfolk County, Massachusetts Superior Court. On October
2, 1998, plaintiff filed a First Amended Shareholder Derivative Complaint that
named HCCP Acquisition Corporation, Hoechst Corporation and Hoechst
Aktiengesellschaft as additional defendants. The amended complaint's allegations
include alleged breach of fiduciary duty and alleged waste of corporate assets
and seeks unspecified money damages and injunctive relief. According to the
amended complaint, "Copley is named as a defendant herein solely in a derivative
capacity. This action is brought on its behalf, and no claims are asserted
against it." The Company is obligated todefend and indemnify the Director
defendants and has put its directors and officers insurance carrier on notice of
this claim. The Company has been advised that the defendants will seek to
dismiss the amended complaint.
Marion Merrell Dow Inc. Bulk Diltiazem Lawsuit
In November of 1992, a lawsuit was filed against the Company by MMD and Tanabe
Seiyaku Co., Ltd. ("Tanabe") in the United States District Court for the
District of Massachusetts captioned Marion Merrell Dow Inc. and Tanabe Seiyaku
Co., Ltd. v. Copley Pharmaceutical, Inc. and Orion Corporation Fermion. MMD and
Tanabe allege that the Company and Orion Corporation Fermion ("Orion"), the
manufacturer of the Company's bulk diltiazem, are infringing a process patent
for one method of manufacturing bulk diltiazem. MMD and Tanabe have alleged that
they are the exclusive licensee and patentee, respectively, of such process
patent. The complaint sought a permanent injunction and trebled unspecified
monetary damages. The Company denied all liability in its answer to the
complaint. On May 10, 1993, the Court ordered the case administratively closed,
staying the case until further notice. On June 27, 1995, the parties jointly
moved the Court for an Order further staying the action until 30 days after
notification of completion of the related International Trade Commission
proceeding discussed below.
International Trade Commission Complaint
On February 25, 1993, the Company, together with a number of other off-patent
pharmaceutical manufacturers and certain chemical manufacturers, was named as a
respondent in a complaint filed by MMD and Tanabe before the United States
International Trade Commission ("the ITC") captioned Complaint of Marion Merrell
Dow Inc. and Tanabe Seiyaku Co., Ltd. Pursuant to Section 337 of the Tariff Act
of 1930. The complaint sought an order (i) prohibiting the importation of, among
other things, the bulk diltiazem purchased by the Company from Orion, and (ii)
requiring the Company to immediately stop selling its current diltiazem product,
which incorporates bulk diltiazem supplied by Orion, based on the alleged
infringement by Orion of a process patent for one method of manufacturing bulk
diltiazem.
9
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the nine months ended September 30, 1998
Orion agreed at its expense to defend the Company in this action and the MMD
Bulk Diltiazem Lawsuit discussed previously and to indemnify the Company for any
damages that might be assessed as a result of the Company's sale of diltiazem
obtained from Orion. In October, 1998 a settlement was reached in this action
and the MMD Bulk Diltiazem Lawsuit. The settlement was made without any cost or
expense to the Company.
SmithKline Beecham Lawsuit
In August 1997, the Company filed an ANDA for nabumetone which certified that
SmithKline Beecham Corporation's ("SB") patent relating to nabumetone was
invalid and unenforceable and that the Company was entitled to manufacture and
sell nabumetone prior to the December 13, 2002 expiration of SB's nabumetone
patent. As a result, on October 31, 1997 the Company was served with a summons
and complaint in a patent infringement action entitled SmithKline Beecham
Corporation and Beecham Group p.l.c. v. Copley Pharmaceutical, Inc. in the
United States District Court for the District of Massachusetts. In their action,
plaintiffs allege that because the Company seeks approval of its ANDA to engage
in the commercial manufacture, use and sale of nabumetone as claimed in their
patent before the patent's expiration, the Company has infringed their
nabumetone patent. Plaintiffs seek damages and an injunction against approval of
the Company's nabumetone ANDA and its sale of nabumetone prior to December 13,
2002. The manufacturer and supplier of the bulk nabumetone that the Company has
designated for use in its ANDA has agreed to defend the Company in this action
and to indemnify the Company for any damages that might be assessed as a result
of the Company's sale of nabumetone obtained from the manufacturer. Although the
Company believes that this complaint is without merit and the Company has
meritorious defenses to these actions, there can be no assurance that the
Company will prevail or that an adverse outcome would not have a material
adverse effect on the Company's consolidated financial condition or results of
operation.
Other Legal Proceedings
The Company has $8.1 million of estimated recall related and legal contingency
reserves accrued at September 30, 1998. These reserves reflect the Company's
estimates of its exposure at September 30, 1998 in its various legal proceedings
described above. Actual settlements amounts may differ from amounts estimated.
In addition, the Company from time to time is subject to claims arising in the
ordinary course of business. While the outcome of the claims cannot be predicted
with certainty, management does not expect these matters to have a material
adverse effect on the results of operations and financial condition of the
Company.
Note D - Debt
At September 30, 1998, the Company had $11.7 million in stand-by letters of
credit related to the Albuterol Settlement Trust Fund outstanding under its
working capital line of credit agreement. Refer to Note C of the Notes to
Condensed Consolidated Financial Statements for further discussion of the
Settlement Agreement.
10
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND CHANGES IN FINANCIAL CONDITION
Item 2. Management's Discussion and Analysis of Results of Operations and
Changes in Financial Condition
Results of Operations
<TABLE>
Net Sales
- - ---------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the nine months ended
September 30, September 30,
1998 1997 Change (Unaudited) 1998 1997 Change
- - --------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$16,931 $19,665 (13.9) % Manufactured products $52,049 $52,478 (0.8)%
18,409 16,810 9.5 % Distributed products 46,226 35,313 30.9%
- - ---------- -------- ---------- ---------
$35,340 $36,475 (3.1) % Net sales $98,275 $87,791 11.9%
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales for the third quarter of 1998 were $35.3 million, a decrease of $1.1
million, or (3.1)%, from the same period in 1997. Increases in unit sales
volumes were not sufficient to offset a continued erosion of prices.
