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 June 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 August 3, 1998 was 19,176,861 shares.
<PAGE>
COPLEY PHARMACEUTICAL, INC.
INDEX
For the Six Months Ended June 30, 1998
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30,
1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
and Comprehensive Income for the three and six 4
months ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
for the six months ended June 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 - 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
<TABLE>
COPLEY PHARMACEUTICAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(In thousands, except share data) 1998 1997
-------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,974 $ 13,847
Available-for-sale securities 19,465 19,498
Accounts receivable, trade, net 34,185 30,170
Inventories:
Raw materials 11,965 7,282
Work in process 4,558 5,207
Finished goods 11,983 10,797
------------ ------------
Total inventories 28,506 23,286
Current deferred tax assets 6,593 5,239
Other current assets 6,094 4,189
------------ ------------
Total current assets 107,817 96,229
Property, plant and equipment, net 44,641 46,450
Other assets 3,015 3,065
------------ ------------
Total assets $ 155,473 $ 145,744
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable, trade $ 5,276 $ 2,583
Accounts payable, related party 17,862 13,668
Current portion of long-term debt 300 300
Accrued compensation and benefits 1,679 1,275
Accrued rebates 7,492 9,071
Accrued income taxes 4,206 374
Current portion of accrued recall
related and litigation expenses 7,916 8,048
Accrued expenses 782 830
------------ ------------
Total current liabilities 45,513 36,149
Accrued recall related and litigation expenses --- 3,645
Deferred tax liabilities 1,021 269
Long-term debt 4,800 4,800
------------ ------------
Total liabilities 51,334 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 78,144 78,063
Unrealized holding loss on available-for-sale securities (7) (16)
Retained earnings 38,292 35,133
Treasury stock, at cost, 6,217,228 and 6,235,978 shares
outstanding, respectively (12,544) (12,553)
------------ -----------
Total shareholders' equity 104,139 100,881
------------ -----------
Total liabilities and shareholders' equity $ 155,473 $ 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 six months ended
June 30, June 30,
1998 1997 (In thousands, except per share data) 1998 1997
-------------- -------------- -------------- --------------
<C> <C> <S> <C> <C>
Net sales:
$ 18,924 $ 17,223 Manufactured products $ 35,118 $ 32,757
15,803 8,277 Distributed products 27,817 18,559
-------------- -------------- -------------- --------------
34,727 25,500 Net sales 62,935 51,316
Cost of goods sold:
13,693 12,223 Manufactured products 26,721 25,193
12,349 6,429 Distributed products 21,788 14,446
-------------- -------------- -------------- --------------
26,042 18,652 Cost of goods sold 48,509 39,639
8,685 6,848 Gross profit 14,426 11,677
Operating expenses:
2,228 3,566 Research and development 4,850 6,249
1,164 1,051 Selling, marketing and distribution 2,425 2,319
1,496 1,990 General and administrative 2,779 3,466
15 2,167 Recall related and litigation, net 194 2,366
--- 310 Restructuring --- 312
-------------- -------------- -------------- --------------
3,782 (2,236) Income (loss) from operations 4,178 (3,035)
476 350 Interest and other investment income 906 653
(157) (68) Interest expense (319) (130)
15 (1,540) Other income (expense), net (76) (1,500)
-------------- -------------- -------------- --------------
4,116 (3,494) Income (loss) before income taxes 4,689 (4,012)
1,360 (1,980) Provision (benefit) for income taxes 1,530 (2,135)
-------------- -------------- -------------- --------------
$ 2,756 $ (1,514) Net income (loss) $ 3,159 $ (1,877)
============== ============== ============== ==============
Other comprehensive income, net of taxes
5 8 Unrealized gains (loss) on securities 11 (20)
Less: reclassification adjustment for
--- --- gains included in net income (2) ---
-------------- -------------- -------------- --------------
$ 2,761 $ (1,506) Comprehensive income (loss) $ 3,168 $ (1,897)
============== ============== ============== ==============
Weighted average common shares
outstanding:
19,154 19,119 Basic 19,153 19,119
19,243 19,119 Diluted 19,246 19,119
Earnings (loss) per share:
$0.14 $(0.08) Basic $0.16 $(0.10)
$0.14 $(0.08) Diluted $0.16 $(0.10)
</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 six months ended
June 30,
(In thousands) 1998 1997
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 3,159 $ (1,877)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,521 3,628
Realized losses (gains) on sales of assets 4 (116)
Change in deferred taxes (602) 90
Changes in operating assets and liabilities:
Decreases (increases) in assets:
Accounts receivable (4,015) 1,920
Inventories (5,220) 67
Other current assets (1,905) (526)
Other assets, net of amortization (20) 1,324
Increases (decreases) in liabilities:
Accounts payable 6,887 (3,756)
Accrued income taxes 3,832 (2,225)
Accrued expenses (5,000) (2,239)
------------ ------------
Net cash provided by (used in) operating activities 641 (3,710)
------------ ------------
Cash flows from investing activities:
Capital expenditures (1,664) (649)
Purchases of available-for-sale securities (9,790) (8,946)
Proceeds from sales of available-for-sale securities 2,410 ---
Proceeds from maturities of available-for-sale securities 7,440 6,800
Proceeds from sales of property, plant and equipment --- 135
------------ ------------
Net cash provided by (used in) investing activities (1,604) (2,660)
------------ ------------
Cash flows from financing activities:
Issuance of common stock to Employee Stock Purchase Plan 90 113
------------ ------------
Net cash provided by (used in) financing activities 90 113
------------ ------------
Net increase (decrease) in cash and cash equivalents (873) (6,257)
Cash and cash equivalents at beginning of period 13,847 15,974
------------ ------------
Cash and cash equivalents at end of period $ 12,974 $ 9,717
============ ============
</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 six months ended June 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 June 30, 1998 and December 31, 1997, the results of its operations for the
three and six months ended June 30, 1998 and 1997, and its cash flows for the
six months ended June 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 six-month period ended June 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 has an initial term of five years, until November 11, 1998, and will
continue until June 1, 1999. 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
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 distribution contracts, the
Company has incurred increased royalty costs. For the six months ended June 30,
1998 and 1997, approximately $21.6 million and $13.7 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 six months ended June 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 insurance expense for these insurance policies was
approximately $2.3 million and $2.4 million, respectively, for the six months
ended June 30, 1998 and 1997.