The Company's net sales were $98.3 million for the nine-month period ended
September 30, 1998 as compared to $87.8 million for the same period in 1997. The
increase in net sales for the nine months ended September 30, 1998 resulted from
new product introductions, most notably pentoxifylline, and higher unit sales
volumes which was partially offset by continued price erosion.
<TABLE>
Gross Profit
- - -------------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the nine months ended
September 30, September 30,
1998 1997 Change (Unaudited) 1998 1997 Change
- - --------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$3,831 $5,801 (34.0)% Manufactured products $12,229 $13,147 (7.0)%
As a % of manufactured
22.6 % 29.5 % products net sales 23.5 % 25.1 %
$3,695 $4,540 (18.6)% Distributed products $ 9,724 $ 8,871 9.6%
As a % of distributed
20.1 % 27.0 % products net sales 21.0 % 25.1 %
$7,526 $10,341 (27.2)% Gross profit $21,953 $22,018 (0.3)%
21.3 % 28.4 % As a % of net sales 22.3 % 25.1 %
- - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's gross profit was $7.5 million, or 21.3% of net sales, for the
third quarter of 1998 as compared to $10.3 million, or 28.4% of net sales, for
the same period in 1997. The lower gross profit as a percentage of net sales was
a result of the continued erosion of prices, a higher mix of distributed
products which realize a lower gross profit and the prior year's quarter having
a one time benefit related to the renegotiation of the distributed product
agreements with Hoechst Marion Roussel, Inc.
For the nine-month period ended September 30, 1998, the Company's gross profit
was $22.0 million, or 22.3% of net sales, as compared to $22.0 million or 25.1%
of net sales a year earlier.
11
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (Continued)
<TABLE>
Operating Expenses
-------------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the nine months ended
September 30, September 30,
1998 1997 Change (Unaudited) 1998 1997 Change
---------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$2,954 $2,831 4.3% Research and development $7,804 $9,080 (14.1)%
17.4 % 14.4 % As a % of net manufactured sales 15.0 % 17.3 %
$1,023 $1,160 (11.8)% Selling, marketing and distribution $3,448 $3,478 (0.9)%
2.9 % 3.2 % As a % of net sales 3.5 % 4.0 %
$1,608 $2,068 (22.2)% General and administrative $4,387 $5,535 (20.7)%
4.6 % 5.7 % As a % of net sales 4.5 % 6.3 %
$183 $227 (19.4)% Recall related and litigation, net $ 378 $2,593 (85.4)%
0.5 % 0.6 % As a % of net sales 0.4 % 3.0 %
$ --- $ (142) (100)% Restructuring --- $ 170 (100)%
--- (0.4) % As a % of net sales --- 0.2 %
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Research and development expenses increased to $3.0 million for the third
quarter of 1998 as compared to $2.8 million for the same period of 1997. For the
nine-month period, research and development expenses were $7.8 million as
compared to $9.1 million reported in the prior year. Significant reductions in
product validation costs related to validation of a new manufacturing process
during the prior year.
Selling, marketing and distribution expenses decreased 11.8% to $1.0 million for
the third quarter of 1998 as compared to $1.2 million for the same period of
1997. For the nine-month period, selling, marketing and distribution expenses
decreased 0.9% to $3.4 million compared to $3.5 million reported a year earlier.
The decrease in selling, marketing and distribution expenses for the quarter and
nine months ended September 30, 1998 resulted primarily from a decrease in
freight expense. Prior year freight was inflated due to a carrier's union strike
which lead to higher pricing by competitors.
General and administrative expenses were $1.6 million for the third quarter of
1998 as compared to $2.1 million for the same period in 1997. For the nine-month
period ended September 30, 1998, general and administrative expenses totaled
$4.4 million compared to $5.5 million a year earlier. This decrease, for both
periods, was primarily attributable to overall cost reductions, including
significantly lower directors' and officers' insurance premiums, and efficiency
improvements.
For the three and nine month periods ended September 30, 1998 and 1997, net
recall related and litigation expenses consisted of the 1997 adjustment to the
Company's reserve to reflect the plea agreement with the Massachusetts U.S.
Attorney and resultant fine, and other uninsured legal expenses incurred by the
Company for representation in its various legal proceedings. Refer to Note C of
the Notes to Condensed Consolidated Financial Statements for further discussion
of the plea agreement and the Company's other outstanding legal proceedings.
The restructuring charges recorded in 1997 primarily reflect a small reduction
in the Company's work force as part of its cost reduction initiatives.
12
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
CHANGES IN FINANCIAL CONDITION (Continued)
<TABLE>
Interest and Other Income (Expense)
- - -----------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the nine months ended
September 30, September 30,
1998 1997 Change (Unaudited) 1998 1997 Change
- - -------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
Interest and other
$ 395 $ 360 9.7% investment income $ 1,300 $ 1,013 28.3%
(110) (304) (63.8)% Interest expense (430) (434) (0.9)%
29 (59) (149.2)% Other income (expense) (46) (1,559) (97.0)%
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and other investment income increased to $395,000 for the third quarter
of 1998 as compared to $360,000 for the same period of 1997. For the nine-month
period, interest and other investment income increased to $1.3 million as
compared to $1.0 million reported a year earlier. In both cases the increase was
due to increased average investment holdings.
Interest expense decreased to $110,000 for the third quarter of 1998 as compared
to $304,000 for the same period of 1997. For the nine-month period interest
expense decreased 0.9% to $430,000 as compared to $434,000 for 1997. The changes
in interest expense for both the quarter and the nine months ended September 30,
1998 were due primarily to the accrual of interest relating to installments
payable under the Company's plea agreement. Refer to Note C of the Notes to
Condensed Consolidated Financial Statements for further discussion of the plea
agreement with the U.S. Attorney. Other expenses of $1.6 million for the
nine-month period ended September 30, 1997 consisted primarily of a one-time
charge related to the Company's decision to discontinue its funding of a
collaborative effort in the field of ophthalmology and to discontinue its
partnership participation in MIR Pharmaceutical, a company formed to manufacture
and sell pharmaceutical products in Russia, refer to Note B of the Notes to
Condensed Consolidated Financial Statements for further discussion of this
Related Party Transaction.
<TABLE>
Taxes and Net Income (Loss)
- - ---------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the nine months ended
September 30, September 30,
1998 1997 Change (Unaudited) 1998 1997 Change
- - ------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$ 975 $2,440 (60.0)% Income tax expense (benefit) $ 2,505 $305 721%
47.1 % 58.2 % Effective tax rate 37.1 % 167.6 %
$ 1,097 $1,754 (37.5)% Net income (loss) $ 4,255 $(123) (3,559)%
- - -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Net income for the third quarter of 1998 was $1.1 million or $0.06 per share
compared to a net income of $1.8 million or $0.09 per share for the third
quarter of 1997.
The 47.1% effective tax rate for the quarter is based on a change in the year
end forecasted tax rate resulting from higher unit sales and timing of new
product introductions.
13
<PAGE>
The higher effective tax rate recognized during the prior year resulted
from certain of the recall and litigation expenses not being deductible for
federal and state income tax reporting purposes.
For the nine-month period ended September 30, 1998, the Company reported net
income of $4.3 million or $0.22 per share as compared to net loss of $0.1
million or $0.01 per share for the same period in 1997.
Changes in Financial Condition
Capital Resources and Liquidity
- - ----------------------------------------------------------
September 30, December 31,
In thousands 1998 1997
- - ----------------------------------------------------------
(Unaudited)
Cash and short-term
investments $38,936 $33,345
Working capital 64,164 60,080
Long-term debt 4,500 4,800
Shareholders' equity 105,445 100,881
- - ----------------------------------------------------------
Working capital increased $4.1 million from December 31, 1997 to $64.2 million
at September 30, 1998 primarily due to working capital generated from
operations.
The Company has a working capital line of credit agreement that provides a
maximum borrowing capacity of $30.0 million. At September 30, 1998, the Company
had $11.7 million of stand-by letters of credit issued under this line of
credit. These stand-by letters of credit were obtained by the Company pursuant
to the requirements of the Albuterol Settlement Trust Fund to cover its
uninsured obligation. Recourse to the letters of credit are contingent on the
number of claims filed within certain categories and will not occur until all
claims are processed and settlement amounts are recommended by the Special
Master. Refer to Note C of the Notes to Condensed Consolidated Financial
Statements for further discussion of the Albuterol Class Action Lawsuits.
New Directors
On August 24, 1998, Daniel L. Korpolinski assumed the offices of President and
Chief Executive Officer of the Company. Mr. Korpolinski also was elected a
Company Director serving on the Board of Directors. In October, 1998 the Company
announced that Jess G. Thoene, MD had been elected an Independent Director
serving on the Board of Directors, filling one of the Independent Director
positions that have been vacant since the resignation of two Independent
Directors in July 1998. The Company continues to evaluate candidates for the
remaining vacant Independent Director position.
Year 2000 Issue/Year 2000 Readiness Disclosure Statement
Overview
The Company is in the process of analyzing and addressing what is known as the
Year 2000 Issue. The Year 2000 Issue has arisen because many existing computer
programs use only two digits to identify a year in the data field. These
programs were designed and developed without considering the impact of the
upcoming change in the century and, accordingly, could misconstrue dates such as
"00" as the year 1900 rather than 2000. The failure of computer programs and
systems to properly recognize dates beginning in the year 2000 could result in
systems failures, miscalculations and an inability to process transactions or
engage in similar normal business activities. For example, in connection with
the Company's business it is necessary for computers to properly calculate and
place on product packaging the expiration dates of the Company's products, which
currently run into the year 2000.
The Company's Year 2000 Compliance Program.
The Company has initiated its Year 2000 Compliance Program, the purpose of which
is: to identify important systems that are not yet Year 2000 compliant; to
initiate replacement or remedial action to assure that key systems will continue
to operate in the Year 2000 and to test the replaced or remediated systems; to
identify and contact key suppliers, vendors, customers and business partners to
evaluate their ability to maintain normal operations in the Year 2000; and to
develop appropriate contingency plans for dealing with foreseeable Year 2000
complications.
14
<PAGE>
The Company has appointed a Year 2000 Project Manager who is
responsible for the Company's Year 2000 Compliance Program and who reports
directly to senior management. The Company is also using an outside consultant
to review the Company's Year 2000 Compliance Program, suggest appropriate
modifications, assist the Company in its implementation of the Year 2000
Compliance Program and assist the Company in formulating its Year 2000
contingency plans.
Information Technology Systems
The Company's critical internal information technology ("IT") systems consist of
its Prism manufacturing and JD Edwards financial accounting and Harbinger EDI
400 software packages. The Company has contacted the vendors of these systems
and obtained written certification that these IT systems are currently in
material Year 2000 compliance. The Company also has completed a pilot room
testing of these systems. The Company plans to evaluate its non-critical IT
systems over the remainder of 1998 and into 1999 and will modify or replace
these systems as it deems appropriate.