During the six months ended June 30, 1998 and 1997 the Company had net sales of
approximately $0 and $30,000, 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 will 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 six months ended June 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 4,100 class action claims totaling approximately $59 million. No
awards have been made to approximately 1,300 non-death class action claims
(including approximately 700 which have been disallowed by the Special Master)
and the District Court has given these claimants additional time to supplement
their claims. 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 one of its agencies, 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 both 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.
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.
8
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the six months ended June 30, 1998
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.
On November 3, 1997 the Company received notification that the Defense
Logistics Agency ("DLA") has proposed the Company be debarred from federal
government contracting and from directly or indirectly receiving the benefits of
certain federal assistance programs. The reason for the proposed debarment is
the Company's guilty plea described above. The Company entered into an
administrative agreement with DLA, effective May 1, 1998, in lieu of debarment.
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 seeks a permanent injunction and trebled unspecified
monetary damages. The Company has 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 seeks 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.
On June 1, 1995, the ITC issued its Final Determination ordering the
investigation terminated with the finding of no violation of Section 337, of no
patent infringement and taking no position on the issue of patent validity and
enforceability. On July 20, 1995, MMD and Tanabe filed an appeal with the United
States Court of Appeals for the Federal Circuit seeking review of the ITC's
Final Determination. On March 7, 1997, the United States Court of Appeals for
the Federal Circuit affirmed the ITC's decision finding no infringement. A
further appeal by MMD to the United States Supreme Court was filed and, in
December 1997, the Supreme Court refused to grant MMD's application to appeal.
Orion has 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. Although the Company believes that these
complaints are without merit, that the Company and Orion have meritorious
defenses to these actions, and that the Company should prevail in these
lawsuits, 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 operations.
9
<PAGE>
COPLEY PHARMACEUTICAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For the six months ended June 30, 1998
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 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 $7.9 million of estimated recall related and legal contingency
reserves accrued at June 30, 1998. These reserves reflect the Company's
estimates of its exposure at June 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 June 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 six months ended
June 30, June 30,
1998 1997 Change (Unaudited) 1998 1997 Change
- --------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$18,924 $17,223 9.9 % Manufactured products $35,118 $32,757 7.2%
15,803 8,277 90.9 % Distributed products 27,817 18,559 49.9%
- ---------- --------- ---------- ---------
$34,727 $25,500 36.2 % Net sales $62,935 $51,316 22.6%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Net sales for the second quarter of 1998 were $34.7 million, an increase of $9.2
million, or 36.2%, from the same period in 1997. The Company's net sales were
$62.9 million for the six-month period ended June 30, 1998 as compared to $51.3
million for the same period in 1997. The increase in net sales for the quarter
and six months ended June 30, 1998 resulted from new product introductions, most
notably pentoxifylline, and higher unit sales volumes which was partially offset
by continued price erosion. Additonally for the quarter ended June 30, 1998, the
Company recognized an approximate $1.0 million benefit for sales allowances and
promotional expenses accrued in prior quarters and whereby actual amount were
favorable to amounts estimated.
<TABLE>
Gross Profit
- -------------------------------------------------------------------------------------------------------------------------
For the quarter ended (In thousands) For the six months ended
June 30, June 30,
1998 1997 Change (Unaudited) 1998 1997 Change
- --------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$5,231 $5,000 4.6% Manufactured products $ 8,397 $ 7,564 11.0%
As a % of manufactured
27.6% 29.0% products net sales 23.9% 23.1%
$3,454 $1,848 86.9% Distributed products $ 6,029 $ 4,113 46.6%
As a % of distributed
21.9% 22.3% products net sales 21.7% 22.1%
$8,685 $6,848 26.8% Gross profit $14,426 $11,677 23.5%
25.0% 26.9% As a % of net sales 22.9% 22.8%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's gross profit was $8.7 million, or 25.0% of net sales, for the
second quarter of 1998 as compared to $6.8 million, or 26.9% of net sales, for
the same period in 1997.
For the six-month period ended June 30, 1998, the Company's gross profit was
$14.4 million, or 22.9% of net sales, as compared to $11.7 million or 22.8% of
net sales a year earlier. Increased volume of both manufactured and the new
distributed product as well as the estimate adjustment contributed to
maintaining margins despite falling prices.
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 six months ended
June 30, June 30,
1998 1997 Change (Unaudited) 1998 1997 Change
--------------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$ 2,228 $3,566 (37.5)% Research and development $4,850 $6,249 (22.4)%
11.8% 20.7% As a % of net manufactured sales 13.8% 19.1%
$ 1,164 $1,051 10.8% Selling, marketing and distribution $2,425 $2,319 4.6%
3.3% 4.1% As a % of net sales 3.9% 4.5%
$ 1,496 $1,990 (24.8)% General and administrative $2,779 $3,466 (19.8)%
4.3% 7.8% As a % of net sales 4.4% 6.8%
$ 15 $2,167 (99.3)% Recall related and litigation, net $ 194 $2,366 (91.8)%
0.0 % 8.5% As a % of net sales 0.3% 4.6%
$ --- $ 310 (100)% Restructuring --- $ 312 (100)%
--- 1.2 % As a % of net sales --- 0.6%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Research and development expenses decreased to $2.2 million for the second
quarter of 1998 as compared to $3.6 million for the same period of 1997. For the
six-month period, research and development expenses were $4.9 million as
compared to $6.2 million reported in the prior year. Significant reductions in
product validation costs were the primary causes of this decrease.
Selling, marketing and distribution expenses increased 10.8% to $1.2 million for
the second quarter of 1998 as compared to $1.1 million for the same period of
1997. For the six-month period, selling, marketing and distribution expenses
increased 4.6% to $2.4 million compared to $2.3 million reported a year earlier.
The increase in selling, marketing and distribution expenses for the quarter and
six months ended June 30, 1998 resulted from new product introductions.