Non-Information Technology Systems
The Company has recently commenced an assessment of its non-information
technology systems (such as, manufacturing, product testing and research and
development equipment, building security, voice mail, telephone and other
systems containing embedded microprocessors) and is in the process of
determining the nature and extent of the work required to make any material
non-IT systems Year 2000 compliant. The Company's strategy is to focus on
mission critical systems first and these systems have been identified. The
Company has sent Year 2000 compliance inquiries to the vendors of these systems,
is tracking responses to its inquiries and, depending on vendor response, is
planning to have the inquiry process completed by the end of 1998. In addition
to the vendor inquiries, the Company has recently commenced an independent
evaluation and testing of its critical non-IT systems and has scheduled August
31, 1999 as the completion date for that process. However, the Company is in the
early stages of evaluation and testing and will monitor its progress and the
scheduled completion date as the evaluation and testing process continues. After
the Company has progressed substantially with its critical non-IT systems, it
plans to expand its evaluation and testing to less critical non-IT systems in
order of relative importance, depending upon the availability of resources. As a
pharmaceutical manufacturer, the Company's research and development and
manufacturing operations are subject to government regulation. Replacement of
equipment for products subject to FDA approval and manufacturing standards
cannot be accomplished without filings and review by FDA. While the Company has
commenced its assessment of its critical non-IT systems, the Company is still in
the early stages of its assessment. The failure of the Company to properly and
timely identify equipment that will not function properly as a result of the
Year 2000 Issue could result in the Company's inability to repair or remediate
that equipment before December 31, 1999. In addition, equipment failures due to
the Year 2000 Issue could result not only in significant replacement costs to
the Company but also in a significant delay in product shipments while the
Company seeks to validate replacement equipment, which could have a material
adverse effect on the Company.
Third Party Suppliers, Vendors and Customers
The Company's Year 2000 Compliance Program also includes an investigation of the
Year 2000 compliance of its major suppliers, vendors, customers and business
partners. For example, third parties handle the payroll function for the
Company, the vast majority of the Company's product orders are received by
computer over the telecommunications systems, and the Company also relies on the
services of banks, utilities, and commercial airlines, among others. The Company
is currently obtaining assurances from key service providers that there will be
no interruption of service as a result of the Year 2000 Issue, and to the extent
that such assurances are not given, the Company intends to devise contingency
plans to ameliorate the negative effects on the Company. The Company expects to
complete the inquiry process by the end of 1998, depending upon third party
responses, and will address contingency planning thereafter.
15
<PAGE>
There can be no assurances that the contingency plans will adequately
prevent a service interruption by the Company's third party suppliers from
having a material adverse effect on the Company.
The Company is contacting its key bulk chemical and packaging suppliers to
determine their Year 2000 compliance status. As with certain of its equipment,
the Company cannot change suppliers of bulk active ingredients unless the
alternative supplier has been approved through the FDA regulatory process. Where
possible, the Company tries to qualify two or more sources of supply. However,
certain of the Company's current and future products will depend on a sole
source of raw material supply. Should one or more of these sole source suppliers
become unable to deliver product in a timely manner due to the Year 2000 Issue,
the Company would need to identify and qualify a new source of supply. This
process is likely to involve significant delays and cost and could have a
material adverse effect on the Company. In addition, the Company is contacting
significant customers to determine their progress towards Year 2000 compliance
and to identify issues, if any, which might develop because of customers'
failure to be prepared for the Year 2000 Issue. In the event issues are
identified, the Company expects to try to develop procedures to permit the
Company to continue to supply the customer involved despite the Year 2000
Issues. The Company has been assured by its key financial institutions that they
are currently Year 2000 compliant or will be Year 2000 compliant in early 1999.
Year 2000 Costs and Expenses
To date, the costs associated with the Year 2000 Issue and the Company's Year
2000 Compliance Program have not been material and were less than $50,000 for
the first three quarters of 1998 and consisted mainly of internal payroll costs.
The Company's policy is to expense all costs related to Year 2000 compliance
unless the useful life of the technological asset is extended or increased. The
Company will incur costs that include internal resources, external consulting,
software and equipment upgrades and replacement. Based on currently available
information, the Company believes that the expense associated with its ongoing
efforts will not be material and will be funded through operations, but the
Company has not completed its evaluation of its non-IT systems and its third
party relationships. If unforeseen compliance efforts are required or if present
compliance efforts are not completed on time, or if the cost of any required
updating, modification or replacement of the Company's systems or equipment
exceeds the Company's estimates, the Year 2000 Issue could result in material
costs and have a material adverse effect on the Company.
Contingency Plans and Worst Case Scenario
At the present time, the Company has not formulated contingency plans and
completed tests for addressing systems failures due to the Year 2000 Issue. The
Company has received written certifications confirming that its critical
internal IT systems are compliant, and the Company and its Year 2000 consultant
will evaluate the need for contingency plans for these systems given those
assurances. The Company has recently begun the process of evaluating the Year
2000 Issue with respect to its internal non-IT systems and with respect to its
major suppliers, vendors, customers and business partners. As this evaluation
process proceeds, the Company will be working with its Year 2000 consultant to
formulate appropriate contingency plans. While the Company's plan calls for most
contingency planning to be completed no later than June 30, 1999, the Company's
ability to prepare contingency plans will depend on the timing and results of
its evaluation and testing process. As issues are identified and analyzed, the
Company expects that new and existing contingency plans will be modified over
time.
One possible worst case scenario for the Company resulting from the Year 2000
Issue would be that one or more of the Company's sole source bulk chemical
suppliers would become temporarily unable to deliver raw materials to the
Company as a result of a system failure. If this were to happen, the Company
would not be permitted to substitute another manufacturer's raw material for
that of its sole source supplier. The Company would not be able to continue to
manufacture product using that raw material once its inventories of the raw
material were expended.
16
<PAGE>
The Company's contingency planning were this to happen with respect to an
important product might include pre-qualifying a second source for critical raw
materials when possible and/or might include building up key sole source raw
material inventories in advance of December 31, 1999.