General and administrative expenses were $1.5 million for the second quarter of
1998 as compared to $2.0 million for the same period in 1997. For the six-month
period ended June 30, 1997, general and administrative expenses totaled $2.8
million compared to $3.5 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 six month period ended June 30, 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 six months ended
June 30, June 30,
1998 1997 Change (Unaudited) 1998 1997 Change
- --------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
Interest and other
$ 476 $ 350 36.0% investment income $ 906 $ 653 38.7%
(157) (68) 130.9% Interest expense (319) (130) 145.4%
15 (1,540) (101.0)% Other income (expense) (76) (1,500) (94.9)%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Interest and other investment income increased to $476,000 for the second
quarter of 1998 as compared to $350,000 for the same period of 1997. For the
six-month period, interest and other investment income increased to $906,000 as
compared to $653,000 reported a year earlier. In both cases the increase was due
to increased average investment holdings.
Interest expense increased to $157,000 for the second quarter of 1998 as
compared to $68,000 for the same period of 1997. For the six-month period
interest expense increased 145.4% to $319,000 as compared to $130,000 for 1997.
The increase for both the quarter and the year 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 Grand Jury settlement. Other expenses of $1.5 million
for the six-month period ended June 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 six months ended
June 30, June 30,
1998 1997 Change (Unaudited) 1998 1997 Change
- ----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <S> <C> <C> <C>
$ 1,360 $(1,980) (168)% Income tax expense (benefit) $ 1,530 $ (2,135) (172)%
33.0 % (56.7)% Effective tax rate 32.6 % (53.2)%
$ 2,756 $(1,514) (282)% Net income (loss) $ 3,159 $(1,877) (268)%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Net income for the second quarter of 1998 was $2.8 million or $0.14 per share
compared to a net loss of $1.5 million or $0.08 per share for the second quarter
of 1997. Net income for 1997 excluding litigation related expenses and
previously announced cost reduction initiatives would have been a profit of $0.2
million or $0.01 per share.
For the six-month period ended June 30, 1998, the Company reported net income of
$3.2 million or $0.16 per share as compared to net loss of $1.9 million or $0.10
per share for the same period in 1997. Excluding the unusual items described
above, 1997 earnings would have been a gain of $0.1 million, or less than $0.01
per share. The increase in adjusted earnings related primarily to higher net
sales and lower research and development spending.
13
<PAGE>
COPLEY PHARMACEUTICAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND CHANGES IN FINANCIAL CONDITION (CONTINUED)
Changes in Financial Condition
Capital Resources and Liquidity
- ----------------------------------------------------------
June 30, December 31,
In thousands 1998 1997
- ----------------------------------------------------------
(Unaudited)
Cash and short-term
investments $32,439 $33,345
Working capital 62,304 60,080
Long-term debt 4,800 4,800
Shareholders' equity 104,139 100,881
- ----------------------------------------------------------
Working capital increased $2.2 million from December 31, 1997 to $62.3 million
at June 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 June 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.
14
<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 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on May 28,
1998.
(b)(1) The following individuals were elected or re-elected to
the Board of Directors. The number of votes cast for each of
the above directors was as follows:
Director For Withheld
Robert P. Cook 16,285,301 132,199
Jane C.I. Hirsh 16,282,996 134,504
David A. Jenkins 16,286,743 130,757
(c)(3) The selection of the firm of KPMG Peat Marwick LLP as
auditors for the fiscal year ending December 31, 1998 was
ratified by the following vote:
Number of
Shares
For 16,046,610
Against 359,694
Abstained 11,196
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Agreement dated May 1, 1998 between The Company and the
Defense Logistics Agency ("DLA").
(b) Reports on Form 8-K
Form 8-K dated May 28, 1998 - Item 5: Other Events. The Company
announced the election results of its annual meeting, various
personnel changes and its decision not to renew its previously
announced retention of CIBC Oppenheimer & Co.
No other reports on Form 8-K were filed during the three
months ended June 30, 1998.
15
<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 August 14, 1998
- ------------------------ Financial Officer and Treasurer
Daniel M. P. Caron (principal financial and principal
accounting officer)
16
ADMINISTRATIVE AGREEMENT
BETWEEN
THE DEFENSE LOGISTICS AGENCY
AND
COPLEY PHARMACEUTICAL, INC.
This Agreement dated the 1st day of May, 1998, is made between Copley
Pharmaceutical, Inc. ("Copley") and the Defense Logistics Agency ("DLA"). As
used herein, "Copley" means Copley Pharmaceutical Inc. and all its operating
sectors, groups, divisions, units and wholly-owned subsidiaries, including those
acquired or established during the term of this Agreement. As used herein,
"Government" means the United States Government.
PREAMBLE
1. Copley is a corporation engaged in the development, manufacture, sale, and
distribution of generic drugs and other products, with its principal place of
business in Canton, MA.
2. On May 28, 1997, Copley was charged by Criminal Information in the United
States District Court for the District of Massachusetts with one count of
conspiracy to defraud the United States in violation of 18 U.S.C. ss. 371. The
Information alleged that, from in or about May 1988 through in or about July
1994, Copley conspired to manufacture drugs approved by the U.S. Food and Drug
Administration ("FDA") using methods different from those approved by FDA, to
falsify manufacturing batch records for FDA-approved drugs, to submit false
annual reports to FDA for approved drugs, and to fail to seek prior FDA approval
for certain manufacturing changes. On June 19, 1997, in accordance with a plea
agreement dated May 27, 1997, Copley pled guilty to the charges in the
Information. Copies of the Plea Agreement and the Information are attached to
this Agreement as Exhibits 1 and 2, respectively.
3. Judgment of conviction and sentence with respect to Copley were entered on
June 19, 1997. Copley was sentenced to "pay a fine in the amount of Ten Million
Six Hundred Fifty Thousand Dollars ($10,650,000)" and to "pay a Special
Assessment in the amount of Four Hundred Dollars ($400). The fine is to be paid
over a three-year period."
4. On October 24, 1997, DLA proposed Copley for debarment from Government
contracting and Government-approved subcontracting pursuant to the procedures
contained in the Federal Acquisition Regulation (FAR) Subpart 9.4 and the
Department of Defense FAR Supplement (DFARS) Subpart 209.4. The proposed
debarment action was based upon Copley's criminal conviction.
<PAGE>
5. By written and oral presentations beginning on December 3, 1997, Copley
presented to DLA information in opposition to the debarment. Copley outlined the
present Copley Business Conduct Policy and Corporate Compliance Program; its
agreement with FDA; its quality accomplishments since August 1994; its current
standard operating procedures; its education and training program; and other
changes in policy since the conduct to which Copley pled guilty. Copley also has
acknowledged improper conduct of its employees and has taken responsibility for
the circumstances of wrongdoing.
6. Copley has expressed an interest in demonstrating to the Defense Logistics
Agency that, notwithstanding the conduct for which Copley was proposed for
debarment, Copley can be trusted to deal fairly and honestly with the
Government, and that debarring Copley from future Government procurement and
non-procurement programs is not a necessary protection in this case.
7. Copley has agreed to keep in place and to incorporate in this Agreement the
measures constituting Copley's Business Conduct Policy voluntarily adopted prior
to the date of this Agreement. In addition, Copley has taken other actions as
specified herein to assure against the recurrence of the conditions giving rise
to the criminal conviction referred to above and to assure that Copley possesses
the high degree of business honesty and integrity required of a Government
contractor.
8. Copley represents that none of the individuals known to Copley to have been
involved in the wrongdoing that was the subject of Copley's plea is now employed
by the company in a position that has responsibility (a) relating to the
manufacture of any product that might be sold to the Government or (b) for any
function subject to the jurisdiction of FDA. Copley further represents that none
of the individuals who were officers or directors of Copley at the time of the
criminal actions is presently employed by Copley, with the following exceptions:
Individual Current Position
Kenneth Larsen Director, Chairman of the Board
Agnes Varis Director
Jane C. I. Hirsh Director, President - International Business
9. DLA has determined that, under the authority of Federal Acquisition
Regulation (FAR) 9.406, cause exists to debar Copley based upon its conviction.
DLA has further determined, however, that the terms and conditions of this
Agreement provide adequate assurance that Copley's future dealings with the
Government, if any, will be conducted with the high degree of honesty and
integrity required of a Government contractor, and that suspension or debarment
is not necessary at this time to protect the Government's interests. The
parties, therefore, agree to the following terms and conditions.
<PAGE>
ARTICLES
1. The period of this Administrative Agreement shall be three years from the
date of execution of this Agreement by DLA, except that, should Copley fail to
be in full compliance with any term or condition of this Agreement, the period
shall be three years from the time that Copley reestablishes full compliance.
2. Copley has entered into a plea agreement with the United States. A copy of
the plea agreement is attached hereto as Exhibit 1, and the terms of the plea
agreement are incorporated herein by reference. Copley agrees, as a term of this
Agreement, to comply with the terms of the plea agreement.
3. Copley shall maintain complete records, including original documents, of all
purchases, sales, receipts, shipments, or testing of any material or product in
any way related to government contracts or subcontracts. These records shall be
sufficient to provide complete evidence of all transactions related to items
furnished directly or indirectly by Copley to the Government upon any government
procurement. These records shall be maintained for not less than four years
after final payment of any affected contract.
4. In addition to any other right DLA may have by statute, regulation, or
contract, DLA or its duly authorized representative may examine Copley's books,
records (including test data records), and other company documents and
supporting materials for the purpose of verifying and evaluating: (a) Copley's
compliance with the terms of this Agreement; (b) Copley's business conduct in
its dealings with all of its customers, including the Government; (c) Copley's
compliance with Federal procurement policies and accepted business practices;
and (d) Copley's compliance with the requirements of Government contracts or
subcontracts. The materials described above shall be made available by Copley at
all reasonable times for inspection, audit, or reproduction. Further, for
purposes of this provision, DLA or its authorized representative may interview
any Copley employee who consents to be interviewed at the employee's place of
business during normal business hours or at such other place and time as may be
mutually agreed between the employee and DLA. Employees may elect to be
interviewed with or without a representative of Copley present.
5. Copley has implemented and agrees to maintain a Business Ethics Program
involving all company employees. The Business Ethics Program consists of (a) the
Business Conduct Policy, (b) the Corporate Compliance Program, (c) the
statements of policy in Exhibits 11 and 12 to this Agreement, and (d) such
additional documents as the Audit Committee of Copley's Board of Directors ("the
Audit Committee") may approve as parts of the Business Ethics Program. The Audit
Committee shall be responsible for overseeing the implementation by Copley's
management of the Business Ethics Program. The Business Ethics Program shall be
maintained so as to ensure that Copley and each of its officers and employees
maintains the business honesty and integrity required of a Government
contractor, and that Copley's performance of each Government contract is in
strict compliance with all applicable laws, regulations, and the terms of the
contract. The Business Ethics Program shall include, at a minimum, the following
components:
a. The written Business Conduct Policy and Corporate Compliance
Program, both adopted on January 30, 1998 by the Copley Board of Directors. The
Policy and Program, as implemented, include (i) a statement of Copley's
commitment to comply with all applicable laws and regulations in the conduct of
its business; (ii) guidelines for Copley employees to follow in their business
dealings on behalf of Copley; (iii) a notice that, consistent with Article 7 of
this Agreement, Copley shall immediately discipline, up to and including
dismissal, any employee, officer, or director of Copley whose conduct relating
to Copley's business violates applicable laws, regulations, Copley's Business
Conduct Policy, the terms of this Agreement, or basic tenets of business honesty
and integrity; (iv) a requirement that employees report to Copley's Compliance
Coordinator any impropriety relating to Copley's business of which they have
knowledge whether committed by an employee of Copley, or of the Government, or
any other person, and whether the impropriety relates to violations of law,
regulation, contract, Copley's Business Conduct Policy, the terms of this
Agreement, basic tenets of business honesty and integrity, or any other
requirement; (v) a notice that employees may report improprieties anonymously;
and (vi) a notice that employees may report improprieties relating to Copley's
business directly to appropriate Government officials. Copies of the Policy and
Program are Exhibit 3 and 4, respectively, to this Agreement.