Various statements in these discussion of the Year 2000 issue are
forward-looking statements (statements which are not historical in fact) within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements include statements of the Company's expectations, anticipated
schedules and expected completion dates, estimated costs and statements
regarding expected Year 2000 compliance. These forward-looking statements are
subject to various risks which may materially affect the Company's efforts to
achieve Year 2000 compliance to accomplish its goals and to meet its
expectations with respect to Year 2000 issues. These risks include the
possibility that the Company will not be able to complete the plans and
modifications that it has identified, on a timely basis, if at all, the
availability of skilled consultants, the difficulty of evaluating and testing
the wide variety of information systems and components, both hardware and
software, that must be evaluated, the variety, number and complexity of
equipment used in the Company's operations and the large number of vendors and
customers with which the Company interacts. The Company's assessment of the
effects of the Year 2000 issue on the Company are based, in part, upon
information received from third parties and the Company's reasonable reliance on
that information. Therefore, the risk that inaccurate information is supplied by
third parties upon which the Company reasonably relied must be considered as a
risk factor that might affect the Company's Year 2000 efforts. Further, the
delay or failure of third parties to respond to inquires will hinder the
Company's ability to evaluate and remediate the Year 2000 issue. The Company is
in the early stages of evaluating certain aspects of the Year 200 Issue and
expects that its assessment of the Year 2000 Issue will evolve as its Year
2000 compliance program progresses and the evolution and testing process
continues.
17
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See descriptions of legal proceedings in Note C of the Notes to Condensed
Consolidated Financial Statements in Part I of this Form 10-Q, which are hereby
incorporated by reference herein.
Item 5. Other Information
The deadline for submission of proposals by shareholders pursuant to Rule
14a-8 issued under the Securities Exchange Act of 1934 (the "Act"), which are
intended for inclusion in the proxy statement to be furnished to all
shareholders entitled to vote at the next annual meeting of shareholders of the
Company, is December 18, 1998. Pursuant to recent amendments to the rules
relating to proxy statements under the Act, the shareholders of the Company are
hereby notified that the deadline for providing timely notice to the Company of
matters that shareholders desire to introduce at the next annual meeting of
shareholders of the Company (which are not otherwise submitted for inclusion in
the proxy statement in accordance with the preceding sentence) is March 15,
1999. Management proxies will be authorized to exercise discretionary authority
with respect to any such shareholder proposal not included in the Company's
proxy materials for the next annual meeting for which the Company receives
notice of such proposal after March 15, 1999. In order to curtail any
controversy as to the date on which a proposal was received by the Company, it
is suggested that proponents submit their proposals by Certified Mail, Return
Receipt Requested.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Employment Agreement dated August 24, 1998 between the Company
and Daniel L. Korpolinski.
(b) Reports on Form 8-K
Form 8-K dated August 24, 1998 - Item 5: Other Events.
The Company announced the appointment of Daniel L. Korpolinski
as the Company's President and Chief Executive Officer.
Form 8-K dated September 2, 1998- Item 5: Other Events.
The Company announced that it had been served as a
nominal defendant in a shareholder derivative action
against six of its seven current Directors.
No other reports on Form 8-K were filed during the
three months ended September 30, 1998.
18
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
Signature Title Date
/s/ Daniel M. P. Caron Vice President-Finance, Chief November 16, 1998
- - ------------------------ Financial Officer and Treasurer
Daniel M. P. Caron (principal financial and principal
accounting officer)
19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made and entered into effective this 24th day
of August, 1998 by and between Daniel L. Korpolinski (the "Employee") and COPLEY
PHARMACEUTICAL, INC. ("Company"), a Delaware corporation.
WITNESSETH
WHEREAS, the Company wishes to employ Employee as President and Chief
Executive Officer of the Company; and
WHEREAS, Employee and the Company desire to enter into an Agreement to
provide for Employee's employment as President and Chief Executive Officer with
the Company as described in Exhibit A which is incorporated herein;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. Employment; Duties. During the term of the Employment Period (as defined
in Section 2), and subject to the terms and conditions hereof, the Company shall
employ the Employee as President and Chief Executive Officer and the Employee
shall perform such duties for the Company as are incident to such position,
together with such other duties, consistent with Employee's knowledge,
experience and position with the Company, as he may be reasonably requested to
perform by the Company from time to time in connection with such employment. In
addition, the Company will undertake its best efforts to nominate and elect
Employee a Company Director to serve on the Company's Board of Directors.
Employee accepts such employment, and agrees to render the services
described herein and to devote his entire available business time, effort, skill
and attention to promote the best interests of the Company.
2. Employment Period. The term of this Agreement shall commence on the
effective date of this Employment Agreement, and shall end on the date two (2)
years after such date, unless sooner terminated pursuant to Section 5 hereof.
Thereafter, this Agreement shall automatically be renewed for successive periods
of one (1) year, unless the Company shall have given the Employee not less than
six (6) months' written notice of non-renewal and shall pay the Employee the
Severance Payments (as defined below) that would be payable if Employee's
employment were terminated in accordance with Section 5.4 hereof. The term
"Employment Period" shall mean the period of the Employee's employment with the
Company hereunder.
3. Salary. As compensation for the services to be rendered by Employee
during the Employment Period, the Company shall pay Employee the base annual
salary of $300,000, payable periodically consistent with the Company's normal
payroll practices, less such deductions and amounts to be withheld therefrom as
may be required under applicable law. The Base Salary may be increased from time
to time as agreed upon by the Company and Employee.
4. Other Benefits and Terms of Employment. During the Employment Period,
the following benefits and other terms of employment shall also apply:
(a) Expenses. The Company shall reimburse Employee for customary and
necessary expenses reasonably incurred by Employee in the course of performing
those duties which are incident to his position or which he has been requested
to perform by the Company, all in accordance with the Company's normal
reimbursement policies. In addition, at the time of commencement of employment,
the Company shall pay Employee $50,000, net of income taxes, for relocation and
housing allowance.