b. The Business Conduct Policy has been circulated to each employee of
Copley. After reading the Code each current employee has signed in a register
(which may be individual forms kept in a loose-leaf book) to be maintained by
Copley and open to inspection by the Government, that the employee has read and
understood the import of the document. At least once in each calendar year, each
then-current employee shall repeat the procedure of reading the Policy and
signing the register. Copley shall submit, as a part of each report to DLA
pursuant to Article 9, a statement by the Chairman of the Board that the Board
of Directors has verified that the register is being maintained, and that each
employee has signed the register as required by this provision. The register
shall be maintained and available for DLA's review and inspection during the
life of this Agreement. Within thirty days of starting employment with Copley,
new employees shall read the Policy and sign the register. Within the thirty
days, the new employee's immediate supervisor or other management person shall
discuss the content and requirements of the Code with the new employee.
c. Copley has instituted and shall maintain an information and
education program designed to assure that all employees are aware of all
applicable laws, regulations, and standards of business conduct that employees
are expected to follow, and the consequences both to the employee and to the
company that will ensue from any violation of such measures. Each employee of
Copley has received at least one hour of initial training in the Copley Business
Conduct Policy. Each employee shall receive annually not less than one hour of
training in Copley's Business Ethics Program.
d. Copley also has installed a toll-free telephone number for reporting
suspected misconduct directly to an independent telephone monitor, who, will, as
appropriate, report suspected misconduct to the Compliance Coordinator, the
General Counsel, or the Audit Committee. This telephone number is listed in the
Canton, MA telephone directory. In addition, Copley has posted in prominent
places accessible, in the aggregate, to each of its employees, a notice
detailing the company's commitment to comply with all applicable laws and
regulations in the conduct of its business. The notice designates the Compliance
Coordinator to receive any reports of misconduct relating to Copley's business
of which any employee may have knowledge, whether committed by an employee of
Copley, an employee of the Government, or other individual or business entity;
provides the toll-free telephone number for the Compliance Coordinator; states
that any report may be anonymous; and designates the Compliance Coordinator to
be available for consultation on any questions the employee may have concerning
Copley's business practices. A copy of the notice is Exhibit 6 to this
Agreement. Every six months, starting six months from the date of this
agreement, Copley, as a part of the report required by Article 9, shall provide
DLA with a report identifying all calls made to the company Hotline (regardless
of the subject matter), and all instances of misconduct relating to Copley's
business that were reported to the Compliance Coordinator, or otherwise brought
to the attention of management, during the preceding six months. Such reports
shall state the nature of the reported conduct, the results of the internal
investigation, and the corrective action, if any, taken by Copley. A matter
pending resolution at the time of a six-month reporting period shall be reported
each six months until final resolution of the matter is reported. Negative
reports are required.
e. All written materials and training related to the Business Conduct
Policy will be provided in English and in any other language necessary to assure
that each employee understands all elements of any written or oral presentation.
6. The principal members of Copley management on the date of execution of this
Agreement by DLA are
We-wei Chang, Ph.D. Executive Vice President - Scientific and
Technical Affairs
Gene Bauer Executive Vice President, General Counsel,
Secretary
Ken Starkweather Vice President, Chief Financial Officer, and
Treasurer; Compliance Coordinator
Julie Trendowicz Vice President - Sales/Marketing
Barbara Morse Vice President - Administration/Corporate
Communications
Michael Moorshead Vice President - Operations
Jane C. I. Hirsh President, Copley Pharmaceutical International
Michael Bogda Vice President - Technical Services and Engineering
Copley agrees to notify DLA promptly if any of these principals leaves his or
her current position and to report the name of a successor to DLA promptly after
appointment.
7. Promotion of the Copley Business Ethics Program is an element of each
manager's and supervisor's performance standards. Copley has implemented and
will maintain an annual certification requirement that all managers at every
level in the company attest that they personally have (a) discussed with each
employee under their direct supervision the content and application of the
company's Business Ethics Program; (b) informed each such employee that strict
compliance with the Program is a condition of employment; and (c) informed each
such employee that Copley will take disciplinary action, including termination,
for violation, in connection with the company's business, of the principles and
practices set forth in the Program, applicable laws or regulations, or basic
tenets of business honesty and integrity. A copy of the certificate used to
fulfill this requirement is attached as Exhibit 7. In addition, promotion of
Copley's Business Ethics Program will be an element of each manager's and
supervisor's own performance standards. Copley will submit, as a part of each
report to DLA pursuant to Article 9, a statement by the Chairman of the Board
that the Board of Directors has verified that the certifications are being
maintained and that each manager has provided a certification as required by
this provision. The certificates shall be maintained and available for DLA's
review and inspection during the life of this agreement.
8. The Audit Committee of the Board of Directors of Copley shall be responsible
for seeing to it that management implements the company's Business Ethics
Program, including maintenance and updating of the Business Conduct Policy, and
auditing of Copley's compliance with this Agreement. The Audit Committee shall
oversee all of Copley's compliance programs, consult with whatever advisors it
deems appropriate in matters relating to these programs, receive reports in
person or in writing not less than quarterly from the Compliance Coordinator
(and from the General Counsel if appropriate) concerning Copley's compliance
with the Program, and take whatever actions are appropriate and necessary to
ensure that Copley conducts its activities in compliance with the requirements
of the law and sound business ethics. Copley shall provide to DLA copies of
written reports and minutes of the Audit Committee meetings reflecting the
reports made to the Committee on the Business Ethics Program and the Committee's
decisions or directions to management concerning any matters in any way related
to Copley's compliance programs or this Agreement. The names of the members of
the Committee are listed at Exhibit 8. If any member of the Committee leaves the
Committee, Copley shall promptly notify DLA of the change and shall report the
name of each new member to DLA promptly after election or appointment.
9. The Board of Directors of Copley shall submit periodic written reports to DLA
describing the measures taken by Copley to implement, and to ensure compliance
with, this Agreement. The reports must be submitted in time to be received at
DLA within three months of the effective date of this Agreement, on or before
the six-month anniversary of the effective date of this Agreement, and
thereafter on or before each six-month anniversary during the term of this
Agreement. The final report is to be received not later than one month prior to
the final day of this Agreement. A schedule of reporting dates is attached as
Exhibit 9. The reporting dates and time frames set forth in this Agreement are
deadlines for receipt of the reports at DLA Headquarters. Copley's failure to
meet these requirements on or before the dates agreed to shall constitute a
breach of this Agreement.
The reports shall include:
o Standards of conduct/ethics/compliance training conducted and the
number of persons who attended.
o Informal notifications or initiatives relating to the Business Ethics
Program.
o Description of each Hotline call or other report of misconduct
received and disposition of each. (It is understood that "misconduct" does not
include "minor violations" within the meaning of ss. 309 of the Federal Food,
Drug, and Cosmetic Act, 21 U.S.C. ss. 336, except that such term does include
any violation of the statutes or regulations administered by FDA that results in
a recall, seizure, injunction, field alert, issuance of FDA Form # 483 (report
of inspectional observations) or Warning Letter.)
o Information required by Articles 12 and 24.
o The status of any ongoing investigation of, or legal proceedings
involving, Copley brought by any Governmental entity; including times, places,
and subject matter of search warrants, subpoenas, criminal charges, criminal or
civil agreements, etc.
10. Copley represents to DLA that, to the best of Copley's knowledge, Copley is
not now under criminal or civil investigation by any Governmental entity. In
addition to the periodic written reports required under Article 9, Copley shall
notify DLA within two working days of the time Copley learns of (a) the
initiation of any criminal or civil investigation of Copley by any Governmental
entity, (b) service of subpoenas on Copley by any Governmental entity, (c)
service of search warrants and/or searches carried out in any Copley facility,
(d) initiation of legal action by any entity that alleges facts that, if true,
would impact upon the business responsibility of Copley. Copley shall provide to
DLA as much information as necessary to allow DLA to determine the impact of the
investigative or legal activity upon the present responsibility of Copley for
Government contracting.
11. Between five and seven months after the effective date of this Agreement,
the Chairman of the Board of Directors or chief Executive Officer of Copley and
the Compliance Coordinator or General Counsel shall offer to meet with the DLA
Special Assistant for Contracting Integrity or a designee to discuss
implementation of this Agreement. Each six months during the term of this
Agreement the Compliance Coordinator or General Counsel shall offer to meet with
representatives of the Special Assistant for Contracting Integrity to discuss
implementation of this Agreement.
<PAGE>
12. As a manufacturer for and supplier to prime contractors, Copley is required
by its customers to submit to outside audits and/or surveys conducted by the
customer or on its behalf by third parties. The written reports resulting from
all such audits or surveys will be included with reports filed under the
provisions of Article 9.
13. Copley has advised DLA that, as a part of Copley's program of
self-governance, Copley has a written policy of voluntarily disclosing suspected
misconduct (as described in Article 9) involving or affecting Copley's
Government business to an appropriate Government official within fifteen days
after such misconduct is discovered by, known to, or disclosed to any management
official of the company. The misconduct to be reported includes misconduct by
any person, including, but not limited to, those associated with Copley or with
the Government, and shall include misconduct disclosed to Copley management from
any source. Copley's program provides that Copley immediately will investigate
any report of misconduct that comes to its attention and will notify the
Government of any potential or actual impact on any aspect of Copley's
Government business and will take corrective action, including prompt
restitution for any harm to the Government. During the term of this Agreement,
Copley will provide to DLA copies of all such disclosures or notice to any
Government official, within ten working days of the disclosure. The fact that
this Agreement incorporates Copley's policy of voluntary disclosure shall not
render a disclosure made pursuant to the policy involuntary for purposes of any
agency Voluntary Disclosure program.
14. Copley has distributed to every supplier and subcontractor to Copley a
letter from Kenneth Larsen, Chairman of the Board of Directors of Copley,
emphasizing Copley commitment to procurement integrity, asking suppliers and
subcontractors not to offer or give anything of value to Copley employees, and
asking suppliers and subcontractors to report to Mr. Larsen any improper or
illegal activity by Copley employees, and informing them of the telephone number
for the Copley Hotline. A copy of the letter is at Exhibit 10. A similar letter
will be sent to all Copley suppliers and subcontractors each year in the month
of November. A copy of the letter shall be furnished to DLA.
15. Copley has a written internal operating policy that Copley shall not
knowingly employ, with or without pay, an individual who is listed by a Federal
Agency as debarred, suspended, or otherwise ineligible for Federal programs. A
copy of the policy is attached as Exhibit 11. In order to carry out the policy,
Copley shall make reasonable inquiry into the status of any potential employee
or consultant. Such reasonable inquiry shall include, at a minimum, review of
the General Services Administration's List of Parties Excluded from Federal
Procurement Programs. Copley policy does not require Copley to terminate the
employment of individuals who become suspended or are proposed for debarment
during their employment with Copley. Copley, however, will remove such employees
from responsibility for or involvement with Copley's government-related business
affairs until the resolution of such suspension or proposed debarment. In
addition, if any employee of Copley is charged with a criminal offense relating
to Copley's business (other than a traffic or parking violation or a similarly
minor violation), Copley will remove that employee immediately from
responsibility for or involvement with Copley's business affairs. If the
employee is convicted or debarred, Copley policy requires that the employee will
be terminated from employment with Copley. Copley shall notify DLA of each such
personnel action taken, and the reasons therefor, within 15 days of the action.
The salary of any officer, employee, or consultant removed from government
contracting in accordance with the Copley policy set forth in this paragraph
shall be unallowable for government contracting purposes and shall not be
charged either directly or indirectly to any government contract. Copley agrees
to account separately for such costs.
16. Copley has a written internal operating policy that Copley shall not
knowingly form a contract (other than a contract for the sale of goods by
Copley) with, make a purchase from, or enter into any business relationship
(other than a contract for the sale of goods by Copley) with any individual or
business entity that is listed by a Federal Agency as debarred, suspended, or
proposed for debarment, where such contract, purchase, or business relationship
involves more than $10,000, unless there is a compelling reason to do so. A copy
of the policy is attached as Exhibit 12. If Copley concludes that there is a
compelling reason, Copley will provide notice to the cognizant Contracting
Officer, if any, and to DLA prior to entering such a business relationship (a)
of Copley's intent to do so, (b) the identity of the proposed business partner,
(c) a written determination by the senior Copley executive that a compelling
reason justifies the relationship, and (d) the procedures Copley has established
to protect the Government's interest. Reasonable inquiry shall be made into the
status of any potential participant with Copley in a transaction within the
scope of this paragraph. Such reasonable inquiry shall include, at a minimum,
review of the General Services Administration's List of Parties Excluded from
Federal Procurement Programs.