(b) Bonus. Employee shall receive such annual or other bonuses as may,
from time to time, be approved by the Company's Board of Directors, based upon
various factors reviewed by the Board and based on the achievement of the
objectives determined by the Board. Such bonuses are entirely within the
discretion of the Board and the Company. Employee shall also participate in such
other incentive compensation programs, if any, as the Company may establish for
key employees. The foregoing notwithstanding, for each of the Company's 1998 and
1999 fiscal years, Employee shall be entitled to a bonus of 30% of his base pay,
payable within three months of the fiscal year close, as follows:
(i) For fiscal year 1998,
the bonus will be pro-rated based upon
achievement of the following:
(x) Objectives (50%)
o Completion of a 1999 Business Plan acceptable to Board of Directors by
11/30/98 o Completion of meetings with all of Copley's key customers by 12/31/98
o Completion of meetings with those key financial analysts who follow Copley by
12/31/98
o Improvement in Company morale demonstrated through employee turnover rate
reduction and effective Company-wide "town meetings" and
(y) Achievement of Copley's existing 1998 EPS Plan (50%)
(ii) For fiscal year 1999,
the bonus will be upon achievement of the
Company's 1999 Business Plan, which will
include specific targets such as EPS, ANDA
submissions, and certain discrete projects
to be mutually agreed upon with the Board of
Directors
(c) Options. At the discretion of the Board of Directors, Employee
shall be eligible to receive periodic grants of stock options to purchase shares
of the Company's Common Stock. Upon commencement of employment, Employee shall
be entitled to receive options to purchase 150,000 shares at the closing price
of the shares on the effective date of this agreement. Any options to be granted
shall be subject to an appropriate option agreement in the form normally used by
the Company with respect to its key employees. The initial grant of options
shall have 37,507 shares vest on the effective date of this agreement and 4,891
shares vest monthly for each of the succeeding 23 months.
(d) Insurance, Other Benefits. Employee shall participate in employee
health, hospitalization, disability, group-term life, vacation, and other
benefit programs on the same basis as that of other Company executives. In
addition, Employee shall be entitled to such other benefits as may be generally
maintained or provided by the Company for the benefit of other employees.
Employee has been given copies of the Company's current insurance and employee
benefit plans.
5. Termination.
5.1 General. The Employment Period shall terminate prior to its
scheduled expiration set forth in Section 2 upon the earliest of the following:
(i) the Employee's death, (ii) a determination that Employee has become
disabled, as defined in Section 5.2, (iii) termination "for cause" under the
provisions of Section 5.3, or (iv) termination without cause as provided in
Section 5.4.
5.2 Disability. Employee shall be regarded as "disabled" for purposes
of this Agreement if s/he has been unable to render the services required for
him/her hereunder, in a manner consistent with past practice, for a period of
four (4) consecutive months or for any period in the aggregate of eight (8)
months in any twelve (12) month period because of a serious and continuing
health impairment; provided, however, that thirty (30) days' prior notice of
termination for disability shall be given to Employee.
If the Employee dies during the Employment Period (without regard to the
Company's right to terminate this Agreement thereupon), or if the Company
exercises its right to terminate the Employee under this Section 5.2, then in
each such case the Employee or his estate shall be entitled to the same payments
and other benefits as are provided in the event of termination pursuant to
Section 5.4 (including without limitation the acceleration of Employee's stock
options as provided in Section 5.4).
In the event that there should be any dispute between Employee and the
Company as to whether Employee is "disabled" within the meaning of this
Agreement or as to whether Employee has recovered from any such disability, such
matter shall be conclusively determined by the written report of a physician
acceptable to the Board and Employee (or, if they cannot reach agreement, by a
physician chosen by the Company's doctor and the Employee's doctor), who shall
set forth in his report the nature and seriousness of the impairment suffered by
Employee and the likely effect of such impairment on Employee's future ability
to render the services required hereunder. Employee agrees to submit to
examination by any such physician to the extent reasonably requested by the
Board for the purpose of ascertaining the extent of Employee's disability or
recovery therefrom and the parties agree that any determination with respect to
Employee's disability may be conclusively resolved in the sole judgment of the
Board if Employee should fail to comply with any reasonable request by the Board
to submit to such an examination.
5.3 For Cause. The Company may terminate the Employment Period and
discharge Employee for cause upon giving thirty (30) days (five (5) days in the
case of sub-paragraph (iv) below) written notice to Employee of such
termination. Regardless of any broader definition of "cause" which might
otherwise apply under applicable law, the term "for cause" as used herein shall
be defined to include only one or more of the following grounds: (i)
misappropriation by Employee of any material amounts of money or other assets or
property (tangible or intangible) of the Company; (ii) the Employee's willful
refusal to perform reasonable assignments given to Employee commensurate with
such Employee's status, functions or responsibilities as a key employee,
provided, that (x) such refusal is material and repetitive, and (y) the Employee
shall have been given reasonable notice and explanation of such refusal, and
reasonable opportunity to cure such refusal, and no cure has been effected
within a reasonable time after notice; (iii) conviction of Employee of a felony;
or (iv) a breach of any of the provisions of Section 6 hereof, provided the
Employee shall have been given reasonable notice and explanation of such
refusal, and reasonable opportunity to cure such refusal, and no cure has been
effected within a reasonable time after notice.
5.4 At the Election of the Company for Reasons Other
than For Cause. The Company may terminate the Employee's employment hereunder at
any time during the term of this Agreement without cause by giving ninety (90)
days' advance written notice to the Employee of an election to terminate.
In the event the Company exercises its right to terminate the Employee
under this Section 5.4, the Company agrees to pay the Employee (i) a lump sum
severance or termination payment equal to the greater of (x) one year's Base
Salary at the then current rate or (y) the Base Salary payable for the remaining
term under this Agreement, (ii) medical and other health insurance benefits for
the severance period set forth in (i) above; and (iii) the pro rata portion of
any bonus to which the Employee is otherwise entitled (the "Severance
Payments"). Such Severance Payments shall be payable on the Employee's last date
of employment hereunder and shall be subject to all applicable federal and state
withholding and other taxes.