17. Copley voluntarily has severed all business relations with Michael Riley,
Mark Riley, Robert Duncan, and Martha Duncan (the "Severed Employees"),
including, but not limited to, the following relationships: employer-employee,
creditor-debtor, and owner-business entity (including shareholder-corporation).
Copley shall not re-employ in any capacity or resume business relations with any
individuals identified to DLA as involved in or responsible for the misconduct
at issue here. Because Copley's securities are publicly traded, Copley has no
control over who purchases its securities. The fact of any Severed Employee
being a holder of Copley securities shall not be considered a violation of this
Agreement.
18. Copley has and shall continuously enforce the following policy:
a. The Severed Employees shall not share any office or storage space,
any building, or any computer system with Copley;
b. The Severed Employees shall not be permitted to enter the premises
of Copley.
19. Copley shall notify DLA of any proposed changes in the directives,
instructions, or procedures implemented in furtherance of Copley's Business
Ethics Program and compliance with this Agreement. DLA, or its authorized
representative, retains the right to verify, approve, or disapprove any such
changes. Copley may implement a proposed change (subject to subsequent
disapproval by DLA) if Copley has submitted such change to DLA and DLA has not
disapproved the change within 30 days.
20. Copley has paid to DLA $ 10,000 to cover DLA's costs of independently
reviewing this matter and administering this Agreement.
21. Copley shall not seek reimbursement from the Government, either directly or
indirectly, for legal or related costs expended or to be expended arising from,
related to, or in connection with, the Government's criminal investigation and
Copley's defense and settlement thereof, or in connection with the Civil
Settlement Agreement entered into by Copley and the United States, or DLA's
independent administrative review, or the negotiation and preparation of this
Agreement, or the performance or administration of this Agreement. Copley shall
treat these costs as unallowable costs for Government contract accounting
purposes. Included in these unallowable costs are any legal or related costs
expended on behalf of any Copley employee. Nothing in this Article shall be
interpreted as relating to the tax treatment of any costs incurred by Copley, or
as relating to Copley's accounting for tax purposes.
22. Copley agrees to waive as to the United States Government all claims,
demands, or requests for monies of any kind or of whatever nature that Copley
may have or may develop in the future arising from, related to, or in connection
with, any investigation, or as a result of administrative or judicial
proceedings, or request for any other relief in law or in equity, or in any
other forum be it judicial or administrative in nature arising out of or
relating to the facts that gave rise to the proposed debarment.
23. Copley hereby releases the United States, its instrumentalities, agents, and
employees in their official and personal capacities, of any and all liability or
claims arising out of the investigation, criminal prosecution, at issue here, or
the suspension (proposed debarment or debarment) of Copley or the discussions
leading to this Agreement.
24. Copley agrees to provide with the reports made pursuant to Article 9 a list
of all internal audit reports generated by or for Copley within the preceding
six months and to make available to DLA copies of any such audit reports
requested by DLA.
25. This agreement shall inure to the benefit of and be binding upon the parties
and their respective successors and assigns. In the event that Copley sells or
in any way transfers ownership of any part of the assets of Copley that are
subject to this Agreement, Copley shall notify DLA in advance and shall require
by the terms of the transfer that the new owner, in addition to Copley, shall be
bound by the terms and conditions of this Agreement, including, but not limited
to, all reporting requirements, with respect to the assets transferred by Copley
to such new owner. If a new owner acquires a controlling interest in Copley or
one or more of Copley's facilities, this Agreement shall continue to apply to
Copley or to the transferred facilities, as applicable; but nothing in this
Article shall be interpreted as extending this Agreement to any of the new
owner's other facilities or operations that were not previously under the
ownership or control of Copley.
26. In the event that Copley purchases or establishes new business units after
the effective date of this Agreement, Copley shall implement with respect to
such new business units all provisions
<PAGE>
of this Agreement, including any training or education requirements, within 60
days following such purchase or establishment.
27. When requested, Copley shall cooperate fully with any investigation of
suspected irregularities involving Copley's operations or activities and shall
encourage present and past employees of Copley to make a full and candid
disclosure of their personal knowledge of the facts and circumstances of any
such suspected irregularities. Nothing in this Article shall be interpreted as
requiring Copley to waive any attorney-client privilege or the protection of the
attorney work product doctrine.
28. Provided that the terms and conditions of this Agreement are faithfully
fulfilled, DLA will not suspend or debar Copley based on the facts and
circumstances set forth in the Information (Exhibit 2) referenced in the
Preamble herein. DLA's decision not to suspend or debar Copley upon the facts at
issue here shall not restrict DLA or any other agency of the Government from
instituting administrative actions, including, without limitation, suspension or
debarment, should information indicating the propriety of such action come to
the attention of DLA or such other agency.
29. Copley's compliance with the terms and conditions of this Agreement shall
constitute an element of Copley's present responsibility for Government
contracting. Copley's failure to meet any of its obligations pursuant to the
terms and conditions of this Agreement constitutes a cause for suspension and/or
debarment.
30. Copley represents that all written materials and other information supplied
to DLA by its authorized representative during the course of discussions with
DLA preceding this Agreement are true and accurate, to the best information and
belief of the Copley signatory to this Agreement. Copley understands that this
Agreement is executed on behalf of DLA in reliance upon the truth and accuracy
of all such representations.
31. This Agreement constitutes the entire agreement between the parties and
supersedes all prior agreements and understandings, whether oral or written,
relating to the subject matter hereof.
32. The provisions of this Agreement in no way alter or diminish the rights and
responsibilities of the United States to carry out its lawful functions in any
proper manner.
33. Gene Bauer, as Executive Vice President, General Counsel, and Secretary of
Copley, is fully authorized to execute this Agreement, and represents that he
has authority to bind Copley.
34. In the event that any one or more of the provisions contained in this
Agreement shall for any reason be held to be invalid, illegal, or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
other provisions of this Agreement.
<PAGE>
35. Any notices or information required hereunder shall be in writing and
delivered or mailed by registered or certified mail, postage prepaid as follows:
If to Copley, to: Gene Bauer
Executive Vice President and General Counsel
Copley Pharmaceutical Inc.