In addition, notwithstanding anything to the contrary contained in any
stock option agreement between the Employee and the Company, if the Company
exercises its right to terminate the Employee under this Section 5.4, then all
stock options then held by the Employee shall automatically accelerate and
become fully exercisable as of the date on which the Employee receives notice of
termination. Such stock options shall remain fully exercisable until the close
of business on the 60th day after the last day of the Employee's employment with
the Company hereunder. The Company shall take any and all actions necessary to
effect the provisions of this paragraph.
It shall be deemed to be a termination "without cause" if the Employee's
responsibilities and executive authority are reduced or diluted in any material
respect without the Employee's consent (which reduction or dilution is not
corrected by the Company within 30 days following written notification by
Employee to the Company that Employee intends to terminate his employment for
such reason) or the Employee is relocated to another Company office or facility
more than 50 miles from Canton, Massachusetts without the Employee's consent.
In the event that Employee would, except for the remainder of this Section,
be subject to a tax pursuant to Section 4999 of the Internal Revenue Code of
1986, as amended, (the "Code") or any successor provision that may be in effect,
as a result of "parachute payments" (as that term is defined in Section 280G(b)
(2) (A) and (d) (3) of the Code) made pursuant to this Agreement, or a deduction
would not be allowed to the Company for all or any part of such payments by
reason of Section 280G(a) of the Code, or any successor provision that may be in
effect, such payments shall be reduced, eliminated, or postponed in such amounts
as are required to reduce the aggregate "present value" (as that term is defined
in Section 280G(d)(4) of the Code) of such payments to one dollar less than an
amount equal to three times Employee's base amount," (as that term is defined in
Section 280G(b)(3)(a) and (d)(1) and (2) of the Code) to the end that Employee
is not subject to tax pursuant to such Section 4999 and no deduction is
disallowed by reason of such Section 280G (a). To achieve such required
reduction in aggregate present value, Employee in his sole discretion shall
determine what item(s) constituting the parachute payments shall be reduced,
eliminated or postponed, the amount of each such reduction, elimination or
postponement, and the period of each such postponement. To enable Employee to
make such determination, the Company shall be required to provide Employee with
such information as is reasonably necessary for such determination.
Prior to the making of any payment under this Section, either party may
request a determination as to whether such payment would constitute a "parachute
payment," and, if so, the amount by which the payment must be reduced in
accordance herewith. If such a determination is requested, it shall be made
promptly, at the Company's expense, by independent tax counsel selected by the
Employee and approved by the Company (which approval shall not unreasonably be
withheld), and such determination shall be conclusive and binding on the
parties. The Company shall provide such information as such counsel may
reasonably request, and such counsel may engage accountants or other experts at
the Company's expense to the extent that they deem necessary or advisable to
enable them to reach a determination.
5.5 Effect of Termination. Notwithstanding any termination of the
Employment Period, the Company shall promptly pay Employee any amounts due to
Employee with respect to all accrued but unpaid salary and accrued but unused
vacation time to the date of termination. If Employee is deceased, such payments
shall be made to such individual or entity as Employee may have designated in
writing submitted to the Company or, in the absence of such written designation,
to Employee's estate.
6. Covenants of the Employee. In consideration of the Employee's continued
employment with the Company, Employee hereby agrees that:
6.1 Noncompetition Covenant. During the Employment Period and for one
additional year thereafter the Employee will not, whether alone or as a partner,
officer, director, consultant, principal, distributor, representative, agent,
employee or stockholder of any company or other commercial enterprise, engage in
any business or other commercial activity which is competitive with the
products, services being marketed, distributed or developed by the Company. The
foregoing prohibition shall not prevent employment or engagement by any company
or business organization not engaged in such business as long as the activities
of any such employment or engagement, in any capacity, do not involve work on
matters directly or indirectly related to the products, services or strategy
being developed, manufactured or marketed by the Company. Ownership of less than
five percent (5%) of the outstanding shares of a company whose stock is publicly
traded shall not be a violation of this provision. If the Employee is terminated
without "cause" (as defined herein), the provisions of this Section 6.1 shall
not apply unless the Company shall have promptly made the payments required to
be made by it pursuant to Section 5.4 hereof.
6.2 Nonsolicitation. During the Employment Period and for one
additional year thereafter the Employee will not, directly or indirectly, either
for himself or for any other commercial enterprise, solicit, or attempt to
solicit, any of the Company's customers, business or prospective customers. For
the purpose of this Agreement, "prospective customers" shall include those
customers who have been solicited by the Company within one year before the date
Employee's employment with the Company terminated. Furthermore, during such
period, the Employee will not solicit any employee of the Company for the
retention of such Company employee for any commercial enterprise, other than for
the Company, nor recruit, solicit, attempt to recruit or solicit, hire, or
attempt to hire any such Company employee for any other commercial enterprise,
whether or not such enterprise may be a competitor of the Company.
6.3 Nondisclosure Obligation. The Employee will not at any time,
whether during or after the term of this Agreement, and regardless of any early
termination thereof, for any reason whatsoever (other than to promote and
advance the business of the Company), reveal to any person or entity (both
commercial and non-commercial) any of the trade secrets, proprietary rights or
confidential business information concerning the Company, including but not
limited to its research and development activities, product designs, prototypes,
technical specifications, processes, formulae, inventions, methods and
memoranda, know-how and know-how, marketing plans and strategies, pricing and
costing policies, customer and supplier lists and accounts, and business,
finances or financial information of the Company so far as they have come and
may come to the Employee's knowledge, except as may be required in the ordinary
course of performing his/her duties as an Employee. These restrictions shall not
apply to: (i) information that may be disclosed generally or is in the public
domain through no default of the Employee; (ii) information received from a
third party who has not violated its own confidentiality obligation to the
Company; (iii) information approved for release by written authorization of the
Company; or (iv) information that may be required by law or an order of any
court, agency or proceeding to be disclosed. The Employee shall keep secret all
matters of such nature entrusted to him/her and shall not use or disclose any
such information in any manner which causes loss to the Company.
6.4 Assignment of Inventions. It is expressly understood and agreed
that any and all right, title and interest of the Employee in any inventions,
discoveries and patent rights conceived or developed by the Employee during the
term of this Agreement (and thereafter if Employee remains an employee of the
Company) which relate to or arise out of his employment services rendered to the
Company are "works for hire" and are hereby assigned to the Company by the
Employee and shall be the sole and exclusive property of the Company.
6.5 Reformation of Agreement. In the event that any of the covenants
contained in this Section 6 may be found by a court of competent jurisdiction to
be invalid or unenforceable as against public policy or otherwise, the parties
hereto expressly authorize such court to exercise its discretion in reforming
any such covenant to the end that Employee shall be subject to the greatest
extent permissible to confidentiality and noncompetition covenants that are
reasonable under the circumstances enforceable by the Company, and consistent
with the Company's legitimate interests (acknowledged by the parties) in
protecting the Company's goodwill associated with the experience, skills, and
loyalty of Employee and with protecting the value of the business and assets of
the Company.
6.6 Injunctive Relief. In the event of a breach or threatened breach by
Employee of any of the covenants contained in this Section 6, Employee agrees
that the Company shall be entitled to injunctive relief in a court of
appropriate jurisdiction to remedy any such breach or threatened breach.
7. Indemnification. The Company hereby agrees to defend and indemnify
Employee to the maximum extent permitted by applicable law against all costs,
charges, and expenses incurred or sustained by him in connection with any
action, suit, or other proceeding to which he may be a party by reason of his
being an employee of the Company or by reason of any action taken or omitted to
be taken in good faith by Employee in such capacity, to the extent that
Employee's actions or omissions are consistent with and not in breach of the
provisions of this Agreement. The provisions of this Section 7 shall not be
interpreted to limit any right to indemnification that the Employee may have
under the Certificate of Incorporation or By-laws of the Company, by contract or
otherwise or under applicable law.
8. Nonassignability. This Employment Agreement may not be assigned by
either Company or Employee, except that, with the Employee's consent (which may
not be unreasonably withheld), the Company may assign its rights under this
Agreement to any affiliated corporation by means of assignment, merger, or
otherwise; and no such assignment shall impair the rights or obligations of the
parties as provided herein.
9. Miscellaneous.
9.1 Notices. All notices and other communications required or permitted
to be given hereunder shall be in writing and shall be deemed to have been duly
given when delivered by hand, sent by overnight courier service or facsimile
transmission, or dispatched by certified mail to the parties at the following
addresses or to such other address for a party as such party may have designated
to the other in a prior notice given in accordance herewith:
(a) If to the Company, to:
Copley Pharmaceutical, Inc.
25 John Road
Canton, MA 02021
Attention: General Counsel
Fax: (781) 575-7374
(b) If to Employee, to:
Mr. Daniel L. Korpolinski
c/o Copley Pharmaceutical, Inc.
25 John Road
Canton, MA 02021
9.2 Entire Agreement. This Agreement sets forth the entire agreement
and understanding of the parties hereto concerning the subject matter hereof and
supersedes any prior understandings and agreements relating to the terms of the
Employee's employment by the Company.
9.3 Amendments; Waivers. This Agreement may be amended, modified,
superseded, or canceled and the terms or covenants hereof may be waived, only by
a written instrument specifically referring to this Agreement and executed by
both of the parties hereto, or, in the case of a waiver, by the party entitled
to the benefit of such provision. The failure of the Company at any time or from
time to time to require performance of any Employee's obligations under this
Agreement shall in no manner affect the Company's right to enforce any
provisions of this Agreement at a subsequent time; and the waiver by the Company
of any right arising out of any breach shall not be construed as a waiver of any
right arising out of any subsequent breach.
9.4 Severability. If any provision of this Agreement, or the
application thereof to any person or circumstance, should, for any reason and to
any extent, be invalid or unenforceable, the remainder of this Agreement should
not be affected thereby.
9.5 Governing Laws; Disputes. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts
applicable to contracts made and to be performed entirely within such
Commonwealth. The Company consents to personal jurisdiction in the State of
California and agrees not to raise a defense of forum non conviens. In any
dispute between the Company and the Employee, the prevailing party shall be
entitled to recover its attorney's fees and expenses.
9.6 Headings. The section headings contained in this Agreement are
intended solely for convenience of reference and shall be given no effect in the
construction or interpretation of this Agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement on this
date first written above, effective as of such date.
EMPLOYEE:
---------------------------------
Daniel L. Korpolinski
Social Security # COPLEY PHARMACEUTICAL, INC.
By: _____________________________
Title: __________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS, STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME AND STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000829987
<NAME> Copley Pharmaceutical, Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 13,119
<SECURITIES> 25,817
<RECEIVABLES> 34,617
<ALLOWANCES> (500)
<INVENTORY> 24,530
<CURRENT-ASSETS> 107,798
<PP&E> 74,826
<DEPRECIATION> (31,042)
<TOTAL-ASSETS> 154,519
<CURRENT-LIABILITIES> 43,634
<BONDS> 4,500
0
0
<COMMON> 254
<OTHER-SE> 105,191
<TOTAL-LIABILITY-AND-EQUITY> 154,519
<SALES> 98,275
<TOTAL-REVENUES> 98,275
<CGS> 76,322
<TOTAL-COSTS> 76,322
<OTHER-EXPENSES> 16,017
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 430
<INCOME-PRETAX> 6,760
<INCOME-TAX> 2,505
<INCOME-CONTINUING> 4,255
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,255
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