25 John Road
Canton, MA 02021
If to DLA, to: Roberta T. Eaton
ATTN: Special Assistant for Contracting Integrity (GC)
Defense Logistics Agency
8725 John J. Kingman Road, Ste 2533
Ft Belvoir, VA 22060-6221
or such other address as any party shall have designated by notice in writing to
the other party.
36. This Agreement, including all attachments, is a public document, and may be
distributed by DLA throughout the Government as appropriate and to other
interested persons upon request, including requests filed under the Freedom of
Information Act.
37. This Agreement may be amended or modified only by a written document signed
by both parties.
__________________ _____________________________
Date for the Defense Logistics Agency
- ------------------ -----------------------------
Date for Copley Pharmaceutical, Inc.
<PAGE>
LIST OF EXHIBITS
EXHIBIT 1 Plea Agreement
EXHIBIT 2 Information
EXHIBIT 3 Business Conduct Policy
EXHIBIT 4 Corporate Compliance Program
EXHIBIT 5 Poster
EXHIBIT 6 Certification Form
EXHIBIT 7 List of Members of Audit Committee
EXHIBIT 8 Dates for Reports
EXHIBIT 9 Form of Letter to Suppliers
EXHIBIT 10 Policy re Debarred Individuals
EXHIBIT 11 Policy re Debarred Contracting Parties
<PAGE>
EXHIBIT 6
FORM FOR CERTIFICATION
BY MANAGERS
I, ___________________(print name),
_________________________(title), hereby certify that, within the last year, I
have personally (check each of the following that is applicable):
_____ (a) discussed with each employee under my direct
supervision the content and application of Copley's Business Ethics Program;
_____ (b) informed each such employee that strict
compliance with the Program is a condition of employment; and
_____ (c) informed each such employee that Copley will take
disciplinary action, including termination, for violation, in connection with
the company's business, of the principles and practices set forth in the
Program, applicable laws or regulations, or basic tenets of business honesty and
integrity.
- ---------------- ---------------------------
Date Signature
<PAGE>
EXHIBIT 7
CURRENT MEMBERS OF AUDIT COMMITTEE
Judith W. Fensterer
Jane C.I. Hirsh
William Hoskins
<PAGE>
EXHIBIT 8
ARTICLE 9 REPORTING SCHEDULE
First report due: August 1, 1998
Second report due: November 1, 1998
Reports due every six months thereafter:
May 1, 1999
November 1, 1999
May 1, 2000
November 1, 2000
Final report due: April 1, 2001 (note that this date is one month before the
Agreement expires)
<PAGE>
EXHIBIT 9
FORM LETTER TO SUPPLIERS
Dear Sir/Madam:
We are proud of our relationship with the many suppliers who have served Copley
Pharmaceutical Inc. through the years.
Our business associations arose and will continue to stand on the basis of
mutual respect. We value your goodwill, your service, and your ability to supply
us with quality materials and supplies at fair prices. We trust you respect our
integrity and independence, which are unencumbered by special interest and
favoritism.
In furtherance of our obligations as a supplier of pharmaceuticals to the U.S.
Government, we request that you and your employees not send any gifts or
gratuities of any kind (even those having only nominal value) to any Copley
employee.
Copley has established a helpline (800-711-6441) to enable employees, suppliers
and/or subcontractors to provide management with information about any possible
improper or illegal activity. Although we encourage anyone making such a report
to identify himself or herself so that we may make appropriate follow-up
inquiries, persons reporting such activity need not identify themselves.
Please convey this policy reminder to your colleagues who call on Copley.
Very truly yours,
Copley Pharmaceutical, Inc.
Kenneth Larsen
Chairman
<PAGE>
EXHIBIT 10
STATEMENT OF POLICY
WITH RESPECT TO
DEBARRED INDIVIDUALS
1. Copley shall not knowingly employ, with or without pay, an
individual who is listed by a Federal Agency as debarred, suspended, or
otherwise ineligible for Federal programs.
2. To carry out this policy, Copley shall make reasonable
inquiry into the status of any potential employee or consultant. Such inquiry
shall include, at a minimum, review of the General Services Administration's
List of Parties Excluded from Federal Procurement Programs.
3. Copley policy does not require Copley to terminate the
employment of individuals who become suspended or are proposed for debarment
during their employment with Copley. Copley, however, will remove such employees
from responsibility for or involvement with Copley's government-related business
affairs until the resolution of such suspension or proposed debarment. In
addition, if any employee of Copley is charged with a criminal offense relating
to Copley's business (other than a traffic or parking violation or a similarly
minor violation), Copley will remove that employee immediately from
responsibility for or involvement with Copley's business affairs. If the
employee is convicted or debarred, the employee will be terminated from
employment with Copley.
<PAGE>
EXHIBIT 11
STATEMENT OF POLICY
WITH RESPECT TO
DEBARRED CONTRACTORS
1. Copley shall not knowingly form a contract (other than a
contract for the sale of goods by Copley) with, make a purchase from, or enter
into any business relationship (other than a contract for the sale of goods by
Copley) with any individual independent contractor or business entity that is
listed by a Federal Agency as debarred, suspended, or proposed for debarment,
where such contract, purchase, or business relationship involves more than
$10,000, unless there is a compelling reason to do so.
2. Copley shall make reasonable inquiry into the status of any
potential participant with Copley in a transaction within the scope of this
policy. Such reasonable inquiry shall include, at a minimum, review of the
General Services Administration's List of Parties Excluded from Federal
Procurement Programs.
<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.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 12,974
<SECURITIES> 19,465
<RECEIVABLES> 34,685
<ALLOWANCES> (500)
<INVENTORY> 28,506
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<PP&E> 74,260
<DEPRECIATION> (29,619)
<TOTAL-ASSETS> 155,473
<CURRENT-LIABILITIES> 45,513
<BONDS> 4,800
0
0
<COMMON> 254
<OTHER-SE> 103,885
<TOTAL-LIABILITY-AND-EQUITY> 155,473
<SALES> 62,935
<TOTAL-REVENUES> 62,935
<CGS> 48,509
<TOTAL-COSTS> 48,509
<OTHER-EXPENSES> 10,248
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<INTEREST-EXPENSE> 319
<INCOME-PRETAX> 4,689
<INCOME-TAX> 1,530
<INCOME-CONTINUING> 3,159
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